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MERCANTILE LAWS_33e

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Index for M.Law

S.No. Name of the Chapter No. of Questions Page No

1. Meaning & Nature of Contract 11 6-19

2. Offer & Acceptance 12 20-38

3. Legal object & Consideration 06 39-54

4. Capacity to Contract 05 55-64

5. Free Consent 08 65-80

6. Void Agreements, Quasi Contracts and Contingent Contracts 16 81-96

7. Performance of Contract 09 97-108

8. Discharge of Contract 07 109-119

9. Remedies for breach of Contract 07 120-130

Total: 81

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HIGHLIGHTS OF THIS MATERIAL

Dear Student, Following are the guidelines for reading this hand book on M.Law….

1. Examination trends: At the beginning of the material itself we have given a table indicating the past examination trends of this subject. At the beginning of each chapter we have given a table indicating the past examination trends of that chapter. This analysis will help you to judge the relative importance of each chapter and also relative importance of each topic or model in each chapter. Based on that judgement you can easily pay more attention on relatively more important areas.

2. References: For each question we have given the reference of Study Material, Practice Manual, RTPs, past examinations. This will help you to assess the relative importance of each question from examination point of view.

3. Purpose of ABC analysis: All the questions are categorized into ABC which shows the importance of the question from examination point of view. This analysis helps the student to devote the time on the important areas at the time of exams. However, it is advisable to read even “C” category questions atleast once. In other words, don’t ignore C category questions completely.

On the other hand, if you have enough time to prepare then it is recommended to thoroughly read C category questions also. The decision to leave B category or C category questions, is purely left to your discretion and it is advisable for you to take the decision based on the availability of time and your caliber.

In simple words, if you have enough time and if you are capable enough then read all the questions. If not then leave C category questions. If you are ready to take still more risk then you can leave B category questions too. Everything depends upon – availability of time, your caliber and the amount of risk you are ready to take.

4. Significance of text given in ‘Italics’ in some places: The text given in italics indicate that the matter need not be written, if that question is asked for lesser marks i.e. as a short answer. However, if the question is asked for more number of marks then the entire answer must be written. In simple words, in the examination, write the content given in italics only if time and marks permit.

5. Few questions are to be prepared on your own: Few main questions and practical questions are marked as “QUESTIONS TO BE PREPARED BY STUDENT ON HIS/HER OWN”. Those questions will not be discussed by the faculty in the classroom. This is to ensure that syllabus is completed in time, otherwise we can’t complete the syllabus in time.

6. Purpose of “SIMILAR QUESTIONS”: At the end of each question there are some similar questions, the purpose of giving similar questions is to make students understand the different ways of asking the same question. For your convenience we have also given guidelines for answering such similar questions in the main exam.

7. QUESTIONS FOR ACADEMIC INTEREST ONLY: Questions classified under this heading are

not important from examination point of view and they are given only for your academic

knowledge and are not important from examination point of view. If time permits then it

is advisable to prepare those questions also. If time does not permit then students can

leave those questions as choice. So it is upto you to decide based on your preparation

schedule.

CO & IC Batch: Of course, this point is not applicable for IC batch students i.e. they must

be thorough with the entire content given in the material.

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Are you appearing for Group 1 alone?: If you want to attempt for Group 1 alone then you

shall not take risk. So, it is advisable to read the full content of the material as there will

be enough time too.

8. Approach to practical questions: First get a complete grip on theory conceptually and

then read practical questions, but simply don’t mug up the practical questions. This is to

ensure that you feel comfortable at the examination, as the CA course is a professional

course you won’t always get the same questions every time, therefore in order to clear

the exams you must be conceptually strong.

9. Answering Practical questions: Students are advised to answer the practical questions in

the same format as given in the material (Facts, Provision, Analysis, Conclusion i.e. FPAC).

10. Reference of Practical Questions: At the end of each Theory question, we have given the

reference of practical question to be read correspondingly. Immediately after completion

of each theory question it is advisable to refer the corresponding Practical Questions, as

per the reference given by us.

11. For ‘differences’ type of questions read Fast Track material – For all the chapters the

difference between two concepts (Eg Bailment Vs Pledge, etc.) are included in the Fast

Track material of respective chapters. Please refer the “Fast Track” material for such type

of questions.

12. All Questions in SM, PM, latest RTPs and latest MTPs have been covered in our material.

Our material is like a one stop solution.

13. In final exam nearly 90% of Questions will be covered from our Material.

IPCC_33e_M.Law _Meaning and nature of contract___________________________________6

Ph: 98851 25025/26 www.masterminds.com

1. MEANING AND NATURE OF CONTRACT

TOPIC WISE ANALYSIS OF PAST EXAM PAPERS OF IPCC ( Theory and Practical )

No ABC M 05 N 05 to

M 12 N 12 M 13 N 13 M 14 N 14 M 15

1 B - - - - - - - -

2 B - - - - - - - -

3 C - - - - - - - -

4 B 4 - - - - - - -

5 A - - - - - - - -

6 A - - - - - - - -

7 C - - - - - - - -

8 C - - - - - - - -

9 C - - - - - - - -

10 C - - - - - - - -

11 C - - - - - - - -

Q.No.1. Define the terms Promise, Reciprocal promise, Agreement, Contract.

Promise – Sec.2(b): “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted becomes a promise”.

Reciprocal Promise –Sec.2(f): Promises which form the consideration or part of the consideration for each other are called reciprocal promises.

Agreement – Sec.2(e):

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

� In simple words, an agreement means a promise. It is created when a person makes an offer to another person and that other person accepts it.

� Thus, Agreement = Offer + Acceptance.

Contract:

1. The word contract was derived from a latin word ‘contractum’. The word ‘contractum’ means drawn together.

2. In ordinary sense, the term ‘contract’ means, any agreement between any two persons. For business persons, making of contracts with others is a very important process to put into effect their business plans.

3. According to Sec.2(h) of the Act, the term contract is defined as "an agreement enforceable by law". On analysing the definition we find that, the contract consists of two essential elements:

- An agreement, and

- Enforceability by law.


No.1 for CA/CWA & MEC/CEC MASTER MINDS

4. An agreement to become a contract must give rise to a legal obligation which means a duty enforceable by law.

5. Thus from the above definitions it can be concluded that -

Contract = Accepted proposal + Enforceability by law.

6. “Every agreement and promise enforceable at law is a contract.” - Pollock

7. “Agreement creating and defining obligations between the parties.” - Salmond

Similar Question: Define Contract? (PM)

Ans: Refer above Question

Q.No.2. Write about Legal Enforceability?

Enforceability by Law / Legal Enforceability:

1. Legal Enforceability means creating a legally binding obligation between two parties.

2. If any one party fails to fulfill his obligation, the other party can take the help of law to enforce it.

3. Legal enforceability depends upon the intention of the parties i.e. whether they want to enter into a legally binding agreement or not. (Since intention of parties is supreme.)

4. If the intention of parties can’t be known then the following presumptions will apply.

a) No intention to create legal relations in case of domestic, social and political agreements. Hence, they do not become contracts.

Any party may challenge the above presumption by proving that, at the time of entering into agreement, they had intention to create legal relations.

Sometimes agreements between husband and wife are also enforceable:

b) However, in business agreements, usual presumption is that parties intend to create legal obligations.

E.g.: ‘XYZ’ mobile company enters into contract with A to supply mobile phones regularly. Here the presumption is that both the parties had the intention to create legal obligations.

c) If the parties in a business transaction intend to rely on good faith and do not want to go to the court of law, such transaction is not legally binding i.e. it is not legally enforceable.

A husband left his wife. For the purpose of making future arrangement, they agreed that wife will pay charges in connection with mortgage of the house. It was in writing. After its completion, husband will transfer the house to wife. The court held, the agreement is legally binding and the principle of Balfour v. Balfour will not apply here because the parties had intention to enter into a legally binding contract.

Merritt Vs. Merritt (1970)

This is a well-known illustration of a domestic agreement. In this case, a husband (Mr.Balfour) was working in Ceylon. During holidays he and his wife (Mrs.Balfour) went to England to enjoy the leave. When Mr.Balfour was to return to Ceylon, his wife was advised to remain in England, due to ill health. Mr.Balfour agreed to send a sum of £30 per month for expenses of maintenance. For some time he sent the amount but afterwards differences arose between them which resulted in their separation and he did not send allowance. Mrs.Balfour’s suit for recovery was dismissed by Lord Atkin on the ground that parties did not have intention to enter into a legally binding contract.

Balfour Vs. Balfour [(1919) 2 KB, 571]



Conclusion:

1. A promise is the acceptance of a proposal giving rise to a binding contract, and Section 2(h) requires an agreement to be worthy of being enforceable by law before it is called 'contract'.

2. Where parties have made a binding contract, they create rights and obligations between themselves.

3. So, Law of Contract deals with only such legal obligations which have resulted from agreements. Such obligation must be contractual in nature.

4. However, some obligations are outside the purview of the law of contract.

Similar Question: A husband promised to pay maintenance allowance every month to his wife, which he failed to perform (RTP M 14)

Ans Refer Point No 4

(IMMEDIATELY REFER PRACTICAL QUESTION NO.2, 3, 4, 11, 12)

Q.No.3. All Agreements are not Contracts, but all Contracts are Agreements. Explain.

1. The term agreement is a wider term than the term contract.

2. It includes variety of agreements such as personal, social, domestic, lawful, unlawful, void, voidable, etc. Some of them are enforceable by law and others are not.

3. Agreements which are not enforceable by law are definitely not contracts as per Sec.2 (h).

4. Hence, it is generally said that all agreements are not contracts, but all contracts are agreements.

Q.No.4. Explain the Essential Elements of a Valid Contract?

According to Section 10, "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." The following essential elements must co-exist in order to make a valid contract:

1. Proper offer and Proper acceptance with intention to create legal relationship.

2. Lawful Consideration and Lawful Object.

3. Capacity to contract.

4. Free Consent.

5. Agreements not declared void or illegal.

6. Certainty of meaning.

7. Possibility of performance of an agreement.

8. Necessary legal formalities.

This is a very good example of a business deal in which parties did not intend to create legal relations. As per the facts of the case, an agreement was drawn between the American and the English firms. The agreement mentioned that “this agreement is not entered into as a formal legal agreement and shall not be subject to legal jurisdiction in the law courts.” The agreement was terminated by one of the parties and other party brought an action for breach of contract. Held, the agreement was not binding contract as there was no intention to create legal relations.

Rose & Frank Co. Vs. J.R. Crompton & Bros. Ltd. (1925) A.C. 445

Copyrights Reserved

To MASTER MINDS, Guntur



Let us discuss each point in a detailed manner:

1. Intention to create legal relationship: The parties ought to have the intention to create legal obligation between them through the form of offer and acceptance. They should have intention to impose duty on the promisor to fulfill the promise and bestow a right on the promisee to claim its fulfillment. It must not be merely a moral one but it must be legal. If such intention on the part of the parties is lacking at the time of making the contract, there will be no valid contract between them.

2. "Lawful consideration" and “Lawful object”: It is an essential element of a valid contract. Consideration is a technical word meaning thereby quid pro quo i.e. something in return. It must result in benefit to one party and detriment to the other party or a detriment to both.

Also, the object of the agreement must be lawful. It must not be illegal, immoral, or opposed to public policy.

If these two essential elements are there then we can say that there is a contract which prima-facie will hold good; or at least we can say that there is an existence of contract, although some more necessary elements of validity may be wanting.

3. Competent parties: The parties to a contract must have capacity (legal ability) to make valid contract. In every case, there must be assent of the parties. If, therefore, either of the parties to an agreement is deprived of the use of his understanding or if he be deemed by law not to have attained it, there can be no such agreement which shall bind him. Section 11 of the Indian Contract Act specifies that every person is competent to contract, provided:

a) is of the age of majority according to the law to which he is subject, and

b) who is of sound mind, and

c) is not disqualified from contracting by any law to which he is subject.

In other words:

a) A minor,

b) A person of unsound mind (a person of unsound mind can enter into a contract during his lucid intervals) and

c) A person disqualified from contracting by any law to which he is subject, e.g. an alien enemy, foreign sovereigns and accredited representatives of a foreign state, insolvents and convicts are not competent to contract.

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

5. The agreement not expressly declared void: The agreement must not be one, which the law declares to be either illegal or void. A void agreement is one, which is without any legal effects. Illegal agreement is an agreement expressly or impliedly prohibited by law and hence punishable in nature.

6. Certainty of meaning: The agreement must be certain and not vague or indefinite.

7. Possibility of performance of an agreement: The terms of agreement should be capable of performance. An agreement to do an act impossible in itself cannot be enforced.

8. Compliance of necessary legal formalities: Wherever a particular type of contract requires by law to be in writing and registered, it must comply with the necessary formalities as to writing, attestation and registration, otherwise unenforceable.

Conclusion: When the parties to an agreement want to make legally enforceable agreement, the agreement should satisfy all the conditions stated in Sec.10 of the Indian Contract Act. If any of these conditions is not satisfied, an agreement is not enforceable at law.



Q.No.5. Write about Different types of Contracts?

Valid Contract: An agreement which is binding and enforceable is a valid contract. It contains all the essential elements of a valid contract. Agreements which satisfy all the essential conditions of Sec.10 are enforceable at law. Such contracts are called valid contracts.

Void Agreement:

1. If an agreement fails to meet any of the conditions in Sec.10, it is termed as void agreement.

2. Such types of agreements are void-ab-initio which means void from the beginning.

3. Legal meaning of the term ‘void’ is - Null and ineffectual i.e. having no legal validity. A void agreement has no legal effect in the eyes of law. It does not create any rights or obligations. Both the parties cannot enforce it in the court of law.

4. Thus a void agreement never matures into a contract.

Void Contract:

1. Sometimes it may happen that a valid contract is formed initially but subsequently it may become void. Then it is called void contract.

2. A valid contract may become void due to supervening or subsequent impossibility. Impossibility can be either legal impossibility or physical impossibility.

3. It is a contract without any legal effect and cannot be enforced in a court of law.

4. Sec.2 (j) defines a void contract as “a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”.

Voidable Contract:

1. As per Section 2(i), “an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.”

2. The party entitled to avoid the contract may or may not avoid it.

3. If the parties decide to avoid it, it can’t be enforced in the court of law.

4. If the parties choose not to avoid the contract, it is a valid contract.

Illegal Agreements / Unlawful Contracts:

1. Illegal contract is a contract which the law forbids to be made. The court will not enforce such contract but also the connected contracts. All illegal agreements are void but all void agreements or contracts are not necessarily illegal.

2. Generally speaking, an agreement which is expressly or impliedly prohibited or forbidden by law is an illegal agreement.

3. Such an agreement may either be against the law of the land or opposed to public policy or be criminal or immoral in nature.

4. The term “Illegal agreement” has not been defined in the Indian Contract Act. However, Sec.23 of the Act states that the object or consideration of an agreement is unlawful in any of the following cases:

a) If it is forbidden by law,

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

c) If it is fraudulent,

d) If it involves or implies injury to the person or property of another,

e) The court regards it as immoral,

f) The court regards it as opposed to public policy.

ON THE BASIS OF VALIDITY



5. The term unlawful agreement is wider in its scope than the term illegal agreement. Thus all the agreements covered under the above stated six heads are not illegal agreements.

6. Only the agreements forbidden by law, agreements opposed to public policy, agreements of criminal or immoral nature are included in illegal agreements.

7. Therefore, it is true that every illegal agreement is unlawful but every unlawful agreement need not be illegal.

8. The parties to an illegal agreement are punishable as per the law of the country.

Unenforceable Contracts:

1. Where a contract is good in substance but because of some technical defect i.e. absence in writing, barred by limitation, non-registration, insufficient stamp duty, etc. one or both the parties cannot sue upon it, it is described as an unenforceable contract.

2. After the technical defect is removed, these contracts become enforceable.

Express Contract:

1. A contract which is made by words either spoken or written is said to be an express contract.

2. According to Section 9 in so far as the proposal or acceptance of any promise is made in words, the promise is said to be express.

3. In such a contract, the terms and conditions depend on the words of the parties either face to face or with the help of letters, telegraph, phone, telex, fax, e-mail, etc.

Implied Contract:

1. According to Section 9 in so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.

2. By implied contract means implied by law (i.e.) the law implies a contract though parties never intended.

Note: Actually this explanation aptly suits for Quasi Contract but not for Implied Contract. But as it is given in ICAI Study Material, we have to follow the same until ICAI amends the same.

3. An implied contract is inferred from the acts or conduct of the parties or by their surrounding circumstances but not by the written or spoken words of the parties.

4. An implied promise results in an implied contract.

Examples:

a) A delivers goods by mistake at B’s warehouse instead of at C’s place. Here there is an obligation on the part of B to return the goods to A, because they never intended to enter into a contract.

Note: This example is not actually related to implied contract. This example is related to Quasi Contract. But as it is given in Study Material, we have to follow the same until Study Material is amended.

Tacit Contract:

1. Tacit Contract is said to be tacit when it has to be inferred from the conduct of the parties.

2. Law experts also use the term “Tacit Contract” which is almost synonymous with the term implied contract.

3. It should be noted that the term “Tacit contract” has not been used in the Indian Contract Act.

ON THE BASIS OF FORMATION



Examples:

a) Obtaining cash through Automatic Teller Machine.

b) Sale by fall of hammer at an auction sale.

Quasi Contract:

1. A quasi-contract is not an actual contract but it resembles to a contract. It is created by law under certain circumstances the law creates and enforces legal rights and obligations when no real contract exists. Such obligations are known as quasi-contracts.

2. It is not a real contract because it does not result from any intentional agreement.

3. It is not created as a result of exchange of promises by the parties.

4. Therefore, it does not have all the essentials of a valid contract.

5. Thus, a quasi-contract is a contract implied by law. It is not made by the parties, but imposed upon the parties by the law on the ground of principle of equity.

6. The principle of equity states that “nobody could be allowed to enrich himself at the cost of the other”.

E.g.: Obligation of finder of lost goods to return them to the true owner or liability of person to whom money is paid under mistake to repay it, cannot be said to arise out of a contract even in its remotest sense, as there is neither offer and acceptance nor consent. These are said to be quasi-contracts.

E - Commerce Contract: An E-commerce contract is one which is entered into between two parties via Internet. In Internet, different individuals or companies create networks which are linked to numerous other networks. This expands the area of operation in commercial transactions for any person.

E.g.: Krishna ordered M.law book from an online book store. The book store makes the delivery in four working days and Krishna pays for the same.

Executed Contract:

1. If the consideration for the promise in a contract (i.e., any act or forbearance) is given or executed, such type of contract is called contract with executed consideration.

2. Where all the parties to a contract have performed their obligations under the contract, it is known as executed contract.

3. Nothing remains pending by any of the parties under such contract.

4. It is a completely performed contract.

Executory Contract:

1. It is so called because the reciprocal promises or obligations which serves as consideration is to be performed in future.

2. Where all or some of the parties to a contract are still to perform their respective obligations in the contract, the contract is known as executory contract.

3. In a contract, if one party has already performed the contract but the other is yet to perform his part of the contract, the contract will be known as Partly Executed and Partly Executory..

ON THE BASIS OF PERFORMANCE

Copyrights Reserved




Executory Contracts are further classified into:

1. Unilateral Contract:

a) A unilateral contract is a one-sided contract in which only one party has to perform his promise or obligation to do or forbear.

b) Unilateral contracts are also known as contracts with executed consideration. 2. Bilateral Contract:

a) Where the obligation or promise in a contract is outstanding on the part of both the parties, it is known as bilateral contract.

b) These contracts are also known as contracts with executory consideration.

Multilateral Contract: In this type of contract more than two parties are involved. These are very complex contracts and generally take international character.

(IMMEDIATELY REFER PRACTICAL QUESTION NO.5, 6, 7, 8, 9, 10)

Q.No.6. Explain the classification of Contracts as per English law?

The English Law Classifies the Contract into two types:

1. Formal contracts. 2. Simple contracts.

1. Formal Contracts: (Formal Contracts include):

a) Contract of Record: A contract of record is either a judgment of a court or a recognizance. A judgment is an obligation imposed by a Court upon one or more persons in favour of another or others. As a matter of fact it is not a contract in the real sense, since it is not based upon any agreement between the two parties. A recognizance is a written acknowledgement of a debt due to the State. It is usually met in connection with criminal proceedings. Contracts of record derive their binding force from the authority of the Court.

b) Contract under Seal: A contract under seal is one which derives its binding force from its form alone. It is in writing and is signed, sealed and delivered by the parties. It is also called a deed or a specialty contract. No consideration is, however, necessary in the case of contracts under seal.

2. Simple Contracts: All contracts which are not made under seal are known as simple contracts. These contracts are made by words of mouth. All simple contracts must be supported by consideration. These contracts are also known by the older name - Parol contracts.

Q.No.7. Miscellaneous.

1. Jus-in-rem (Right against whole world): Jus-in-rem” implies a right available to a person

against the whole world.

2. Jus-in-personam (Right against particular person or persons):“Jus-in-personam” means a right against a particular person or persons.

3. Contract creates right in personam: The right created by a contract is purely personal in nature (i.e. right in personam) and only enforceable by action against the party in default.

4. Plaintiff: Plaintiff is a person who brings a suit against another person in the court.

5. Defendant: Defendant is a person who is sued in the court. Copyrights Reserved




Q.No.8. What is Mercantile Law or Commercial Law?

1. Mercantile Law is not a separate branch of law.

2. Basically, it is a part of Civil Law which deals with the rights and obligations of mercantile persons arising out of mercantile transactions in respect of mercantile property.

3. It includes laws relating to various contracts, partnership, companies, negotiable instruments, insurance, carriage of goods, etc.

Q.No.9. Explain the Different Sources of Mercantile Law?

1. English Mercantile Law: English laws are the primary sources of Indian Mercantile Law.

2. Indian Statute: The various Acts passed by the Indian Legislature are the main sources of Mercantile law in India, e.g. Indian Contract Act, 1872, The Sale of Goods Act 1930, The Indian Partnership Act 1932, The Negotiable Instruments Act 1881, The companies Act, 1956.

3. Judicial Decisions: The past judicial decisions of English courts and Indian courts are also one of the sources of law. Wherever the law is silent on a point, the judge has to decide the case according to the principles of equity, justice and good conscience.

4. Customs and Usages of trade: The customs and usages of trade are also one of the sources of Mercantile law in India.

Q.No.10. Explain the Meaning, Scope and Applicability of Indian Contract Act, 1872?

1. The Indian Law relating to contracts is now embodied in the Indian Contract Act, 1872.

2. Originally the Act contained 266 sections in 11 Chapters.

3. But in the year 1930, its provisions relating to “Sale of Goods” and in the year 1932, the provisions relating to “Partnership” were repealed from this Act and separate Acts were enacted for that purpose.

4. As on the date, the Contract Act contains the following provisions:

a) General Principles of the law of contracts and Quasi contracts [Secs.1 to 75]. These principles apply to all kinds of contracts irrespective of their nature.

b) Certain special kinds of contracts i.e.

i) Indemnity & Guarantee [Sec.124 to 147];

ii) Bailment & Pledge [Secs.148 to 181]; & Contract of Agency [Secs.182 to 238]

5. Sections 1-75 of the Contract Act lays down general principles relating to contracts. It does not lay down the rights and duties of the parties to a contract.

6. The parties are free to make their own terms and conditions of a contract subject to the provisions of the law of the land.

Enforcement of the Act:

1. The Act came into force on 1st September, 1872.

2. The Act is not retrospective and does not apply to contracts entered into before it came into force.

3. Hence, the contracts entered into prior to 1st September, 1872 and to be performed after passing of this Act are not hit by this Act.

QUESTIONS FOR ACADEMIC INTEREST ONLY



Extent of the Act: It extends to the whole of India except the State of Jammu and Kashmir.

Applicability of the Act:

1. The Act applies to all contracts in India. It does not deal with the place where contract is made.

2. The express provisions of the Act are applicable to both Hindus and Mohammedans and override the provisions of the Hindu Law and of the Mohammadian Law.

The Act is not Complete and Exhaustive:

1. The Contract Act is not a complete and exhaustive code dealing with the law of contracts.

2. For example, the laws relating to sale of goods, partnerships, negotiable instruments, transfer of property, insurance etc., have not been incorporated in it. Separate Acts have been enacted to deal with such special contracts.

(IMMEDIATELY REFER PRACTICAL QUESTION NO.1)

Q.No.11. Explain the Need and Importance of the Indian Contract Act, 1872?

1. The Law of Contract is the most important branch of Business / Mercantile / Commercial laws.

2. It is very important not only for the business world, but also for every one of us, because we all enter into contracts of one kind or the other in all walks of life.

3. The Indian Contract Act is so much infused in our daily lives that it affects all of us, for every purchase that one does, or a loan of a book that one does with other, or a ride one takes in a bus and many other transactions of daily life. We enter consciously or unconsciously into number of agreements conferring the rights and the duties on one and the other.

4. Bread, butter, home-appliances, clothes, books, stationery, journey-tickets, Newspaper, Milk etc. are some of the goods and services we buy or borrow in our daily life. For that purpose we enter into contracts of different kinds.

5. The Law of Contracts seeks to regulate the behaviour of persons who make contracts.

6. It also determines the circumstances under which a promise or an agreement shall be legally binding on the person making it.

7. It also provides remedies, available in the court of law against the person who fails to fulfill his contractual obligations.

8. Thus this law is ubi jus, ibi remedium i.e., where there is a right, there is a remedy.

9. The law relating to contracts is contained in the Indian Contract Act, 1872 based mainly on English Common Law.

10. This Act shall not affect any usage or custom of trade. It lays down the general principles of the contract law, thus it is not a complete and exhaustive law on all types of contracts.

Until now, a minor amendment in Section 28 of the Act was made by the Indian Contract (Amendment) Act, 1996.

Q.No.1. X and Y of Jammu entered into a contract on 1st September, 2006 as per the provisions of the Indian contract Act. They want to enforce the contract as per the provisions of this Act. Will they succeed?

Facts of the case: X and Y of Jammu entered into a contract on 1st September, 2006 as per the provisions of the Indian contract Act, and they want to enforce the contract.

Issue/ Question: – Whether the Indian contract Act, 1872 applies to the contract between X and Y

Law/Provision: Sec 1- Extent and Commencement of Indian contract Act, 1872.

PRACTICAL QUESTIONS



Extent - Whole of India except to the state of Jammu & Kashmir and it shall come into force on the 1st day of September, 1872.

Analysis: As per Sec.1 of this Act, the Act does not apply to the state of Jammu & Kashmir, so the contract between X and Y in the state of Jammu & Kashmir cannot be enforced by them.

Conclusion: They will not succeed in enforcement of the contract.

Q.No.2. X Invites Y to dinner. Y accepts the invitation but X failed to attend. Can X sue Y for the damages?

Facts of the case: Y accepted the X’s invitation to attend for dinner, but failed to attend for dinner.

Issue / Question: – Can X sue Y for damages for breach of contract?

Law/Provision: There is no provision in the Indian Contract Act nor there has been any reported decision in India, requiring that an offer or acceptance should be made with the intention of creating legal relation. But in English law, it is a settled principal that “To create a contract, there must be a common intention of the parties to enter into legal obligations”. In Balfour vs. Balfour this principle was excused that there are arrangements between parties which do not result in contract within the meaning of the term contract.

Analysis: Therefore, in the case of arrangements regulating social relations, it follows almost as a matter of fact that the parties do not intend legal consequences as to follow.

Conclusion: The contract between ‘X’ and ‘Y’ is a social contract. In the case of Social, Domestic and Political agreements, the legal presumption is that parties do not have an intention to create legal relations. Therefore, ‘X’ cannot sue Y for damages.

Q.No.3. X makes a promise to his wife Y to give her pocket money of Rs. 1,000 per month. After 6 months, he stops of giving money as he promised. Can Y claim damages from X.

Facts of the case: X promised Y, his wife to give pocket money of Rs.1,000. But he stopped giving money after six months.

Issue / Question: – Can ‘Y’ enforce the contract?

Law / Provision: There is no provision in the Indian Contract Act nor there has been any reported decision in India, requiring that an offer or acceptance should be made with the intention of creating legal relation. But in English law, it is a settled principal that “To create a contract, there must be a common intention of the parties to enter into legal obligations”. In Balfour vs. Balfour this principle was excused that there are arrangements between parties which do not result in contract within the meaning of the term contract.

Analysis: Therefore, in the case of arrangements regulating social relations, it follows almost as a matter of fact that the parties do not intended legal consequences as to follow.

Conclusion: The agreement between ‘X’ and ‘Y’ cannot be enforced because it is a domestic agreement. In the case of domestic agreement, the legal Presumption is that, parties do not have an intention to create legally binding obligations. Therefore, for the reasons mentioned above, ‘Y’ cannot enforce the contract.

Q.No.4. Father promised to pay his son a sum of Rs. One lakh if the son passed C.A. examination in the first attempt. The son passed the examination in the first attempt, but father failed to pay the amount as promised. Son filed a suit for recovery of the amount. State along with reason whether son can recover the amount under the Indian Contract Act, 1872. (M 05 – 4M)

Facts of the case: Father promises to his son that, if he passed C.A examination in first attempt, he will give one lakh to him. Son passed the examination, father failed to give the money that he promised.

Issue / Question: Whether the son can enforce the contract to recover the amount promised by his father

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Law / Provision: There is no provision in the Indian Contract Act nor there has been any reported decision in India, requiring that an offer or acceptance should be made with the intention of creating legal relation. But in English law, it is a settled principal that “To create a contract, there must be a common intention of the parties to enter into legal obligations”. In Balfour vs. Balfour this principle was excused that there are arrangements between parties which do not result in contract within the meaning of the term contract.

Analysis: Therefore, in the case of arrangements regulating social relations, it follows almost as a matter of fact that the parties do not intended legal consequences as to follow.

Conclusion: The agreement between Father and Son cannot be enforced because it is a domestic agreement. In the case of domestic agreement, the legal Presumption is that, parties do not have an intention to create legally binding obligations. Therefore, for the reasons mentioned above, Son cannot enforce the contract.

Q.No.5. X polished Y’s shoes without being asked by Y to do so. Y does not make any attempt to stop X from polishing the shoes. Is Y bound to make payment to X?

Facts of the case: X polished shoes of Y without being asked by him. Y did not stop his attempt.

Issue / Question Involved: Is ‘Y’ bound to make payment to ‘X’?

Law / Provision: Sec 70 - Liability to pay for non – gratuitous acts - “Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the later is bound to make compensation to the former in respect of or to restore, the thing so done or delivered’.

Analysis: See 70 - Creates liability to pay for the benefits of an act which the doer did not intend to do gratuitously. It is explained that three conditions must be satisfied before this section can be invoked:

1. A Person should lawfully do something for another person or deliver something to him.

2. In doing the said thing or delivering the said thing he must not intend to act gratuitously. &

3. The other person for whom something is done or to whom something is delivered must enjoy the benefit thereof.

Conclusion: In the given problem ‘Y’ enjoyed the service rendered by ‘X’ which is not intended to do gratuitously. Therefore, law imposes obligations U/S 70 to pay for the services. Hence, ‘Y’ is bound to pay to ‘X’.

Q.No.6. X agrees to marry Y. Y dies before the marriage takes place. Is it a void agreement?

Facts of the case: X agrees to marry Y, who was dead before the marriage has taken place.

Issue / Question Involved: Is it a void agreement?

Law / Provision: Sec. 2(g) or sec. 2(j) and sec. 56

Sec. 2(g) states that an agreement not enforceable by law is said to be void.

Sec. 2(j) states “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”, and U/S 56 “A contract to do an act, which after the contract is made, becomes impossible by reason of some event, becomes void when the act becomes impossible or unlawful”.

Analysis: When we analyze these sections mentioned above, we can say that void agreement is entirely different from void contract. Void agreement is void abinitio i.e. from the beginning it is void. But void contract is not void abinitio. It becomes void subsequently i.e. the contract is valid at the beginning, but subsequently, if some event happens, which is not controlled by the parties, it becomes impossible for performance or it may become unlawful. Then the contract becomes void.

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Conclusion: By the given problem, after the conclusion of the contract between ‘X’ and ‘Y’ for marriage, ‘Y’ dies. The contract was, at the time of formation, was perfectly valid, but subsequently, on the death of ‘Y’ it becomes void. Therefore, the contract between ‘X’ and ‘Y’ is not void agreement but void contract.

Q.No.7. X agreed to sell a particular horse to Y. Later on, it was discovered that the horse was dead at the time of making the contract. Advise the parties.

Facts of the case: X agreed to sell a particular horse to Y, which was dead at the time of making the contract.

Issue / Question involved: Whether the contract is void

Law / Provisions: Sec. 20 – “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

Analysis: The mistake as to subject matter of contract may be as regards the existence, title, identity, price, quantity or quality. This problem given above relates to existence of subject matter of contract.

Conclusion: Both the parties of contract are under a mistake. Therefore, according to sec. 20, the agreement is void and it cannot be enforced.

Q.No.8 X agrees to pay Rs. 1,00,000 to Y if Y does not marry throughout his life. Y promises not to marry at all but later on X refuses to pay Rs. 1,00,000. Advise Y.

Facts of the case: Y agrees not to marry throughout his life, for which X agrees to pay Rs.1,00,000.

Issue/Questions involved: Can ‘Y’ recover his amount from ‘X’?

Law/Provision: Sec 26. Agreement in restraint of marriage is void – “Every agreement in restraint of the marriage of any person, other than a minor is void.

Analysis: Agreements in restraint of marriage is bad, as being opposed to public policy. According to law, marriage and the married status being the right of every individual. Any agreement which prevents a person from marrying is void.

Conclusion: By an agreement ‘X’ restrained ‘Y’ from marrying. Therefore, the agreement is void as being opposed to public policy U/S 26. So, “Y’ cannot recover the promised amount from ‘X’.

Q.No.9. X threatens to kill Y if he (Y) does not sell his house to X for Rs. 1, 00, 000. Y agrees. X borrows Rs. 1,00,000 from Z who is also aware of the purpose of the loan. What is the nature of the agreement between X and Y and X and Z?

Facts of the case: X threatens to kill Y if he did not sell his house for Rs.1,00,000. X borrowed the amount from Z who is also aware of the purpose.

Issue / Provisions: What is the nature of agreements between ‘X’ and ‘Y’ and ‘X’ and ‘Z’?

Law/Provision: Sec.10, Sec.14, Sec.15 and Sec.19.

According to Sec.10 - One of the essential elements of a valid contract is “free consent”. Sec.14 states that Consent is said to be free when it is not caused by Coercion or Undue Influence or Fraud or misrepresentation or, mistakes subject to the provisions of Sec. 20, 21 and 22.

Sec. 15 defines “Coercion” as “Committing or threatening to commit any act forbidden by Indian penal code, 1860 and Sec. 19 result of coercion is that the agreement is voidable.

Analysis: A Contract may be violated by the absence of free consent. The consent obtained by coercion is not free consent and the agreement is voidable, that can be avoided by the aggrieved party.



Conclusion: In the problem, ‘X’ obtained the consent of ‘Y’ by threatening him to kill. Therefore, it amounts to coercion. It lacks free consent. The agreement between ‘X’ and ‘Y’ is voidable. In pursuit of the aforesaid contract ‘X’ borrows one lack rupees to pay for the house which is a valid contract as borrowing for purchase of house is lawful.

Q.No.10. State with reason whether there is any contract made in the following case as per the Indian Contract Act, 1872: “J puts three one rupee coins in the slot of a platform ticket vending machine at the Railway Station”

In this case there comes into existence a valid contract as soon as J puts three one rupee coins in the slot of the ticket vending machine. This amounts to acceptance on the part of J, of an implied offer by the owner of the ticket vending machine.

Q.No.11. Mr. X promises to pay Rs. 1,000 per month to Mrs. X but fails to pay the promised amount. Mrs. X filed a suit against her husband for breach of this agreement. Will she succeed?

Facts of the case: X promised Y, his wife to give an amount of Rs.1,000 per month. But fails to pay the amount. Mrs. X filed a suit against Y for breach of contract.

Provisions and Analysis: Agreements of moral, religious or social nature like promise to attend marriage, birthday party etc. are not treated as contracts because they are not intended to create legal duty enforceable by law as the parties to such agreements never intended to create legal consequences for breach thereof. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship.

Conclusion: She will not succeed because it was a domestic agreement and the parties never intended to create any legal relations. [Leading case: Balfour Vs. Balfour].

Q.No.12. X Ltd. was appointed as an agent by Y Ltd., by an agreement. One of the clauses of the agreement provided that, “This agreement is not entered into as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts “. Is this agreement a valid contract?

Facts of the case: X Ltd. appointed Y Ltd. as an agent by an agreement with a clause in it that, this agreement cannot be legally enforceable.

Provisions and Analysis: An agreement enforceable by law is a valid contract. In other words if an agreement satisfies all the requirements laid down in section 10 is said to be a valid contract. If any of the essential requirements is missing, it is not a valid contract. [Leading Case: Rose & Frank Company v. Crompton Brothers]

Conclusion: This agreement is not a legally binding contract because there was no intention to create relations.

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2. OFFER AND ACCEPTANCE


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Q.No.1. Define the term Offer / Proposal. Explain the Legal Rules for Valid Offer.

Introduction:

1. An offer is a proposal by one party to another to enter into a legally binding agreement with him

2. An offer is the starting point of an agreement. An offer is also called ‘proposal’.

3. The person making the proposal or offer is called the ‘proposer’ or ‘offeror’, and the person to whom the offer is made is called the ‘offeree’ or ‘proposee’ and after acceptance of offer the offeror becomes ‘promisor’ and the person accepting the offer becomes the ‘promisee’ or ‘acceptor ’.

Definition [Sec.2(a)]:

1. The words proposal and offer are used interchangeably and it is defined under Sec.2(a) of the Indian Contract Act, 1872 as “When one person signifies to another, his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”

2. Thus, for a valid offer, the party making it must express his willingness ‘to do’ or ‘not to do’ something. But mere expression of willingness does not constitute an offer.

For instance, where ‘A’ tells ‘B’ that he desires to marry by the end of 2004, it does not constitute an offer of marriage by ‘A’ to ‘B’.

3. Therefore, to constitute a valid offer expression of willingness must be made to obtain the assent (acceptance) of the other.

Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute an offer.

1. Offer consists of willingness to do some act or not to do any act: Offer may be in the form of doing or not doing (abstinence) or restraining from doing (self denial) any act. Simply, an offer can be positive or negative.

2. Offer must be capable of creating legal relationship: If the offer does not intend to give rise to legal consequences and creating legal relations, it is not considered as a valid offer in the eyes of law. A social invitation, even if it is accepted, does not create legal relations because it is not so intended, An offer, therefore, must be such as would result in a valid contract when it is accepted.

Legal Rules for Valid Offer

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3. The offer must be distinguished from an invitation to offer: An invitation to offer means the person inviting the other party to make an offer. His object is only to circulate the information that he is willing to deal with anyone who, on such information, is willing to have negotiations with him.

4. An offer may be specific or general. An offer can be made to either public at large or to any specific person or group of persons.

5. An offer may be conditional: An offer can be made subject to any terms and conditions by the Offeror. The Offeree will have to accept all the terms of the offer, otherwise the contract will be treated as invalid.

6. The terms and conditions of the offer must be clear, definite and unambiguous:

a) If the terms of an offer are vague or indefinite, its acceptance cannot create any contractual relationship.

b) It should not be loose or vague. A vague offer does not convey the actual meaning of the offer.

c) If the agreement contains reference for ascertaining a vague term, the agreement is not void

on the ground of its being vague.

7. The offer must be communicated: An offer, to be complete, must be communicated to the person to whom it is made. Unless an offer is communicated, there can be no acceptance by it. An acceptance of an offer, in ignorance of the offer, is not acceptance and does not create any right on the acceptor.

8. Communication of complete offer (or) Standard form of Contracts:

a) It is the duty of the offeror to communicate all the terms of the offer (i.e. complete offer) to the offeree.

b) The special terms of the offer must also be communicated along with the offer otherwise the offeree will not be bound by these terms.

c) Generally special terms arise in case of standard form of contracts with big companies such as insurance companies, railways, shipping companies, banking companies, hotel companies, dry cleaners, etc.

d) Sometimes some conditions attached to the contract will be printed on the front side of the ticket. In such a case communication is complete and offeree is bound by those conditions. Offeree can't say that he didn’t or could not read those conditions.

e) If the conditions are printed in a language which the offeree doesn’t know then it is the duty of the offeree to ask for the translation before accepting the offer. Otherwise, it will be presumed that he knows them and he will be bound by them.

f) If those conditions are printed on the back side then it is the duty of the offeror to indicate some mark that conditions are printed on the back side. For example, "For conditions see back". Then only offeree will be bound by those conditions.

G’s nephew was missing. L, who was servant of G, left his services to search for the missing boy. Meanwhile G issued an advertisement offering reward of Rs.501 to anyone who might trace the boy. L found the boy and brought him home. He did not get the reward and filed a suit against G. The court held that he acted in ignorance of the offer and so he is not entitled to reward.

Lalman Shukla Vs. Gauri Dutt [(1913) 11 All LJ 489]

A offered to take a house on lease for 3 years at Rs.10,000 per annum if the house was “put into thorough repair and drawing rooms handsomely decorated according to the present style.” Held, the offer was too vague and hence invalid.

Taylor Vs. Portington (1855) All ER 128



g) The special terms and conditions must be reasonable. What is reasonable is a question of fact. If terms and conditions are unreasonable then the other party will not be bound by them.

9. An offer must not put the burden of acceptance on the Offeree: a man cannot say that if acceptance is not communicated by a certain time the offer would be considered as accepted.

10. An offer may be made either by words or by conduct.

11. Offer must be made with a view to obtain the assent of the other: The offer must be made with a view to obtaining the consent/assent of the Offeree. Thus a casual enquiry or a mere statement of intention is not a proposal.

12. The offer must be made to some other person, but not to himself.

13. Offer is different from:

a) Invitation to offer.

b) Cross offer.

c) Counter offer.

d) Declaration of intention or an announcement

Note: You will get detailed discussion on this concept in the next questions of this chapter itself. Similar Question : Define an offer. Explain the rules of an offer. Hew an offer is different from an invitation to offer (PM)


(IMMEDIATELY REFER PRACTICAL QUESTION NO.6, 7, 17)

Q.No.2. Types of Offer.

Q.No.3. Write about Specific Offer & General Offer.

Specific / Special Offer:

1. When offer is made to a definite person, it is known as specific offer and such offer can be accepted only by that specified person.

2. Offer to one particular person: Where an offer is made to one particular person, it can be accepted by that person only.

3. Offer to a group of persons: Where an offer is made to a particular group of persons, it may be accepted by any member of that group.

TYPES OF OFFER

SPECIAL OFFER COUNTER OFFER

GENERAL OFFER CROSS OFFER STANDING OFFER

P bought a steamer ticket. On its back certain conditions were printed. One of the conditions excluded the liability of the company for loss, injury or delay to the passenger or his luggage. There was no indication on the face of the ticket that certain conditions were written on the back of it. P’s luggage lost on the way because of the negligence of the company’s servants. The court held that P was entitled to recover his loss from the company.

Henderson Vs. Stevenson



General Offer:

1. It is an offer made to the public in general and hence anyone can accept and do the desired act.

2. Section 8 of the Indian Contract Act, points out that performance of the conditions of a proposal is an acceptance of the proposal.

3. Where an offer is made to the whole world, it can be accepted by anyone having its knowledge. When the offer is accepted by a particular person, there is a contract between the offeror and that particular person. If a large number of persons accept the offer, there are as many contracts as the number of persons accepting the offer.

4. Where some reward is offered for giving some information, e.g. information about some lost property, information about some thief, etc. acceptance can be made only by the first person who gives such information.


Q.No.4. Write about Cross Offers.

1. When two parties exchange identical offers in ignorance at the time of each other’s offer, the offers are called cross offers.

2. There is no binding contract in such a case, as one’s offer cannot be construed as acceptance by the other.

Q.No.5. Write about Counter Offer.

1. Counter offer means making a fresh offer instead of accepting the original offer. Acceptance of an

offer with a variation is not acceptance. It is simply a counter offer.

A company advertised to give a reward to anyone who is contacted by influenza after using the medicine of the company for a certain period according to the printed directions. Mrs. ‘X’ purchased the advertised medicine and contacted influenza though using the medicine as per printed instructions. Mrs.’X’ claimed for the reward. The claim was denied by the company on the ground that offer was not made to Mrs.’X’ and also that she had not communicated her acceptance to an offer. It was decided that she could recover the reward as she had accepted the offer by complying with the terms of offer.

Carlill v. Carbolic Smoke Ball Co.

A offers by a letter to sell 100 tons of steel at Rs.1000 per ton. On the same day B also writes to A offering to buy 100 tons of steel at Rs.1000 per ton. The two letters crossed each other in post. B brought an action against A for the supply of steel. He contended that a valid contract had been created with A. Held, that there were only two cross offers and either of the parties has not accepted. Hence, no binding contract was created.

Tinn v. Hoffman

J offered to purchase 50 feet of leather from Z. In the meantime Z sold his business to B. Therefore instead of Z, B supplied the leather to J. J refused to accept the leather on the plea that his offer was open to Z only and B’s acceptance does not carry any meaning. It was held that the offer had been directed to Z personally and it could not be accepted by B.

Boulton Vs. Jones



2. When the Offeree offers to qualified acceptance of the offer subject to modifications and

variations in the terms of the original offer, he is said to have made a counter offer.

Effects of Counter Offer: 1. Counter offer amounts to rejection of the original offer.

2. Once a counter offer is made, the original offer is lapsed. An offer once rejected is dead.

3. Counter offer results in a new offer.

4. Acceptance of counter offer by the original offeror amounts to acceptance and a contract is formed (on the basis of counter offer).

5. Sometimes offeree may change his mind and wants to accept the original offer. If the original offeror wants to form a contract then he may accept this and a valid contract is formed on the basis of fresh offer. But there is no rule that offeror must accept. This is so because when a counter offer is made original offer comes to an end.

Examples:

� ‘A’ offers to sell his plot to ‘B’ for Rs.10 lakhs. ’B’ agrees to buy it for 8 lakhs. It amounts to counter offer. It may result in the termination of the offer of ’A’. And if later on ‘B’ agrees to buy the plot for Rs. 10 lakhs, ’A’ may refuse.

Note: Mere statement of enquiry is not a counter offer.

E.g.: M made an offer to sell iron to S at Rs.40,000 net cash per ton”. S replied asking whether delivery could be within two months. M thereupon sold the iron to X, a third party. S had no knowledge of the sale to X and informed M that he would accept on the proposed terms. M contended that enquiry made by S had the effect of canceling the original offer. It was held that the first reply by S was merely a request for information. It did not amount to counter offer. Therefore, original offer will not lapse and it will continue. Therefore, M has done breach of contract by selling iron to X.


Q.No.6. Write about Invitation to Offer.

Offer and Invitation to Offer:

1. An offer should be distinguished from an invitation to offer.

2. An offer is definite and capable of converting an intention into a contract. Where as an invitation to an offer is only a circulation of information and it is an attempt to induce offers and precedes a definite offer.

3. Acceptance of an invitation to an offer does not result in the contract and only an offer emerges in the process of negotiation.

4. When a person advertises that he has stock of books to sell or houses to let, there is no offer to be bound by any contract. Such advertisements are offers to negotiate i.e. offer to receive offers.

5. Does the person who made the statement intends to be bound by it as soon as it is accepted by the other or he intends to do some further act, before he becomes bound by it? In the former case, it amounts to an offer and in the latter case, it is an invitation to offer.

6. In order to ascertain whether a particular statement amounts to an ‘offer’ or an ‘invitation to offer’, the test would be intention with which such statement is made.

7. When a person makes an invitation to offer, the purpose is not to obtain the assent of the other person, but merely to circulate the information that he is willing to deal with.

8. Acceptance to an invitation to offer cannot give rise to a contract.



Possible Forms of ‘Invitation to Offer’: 1. Displaying goods for sale: Where goods, with a price tag attached, are displayed in a shop

window, it is not an offer by the shop, but it is merely an invitation by the shop to the public to make an offer for the goods.

2. Price lists, catalogues: The issue of a tradesman’s circular or catalogue advertising goods for sale is usually treated as mere attempt to induce offers and it is not an offer. The price list of goods does not constitute an offer for sale of certain goods on the listed prices. It is an invitation to offer.

3. Advertisement: Generally, an advertisement on a hoarding, a newspaper ‘display’, or a television advertisement, etc. is not regarded as an offer. These are simply attempts to make the public aware of what is available and cannot be treated as an offer. A recognised exception to this is a general offer of reward to the public.

4. Declaration of intention: A declaration of intention, such as an advertisement to hold an auction, does not amount to an offer. Likewise, an announcement of a beauty competition by a beauty parlour or a scholarship examination by some college is not an offer.

5. Auctions: At an auction sale, the auctioneer’s request for bids is invitation to offer. Bids placed by

the bidders will be treated as offer. If the auctioneer accepts the offer, he will strike the table with his hammer. Thus an auctioneer can withdraw any item from auction, before the fall of hammer.

6. Prospectus: A company which makes an offer to the public of new shares is treated as invitation to offer. It invites members of the public to apply for the shares. The share applications put by the general public will be treated as offer. The allotment of shares by the company is treated as acceptance.

7. Tenders: If A asks number of tradesmen to put in tenders for supplying certain goods or services, he is not making any offer. Consequently he is not bound to accept the lowest or any other tender. The offer comes from the tradesmen in the form of tender or estimate.

8. Quotation of lowest price is not an offer.

(IMMEDIATELY REFER PRACTICAL QUESTION NO.3, 4, 5, 18)

H sent a telegram to F writing “will you sell your house? Telegraph lowest cash price”. The defendant also replied by a telegram “Lowest price for the house, Rs.10,000”. The plaintiff immediately sent a last telegram stating, “We agree to buy your house for Rs.10,000 asked by you”. F refused to sell the property at the price. H contended that F has quoted the minimum price, which should be treated as offer, and he has accepted the offer. The court pointed out that in their first telegram H has asked two questions, first about the willingness to sell and second about the lowest price. The defendant answered only the second question and gave the lowest price. They reserved their answer to first question. Thus, they had made no offer. The court was of the opinion that the mere statement of lowest price cannot be considered as offer. So, there is no contract at all.

Harvey Vs. Facie

An auctioneer, N, advertised that a sale of office furniture would take place at a particular place on a particular date. H saw the advertisement and travelled from London to attend the sale. When he arrived, he came to know that the office furniture was withdrawn from sale. He claimed the damages for loss of time and expenses incurred in journey. It was held that the advertisement was mere declaration of intention, not an offer. H was not entitled for compensation.

Harris v. Nickerson



Q.No.7. Define the term ‘Acceptance’. Discuss the Legal Provisions relating to its Communication (M 12 -5M)

Meaning: 1. A proposal or offer is said to have been accepted when the person to whom the proposal is made

signifies his assent to the proposal to do or not to do something [Sec.2(b)].

2. Acceptance is an expression, by words or conduct, which clearly indicates that the person making it, agrees to be bound by the terms of offer.

3. An acceptance is the manifestation by the offeree of his willingness to be bound by the terms of the offer.

Essential Elements of Valid Acceptance (or) Rules Regarding Acceptance: 1. Acceptance must be absolute and unqualified (Sec 7(1)):

a) As per Sec.7 an acceptance is valid when it is absolute and unqualified and is expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted.

b) Also an acceptance with a variation is no acceptance. It is simply a counter proposal which shall have to be accepted by the original proposer before a contract can be deemed to have come into existence.

c) A counter proposal is the offer by the offeree and can result in a contract only if it is accepted by the other party.

2. The acceptance must be expressed in some usual or reasonable manner (Sec.7(2)):

a) Where the mode of acceptance is prescribed in the proposal, it must be accepted in that manner.

b) But if the proposer does not insist on the proposal being accepted in the manner prescribed after it has been accepted otherwise, i.e., not in the prescribed manner, the proposer is presumed to have consented to the acceptance.

c) If acceptance is not communicated according to the mode prescribed, it is called deviated acceptance. Even in such a case acceptance is not invalid.

d) Law imposes a duty on the offeror to reject such acceptance within a reasonable time. If he fails to do so, he becomes bound by the acceptance

E.g.: If the Offeror prescribes acceptance through messenger and offeree sends acceptance by email, there is no acceptance of the offer if the offeror informs the offeree that the acceptance is not according to the mode prescribed. But if the offeror fails to do so, it will be presumed that he has accepted the acceptance and a valid contract will arise.

3. Acceptance must be given before the offer lapses or revoked: Acceptance can be given only to an existing offer. When an offer terminates, it cannot be accepted.

4. An acceptance must be communicated to the offeror: It must further be remembered that an acceptance must be communicated to the person who made the offer. The Offeree should do something to signify his assent i.e. to communicate his acceptance.

Acceptance can be communicated in any of the following modes:

a) By words spoken, b) By words written, c) By conduct.

5. Acceptance by conduct: The assent means that acceptance has been signified either in writing or by words of mouth or by performance of some act. Therefore, when, a person performs the act intended by the proposer as the consideration for the promise offered by him, the performance of the act constitutes acceptance.



6. Mere silence is not acceptance: The acceptance of an offer cannot be implied from the silence of the Offeree or his failure to answer, unless the Offeree has in any previous conduct indicated that his silence is the evidence of acceptance.

E.g.: ’A’ subscribed for the weekly magazine for one year. Even after expiry of his subscription, the magazine company continued to send him magazine for five years. And also ‘A’ continued to use the magazine but denied to pay the bills sent to him. ’A’ would be liable to pay as his continued use of the magazine was his acceptance of the offer.

7. Where the Offeree (having reasonable opportunity to reject the offered goods or services) enjoys or avails the benefits of goods or services, it will be regarded as acceptance.

8. Agreement to agree in future is not valid.

9. Acceptance must be given by the party to whom the offer is made. Acceptance can be given by the offeree or his duly authorised agent.

10. Time: Acceptance must be given within the specified time limit, if any, and if no time is stipulated, acceptance must be given within the reasonable time and before the offer lapses.

11. Acceptance cannot precede an offer. Acceptance must be given after receiving the offer. It should not precede the offer.

12. Acceptance cannot be made in ignorance of offer: An acceptance made by the intended Offeree without the knowledge that an offer has been made to him cannot be deemed as an acceptance thereto. (Bhagwandas v.Girdharilal). The rule is that acceptance follows the offer.

13. A mere mental acceptance is not considered as acceptance in the eyes of law.

E.g.: A draft agreement relating to the supply of coal was sent to the manager of a Railway company for his approval. The manager put the words ‘approved’ on the agreement but the draft remained in his table. Held, there was no contract because there is no communication.

14. Acceptance subject to contract is no acceptance: If the acceptance has been given “subject to contract” or subject to approval by certain persons or by the use of similar words, it has no effect at all. Such an acceptance will not create binding contract until a formal contract is prepared and signed by all the parties.

Similar Question:

1. B agrees to purchase the car from A as per his proposal, subject to availability of valid registration certificate for the car. (RTP M 14)

Ans: Refer point no 14.

2. Explain in brief the rules relating to acceptance of an offer under the provisions of the Indian contract Act., 1872.

Ans: Refer above answer


Q.No.8. How an Offer gets Terminated?

An offer may terminate by the operation of law or by the act of the parties. The Act under section 6 states the circumstances when an offer comes to an end. But these are not exhaustive.

1. Revocation [Sec.6(1)]: A proposal is revoked by the communication of notice of revocation by the proposer to the other party. A proposal may be revoked at any time before the proposal is accepted.

2. Lapse of time [Sec 6(2)]: A proposal is revoked by the lapse of time prescribed in such proposal. If no time is prescribed in the offer, the offer comes to an end after the lapse of reasonable time.

3. Failure of acceptor to fulfill the condition precedent to acceptance [Sec.6(3)]: A proposal is revoked when the acceptor fails to fulfill a condition precedent to the acceptance of the proposal.



E.g.: A, a seller agrees to sell his house subject to the condition that B, a buyer, pays the agreed price before a certain date. B fails to fulfill that condition. Hence the offer stands revoked.

4. Death or insanity of the proposer [Sec.6(4)]:

a) 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.

b) If the offeree does not know that the offeror has died or gone insane and gives his acceptance, it is a valid acceptance in the eyes of law. This will result in a valid contract and legal representatives of the deceased offeror shall be bound by the contract.

5. Death of Offeree before acceptance, terminates the offer.

6. Rejection: An offeree may reject the offer. Once he rejects, he cannot subsequently accept it. Rejection of proposal is entirely different from revocation.

Rejection may be of two types:

Express rejection: The offeree may reject the offer expressly, i.e. by words written or spoken. Express rejection is effective only when notice of rejection reaches the offeror.

Implied rejection: Rejection of offer is implied by law:

a) Where the offeree makes a counter offer.

b) Where the offeree gives a conditional acceptance.

7. Counter offer: A counter offer proposing different terms terminates the original offer.

8. Failure to accept according to the mode prescribed: Offer is terminated if the offeree fails to accept it according to the mode prescribed by the offeror.

9. Subsequent illegality or destruction of the subject matter: An offer lapses if it subsequently becomes illegal or when the subject matter of an offer gets destroyed.

Q.No.9. State the Legal Provisions relating to Tenders.

Tender: A tender is an offer made in response to an invitation to offer (i.e. notice inviting tenders) for supply of goods or services or to execute certain work at a particular price. The persons filling up the tenders are called as tenderors or bidders or offerors. A tender can be: Specific or Definite: Where the offer is to supply a definite quantity of goods it is called specific or definite tender. The party inviting the tenders may either accept or reject it. When a particular tender is accepted (generally the lowest one) it creates a contract between the parties. Standing Offer or Tender:

1. An offer is allowed to remain open for acceptance over a period of time is known as a standing, open or continuing offer. Tender for supply of goods is a kind of standing offer.

2. Offer to supply goods periodically or in accordance with the requirements of the Offeree is a standing tender.

3. If such tender is approved, it becomes a standing or open or continuing offer.

4. As and when an order is placed (on the basis of standing offer), it amounts to acceptance. Each order creates a new binding contract between the parties.

5. Thus, there are as many contracts as number of orders.

E.g.: A Railway Co. invited tenders for the supply of stores. W made a tender 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.



Held W was bound to supply the goods as per the terms of the tender.

6. 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. But the tender is irrevocable:

- If the tenderer has promised not to withdraw it, on some consideration or

- Where there is a statutory prohibition against withdrawal. Note: Tender = bid = offer Tenderer = bidder = offeror

Q.No.10. When is the Communication of an Offer and Acceptance Complete?

Communication:

1. When the contracting parties are face to face, there is no problem of communication, because there is instantaneous communication of offer and acceptance. In such a case the question of revocation does not arise since the offer and its acceptance are made instantly.

2. Difficulty arises when the contracting parties are at a distance from one another and they utilise the services of the post office or telephone. In such cases it is very much relevant for us to know the exact time when the offer or acceptance is made or complete.

Acceptance Over Telephone or Telex or Fax:

1. When an offer is made of instantaneous communication like telex, telephone, fax or through e-mail, the contract is only complete when the acceptance is received by the Offeror and the contract is made at the place where the acceptance is received. (Entores Ltd. v. Miles Far East Corporation)

2. In case of telephone/fax etc., it is presumed that there is instantaneous communication. So, there is no scope for revocation.

3. But while communicating, if the equipment goes out of order or some other disturbance occurs, due to which the message is not conveyed properly, the communication is not treated as complete.

4. Where the acceptance is given by post, the place where the letter is posted is the place of contract.

5. When the parties negotiate a contract through mail (i.e. post) or by telegram, there is considerable time lag between putting the message in the course of transmission by one party and its receipt by the other party.

6. In such cases, it is very important to decide the precise moment when communication is completed.

Communication of Offer - When Complete?

1. The communication of an offer is complete when it comes to the knowledge of the person to whom it is made (Sec.4).

2. An offer may be communicated either by words spoken or written or it may be inferred from the conduct of the parties.

3. When a proposal is made by post its communication will be complete when the letter containing the proposal reaches the persons to whom it is made.

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E.g.: A makes proposal to B to sell his house for Rs.two lakhs. The letter is posted on 10th March. This letter reaches B on 12th instant. The offer is said to have been communicated on 12th, when B receives the letter.

Communication of Acceptance when complete?

1. Communication of an acceptance is complete:When a proposal is accepted by a letter sent by the post the communication of acceptance will be complete

� as against the proposer when the letter of acceptance is posted and

� as against the acceptor when the letter reaches the proposer.

2. Thus, the offeror becomes bound by the acceptance as soon as the letter of acceptance is posted by the acceptor.

For the acceptor, the communication of acceptance is complete, when it comes to the knowledge of the offeror.

3. Acceptance is complete as against the offeror as soon as the letter of acceptance is posted.

The contract is complete even if the letter of acceptance goes away or is lost through an accident in the post.

But in order to bind the offeror, it is important that the letter of acceptance is correctly addressed, sufficiently stamped and posted.

If it is not correctly addressed and sufficiently stamped, the communication of acceptance is not complete.

Ex: A proposes, by a letter to sell his house to B at a certain price. The letter is posted on 1st June at 10.00 a.m. It reaches to B on 3rd June at 3.00 p.m. B accepts A's proposal, by a letter sent by post on 13th instant. The letter reaches A on 15th instant. The communication of the acceptance is complete as against A when the letter is posted i.e. on 13th and as against B it is complete when the letter is received by A i.e. on 15th.

Continuing with the above example, on 5th June at 2.00 p.m. B hands over the letter of acceptance to his peon for posting. Peon actually posted the letter at 2.30 p.m. The letter reaches A on 8th June at 11.00 a.m. Communication of acceptance is complete:

As against A, the offeror - when letter is actually posted at 2.30 p.m. on 5th June (not at 2.00 p.m. when it was handed over to the peon, since the letter is said to be out of the power of the acceptor only when the letter is actually posted).

As against B, the acceptor - On 8th June at 11.00 a.m. when letter is received by A.

4. Position in English Law: In English Law, communication of acceptance as against the offeror and offeree completes with the posting of letter of acceptance.


Q.No.11. Revocation of Offer.

Revocation means ‘taking back’ or ‘recalling’ or ‘withdrawal’.

When an Offer may be Revoked?

1. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. [Sec. 5]

2. In simple words it can be said that an offer can be revoked before its acceptance. But the communication of revocation of offer should reach offeree before he posts the letter of acceptance.

3. Ordinarily, the offeror can revoke his offer before it is accepted. If he does so, the offeree cannot create a contract by accepting the revoked offer.



E.g.: The bidder at an auction sale may withdraw (revoke) his bid (offer) before it is accepted by the auctioneer by fall of hammer.

4. An offer may be revoked by the offeror before its acceptance, even though he had originally agreed to hold it open for a definite period of time. So long as it is a mere offer, it can be withdrawn whenever the offeror desires.

E.g.: X offered to sell 50 bales of cotton at a certain price and promised to keep it open for acceptance by Y till 6 pm of that day. Before that time X sold them to Z. Y accepted before 6 p.m., but after the revocation by X. In this case it was held that the offer was already revoked.

5. If the Offeror has agreed to keep his offer open for a certain period he can revoke it before the expiry of that period only:

• If the offer is not accepted in the meantime.

• If there is no consideration for keeping the offer open.

Ex T offered, by a letter on October 1, to sell goods to B in New York. B received the offer on 11th and immediately telegraphed his acceptance. On 18th, T wrote a letter revoking his offer. The letter was received by B on 20th. Held, the revocation was of no effect until it reached B. A contract was made on 11th October when B accepted the offer.

Communication of Revocation of offer - when complete? Under Sec.4, the communication of revocation is complete:

1. As against the person who makes it, (Proposer) - when it is put into a course of transmission to the person to whom it is made (Proposee) so as to be out of the power of the person who makes it;

2. As against the person to whom it is made (Proposee/Acceptor) - when it comes to his knowledge.

Ex: A proposes by a letter to sell a house to B at a certain price. The letter is posted on 15th may. It reaches B on 19th may. A revokes his offer by telegram on 18th may. The telegram reaches B on 20th may. The revocation is complete as against A when the telegram is dispatched i.e. on 18th. It is complete as against B when he receives it i.e. on 20th.

Notes:

1. Revocation must always be expressed.

2. Revocation must move from the offeror himself or a duly authorised agent.

3. Notice of revocation of a general offer must be given through the same channel by which the original offer was made.

4. Offer cannot be revoked even if the letter of acceptance is lost or delayed in transit.

Q.No.12. Revocation of Acceptance.

When an Acceptance may be Revoked?

1. An acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor, but not afterwards. [Sec. 5]

2. Thus an acceptance can be revoked any time before the letter of acceptance reaches the offeror. Once the acceptance comes to the knowledge of the offeror, it cannot be revoked.

3. Under Sec.5, a proposal may be revoked at any time, before the communication of its acceptance is complete as against the proposer.

An acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor.

E.g.: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. Whereas B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.



4. An acceptance to an offer must be made before that offer lapses or is revoked.

5. The law relating to the revocation of offer is the same in India as in England, but the law relating to the revocation of acceptance is different.

6. In English law, the moment a person express his acceptance of an offer, that moment the contract is concluded, and such an acceptance becomes irrevocable, whether it is made orally or through the post. In Indian law, the position is different as regards contract through post.

7. Contract through post – As acceptance, in English law, cannot be revoked, so that once the letter of acceptance is properly posted the contract is concluded. In Indian law, the acceptor can revoke his acceptance any time before the letter of acceptance reaches the offeror, if the revocation telegram arrives between or at the same time with the letter of acceptance, the revocation is absolute.

8. Contract over Telephone – A contract can be made over telephone. The rules regarding offer and acceptance as well as their communication by telephone or telex are the same as for the contract made by the mutual meeting of the parties. The contract is formed as soon as the offer is accepted but the offeree must make it sure that his acceptance is received by the offeror, otherwise there will be no contract, as communication of acceptance is not complete. If telephone unexpectedly goes dead during conversation, the acceptor must confirm again that the words of acceptance were duly heard by the offeror.

(IMMEDIATELY REFER PRACTICAL QUESTION NO.14, 15)

MISCELLANEOUS

Acceptance is "to an offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone". – William Anson

Q.No.1. “Good Girl” Soap Co. advertised that it would give a reward of Rs. 1,000 who developed skin disease after using “Good Girl” soap of the company for a certain period according to the printed directions. Miss Rakhi purchased the advertised “Good Girl” soap and developed skin disease in spite of using this soap according to the printed instructions. She claimed reward of Rs. 1,000. The company refused the reward on the ground that offer was not made to her and that in any case she had not communicated her acceptance of the offer.

Decide whether Miss Rakhi can claim the reward or not. Refer the relevant case law, if any,

Facts of the case: Good Girl soap Co. advertised that it would give a reward of Rs. 1,000 who developed skin disease after using their soap. Miss. Rakhi purchased the same and used it. She developed the disease after using it. Later the company refuses to pay award to her that she had not communicated her acceptance to them.

Case Law: Carlill v. Carbolic Smoke Ball Co.

Provision & Analysis: Advertisement issued by the company is an offer made to the public in general and hence any one can accept and do the desired act. Where a general offer is of continuing nature, it will be open for acceptance to any number of persons until it is retracted. The Contract Act posits that performance of the conditions of a proposal is an acceptance of the proposal. So there is no need of actual and formal offer and the communication of an acceptance of an offer. In this case Miss. Rakhi has received an offer through general offer. Therefore acceptance for such offer is not necessary.

Conclusion: Yes, Miss Rakhi can claim the reward of Rs.1, 000.

Q.No.2. X advertises in a news paper that he would pay Rs. 1,00,000 to anyone who traces his missing son. Y traced that boy and claimed the amount of reward. State whether Y is entitled to receive the amount of reward if (a) he did not know about the reward, (b) if he knows about the reward?

PRACTICAL QUESTIONS

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Facts of the case: X in order to trace his missing son, advertised in the news paper a reward of Rs.1,00,000. Y traced the boy and claimed the amount.

Provisions and Analysis: The offer must be capable of creating legal relation. It may be express or implied. A proposal is said to have been accepted when the person to whom it is made signifies his assent to the proposal to do or not to do something. An offer made by the intended offeree without the knowledge that an offer has made to him cannot be deemed as an acceptance thereto.

Conclusion:

a) Y is not entitled to receive the amount of reward because there can be no valid acceptance without the knowledge of the offer. [Leading case: Lalman Shukla v. Gauri Dutt].

b) Y is entitled to receive the amount of reward because Y has accepted the general offer by tracing the missing son. [HarBhajan Lal v. Harcharan Lal]

Q.No.3. X, a broker of Mumbai wrote to Y, a merchant of Ghaziabad stating the terms on which he is willing to do business. Is the letter a valid offer by X to Y?

Facts of the case: X, a broker of Mumbai wrote to Y, a merchant of Ghaziabad stating the terms on which he is willing to do business.

Provisions and Analysis: An offer is definite and capable of converting an intention into contract. A mere intention cannot be said as an offer. [Devidatt v. Shriram]

Conclusion: The letter was a mere statement of intention and not an offer at all.

Q.No.4. A notice that the goods stated in the notice will be sold by tender. Is the notice a valid offer to sell?

Facts of the case: A notice that the goods stated in the notice will be sold by tender.

Case law: Spencer v. Harding

Provisions and Analysis: An offer is definite and capable of converting an intention into contract. A mere intention cannot be said as an offer.

Conclusion: The notice was mere a statement of intention and not an offer to sell.

Q.No.5. X, gave an advertisement in a newspaper that a sale of office furniture by auction will be held at 2 P.M. On 9th August, 1997 at ‘Pragati Maidan, Stall No. 420, New Delhi’. Y from Mumbai reached New Delhi on the appointed date and time but X had cancelled the auction sale. Advise Y.

Facts of the case: X, gave an advertisement in a newspaper that a sale of furniture by auction at New Delhi. Y came to attend the auction sale, later which was cancelled.

Provisions and Analysis: In the case of invitation to offer the person sending out invitation does not make an offer but only invites the other parties to make an offer. An advertisement for sale of goods by auction, quotations, catalogues of prices or display of goods at show room with price tag etc. is invitation of offer rather than offer. [Leading case: Harris v.Nickerson].

Conclusion: Y cannot file a suit against X for his loss of time and expenses because the advertisement was merely an invitation to offer and not an offer to sell.

Q.No.6. X delivered a coat to Y, a dry cleaner for dry cleaning and took the receipt. On the back of the receipt, certain conditions were printed in English language. One of the conditions printed on the back was ”the liability of the dry cleaner Company shall be limited to the 50% of the cost of goods.” X never looked at the back of the receipt. X’s coat was lost and X claimed the actual value of the coat. Discuss the legal position in each of the following alternative cases:

Case (a): If there was nothing on the face of the receipt to draw the attention to the conditions printed on the back side and X was a graduate in English.



Case (b): If on the face of the receipt, the words ‘See Back’ were printed in English but X did not read it.

Facts of the case: X delivered Y, his coat for dry cleaning and took the receipt. There were certain conditions written on back of the receipt which were overlooked by X. Later on X’s coat was lost.

Provisions and Analysis: The party delivering the document should have given reasonable notice of the special terms and conditions. Words like See Back, Please Turnover etc. are indicative of a reasonable notice to the acceptor. It shall be binding even though the acceptor did not read or understand the same. Moreover the acceptor will not incur any contractual obligation, if the document is printed or delivered to him in such condition that, it does not give reasonable notice on its face that it contains certain special conditions. [ Case law: Handerson v. Stevenson. Conclusion:

Case (a): X was entitled to claim compensation for the loss of his coat because there was no indication on the face of the ticket to draw his attention to the special terms printed on the back of the tickets.

Case (b): X was entitled to claim only 50% of the cost of the coat because there was sufficient notice on the face of the ticket as to the existence of the conditions.

Q.No.7. X and Mrs. X hired a room in a hotel for a week. When they entered the room, they found a notice on the wall disclaiming the owner’s liability for damages, loss or theft of articles. Some of their items were stolen. Discuss the legal position.

Facts of the case: X and Mrs. X hired a room in a hotel for a week. They found a notice in the room stating the owner’s liability for the lost items.

Provisions and Analysis: The party delivering the document should have given reasonable notice of the special terms and conditions. Words like See Back, Please Turnover etc. are indicative of a reasonable notice to the acceptor. It shall be binding even though the acceptor did not read or understand the same. Moreover acceptor is not bound, when the conditions are contained in a document that is delivered after the contract is complete.

Case law: Leading case: Olley vs. Marlborough Court Ltd.

Conclusion: The owner of the hotel was liable because the special terms (i.e. notice) were communicated after the formation of the contract.

Q.No.8. X sold his business to Y but this fact was not known to an old customer Z. Z placed an order for certain goods to X by name. Y supplied the goods to Z. Is there a valid contract?

Facts of the case: X sold his business to Y, which was not known to his old customer Z, placed the order in the name of X.

Provisions and Analysis: Offer can be specific or general. An offer is said to be Specific when it is addressed to a definite person or persons. Such offer can be accepted only by the person or persons to whom it is made. A general offer on the other hand is addressed to public in large and may be accepted by anybody fulfilling the terms and conditions. Case law: Boulton v. Jones. Conclusion: There was no contract at all between Y and Z because Z’s offer was a specific offer to X and X alone could accept it.

Q.No.9. X offered to sell his car for Rs. 1,00,000 to Y. Y replies “I will pay Rs. 90,000 for it”. X refuses to sell at this price. Y then attempts the original but X refuses to sell his car. Discuss the legal position.

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Facts of the case: X offered to sell his car to Y. Provisions and Analysis: When the offeree gives acceptance on different terms, it is treated as a counter offer and it is up to the original offeror whether to accept the same or not. Case law: Nihal Chand v. AmarNath, Union of India vs. Babulal. Conclusion: Y’s first reply is a counter offer and not an acceptance of X’s offer and has put an end to the original offer. After having made the counter offer, Y cannot accept the original offer which has already come to an end. Hence, X is not bound to sell his car to Y.

Q.No.10. X offered to sell two plots of land to Y at a certain price. Y accepted the offer for one plot. Is there a valid contract?

Facts of the case: X offered to sell two plots of land to Y at a certain price. Y accepted the offer for one plot. Provisions and Analysis: When the offeree gives acceptance on different terms, it is treated as a counter offer and it is up to the original offeror whether to accept the same or not. Moreover, acceptance must be absolute and unqualified u/s-7(1). Case law: Bhawan vs. Sadula. Conclusion: This is not a contract at all because the acceptance was not valid as it was not for the whole of the offer.

Q.No.11. F offered by a letter to buy his nephew’s horse for Rs.100 saying “If I hear no more from him then, I shall consider the horse is mine.” The nephew sent no reply at all but told B his auctioneer not to sell that particular horse as he intended to sell that horse to F. B sold the horse by mistake. F filed a suit against B. Will he succeed?

Facts of the case: F offered to buy his nephew’s horse for Rs.100 by a letter, saying that if he does not hear anything from him, he (F) shall consider that he has owned the horse. B, the auctioneer sold the horse by mistake. Provisions and Analysis: A proposal is said to be accepted as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor and as against the acceptor, when it comes to the knowledge of the proposer. Case law: Felthouse v. Bindley. Conclusion: F will not succeed because his nephew had not communicated acceptance to him.

Q.No.12. X made an offer to buy shares of Y Ltd. on 10th Jan.1997 but the allotment was made on 10th July 1997. Is X bound by the acceptance? Facts of the case: X made an offer to buy shares of Y Ltd. on 10th Jan.1997 but the allotment was made on 10th July 1997. Provisions and Analysis: The acceptance must be absolute and unqualified and be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. Acceptance must be given within a reasonable time and before the offer lapses.

Case law: Ramsgate Victoria Hotel Co. vs. Montefore. Conclusion: X is not bound by the acceptance because the acceptance was not given within a reasonable time.



Q.No.13. X of Agra sends a letter by post to Y of Delhi offering to sell his car for Rs. 1,00,000. This letter is posted on 1st Jan. and reaches Y on 7th Jan. Y sends his acceptance by post on 10th Jan. but X receives this letter of acceptance on 15th Jan. Answer each of the following questions. a) When is the communication of offer complete? b) When is the communication of acceptance complete as against the offeror? c) When is the communication of acceptance complete as against the acceptor? d) If X sends a telegram on 8th Jan. revoking his offer, and this telegram reaches Y before the letter of

the acceptance is posted. Is revocation of offer is valid? e) If Y sends a telegram on 14th Jan. revoking his acceptance and this telegram reaches X before

the letter acceptance is received by X. Is revocation of acceptance is valid?

a) The communication of offer is complete on 7th Jan. because the letter containing the offer reaches

the offeree on 7th Jan.

b) The communication of acceptance is complete as against the offeror on 10th Jan. because the letter of acceptance is posted on 10th Jan.

c) The communication of acceptance is complete as against the acceptor, on 15th Jan. because the letter of acceptance is received by the offeror on 15th Jan.

d) X’s revocation is valid because X can revoke his offer at any time before the letter of acceptance is posted by the offeree.

e) Y’s revocation is valid because Y can revoke his acceptance at any time before the letter of acceptance is received by the offeror.

Q.No.14. X offered to sell his house to Y for Rs 50,000. Y accepted the offer by e-mail. On the next day Y sent a fax revoking the acceptance which reached X before the e-mail. Is the revocation of acceptance valid? Would it make any difference if both the e-mail of acceptance and the fax of revocation of acceptance reach X at the same time?

Conclusion: Yes, the revocation of acceptance is valid because the acceptor may revoke his acceptance at any time before the letter of acceptance reaches the offeror. If the letter of acceptance (email) and the Fax of revocation of acceptance reach X at the same time, the formation of contract will depend on the fact that which of the two is opened first by X. If X reads the Fax letter first, revocation is valid but if he reads the e-mail first, revocation is not possible.

Q.No.15. Ramaswami proposed to sell his house to Ramanatham. Ramanatham sent his acceptance by post. Next day, Ramanatham sends a telegram withdrawing his acceptance. Examine the validity of the acceptance in the light of the following:

a) The telegram of revocation of acceptance was received by Ramaswami before the letter of

acceptance.

b) The telegram of revocation and letter of acceptance both reached together. (M 06-5M)

Facts of the case: Ramaswami proposed to sell his house to Ramanatham. Acceptance is given through post. Later Ramanatham withdrew his acceptance through telegram. Provision: Sec.4 – Communication when completes. Analysis: The problem is related with the communication and time of acceptance and its revocation. Sec.4 of Indian Contract Act, 1872 states that the communication of an acceptance is complete as against the acceptor when it comes to the knowledge of the proposer.

An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. In this case there are two conflicts, if letter have reached first, then Ramanatham is liable to buy the house or else telegram reaches first, then the contractual capacity of Ramanatham gets revocated.



Conclusion:

a) Yes, the revocation of acceptance by Ramanatham (the acceptor) is valid.

b) If Ramaswami opens the telegram first (and this would be normally so in case of a rational person) and reads it, the acceptance stands revoked. If he opens the letter first and reads it, revocation of acceptance is not possible as the contract has already been concluded.

Q.No.16. Examine what is the legal position, as to the following:

i) M offered to sell his land to N for Rs 28,000/-. N replied purporting to accept the offer and enclosed a cheque for Rs 8,000/-. He also promised to pay the balance of Rs 20,000/- in monthly installments of Rs 5,000/- each.

ii) A offered to sell his house to B for Rs 10000/-. B replied that he can accept the house for only Rs 8,000/-. A rejected B’s counter offer to buy the house for Rs 8,000/-. B later changed his mind and is now willing to buy the house for Rs 10,000/-.

To conclude a contract between the parties, the acceptance must be communicated in some perceptible form. Any conditional acceptance or acceptance with varying or too deviant conditions is no acceptance. Such conditional acceptance is a counter proposal and has to be accepted by the proposer, if the original proposal has to materialize into a contract. Further when a proposal is accepted, the offeree must have the knowledge of the offer made to him. If he does not have the knowledge, there can be no acceptance. The acceptance must relate specifically to the offer made. Then only it can materialize into a contract. With the above rules in mind, we may note that the following is the solution to the given problems:

a) It is not a valid acceptance and no contract can come into being. In fact this problem is similar to the facts of Neale vs. Merret [1930] W.N 189, where M offered to sell his land to N for Rs 28,000/- N replied purporting to accept the offer but enclosed a cheque for Rs 8,000/- only. He promised to pay the balance of Rs 20,000 by monthly installments of Rs 5,000. It was held that N could not enforce his acceptance because it was not an unqualified one.

b) This problem is similar to the facts of Union of India v. Bahulal (AIR 1968 Bombay 294) case, wherein A offered to sell his house to B for Rs 10,000/-, to which B replied that, “I can pay Rs 8,000 for it”. Consequently, the offer of ‘A’ is rejected by ‘B’ as the acceptance is not unqualified. But when B later changes his mind and is prepared to pay Rs 10,000/-, it becomes a counter offer and it is up to A whether to accept it or not.

Q.No.17. A sends an offer to B to sell his second-car for Rs 40,000 with a condition that if B does not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his proposition? What shall be the position if B communicates his acceptance after one week?

Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it is expressly stated in the offer itself. Unless the offeree has by his previous conduct indicated that his silence amounts to acceptance, it cannot be taken as valid acceptance. So in the given problem, if B remains silent, it does not amount to acceptance.

The acceptance must be made within the time limit prescribed by the offeror. The acceptance of an offer after the time prescribed by the offeror has elapsed will not avail to turn the offer into a contract. (Ramsgate Victoria Hotel (v) Montefiore).

Q.No.18. Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the shop, took a basket and after taking articles of her choice into the basket reached the cashier for payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide. (M 13 – 5M)

The offer should be distinguished from an invitation to offer. An offer is the final expression of willingness by the offeror to be bound by his offer should the party chooses to accept it. Where a party, without expressing his final willingness, proposes certain terms on which he is willing to



negotiate, he does not make an offer, but invites only the other party to make an offer on those terms. This is the basic distinction between offer and invitation to offer.

The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. Prakash by selecting some articles and approaching the cashier for payment simply made an offer to buy the articles selected by her. If the cashier does not accept the price, the interested buyer cannot compel him to sell. [Fisher V. Bell (1961) Q.B. 394 Pharmaceutical society of Great Britain V. Boots Cash Chemists].

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IPCC_33e_M.Law _Legal Object & Consideration____________________________________39


3. LEGAL OBJECT AND CONSIDERATION


No ABC N 04 M 05 N 05 M 06 to

M 09 N 09

M 10 to

N 11 M 12

N 12 to

M 15

1 B - - - - - - 8 -

2 A - - - - 5 - - -

3 C - - 6 - - - - -

4 B - - - - - - - -

5 A - - - - - - - -

6 A 4 - - - - - - -

Introduction:

1. Consideration is a term used in the sense of quid pro quo i.e. ‘something in return’.

2. Consideration is an essential element of a contract without which no single promise will be enforceable.

3. Consideration is, in a sense, the price agreed to be paid by the Promisee for the obligation of the Promisor.

4. The word consideration was described in a very popular English case of Currie v. Misa. Consideration has, therefore, been defined in an English judgment as “some right, interest, profit or benefit accruing to one party (i.e. promisor) or forbearance, detriment, loss or responsibility given, suffered or undertaken by the other (i.e., the promisee )” at the request of the promisor.

5. Having a double aspect of

1. A benefit to the Promisor and 2. A detriment to the Promisee,

It has to be really understood in the sense of detriment as envisaged by English Law.

Thus, consideration must result in a benefit to the promisor, and a detriment or loss to the promisee or a detriment to both.

Q.No.1. Define the term Consideration and Explain the Different Forms in which Consideration may exist? (M 12 – 8M)

Definition: As per Sec.2(d) of the Act, Consideration is defined as: “When, at the desire of the Promisor, the Promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called as consideration for promise.”

That is to say, consideration is the doing or not doing of something which the promisor desires to be done or not done.

Ex:-A agrees to sell his house to B for Rs.10,000. Here, B’s promise to pay the sum of Rs.10,000 is the consideration for A’s promise to sell the house and A’s promise to sell the house is the consideration for B’s promise to pay Rs.10,000.

Different Forms in which Consideration may exist:

1. Abstinence from doing: Abstinence from doing something at the desire of the promisor may also be a good consideration for the promisor. It is a negative form of consideration.

2. Forbearance to sue: If a person who could sue another for the enforcement of a right agrees not to sue him, this is a good consideration for a promise by the other person.

IPCC_33e_M.Law _Legal Object & Consideration___________________________________40


3. When there is detriment to Promisee, even though there is no benefit to Promisor, still it is

valid consideration.

E.g.: A promises to carry B’s goods free of charge, and B allows A to carry the same. Here A will be the Promisor and B will be the Promisee. The question that arises in this case is, does B offer any consideration as against A’s promise to carry his goods?

The answer must be in the affirmative, because the detriment or the disadvantage which B suffers in parting with the goods so that goods may be carried by A is sufficient consideration as against A’s promise to carry. So, the essence of consideration is detriment suffered or burden taken by the promisor

4. Compromise of a disputed claim:

5. Compromise with creditors:


Q.No.2. What are the Essential Elements or Legal Requirements of Consideration?

Essential Elements or Legal Requirements of Consideration:

1. Consideration must move at the desire of the promisor: Consideration must be offered by the Promisee or the third party at the desire or request of the Promisor. An act done at the desire of a third party or voluntarily is not a consideration.

2. Consideration may move from the promisee or any other person: In India, consideration may proceed from the Promisee or any other person who is not a party to the contract. The definition of consideration as given is Sec.2 (d) makes that proposition clear. According to the definition, when at the desire of the Promisor, the Promisee or any other person does something, such an act is consideration. In other words, there can be a stranger to a consideration but not stranger to a contract i.e. even a stranger to the contract can provide consideration. Of course, under the English law, consideration must move from the promisee.

‘A’ by gift deed transferred certain property to her daughter with the direction that the daughter should pay an annuity to ‘A’s brother as had been done by ‘A’. Whereas daughter executed a writing in favour of ‘A’s brother to pay the annuity. Afterwards she refused to fulfill her promise saying that no consideration had moved from A’s brother. The court held that ’A’s brother was entitled to maintain the suit because consideration is already moving from A which is a valid consideration.

Chinnayya v. Ramayya (1881) 4 Mad 137

D, on the order of the collector of the District, reconstructed certain shops in a market at his own expense. Subsequently, the shops are occupied by the shopkeepers. Since the money was spent for reconstruction of the shops by D, B (President of shopkeepers association) promised to pay him a commission on articles sold in the market. D’s action to recover the commission was rejected on the ground that nothing was done at the desire of the promisor B. The reconstruction of shops was done at the desire of the Collector of the District.

Durgaprasad Vs. Baldeo (1881) 3 All 221



3. Consideration may be an act, abstinence (Self-denial), forbearance (Foregoing one’s legal right) or detriment (Loss): Already covered in the previous question.

4. Consideration can be past, present or future:

a) Past consideration:

i) The words “has done or abstained from doing” [as contained in Sec. 2(d)] are a recognition of the doctrine of past consideration.

ii) In order to support a promise, a past consideration must be moved by a previous request. It is the general principle that consideration is given and accepted in exchange for the promise.

iii) The consideration, if past, may be the motive but cannot be the real consideration of a subsequent promise. But in the event of the services being rendered in the past at the request or the desire of the promisor, the subsequent promise is regarded as an admission that the past consideration was not gratuitous.

iv) When consideration by a party for a present promise was given in the past i.e. before the date of the promise it is called past consideration. Under the English Law, past consideration is no consideration.

b) Present or executed consideration: When consideration from one party to another moves simultaneously with the promise is called present consideration. It is also known as executed consideration as the act constituting consideration is wholly performed at time of agreement. A contract of cash sale is the best example for present consideration.

c) Future or Executory consideration: When consideration from one party to the other is to pass subsequently to the making of the contract, it is called future or executory consideration.

d) Executed and Executory consideration: A consideration which consists in the performance of an act is said to be executed. When it consists in a promise, it is said to be executory. The promise by one party may be the consideration for an act by some other party, and vice versa.

5. Consideration need not be adequate: Consideration need not be of any particular value. It need not be approximately of equal value with the promise for which it is exchanged but it must be something which the law would regard as having some value.

In other words, consideration means “something in return”. This “something in return” need not be equal in value to “something given”.

If consideration is inadequate, court may consider this fact to judge whether consent is freely given or not. It may be noted in this context that Explanation 2 to Section 25 states that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate.

6. Consideration should be real and competent: Consideration must be real and must also be competent. It must be something to which the law attaches some value. Consideration should not consist of impossible act or promise. It must be real and not illusory. A consideration which does not have value in terms of money is illusory consideration.

7. Performance of what one is legally bound to perform:

a) The performance of an act by a person who is already legally bound to perform the same cannot be the consideration for a contract. Hence, a promise to pay money to a witness is void, for it is without consideration. Hence such a contract is void for want of consideration.

B received summons to appear in a civil suit and A promised to pay certain sum of money as a compensation for loss of time. It was held that the promise was without consideration as B was already under a duty to appear and give evidence.

Collins Vs. Godefrey (1831) 1 B & Ad 956



b) But where a person promises to do more than what he is legally bound to do, such a promise is a good consideration (provided it is not opposed to public policy,).

8. Consideration must be lawful and must not be immoral or opposed to public policy: Sec.23 states that consideration is unlawful if:

a) It is forbidden (Prohibited) by law; b) It is of such a nature that if allowed it would defeat some other law of the Country; c) It is fraudulent; d)It involves injury to the person or property of the other; e) Court regards it as immoral or opposed to public policy.


Q.No.3. State the Exceptions to the Doctrine of Consideration. (N 05 – 6M)

1. Sec.10 of the Indian Contract Act describes lawful consideration as one of the essential elements of a valid contract. This means that an agreement without consideration is void. This is also called “Doctrine of consideration”.

2. But there may be certain circumstances where it will not be reasonable to apply the doctrine of consideration. Sec.25 of the Indian Contract Act takes care of such circumstances.

However, the Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made without consideration, will be valid and enforceable.

1. Natural Love and Affection: A written and registered agreement based on natural love and affection between the parties standing in near relation (e.g., husband & wife) to each other is enforceable even without consideration.

Note: The Act does not provide any guidance as to who is near relative. Therefore, the expression includes parties related by blood or marriage. Further, nearness of relationship does not necessarily imply natural love and affection.

2. Compensation for past voluntary services: A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable under Sec. 25(2) if, it fulfill the following essential factors:

a) The services should have been rendered voluntarily

b) The services must have been rendered for the promisor.

c) The promisor must be in existence at the time when services were rendered.

d) The promisor must have intended to compensate the promisee.

Example:

A says to B’ “At the risk of your life you saved me from drowning. I promise to pay you Rs.1,000. This is a legally binding contract between A and B.

A Hindu husband, after a lot of disagreement and quarrels between him and his wife decided to live a part. He after referring to the quarrels and disagreement, executed a registered document in favour of his wife whereby he agreed to pay for her separate residence and maintenance. Held, the agreement was void, because the document had been executed not on account of natural love and affection between the parties. Hence, wife was not entitled to recover the sum mentioned in the document.

Rajlukhy Vs. Bhoothnath Mookherjee (1900) 4 CWN 488

An agreement by a client to pay to his counsel after the latter has been engaged, a certain sum over and above the fee, in the event of success of the case would be void, since it is without consideration.

Ramachandra Chintaman Vs. Kaluraju



3. Promise to pay time barred debt: A time barred debt is a debt which is not recoverable because of lapse of specified time (presently 3 years) under the Limitation Act. In the normal course, once a debt becomes time barred, the lender can’t get back his money.

[Sec.25(3)] the contract is still enforceable, provided:

� It is made in writing,

� The promise must be signed by the debtor (promisor) or by his authorised agent.

� The promise may be to pay the whole or any part of the debt.

4. Completed Gift: In case of completed gifts, the rule “No consideration, No contract” does not apply. Explanation (1) to Section 25 states that “nothing in this section shall affect the validity as between the donor and the donee, of any gift actually made”. Thus, gifts do not require any consideration.

5. Remission: Consideration is not necessary for an agreement to receive less than what is due. This is known as remission in law.

6. Charitable subscription: Generally promise made to give some charitable subscription is not enforceable in the court of law because it is not supported by some real consideration.

If a promisee undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid. In such a case the person making the promise is bound to pay the amount to the extent of commitments made subject to the maximum limit of promised amount.

7. Agency: According to Sec.185 of the Indian Contract Act, consideration is not necessary to create contract of agency.

8. Bailment: No consideration is required to effect the bailment (Section 148).

9. Guarantee: A ‘contract of guarantee’ is a contract to perform the promise or discharge the liability of third person in case of his default. Consideration received by the principal debtor is a sufficient consideration for the surety.

10. Contract under seal: Contract under seal means a contract which is in writing, signed, sealed and delivered to the other party. (Formal Contracts under the English Law). A contract under seal is enforceable even without consideration.

Similar Question: “ An agreement made without consideration is void” with reference to provision of the Indian contract Act 1872, examine the validity of the statement and explain the cases in which the statement does not apply


The facts of this case were almost similar to those of the previous case, but the secretary in this case incurred a liability on the strength of the promise. Held, the amount could be recovered. The promise could, however, be enforced only to the extent of the liability (detriment) incurred by the secretary. In this case the promise, even though it was gratuitous, became enforceable.

Kedar Nath Vs. Gauri Mohammed (1886) ILR 14 Cal 64

The secretary of a Mosque Committee filed a suit to enforce a promise to subscribe Rs.500 to the re-construction of a mosque. Held, “the promise was not enforceable because there was no consideration in the sense of benefit”, as “the person who made the promise gained nothing in return for the promise made”.

Abdul Aziz Vs. Masum Ali AIR (1914) All, 22



Q.No.4. State the circumstances in which a Stranger to the Contract can Sue. (or) Write about the Doctrine of Privity of Contract.

1. Under the law of contract, an agreement can be enforced only by the parties to it. A stranger to the contract can’t sue and be sued. Since contract is a private relationship between parties, the rights and obligations under such contract are strictly restricted to them. This is known as doctrine of privity of contract.

The Consequences of this Doctrine are:

a) A person who is not a party to the contract can’t sue upon it even though he has provided the consideration.

b) A contract can’t create rights or impose obligations on any person other than the parties to it. Thus, if there is a contract between X and Y then Z can’t enforce it.

2. Though under the Indian Contract Act, 1872 the consideration for an agreement may proceed from a third party, the third party cannot sue on agreement. Only a person who is party to a contract can sue on it.

3. Thus, the concept of stranger to consideration is valid and is different from stranger to a contract which means contract by the person who is not a party to the contract.

4. A Stranger to the Contract cannot Sue: A stranger to a contract cannot sue because of the absence of privity of contract (i.e. relationship subsisting between the parties to a contract).

5. A Stranger to the Contract cannot be Sued: A person who is not a party to the contract cannot be sued upon it.

Exceptions to Doctrine of Privity of Contract: The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity of contract”, is however, subject to certain exceptions. In other words, even a stranger to a contract may enforce a claim in the following cases:

1. Beneficiary under some trust or charge:

a) The person creating the trust is known as author of the trust.

b) The person for whose benefit the trust is created is called as beneficiary. The person who is entrusted with the trust property and to execute the trust is called trustee.

c) The agreement creating the trust is entered into between the author of the trust (settler) and the trustee.

d) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee.

2. Family arrangement for marriage expenses, maintenance of members, etc.: In the case of a family settlement, if the terms of the settlement are reduced in to writing, the members of family who originally had not been parties to the settlement may enforce the agreement. In the case of certain marriage contracts, a female member can enforce a provision for marriage expenses, made on the partition of the Hindu Undivided Family.

The doctrine of privity of contract can be best illustrated by an English case Dunlop Pneumatic Tyre Co. Ltd., V. Selfridge & Co., Ltd. As per the facts of the case, Dunlop & Co. sold some tyres to Dew & Co., with an agreement that these tyres will not be sold below the listed price. Dew & co., in turn, sold some of the tyres to Selfridge & Co.,(S) with an agreement that they (S) will observe conditions as to price. They (S) also promised that they would pay to the Dunlop & Co., a sum of 5 Pounds for every tyre sold below the list price. S sold some tyres below the list price and the Dunlop & Co., brought an action against S to recover damages for the same. House of Lords held that, Dunlop & Co., can’t bring an action against S because, there was no contract between the two.

Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge and Co. Ltd. (1915) AC 847



3. Covenants running with land: In the case of covenant running with the land, the person who

purchases land with notice that the owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.

4. Acknowledgement or Estoppel: In the case of an estoppel by acknowledgement of liability or part performance thereof, that is, when one admits the liability. Where the promisor by his conduct, acknowledges or otherwise behaves as an agent of a third party, a binding obligation is incurred by him towards third party.

5. Minor’s marriage contract: Where the parents or guardians enter into a contract for marriage of their wards, the contract may be enforced by the wards even though they are not parties to the contract.

6. Assignment of a contract: In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract. The assignment may be either voluntarily or by operation of law.

7. Contracts made by the agent: The principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal.


LAWFUL OBJECT AND CONSIDERATION

1. There are certain provisions of law which are general in character and are applicable to the community as a whole. Subject thereto, an individual generally has the right to adjust his rights and obligations as he may wish.

2. But this contractual freedom or the right of individuals to make by an agreement what in effect is law between themselves, is not absolute. In other words, there is a limitation on the contractual freedom of an individual.

3. The term Object means purpose or design.

4. The term ‘consideration’ is defined in section 2(d) and the various forms it may take have been considered earlier in this study module.

5. It should be noted that the words “Consideration” and “Object” used in Sec.23 are not synonymous. The word object is used distinctly to mean “purpose or design” of the agreement. The word ‘consideration” is different from object.

6. Thus in an agreement both object and consideration may be lawful or unlawful. Sometimes, only one of them is unlawful and the other is lawful. But Sec.10 requires that in a contract, both must be lawful. Therefore, if both the object and consideration of an agreement are not lawful, the agreement is void.

Q.No.5. State some Agreements that are Expressly Declared as Void.

1. Where the consideration or object is forbidden by law:

Two brothers, on the partition of family property agreed to pay Rs.300 in equal share to their mother for maintenance. It was held that the mother can enforce this contract even though she is a stranger to this contract.

Shuppu Ammal Vs. Subramanian

On the partition of a joint Hindu family property, an agreement was entered among its male members to make provision for the marriage expenses of a female member. It was held that the female member can sue the parties to the partition deed to enforce such provisions.

Sunderraja Aiyangar Vs. LaxmiAmmal (1915) 38 Mad 788



a) Acts forbidden by law are those which are punishable under any statute as well as those

prohibited by regulations or orders made in exercise of the authority conferred by the legislature.

b) The limits to contractual freedom are set out in Section 23 of the Act. An agreement, the object or consideration of which is unlawful is void. “Consideration or object is unlawful if it is forbidden by law; or it would; if permitted defeat the provisions of any other law or is fraudulent; or involves injury to the person or property of another, or is immoral; or opposed to public policy.

c) An act is said to be forbidden by law in any of the following 3 cases:

� When an act is punishable by the criminal law of the land e.g. by Indian Penal Code, � When an act is forbidden by any special legislation,

� When an act is forbidden by the regulations or orders made under the authority derived from the legislation.

2. If it defeats the Provisions of any Law:

a) The term ‘law’ includes any legislative enactment or rule of the Hindu and Muslim Laws or any other rule for the time being in force in India.

b) Legislative enactment would be defeated by an agreement by a debtor not to plead limitation, as the object is to defeat the provisions of the Limitation Act.

c) The Hindu Law is defeated by an agreement to give the son in adoption in consideration of annual allowance to the natural parents.

d) If the object or the consideration of an agreement is of such a nature that, if permitted, it would defeat the provisions of any law, then such agreement is void.

3. Defeat of any rule for the time being in force in India:

a) A promise, therefore, to pay the salary of a receiver without the leave of the Court, even if unconditional, being in contravention of law, is not binding on the promisor.

b) The object or consideration in all the agreements being unlawful, are void. 4. Where the consideration or object is of such a nature that it is fraudulent: Where agreement

involves the commission of a wrong act or commission of a fraud against a third party or commission of fraud against public, they are unlawful and unenforceable. The following are examples of agreements the object or consideration thereof is unlawful on the ground of fraud.

5. Where the consideration or object of the agreement involves injury to other person or property: The word ‘injury’ means criminal or wrongful harm. An agreement to cause injury to the person or property of another is void. In the following examples, the object or consideration is unlawful as it involves injury to the person or property of another.

Ex: An agreement to print a book in violation of another’s copyright is void, as the object is to cause injury to the property of another. It is also void as the object of the agreement is forbidden by the law relating to copyright.

6. Where the consideration or object is regarded by the court as immoral: An agreement, the consideration or object of which is immoral, is void. An immoral agreement is one which is regarded by the court as immoral. The Apex Court has confined its meaning only to sexual immorality. The following are the examples of agreements where the object or consideration is unlawful, being immoral.

X borrowed Rs.1,00,000 from Y and agreed not to raise any objection as to the limitation and that Y may recover the amount even after the expiry of limitation period. This agreement is void. Because, it defeats the provisions of the Limitation Act.

Rama Murthi Vs. Gopayya



Ex: A landlord cannot recover the rent of a house knowingly let to prostitute who carries on her vocation there. Here, the object being immoral, the agreement to pay rent is void.

7. Where the consideration or object is regarded by the court as opposed to public policy: An

agreement which is injurious to the public or against the interests of the society is said to be opposed to public policy. A contract may be against public policy either from the nature of acts to be performed or from the nature of consideration.

Similar Question: threat to publish a defamatory statement against a person to enter into an agreement (RTP M 14 ) Ans : Refer Point No 5

(IMMEDIATELY REFER PRACTICAL QUESTION NO.2, 3, 4, 5, 6, 7, 10)

Q.No.6. State some Agreements that are Opposed to Public Policy.

Introduction:

1. The expression ‘public policy’ can be interpreted either in a wide or in a narrow sense. The freedom to contract may become illusory, unless the scope of ‘public policy’ is restricted. In the name of public policy, freedom of contract is restricted by law only for the good for the community.

2. Public policy is a policy which should be followed by people so that they do not cause any harm to the society. Public policy is not the policy of a particular Government.

3. The Indian Contract Act does not specifically identify the instances which are to be considered as opposed to public policy. But it clearly states the intention that any contract opposed to public policy is unlawful.

Agreements Opposed to Public Policy: Some well established instances of agreements opposed to public policy are discussed below: 1. Trading with an Alien enemy: Any trade with person owing allegiance to a Government at war

with India without the license of the Government of India is void, as the object is opposed to public policy.

2. Agreements interfering with the course of justice:

a) An agreement whose object is to induce any judicial officer of the State to act partially or corruptly is void, as it is opposed to public policy.

b) Similarly an agreement by A to reward B, who is an intended witness in a suit against A in consideration of B’s absenting himself from the trial.

c) For the same reasons, an agreement which contemplates the use of under-hand means to influence legislation is void.

d) Similarly, an agreement to induce any executive officer of the State to act partially or corruptly is void.

3. Stifling (confining) prosecution:

a) An agreement to stifle prosecution tends to be a perversion or an abuse of justice; therefore, such an agreement is void.

b) The principle is that one should not make a trade of felony.

c) The compromise of any public offence is generally illegal. Under the Indian Criminal Procedure Code, there is, however, a statutory list of compoundable offences and an agreement to drop proceeding relating to such offences with or without the permission of the Court, as the case may be, in consideration the accused promising to do something for the complainant, is not opposed to public policy.



4. Maintenance and Champerty:

a) Maintenance is the promotion of litigation in which one had no interest and champerty is bargain whereby one party agrees to assist the other in recovering property, with a view to sharing the profits of litigation.

b) Agreements tending to champerty and maintenance are void in England but in India they are not necessarily void.

c) Thus, in India, an agreement to share the subject of litigation, if recovered in consideration of the party’s supplying the funds in good faith to carry it on, is not itself, opposed to public policy.

d) But where such advances are made by way of gambling in litigation, the agreement to share the subject of litigation is certainly opposed to public policy and therefore void.

5. Sale of Public Offices:

a) An agreement to traffic in public office is opposed to public policy, as it interferes with the appointment of a person best qualified for the service of the public.

b) Public policy requires that there should be no money consideration for the appointment to an office in which the public is interested.

Examples:

An agreement intended to induce a public officer to act corruptly.

An agreement to procure a public title like "Bharat Ratna", "Padma Vibhushan", for reward.

An agreement for procuring votes in election for consideration.

6. Agreements creating interest opposed to duty: The public policy requires that a person must perform his duties honestly. If a person agrees to do something which is against his public or professional duty, the agreement is void.

7. Agreements unduly restraining personal liberty: An agreement which restricts the personal liberty of an individual is void.

8. Agreements interfering with parental duties: The father and the mother are the natural guardians of a minor child. This right of guardianship can’t be taken away by any agreement.

9. Marriage Brokerage agreements: An agreement to negotiate marriage for reward, which is known as a marriage brokerage contract, is void, as it is opposed to public policy.

10. Interest against Obligation: The following case an agreements is void as it tend to create an interest against obligation. The object of such agreements is opposed to public policy.

i) An agreement by an agent, to receive without his principal’s consent, compensation from another for the performance of his agency is invalid.

11. Agreement to form Monopoly: Agreements having for their object the establishment of monopolies are opposed to public policy and therefore void. It is also hit by the MRTP Act.

12. Agreements to defraud creditors or revenue authorities: Agreement, the object of which is to defraud the creditors or the revenue authorities is not enforceable.

13. Agreements not to bid against each other in an auction sale is void, if the bidders intention is to defraud the auctioneer.

The father of two minor sons agreed to transfer their guardianship to Mrs.A, permanently. Subsequently, G wanted to set aside the agreement and take back the custody of his children. The court held that the guardianship of G can’t be permanently alienated. The agreement was void and G got back the custody of boys.

Giddu Narayanish Vs. Mrs. Annie Besant



14. Agreement to commit a crime: Where the consideration in an agreement is to commit a crime, the agreement is opposed to public policy. Likewise an agreement to indemnify a person against consequences of criminal act is opposed to public policy and hence unenforceable.

15. Agreements interfering with marital duties: Any agreement which interferes with the performance of marital duties is void because it is opposed to public policy.

• Ex: A promise by a married person to marry another lady during the life time or after the death of spouse.


Q.No.1. X transferred his house to his daughter M by way of gift. The gift deed, executed by X, contained a direction that M shall pay a sum of Rs. 5,000 per month to N (the sister of the executants). Consequently M executed an instrument in favour of N agreeing to pay the said sum. Afterwards, M refused to pay the sum to N saying that she is not liable to N because no consideration had moved from her. Decide with reasons under the provisions of the Indian Contract Act, 1872 whether M is liable to pay the said sum to N.

Facts of the case: X transferred his house to his daughter M by way of gift including with a condition that, M should pay Rs. 5,000 P.M to N. Later M refuses to pay such amount to N for the reason that, she has not getting any consideration from her. Therefore she is not liable to N.

Case law: Chinnayya vs. Ramayya.

Issue/Question involved: Whether ‘M’ is liable to pay the sum of Rs.5, 000 to N? or Whether consideration furnished by ‘X’ is considered as consideration to enforce the contract by ‘N’?

Law/Provision: Sec.2 (d) of Indian contract Act, 1872 - “When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, promises to do or to abstain from doing, something, such act or abstinence or promise is called consideration for the promise”.

Analysis: The notable feature of the definition of consideration is that the act which is to constitute a consideration may be done by “the promisee or any other person”. It means therefore, that as long as there is a consideration for a promise, it is immaterial who has furnished it. Analyzing this to given problem, the consideration for M’s promise to pay the said sum was the gift of house by ‘X’. Consideration moved from ‘X’ is considered as consideration given by ‘N’.

Conclusion: Therefore, ‘N’ can enforce the contract and claim the said sum.

Q.No.2. X granted a loan to Y, guardian of a minor to enable him to celebrate the minor’s marriage. Can X recover his loan from Y?

Facts of the case: X granted a loan to Y, guardian of a minor to enable him to celebrate the minor’s marriage.

Issue/Question involved: Can ‘X’ recover his loan from ‘Y’

Law/Provision: Sec.10 of Indian contract Act says object must be lawful for validity of contract. Sec.23 renders certain considerations and objects as unlawful, when it is forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law or is fraudulent or involves injury to the person or property of another or court regards it as immoral.

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

Analysis: According to the provisions of Sec.23, where ’Y’ borrowed a loan for the celebration of minor’s mirage, the object of which is an offence under child marriage restraint Act, 1929. Thus the

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object was to defeat the provisions of any other law. Therefore, the object is unlawful and loan become unlawful and hence, void.

Conclusion: For the reasons mentioned above, ‘X’ cannot recover his loan from ‘Y’.

Q.No.3. X’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which a defaulter is prohibited from purchasing the estate. Y, upon the understanding with X, becomes the purchaser and agrees to convey the estate to X for the price which Y has paid. Is this agreement valid?

Facts of the case: X’s estate is sold towards the arrears of revenue, by which a defaulter is prohibited from purchasing the estate. Y upon the understanding with X becomes purchaser and agrees to convey the estate to X for the price which Y has paid.

Issue/Question involved: Whether the agreement between X and Y is Valid?

Law/Provision: Sec.23 of Indian contract Act, declares if the object or consideration of an agreement defeats the provisions of any Law, the agreement becomes unlawful and void, and Sec.10 requires lawful object and lawful consideration for the validity of Contract.

Analysis: When the law clearly prohibits a person who is defaulted in payment of revenue from purchasing the property which is the subject matter of sale for the arrears, an agreement to defeat these provisions of law between X and Y is void.

Conclusion: Therefore, as per reasons mentioned above, the agreement between X and Y is Void.

Q.No.4. X, Y and Z enter into an agreement for the division among them of gains acquired or to be acquired by them by fraud. Is this agreement valid?

Facts of the case: X, Y and Z enter into an agreement for the division among them of gains acquired or to be acquired by them by fraud.

Issue/Question involved: Is the agreement void?

Law/Provision: Sec.10 and Sec.23

Sec.10 requires that the consideration and object must be lawful for a valid contract.

Sec.23 states that consideration and object is not lawful when it is fraudulent.

Thus when the agreement is entered, the object of which is to defraud others, object becomes unlawful and agreement becomes void. Analysis: Therefore, in the given problem, the object of the agreement is to defraud others and hence, object is unlawful and the agreement is void.

Conclusion: As the object of the agreement is unlawful, according to sec.23, the agreement is void.

Q.No.5. X borrowed Rs. 1,000 from Y. X executed a bond promising to work for Y without pay for 2 years and in case of default agreed to pay interest at 10% per month and the principal amount at once. Is this agreement valid?

Facts of the case: X borrowed Rs. 1,000 from Y and executed a bond promising to work for Y without pay for 2 years and in case of default agreed to pay interest at 10% per month and the principal amount at once. Issue/Question involved: Whether the agreement between X and Y is valid Law/Provision: Sec.10 and Sec.23

Sec.10 requires that the consideration and object must be lawful for a valid contract.



Sec.23 states that consideration and object is not lawful when it involves injury to the person or property of another.

Analysis: The agreement, the object of which is such that if it involves or injuries to the person or property of another, the agreement is unlawful and void.

Conclusion: The object of the agreement between X and Y in the given question is unlawful and void.

Q.No.6. X let a flat on hire to Y, a prostitute, knowing that it would be used for immoral purpose. Is this agreement void?

Facts of the case: X let a flat on hire to Y, a prostitute, knowing that it would be used for immoral purpose.

Issue/Question involved: Is the agreement valid Law/provision: As per sec.10, one of the essential elements of a valid contract is lawful object and lawful consideration.

Sec.23 provides that the object and consideration is unlawful if the court regards it as immoral or opposed to public policy and hence, agreement becomes void.

Analysis: The law does not allow the agreement tainted with immorality to be enforced. Consequently, every agreement the object or consideration for which is immoral is unlawful. Dealing with prostitutes has always been regarded as immoral, if the purpose is known to the contracting party at the time of the contract.

Conclusion: Therefore, in the given question, as the owner has knowledge that it was hired for immoral purpose, the agreement is void.

Q.No.7. X, knowing that Y has committed a murder, obtains a promise from Y to pay him (X) Rs. 5,00,000 in consideration of not exposing Y. Is this agreement valid?

Facts of the case: X, knowing that Y has committed a murder, obtains a promise from Y to pay him (X) Rs. 5,00,000 in consideration of not exposing Y.

Issue/Question involved: Whether the agreement between X and Y is valid


As per sec.10, one of the essential elements of a valid contract is lawful object and lawful consideration. Sec.23 provides that the object and consideration is unlawful if the court regards it as immoral or opposed to public policy and hence, agreement becomes void. Analysis: Stifling prosecution is opposed to public policy, if it is in public interest that criminals should be prosecuted and punished. Hence, an agreement is void if the offence is of public interest. Such agreements are called agreements to stifle prosecution. “If you are aware that a crime has been committed, you should not convert that crime into a source of profit or benefit to yourself”.

Conclusion: In the given question, ‘Y’ has committed murder, ‘X’ knows it and then it is the duty of ‘X’ to arrest ‘Y’ and take steps to punish ‘Y’. Instead of that, he obtained promise from ‘Y’ to pay Rs.5, 00, 000 by which he has converted that crime into a source of income which amounts to stifling prosecution and opposed to public policy. Therefore, on the reasons mentioned above, the agreement between ‘X’ and ‘Y’ is void.

Q.No.8. X, a father having two minor sons agreed to transfer their guardianship in favour of Mrs. Y and also agreed not to revoke the transfer. Subsequently, he filed a suit for the recovery of the boys and declaration that he was the rightful guardian. Discuss the legal position.



Facts of the case: X, a father having two minor sons agreed to transfer their guardianship in favour of Mrs. Y and also agreed not to revoke the transfer. Subsequently, he filed a suit for the recovery of the boys and declaration that he was the rightful guardian.

Issue/Question involved: Whether the agreement between X and Y is valid?


As per sec.10, one of the essential elements of a valid contract is lawful object and lawful consideration.

Sec.23 provides that the object and consideration is unlawful if the court regards it as immoral or opposed to public policy and hence, agreement becomes void. One of such agreements which court regards it as opposed to public policy is agreements interfering with parental duties. It is unlawful and void.

Analysis: The father and the mother are the natural guardians of a minor child. This right of guardianship cannot be taken away by any agreement which is opposed to public policy and hence, the agreement becomes void. Conclusion: In the given question, the agreement between the parties is to transfer guardianship in favour of Mrs Y. Therefore, the agreement is opposed to public policy and hence it is void. He can file a suit for the recovery of the custody of the children from Y.

Q.No.9. X promises Y to give a diamond ring at the time of his marriage. X fails to give the ring. Can Y claim the ring?

Facts of the case: X promises Y to give a diamond ring at the time of his marriage, which he fails. Issue / Question Involved: Can ‘Y’ Claim the ring? Law / Provision: Sec.10 Provides that for a contract to enforce there must be lawful consideration. Analysis: An agreement without consideration, subject to certain exceptions, is absolutely void. Consideration means “something in return” for a promise. Sec.2(d) says any act operatively done by the promisee at the desire of the promisor is a consideration. Conclusion: In this given problem for ‘X’ promise to give a diamond ring, there is no consideration moving from the promisee ‘Y’. Therefore, there is no valid contract between them and he cannot claim the ring from ‘X’.

Q.No.10. X agrees to let his flat to Y for use as a gambling den on a monthly rent of Rs. 10,000. After 3 months, Y stops making the payment of rent. Advise X.

Facts of the case: X agrees to let his flat to Y for use as a gambling den, for which Y stops payment of rent. Issue / question involved: Can ‘X’ recover the rent? Law / Provision: One of the essentials of a valid contract according to Sec. 10 is lawful consideration and lawful Object. Where the object of an agreement is not lawful, the agreement is void. Analysis: For the enforcement of a contract, the parties must satisfy requirements provided by sec. 10. If any one of the requirements is not fulfilled say for example lawful, that agreement is void and cannot be enforced. Conclusion: In the above problem, the agreement between X and Y is void because the object of the agreement i.e. letting the house for gambling purpose, is not lawful. Therefore, the agreement is void and ‘X’ cannot recover anything.



Q.No.11. Mr. Singh, an old man, by a registered deed of gift, granted certain landed property to A, his daughter. By the terms of the deed, it was stipulated that an annuity of Rs 2, 000 should be paid every year to B, who was the brother of Mr. Singh. On the same day A made a promise to B and executed in his favour an agreement to give effect to the stipulation. A failed to pay the stipulated sum. In an action against her by B, she contended that since B had not furnished any consideration, he has no right of action. (N 09 – 5M)(Similar MTP M 15)

Examining the provisions of the Indian Contract Act, 1872, decide, whether the contention of A is valid?

Problem as asked in the question is based on the provisions of the Indian Contract Act, 1872 as contained in section 2(d) and on the principle ‘privity of consideration’. Consideration is one of the essential elements to make a contract valid and it can flow from the promisee or any other person. In view of the clear language used in definition of ‘consideration’ in Section 2(d) “…. the promisee or any other person…..”, it is not necessary that consideration should be furnished by the promisee only. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves from the promisee or any other person. The leading authority in the decision of the Chinnaya Vs. Ramayya (1882) 4 Mad 137., held that the consideration can legitimately move from a third party and it is an accepted principle of law in India. In the given problem, Mr. Singh has entered into a contract with A, but Mr. B has not given any consideration to A but the consideration did flow from Mr. Singh to A and such consideration from third party is sufficient to enforce the promise of A, the daughter, to pay an annuity to B. Further the deed of gift and the promise made by A to B to pay the annuity were executed simultaneously and therefore they should be regarded as one transaction and there was sufficient consideration for it.

Thus, a stranger to the contract cannot enforce the contract but a stranger to the consideration may enforce it.

Q.No.12. X, a guardian, on behalf of Y, her minor daughter, entered into a contract with Z whereby Z promised to marry her. Later on Z refused to marry. Can Y sue Z for damages?

Facts of the case: X, a guardian, on behalf of Y, her minor daughter, entered into a contract with Z whereby Z promised to marry her. Later on Z refused to marry. Issue/Question Involved: Is the contract of marriage of a minor enforceable? Law/provision: According to Sec.10 – one of the essential elements of a valid contract is the capacity of the parties to enter into a contract and Sec.11 provides that a person who is of age of majority has capacity to enter into a contract. The leading case Mohiribibi vs. Dharmadas declared that a minor contract is absolutely void. But those, of applied against the minor, it becomes detrimental under certain circumstances. Therefore, to avoid this difficulty, courts inclined to enforce the contract with a minor where there is some benefit to the minor. Conclusion: A contract for the marriage of a minor is also prima facie for his or her benefit. “It is customary among most of the communities for parents or guardian to arrange marriages between their minor children. It has, therefore, well established that the contract of marriage can be enforced. For these reasons Y can sue Z for damage for breach of Contract.

Q.No.13. Mr. Seth an industrialist has been fighting a long drawn litigation with Mr. Raman another industrialist. To support his legal campaign Mr. Seth enlists the services of Mr. X a legal expert stating that an amount of Rs 5 lakhs would be paid, if Mr. X does not take up the brief of Mr. Raman.

Mr. X agrees, but at the end of the litigation Mr. Seth refuses to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth under the provisions of the Indian Contract Act, 1872. (N 04 – 4M)



The problem as asked in the question is based on one of the essentials of a valid contract. Accordingly, one of the essential elements of a valid contract is that the agreement must not be one which the law declares to be either illegal or void. A void agreement is one without any legal effect. Thus any agreement in restraint of trade, marriage, legal proceedings etc., are void agreements. Thus Mr. X cannot recover the amount of Rs 5 lakhs promised by Mr. Seth because it is Opposed to public policy.

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Q.No.1. What is meant by Capacity to Contract?

Meaning:

1. The legal capability of a person to enter into contract is known as capacity to contract.

2. Capacity refers to the competence of the parties to make a contract. It is one of the essential elements to form a valid contract.

3. According to Sec.10, all agreements are contracts if they are made by the parties competent to contract. Thus, the competence or capacity to contract is one of the essential elements of a valid contract.

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

Q.No.2. State the Legal Provisions relating to Contracts Entered into by Minors.

Who is a Minor?

1. A minor is a person who has not attained the age of majority.

2. The age of majority is to be determined according to the law to which the minor is subject to.

3. Age of majority in India: In India, the age of majority is regulated by the Indian Majority Act (Act IX of 1875). Every person domiciled in India attains majority on the completion of 18 years of age. ( Sec.3 of the Indian Majority Act, 1875)

4. A person is deemed to have attained majority as under:

Where a guardian of a minor’s person or property is appointed under the Guardian and Wards Act, 1890. On completion of 21 years

Where minor’s property has passed under the superintendence of the court of wards On completion of 21 years

In other cases On completion of 18 years Status of Contracts entered into by a Minor: According to Sec.10 of the Indian Contract Act, agreements entered into by a minor are void-ab-initio.

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Law relating to Minor’s Agreements / Position of Minor’s Agreements:

1. Void-ab-initio: An agreement entered with minor is void-ab-initio. It is altogether void. A minor is not competent to contract and any agreement with or by a minor is void from the very beginning. In the leading case of Mohiri Bibee v. Dharmodas Ghose, it was held that, the minor’s contracts are absolutely void.

2. No ratification after attaining majority: When a person accepts obligation acquired under some previous agreement, ratification is said to be made. Ratification relates back to the date of making the contract. A minor cannot ratify the agreement on attaining majority as the original agreement is void-ab-initio. Once a minor reaches the age of majority, he or she can’t ratify any contract made during his minority, because there is no consideration to the new contract.

If in addition to the consideration already given during minority, a further advance is made, or a fresh consideration is given after majority, a promise to pay the whole amount becomes binding contract.

3. No specific performance: Specific performance means implementation of a contract as agreed. A minor’s agreement can’t be specifically enforced.

4. The doctrine of estoppel does not apply to a minor: The doctrine of estoppel is that - when a person makes a false representation and the other person believes it to be true and acts accordingly, later on the person who made such false representation is not allowed to deny the truth of that representation.This doctrine is not applicable to a minor

E.g.: A told to B that C wants to buy 100 kgs. of rice from B for his daughter’s marriage. B said he will be sending the rice to C’s place in a day’s time. C, who was also present at that time did not utter a single word. Next day, B sent 100 kgs. rice to C’s place. Now C said that he did not want to take the rice and that he did not make any contract with B. In this case, the legal position is that C has to accept the rice and pay the respective price because by keeping silent, he made B to believe that he wanted to make the said transaction. Now he is ‘estopped’ from denying the said transaction.

5. A minor can always plead minority: A minor can always plead minority and is not stopped to do so even where he has taken any loan or entered into any contract by falsely representing that he was major. He can always plead minority and cannot be asked to compensate for any benefit received under a void agreement.

A minor borrowed a sum of money, executing a simple bond for it, and after attaining the majority executed a second bond in respect of the original loan plus interest. Held, the bond was not maintainable as it was without consideration.

Suraj Narayan Vs. Sukhu Aahir

In this landmark decision court declared that all contracts entered into by a minor are null and void. Dharmodas Ghosh, a minor, executed a mortgage deed of his house in favour of a money lender for Rs.20,000. Out of this he received cash worth Rs.8,000 from the money lender. Later on the money lender filed a suit for recovery of his money and sale of the mortgaged property. It was held that an agreement by a minor is absolutely void and therefore the money lender can’t recover the mortgage money, nor he could sell the minor’s mortgaged property.

Mohiri Bibee Vs. Dharmodas Ghosh



6. No restitution except in certain cases: The term ‘restitution’ may be defined as an act of restoring to the rightful owner, that which has been taken away or lost. If a minor obtains goods on credit, its payment cannot be enforced but the goods can be recovered if they are still in his possession. This rule applies to a minor only when he enters into a contract by misrepresenting his age.

7. Minor can be a beneficiary or can take benefit out of a contract: A promissory note duly executed in favour of a minor is not void and can be sued upon by him, because though a minor is incompetent to contract, may yet accept a benefit. A minor can enforce such agreements in which he is a beneficiary or promisee and does not create any obligation on his part. However, this right is subject to a condition that he must have performed his promise under the agreement.

8. Validity of minor’s agreement jointly with a major person: A minor can be a joint promisor with a major. But the minor cannot be held liable. The major person can be forced to perform the entire promise.

9. Minor as a partner in a firm: A minor can’t become a partner in a partnership firm. However, he may, with the consent of all the partners, be admitted to the benefits of partnership (Sec.30 of the Indian Partnership Act, 1932). He can share the profits without incurring any personal liability.

10. Contract for supply of Necessaries: Minor is liable to pay out of his property for the necessaries supplied to him by the other (Sec.68).

11. Contract by guardian – How far enforceable?

a) Though a minor’s agreement is void, his guardian can, under certain circumstances enter into a valid contract on the minor’s behalf.

b) Where the guardian makes a contract for the minor, which is within his competence and which is for the benefit of the minor, there will be valid contract which the minor can enforce.

c) But all contracts made by guardian on behalf of a minor are not valid.

d) If, a contract entered into by a certified guardian (appointed by the Court) of a minor, with the sanction of the court for the sale of the minor’s property, may be enforced by either party to the contract.

e) The parent or guardian of a minor cannot be held liable unless some goods / services are supplied to a minor, as the agent of the parent or guardian.

12. Minor as an agent: A minor can act as an agent and bind his principal by his acts without incurring any personal liability.

13. Minor as a shareholder or member of a company:

a) A minor can't apply for allotment of shares in a company in primary market. However, a minor can apply for transfer of fully paid shares in a company through his guardian.

b) In case a minor inherits certain shares the name of his lawful guardian will be entered as a member in the register of members of the company.

14. Minor as an insolvent: A minor can’t be declared as insolvent.

15. Liability for tort: A minor is liable for a tort i.e. civil wrong committed by him.

E.g.: Raju, a 15 years old boy drives a car carelessly and injures Krishna. Here Raju is liable for the accident i.e. tort.

A, a minor advanced certain sum of money to B for which B executed a mortgage of his immovable property in favour of A. In this case, the mortgage can be enforced by A, if B does not repay the money.

Raghva Chariar Vs. Srinivasa



But where a tort arises out of a contract a minor is not liable because if it is allowed it is an indirect way of enforcing an invalid contract.

E.g.: X, a minor taken a car from a travel agency and met with an accident which results into damage of a car. Here X is not liable to pay any damage to travel agency.

16. A Minor and Negotiable Instruments Act: A minor can draw, make, negotiate or endorse any negotiable instruments i.e. cheque, promissory note, bill of exchange, etc. but he will not be liable under any such instruments. However any negotiable instruments executed or endorsed in favour of a minor can be enforced by him. (Sec.26 of the Negotiable Instruments Act 1881)

17. Membership in a Trade Union: Any person who attained the age of 15 years may be a member of a registered Trade Union, provided the rules of the Trade Union allow so. In such a case the minor will enjoy all the rights as a member.

18. Contracts of Apprenticeship: A contract of apprenticeship, if it is beneficial for the minor can be made and enforced by the minor's guardian under the Indian Apprenticeship Act, 1961. However, the minor must be at least 14 years of age and be physically fit.


Q.No.3. Who are the persons of Unsound Mind? What are the Various Forms in which Unsoundness may occur? State the Legal Effect of Agreement entered into by a Person of Unsound Mind?

Who is considered as 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, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests [Sec.12] Who is a person of Unsound Mind? A person who does not have sound mind is considered as a person of unsound mind. Different Forms of Unsoundness:

1. Idiot: An idiot is a person who doesn’t have mental ability of thinking. His incapacity is permanent and at any time he is unsound mind.

2. Lunacy or insanity: A lunatic is a person whose mental thinking is disordered due to some mental strain or disease. However, the mental capacity of such persons may not be completely lost. He will have intervals of sanity (capable) and insanity (incapable). The period during which he is sane is called lucid intervals (i.e. capable to enter into contract). Contract entered into during lucid intervals is valid.

3. Drunkard or intoxicant: A drunkard or intoxicated person loses his contractual capacity when he is intoxicated so excessively that he loses reasoning power for the time being. Drunkenness is similarly treated as insanity. He can’t enter into a valid contract during drunkenness.

4. Delirious persons: A person delirious from fever is also not capable of understanding the nature and implications of an agreement. So, he can't enter into a contract when he is delirious.

A property worth about Rs.25,000 was agreed to be sold by a person for Rs.7,000 only. His mother proved that he was an idiot, incapable of understanding the transaction and that he mostly wandered about. The sale was held void.

Inder Singh Vs. Parmeshwardhari Singh



5. Hypnotised persons: Hypnotism produces temporary incapability till a person is under the effect of artificial induced sleep. Such a person cannot enter into a contract.

6. Mental decay: There may be mental decay due to old age or poor health. If such person is not capable of understanding the contract and its effects upon his interest then he can't enter into a contract.

At what time Soundness of Mind is Required? The soundness of mind is required only at the time of entering into a contract. If a person becomes unsound mind after entering into a contract, the contract remains valid. Consider the following points:

a) Contract by a person usually of unsound mind: A person, who is usually of unsound mind, but occasionally of sound mind, may enter into a valid contract when he is of sound mind.

b) Contract by a person usually of sound mind but occasionally of unsound mind: A person who is usually of sound mind, but occasionally of unsound mind can enter into a contract when he was sound mind. He can't enter into a contract when he was unsound mind. [Sec.12 para 3].

Burden of Proof:

Case The Burden of Proof

Where a person is usually of sound mind.

The burden of proving that he was of unsound mind at the time of entering into contract lies on the person who challenges the validity of the contract.

Where a person is usually of unsound mind.

The burden of proving that he was of sound mind at the time of entering into contract lies on the person who wants to continue the contract.

(IMMEDIATELY REFER PRACTICAL QUESTION NO. 5)

Q.No.4. Who are the Disqualified Persons to enter into a Contract?

Law specifically disqualifies some persons to enter into a contract in order to protect the public from the possible negative consequences. Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly, so that the contracts by such persons are void. Incompetency to contract may arise from political status, corporate status, legal status, etc. Following Persons are Specifically Disqualified under Indian Contract Act:

a) Alien Enemies: An alien is a person who is a foreigner to the land. If war is declared between two countries then such other country is called alien enemy. Contract entered with an alien enemy during war time is void. If a contract is entered during peace times and a war breaks out later, then the contract has to be suspended till the restoration of peace, or it should be dissolved by the parties or the parties can wait till the completion of war and after restoration of political relations, the contract can be executed.

b) Foreign Sovereigns, Diplomatic staff, etc.: Foreign sovereigns, Government, their representatives and diplomatic staff (e.g. ambassadors, envoys etc.) have full capacity to contract in India but they have the privilege of not being sued. They can’t be sued unless they voluntarily submit to the jurisdiction of our Law Courts; or the Central Government permits to sue them.

c) Insolvent: On adjudication, insolvent’s property lies in the hands of ‘Official Receiver’, and he has no power to deal with that property. Thus he can’t enter into any contract regarding the same. After getting the “Certificate of Discharge” he can make all types of contracts just like an ordinary person.



d) Convicts: A convict during the period of his imprisonment becomes

incompetent for two things:

i) To enter into contract

ii) To sue on contracts made before conviction.

However, he may get a license i.e. ‘ticket of leave” from the government and perform the above acts while undergoing imprisonment. His disability comes to an end either on the expiry of the period of sentence or when he is pardoned. On regaining his contractual capacity, he can sue on his contracts as the provisions of Limitation Act also remain in abeyance for him during the period of the sentence.

e) Corporations & Companies: Corporations & companies are the artificial persons created by law. A corporation is formed under some special statute passed by the Legislature. Its contractual capacity is determined by the statute creating it. It is competent to contract within the provisions of the statute creating it. A company is formed under the Companies Act. Its contractual capacity is determined by the “Object Clause” of its Memorandum of Association registered under the Companies Act. It is competent to make contract within the scope of the Memorandum. Any contract made beyond the Memorandum is void.

f) Women:

i) Indian law makes no difference between men and women with respect to contractual capacity. A woman (whether married or not) can enter into a contract and sue and be sued in her own capacity with respect to her property (Stridhanam). Even husband and wife can enter into valid contracts. They can sue each other because they are independent persons and have separate legal identity.

ii) A husband is not liable for the contracts made by his wife unless he allows her to act as his agent either with express or implied authority.

iii) However, a husband is liable for the contracts made by his wife for supply of pressing necessaries of life. In such a case, she is an agent of her husband by necessity.


Q.No.5. State the Legal Provisions relating to the act of Supply of Necessaries to Incapable Persons?

Meaning of Necessaries:

a) It may be noted that necessaries of life are those things without which an individual cannot reasonably exist.

b) What is necessary shall be decided on the basis of the status of the incompetent person and the circumstances of the case.

c) Food, clothing, housing, education expenses, medical expenses, legal expenses for defending a minor in some civil or criminal proceedings, funeral expenses of his deceased family members, marriage expenses of a dependent female member in the family, diwali pooja expenses, etc. are the examples of necessaries.

d) Loan given to an incompetent person for purchase of necessaries also comes under u/s. 68.

Sec.68 of the Act provides that, “If a person incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition of life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.”

The liability to pay for necessaries is a quasi-contractual liability.

Conditions to be Satisfied:

a) The person incapable of entering into a contract may be a minor, or a person of unsound mind.



b) The other person has supplied necessaries suited to his condition of life either to him or to anyone whom he is legally bound to support.

Important Points to be Remembered:

a) The things must be suitable to the condition in life of the incompetent person: What is necessary is a relative fact to be determined with reference to the circumstances of each case.

b) The incompetent person must be in need of such things: If the person is already having sufficient supply of things and does not need them anymore, further supply of them will not be considered as necessary.

a) You should, however, note that in such circumstances, the price only of necessaries and not of articles of luxury, can be recovered. To establish his claim, the supplier must prove not only that the goods were supplied to the person who was minor or a lunatic but also that they were suitable to his actual requirements at the time of the sale and delivery.

b) Similarly, if money has been advanced in like circumstances for the purchase of necessaries, its reimbursement can be claimed.

The Effect of the Provision is that:

a) The price of the goods or services so supplied can be recovered only out of the property of the incompetent person, if any. In other words, there is no personal liability to such incapable person.

b) Incompetent person’s property is liable to pay only a reasonable price for such goods or services supplied and not the price agreed by such incompetent person. (Because, an incompetent person cannot accept any contractual obligation).

c) It should be noted that if the incompetent person has no property, nothing can be recovered.

(IMMEDIATELY REFER PRACTICAL QUESTION NO. 4, 6)

Q.No.1. D, a minor, borrowed a sum from M by executing a mortgage of his property in favour of M. Subsequently, D sued for setting aside the mortgage. Is mortgage valid? Can M recover the sum advanced to D?

Facts of the case: D, a minor borrowed a sum from M by executing a mortgage of his property in favour of M. Later on, D sued for setting aside the mortgage. Issue/Question involved: Whether mortgagee recover the advance from the minor (D)? Law/Provision: Sec 10 and Sec 11

Sec. 10 says that “All agreements are contract if they are made by the free consent of the parties competent to contract, for lawful consideration and with a lawful object and are not hereby expressly declared to be void”.

Sec.11 provides that “Every person is competent to contract who is of age of the 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”.

PRACTICAL QUESTIONS

A, a minor purchased 11 fancy waist coats and other clothes while he was already having sufficient clothes to wear. Held, the 11 waist coats and other clothes purchased were not necessaries and the price was irrecoverable

Nash v. Inman (1908) 2 KB 1



Analysis: According to sec 10 one of the ingredients for a contract to be valid is competency of the parties and according to sec 11 every person who is of age of the majority is a competent person to enter into a contract. Therefore, a person who is not a major is not competent person. So a minor is not competent to enter into a contract. A contract with a minor, as per landmark case of Mohiribibi vs. Darmadas Gosh, is absolutely void i.e, from the beginning it is void. And the other party to the contract cannot recover any amount paid to the minor.

Conclusion: As per the reasons mentioned above, the mortgage is absolutely void and mortgagee cannot recover the advance paid to the minor.

Q.No.2. X, on attaining majority, gave a promissory note in the satisfaction of one executed by him for money borrowed when he was a minor. Is this promissory note valid?

Facts of the case: X, on attaining majority, gave a promissory note in the satisfaction of one executed by him for money borrowed when he was a minor.

Issue/Question involved: Whether the promissory note can be enforced or the minor can ratify the contract entered into during his minority?

Law/Provision: See 10 of the contract Act provides that for the validity of this contract the parties must be competent persons.

Analysis: Sec 11 - A minor has no capacity to enter into a contract and hence minor contract is absolutely void. Therefore, he cannot ratify the contract or affirm the contract entered during his minority for the reason that ratification goes back to the date of contract. So, it amounts to enforcement of a void agreement which is against the statute.

Conclusion: The Promissory note executed after attaining the majority is not valid as there is no consideration. Because the consideration received during minority is not valid and cannot be ratified.

Q.No.3. X, a guardian, on behalf of Y, a minor, entered into a contract with Z for the purchase of a movable property for the benefit of the minor. Is the contract valid?

Facts of the case: X, a guardian, on behalf of Y, a minor, entered into a contract with X for the purchase of a movable property for the benefit of the minor.

Issue/Question involved: Whether the contract is valid?

Law/Provision: Sec 10 states that parties must have competency to enter into a contract and by sec 11 it says that every person is competent person to enter into a contract who is of age of majority. Therefore, a minor is not a competent person to enter into a contract. Mohiribibi vs. Dharmadas Gosh declared that a contract with a minor is absolutely void.

Analysis: The law declared by Mohiribibi case that a minor’s agreement is “absolutely void” has been generally followed, but it has been confirmed to case where a minor is changed with obligations, the other contracting party seeks to enforce those obligations. Thus what is meant by propositions that “the contract is void that the law will not enforce contractual obligations of a minor”. Accordingly, a minor is allowed to enforce a contract which is of some benefit to him and under which he is required to bear no obligation.

Conclusion: On this analysis made above, the contract is beneficial to the minor and can be enforced if his guardian acts within the scope of his authority.

Q.No.4. X, a minor entered into contract with Y to supply food and clothes to his dependents. Y supplied the same but X refused to pay for the same. Can Y recover anything?

Facts of the case: X, a minor entered into contract with Y to supply food and clothes to his dependents. Y supplied the same but X refused to pay for the same.



Issue/Question involved: Whether `Y’ is entitled to recover the loan from the estate of a minor?

Law/Provision: Sec 68 - Claim for necessaries supplied to persons incapable of contracting on his account. If a person incapable of entering into a contract, or any one whom he is legally bound to support, or is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.

Analysis: As per law mentioned above the liability is only for necessaries which are suited to his conditions in life of such incapable persons. The minor or unsound mind persons are incapable of making contracts of purchase in strict sense of the word, but of a man satisfies his needs of such incapable persons by supplying him necessaries, the law will imply an obligation to repay him for the necessaries and will enforce that obligation against the estate of incapable persons.

Conclusion: Loan given for food and clothes to his dependents is a necessity to a minor. Therefore, ‘Y’ i.e the lender is entitled to recover the loan from the estate of ‘X’.

Q.No.5. X, agreed to sell his property worth about Rs. 1,00,000 for Rs, 10,000 only. X’s mother proved that X was a congenital idiot, incapable of understanding the transaction. Is this sale valid?

Facts of the case: X, agreed to sell his property worth about Rs. 1,00,000 for Rs, 10,000 only. Issue/Question involved: Whether the contract for the sale of property is valid?

Law/provision: Sec.10 requires capacity to enter into a contract and Sec.11 states “Every person is competent person to enter into a contract who is of sound mind” and Sec.12 said that “a person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interest.

Analysis: According to Sec.12, the person entering into the contract must be a person who understands what he is doing and is able to form a rational judgment as to whether what he is about to do this interest or not. An idiot is a person of such a notice.

Conclusion: In this question, his mother proved that he was a congenital idiot, incapable of understanding the transaction and incapable of exercising his own judgment as to its effects upon his interest. Therefore, the contract of sale is void.

Q.No.6. Ramesh, aged 16 years, was studying in an engineering college. On 1 March, 2011 he took a loan of Rs 1 lakh from Suresh for the payment of his college fee and agreed to pay by 30th May, 2012. Ramesh possesses assets worth Rs 10 lakhs. On due date Ramesh fails to pay back the loan to Suresh. Suresh now wants to recover the loan from Ramesh out of his assets. Whether Suresh would succeed? Decide, referring to the provisions of the Indian Contract Act, 1872. (N 12 – 5M) , (Similar N 06 – 5M)

According to Sec11 of ICA, 1872, a person who is of the age of majority to the law to which he is subject is competent to enter into any contract. A person who has completed the age of 18 years is a major and otherwise he will be treated as minor. Thus Ramesh who is a minor is incompetent to contract and any agreement with him is void [Mohori Bibi Vs Dharmodas Ghose 1903, 30 Cal, 539 (PC)]. Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a minor’s estate for the supply of the things which are the necessaries of life to him. It says that,the supplier or lender will be entitled to claim the money/price of goods or services which are necessaries suited to his condition of life provided that the minor has a property. The liability of minor is only to the extent of the minor’s property. Thus, according to the above provision, Suresh will be entitled to recover the amount of loan given to Ramesh for payment of the college fees from the property of the minor.



Q.No.7. ‘An agreement entered into with a minor may be ratified on his attaining majority’.

Incorrect: In accordance with the provisions of the ICA,1872 as contained in Section 11, “every person is competent to contract who is of the age of majority “ Accordingly, a person who is minor is incompetent to contract. The law declares that an agreement entered into with a minor is void. As a minor’s agreement is void ab initio, he cannot validate it by ratification on attaining his majority. Ratification in law is treated as equivalent to a validation of previous authority, and it follows that, as a general rule, a person or body of persons, not competent to authorize an act, can not give it validity by ratifying it. Of course, such a person (minor) can enter into a fresh agreement, but the earlier amount received cannot be treated as consideration for the new agreement. (Relevant cases on this point are Mohiri Bibi vs. D.D. Ghosh and Nazir Ahmed vs. Jeevandas).

Q.No.8. K is the wife of A. She purchased a saree on credit from B. B demanded the amount from A. A refused to make the payment. B filed a suit against A for the same amount. Decide in the light of provisions of the Indian contract Act, 1872, Whether B would Succeed. (M 13 – 4M)

Facts of the case: K the wife of A purchased saree on credit from B. B demanded the amount from A. A refused to make the payment. B filed a suit against A for the same amount Issue/Question involved: in the light of provisions of Indian contract Act, 1872. Whether B would succeed. Analysis:

Case Provision

1. Where wife lives with her husband.

There is a legal presumption that a wife has authority to pledge her husband’s credit for necessaries. But the legal presumption can be rebutted in the following cases.

a) Where the goods purchased on credit are not necessaries.

b) Where the wife is given sufficient money for purchasing necessaries

c) Where the wife is forbidden from purchasing anything on credit or contracting debts.

d) The trader has been expressly warned not to give credit to his wife.

2. Where wife lives apart for no fault on her part.

A wife has authority to pledge her husband’s credit for necessaries. This legal presumption can be rebutted only in case (a) and (b) and not incases (c) and (d)

3. Where wife lives apart for no fault on her husband’s part

A wife has no authority to pledge her husband’s credit even for necessaries.

Conclusion: Thus, in light of above mentioned provisions it may be said that B can recover the said amount from A provided the saree purchased by K are necessaries for her

THE END



Copyrights Reserved


IPCC_33e_M.Law_Free Consent_________________________________________65


5. FREE CONSENT


No ABC N 02 M 03 N 03 M 04 to

M 13 N 13 M 14 N 14 M 15

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Q.No.1. Define the terms Consent and Free Consent.

1. Sec.13 of the Indian Contract act states: “Two or more persons are said to consent when they

agree upon the same thing in the same sense”. (Consensus–ad-idem)

2. Consequently, when parties to a contract make some fundamental error as to the nature of the transaction, or as to the person dealt with or as to the subject-matter of the agreement, it cannot be said that they have agreed upon the same thing in the same sense and if they do not agree in the same sense, there cannot be consent. A contract cannot arise in the absence of consent.

3. Ambiguity in the terms of an agreement, or an error as to the nature of any transaction or as to the subject-matter of any agreement may prevent the formation of any contract on the ground of absence of consent.

4. In the case of fundamental error, there is really no consent whereas, in the case of mistake, there is no real consent.

5. One of the essential elements of a contract is consent and there cannot be a contract without consent. Consent may be free or not free. Only free consent is necessary for the validity of a contract.

6. Consent is said to be free when it is not caused by (a) Coercion, (b) Undue Influence, (c) Fraud, (d) Misrepresentation (Sec.14). When consent is not caused by any of these factors, it is said to have been freely given.

7. In case of Mistake there is no consent at all. When consent is not free due to mistake, the agreement is void but in all other cases, the contract is voidable at the option of the party whose consent was obtained by coercion, etc.

8. According to Salmond, when there is no consent it is error in consensus and when there is no free consent it is error in cause.

Q.No.2. What is meant by Coercion? State some acts that Amount to and do not amount to Coercion.

1. Coercion means compelling a person to enter into a contract under

some pressure or threat.

2. Sec.15 of the Indian Contract Act defines it as - “Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code (45 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.”



Acts Amounting to Coercion:

a) Coercion is the committing of any act forbidden by IPC with an intention of causing any person to enter into an agreement.

b) Threatening to commit any act forbidden by IPC also amounts to coercion.

c) Unlawful detaining of property also amounts to coercion.

d) Threatening to detain any property also amounts to coercion.

Acts that do not Amount to Coercion:

a) Act done under statutory compulsion: Where the law requires that a contract be made by the parties, the consent in such a contract will not be deemed to be caused by coercion or undue influence.

b) Threat to strike: A threat to strike by employees in support of their demands is not regarded as coercion. This is so because the threat to strike is not an offence under the I.P.C. Rather, it is a right given under the Industrial Disputes Act, 1947.

c) Detaining the Property under Mortgage: Detention of property by a mortgagee until the payment of loan does not amount to coercion. Similarly, the refusal by the mortgagee to reconvey the property, except on the terms of mortgage, is not treated as coercion.

d) Threat to Sue: Where a person threatens another person to file a suit in case of non-fulfillment of promise on due date or on refusing to renew a contract, will not amount to coercion. Similarly, a threat not to withdraw pending criminal proceedings unless a bond is executed, cannot be regarded as coercion.

However, a threat to sue on a false charge amounts to coercion because such an act is forbidden by the I.P.C.


1. It is immaterial whether IPC is in force or not in the place where coercion is employed.

2. Coercion may proceed from a third person also.

E.g.: A, threatens to kill B if he will not sell his house to C as per the terms decided by C. The contract of sale of house by B to C is induced by Coercion.

A Madrasi gentleman died leaving a young widow. The relatives of the deceased threatened the widow to adopt a boy otherwise they would not allow her to remove the dead body of her husband. The widow adopted the boy and subsequently, applied for cancellation of the adoption. The act of restraining a dead body from being removed for cremation is forbidden by IPC. Thus the adoption was not valid.

Ranganayakamma Vs. Alwar Setti (1889) 13 Mad 214



3. Coercion may be applied against any third person.

4. Threat to commit suicide: It is deemed to be forbidden by IPC. Hence it amounts to coercion within Section 15. Threat to commit suicide is not punishable under the IPC, but any consent obtained under this threat amounts to coercion.

5. The intention must be to compel the other person to enter into a contract.

Duress: In the English law the near equivalent of the term "Coercion" is "Duress".

Following are the differences between Coercion and Duress:

a) Duress does not include detaining of property or threat to detain property.

b) Duress can be employed only by a party to the contract or his agent.

Effects of Coercion (SEC.19, 64, 72):

a) The contract is voidable at the option of the party whose consent was obtained by coercion.

b) When the aggrieved party decides to rescind the contract, he must restore any benefit received from the other party under the contract.

c) If the aggrieved party does not rescind the contract, it is a valid contract.

d) A person to whom money has been paid or anything delivered by mistake or under coercion must repay or return it.

Burden of proof: The burden of proof lies upon the aggrieved party who wants to rescind the contract. Aggrieved party has to prove that:

1. Consent was obtained by coercion

2. He would not have entered into the contract, if there was no coercion.


Q.No.3. Explain the concept of Undue Influence.

1. Sec.16 of the Act defines the term ‘Undue Influence’ as: “A contract is said to be induced by

‘undue influence’, where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other”.

2. Undue influence is a type of moral coercion.

3. A person is deemed to be in a position to dominate the will of the other, when he holds authority, real or apparent over the other, or when he stands in a fiduciary relation to the other.

The essential Ingredients under this Provision are:

1. Relation between the parties: A person can be influenced by the other when near relation exists between the two.

2. Position to dominate the will: Relation between the parties exist in such a manner that one of them is in a position to dominate the will of the other.

Where husband obtained a release deed from his wife and son, under a threat of committing suicide, the transaction was set aside on the ground of coercion, suicide being forbidden by the Indian Penal Code.

Chiikham Amirazu Vs. Chikham Sheshamma (1917) 41 Mad 33



A person is deemed to be in Dominating Position in the Following Circumstances:

a) Real or Apparent Authority: A person in real authority can dominate the will of other person over whom he has authority. The expression ‘apparent authority’ includes cases in which a person has no real authority, but is able to influence others. .

b) Fiduciary Relation: It is a relationship of trust and confidence. There is no exhaustive list of such relationships. However, by common sense and on the basis of past decisions, some relationships are considered as fiduciary like the relationship of parent and guardian.

E.g.: Trustee & Beneficiary, spiritual adviser and his disciples, solicitor and client, guardian and ward, creditor and debtor, father and son, husband and wife etc.

c) Mental Distress: An undue influence can be used against a person to get his consent on a contract where the mental capacity of the person is temporarily or permanently affected by the reason of mental or bodily distress, illness or of old age. Such a person may be easily influenced to give consent.

3. The object must be to take undue advantage: Where the person is in a position to influence the will of the other in getting consent must have the object to take undue advantage over the other.

Unconscionable Transactions: When a contract is made between two parties and one party is in a position to dominate the will of the other and the transaction appears to be unreasonable, it is presumed that the stronger party has exercised undue influence over the weaker party.

Relationships which Raise Presumption of Undue Influence: The following relationships usually raise a presumption of undue influence, viz., (i) parent & child, (ii) guardian & ward,(iii) trustee & beneficiary, (iv) religious adviser and disciple, (v) doctor and patient, (vi) solicitor and client, and (vii) fiance and fiancee. Relationships which do not Raise Presumption of Undue Influence: (i) landlord and tenant, (ii) creditor & debtor, and (iii) husband and wife (other than pardanashin women). (iv) Principal and agent. In other words, in case of these relations undue influence shall be proved.

Examples:

a) A father, by reason of his authority over the son, can dominate the will of the son.

b) A spiritual adviser (guru), induced B, his devotee, to gift him the whole of his property to secure benefit to his (devotee’s) soul in the next world. The court held that the gift was obtained by undue influence.

c) A solicitor can dominate the will of his client.

d) A trustee can dominate the will of the beneficiary.

e) A person whose mental capacity is affected by age, illness or distress may be a prey to undue influence.

f) A doctor is deemed to be in a position to dominate the will of his patient enfeebled by protracted illness.

A poor Hindu widow who was in great need of money, was influenced by a money lender to pay 100% rate of interest. Court held that this is a case of using undue influence and thus reduced the rate of interest to 24%.

Ranee Annapurni Vs. Swaminatha (1910) 34 Mad 7

A, a solicitor, sold certain properties to one of his clients B. B filed a suit upon A claiming that the property was considerably over-valued and that his consent was caused by undue influence. Court held that since the relationship of solicitor and client is fiduciary, undue influence is presumed.

Moody Vs. Cox



Transaction with Pardanashin Woman:

a) A woman who is completely secluded (isolated, separated) from social intercourse is a pardanashin woman. These ladies are generally illiterate and are easily subject to undue influence. Thus law wants to protect them.

b) Once it is established that a contract is made with a pardanashin woman, law presumes undue influence and the other party has to prove that undue influence is not exercised.

c) When any agreement is made with such women the terms of the agreement should be explained to them in the presence of atleast 2 adult male members of her family, otherwise the agreement becomes voidable at the option of such women.

d) Examples for Pardanashin women in India - Brahmin families of U.P., Marwadi families in Rajasthan, Parsi families in Mumbai and Muslim families.

Effect of Undue Influence: (Sec.19A)

a) The agreement is voidable at the option of the party whose consent was caused by undue influence.

b) At the request of aggrieved party court may set aside such contract absolutely.

c) Other party may be required to refund the benefit received under the contract.

d) If the aggrieved party does not want to set aside the contract, it becomes a valid contract. Burden of Proof:

a) In ordinary cases: The burden of proving undue influence rests on the person who wants to set aside the contract.

b) In case of unconscionable transactions: the weaker party has to prove that

i) The other party was in a position to dominate his will; and

ii) The transaction appears to be unreasonable.

c) The burden of proving the absence of the use of the dominant position to obtain the unfair advantage will lie on the party who is in a position to dominate the will of the other (i.e. stronger party)

Similar Question:

1) what do you understand by “coercion” and “undue influence” under the provisions of the Indian Contract Act, 1872? What are the differences between them

2) Examine the validity of a contract when the acceptance from the offeree is obtained under “Coercion” or under “undue influence” point out the distinction between “Coercion” and “Undue influence”

Ans: Refer above Q no .1 and Q.no.2


Q.No.4. Explain the concept of Fraud and also Explain the concept of Silence as to Fraud?

Fraud can be defined as the intentional misleading of one person by another. The most common type of fraud occurs when one person lies to another about material fact, as a result of which contract is made. Definition (Sec.17): “‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent, with an intent to deceive another party thereto or his agent, or to induce him to enter into the contract.



Essential Elements of Fraud:

a) There should be some representation and it should be false.

b) The representation must relate to a material fact which exists now or existed in the past.

c) The representation must have been made before the conclusion of the contract with an intention of inducing the other party to enter into contract.

d) The representation must have been made with a knowledge of its falsity or without belief in its truth or recklessly.

e) The other party must have relied upon the representation and must have been deceived.

f) The other party acting upon the representation must have suffered some loss. In other words, no damage no fraud.

Acts which Constitute Fraud:

a) Giving a suggestion as to a fact by one person who does not believe it to be true: A statement which is made with the knowledge that it is false or without belief in its truth, is considered as fraud. A false statement made recklessly without enquiring whether it is true or false, will also amounts to fraud.

E.g.: The Directors of a company issued a prospectus containing false statements. A shareholder who had subscribed for the shares on the faith of the prospectus wanted to avoid the contract. It was held that he could do so because the false statement made by the directors amounted to fraud.

b) An active concealment of fact, by one, having knowledge or belief of the fact: Concealment is as bad as direct lie. If a person conceals a fact which is material to the contract and it is his duty to disclose it, it is considered as an act to defraud the other.s

c) A promise made without any intention of performing it: When a person makes a promise without any intention to perform his part of promise, is considered as fraud.

d) Any other act fitted to deceive others: The expression ‘act fitted to deceive’ means any act which is done with an intention of committing fraud.

e) Any such act or omission which law specifically declares to be fraudulent: In some cases, the disclosure of certain kinds of facts is expressly required by the law and non-compliance with the law is expressly declared to be fraudulent.

f) The fraud, which results into a contract, is only covered by this section. Any act committed by a party which does not lead the other party to enter into a contract is not covered by this section.

Effect of Fraud (SEC.19):

1. The party whose consent was caused by fraud can rescind (cancel) the contract. When a party opts to rescind the contract, he may claim restitution i.e. to be placed in the same position as if there was no contract at all. He can also claim compensation for damages.

2. The party whose consent was caused by fraud may, if he thinks fit, insist that the contract shall be performed and that he shall be put in the position in which he would have been if the representation made was true.

3. The party whose consent was caused by fraud can claim damages, if he incurs some loss.

But he can’t do so in the following cases:

a) Silence does not amount to fraud, where truth can be discovered with ordinary diligence.

b) Where the aggrieved party gave the consent in ignorance of fraud.

c) Where the aggrieved party after being aware of fraud takes a benefit under the contract.



But in the following two cases the aggrieved party can claim damages, if any.

a) Before the contract is rescinded, an innocent third party acquires some interest in the property.

b) Where the aggrieved party can’t be restored to his original position.

4. Person rescinding a voidable contract shall restore to the other party any benefit received under the contract.

SILENCE AS TO FRAUD

General Rule: According to explanation to Sec.17, mere Silence is not fraud. “Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.” Exceptions to this General Rule: (In other words, in the following cases silence is fraud)

a) Contracts of uberrimae fidei or contracts of utmost good faith: In these contracts there is a legal duty on the parties to disclose complete and full material facts. In such contracts, suppression of truth amounts to fraud.

Examples:

a) Contracts of insurance b) Contracts of sale of immovable property c) Allotment of shares

d) Contracts of marriage e) Contracts of family settlements.

E.g.: A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter. Here, the relation between the parties makes it compulsory to disclose that the horse is unsound.

b) Where the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silent to speak. Duty to speak arises when one contracting party reposes trust and confidence in the other or where one party has to depend upon the good sense of the other (e.g. Insurance Contract).

c) Where the silence itself is equivalent to speech: Where it is the duty of a person to speak, or his silence is equivalent to speech, silence amounts to fraud.

E.g.: B says to A, “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech. If the horse is not good, A can be held liable for fraud.

d) Latent defects: If a seller fails to inform the buyer about the latent (inside) defects, his silence amounts to fraud.

e) Half truth: Half truth is worse than a lie. Partial truthful disclosures may easily deceive the other party.

E.g.: Prospectus of a company disclosing only average dividend declared by the company in the last 5 years. Actually the dividends are gradually declining over that period. This amounts to fraud.

BURDEN OF PROOF: Burden of proof lies upon the party who wants to get relief in the court of law.


Q.No.5. Explain the concept of Misrepresentation?

Misrepresentation (Sec.18):

a) Where a person asserts something which is not true, though he believes it to be true, his assertion amounts to misrepresentation. Misrepresentation may be either innocent or without reasonable ground. Misrepresentation is misstatement of facts by one, which misleads the other who, consequently, can avoid the contract.

b) ‘Misrepresentation’ is any untrue statement made by a party to the contract to another party which induces the other party to act upon the statement and enter into the contract.



c) This false representation must be related to some material fact to the contract.

d) If this false statement is made innocently, it is called misrepresentation. But if it is made intentionally, with a view to deceive the other party, it is called fraud.

e) Where a party to a contract commits fraud or misrepresentation, but in fact, the other party is not misled by such fraud or misrepresentation, the contract cannot be avoided by the latter on the ground of Misrepresentation (Explanation to Sec.19).

According to Section 18, There is Misrepresentation:

1. When a person positively states that a fact is true when his information does not warrant it to be so;

2. When there is a breach of duty by a person, without any intention to deceive, which brings an advantage to him and loss to the other;

3. When a party causes the other party to the agreement to make a mistake as to the subject matter.

Acts that Constitute Misrepresentation (Sec.18):

a) Unwarranted statement: An innocent false statement of material fact, not warranted by information (Trustworthy source), is considered as misrepresentation.

b) Breach of duty: There are certain cases where the party is under duty to disclose certain facts and he does not disclose these facts and thereby misleads the other party. Under the English law this is called 'constructive fraud'.

E.g.: Under a contract of Insurance, If an assured person honestly states his age as 20 years whereas he is actually 25 and thereby induces the LIC to charge a lower premium, it will be a case of misrepresentation.

c) Inducing mistake about subject matter: When one party misleads the other, however innocently, regarding the nature and quality of subject matter, a misrepresentation is said to be made.

Essential conditions of Misrepresentation:

a) Misrepresentation must be or must have become a false statement, but the person making it must honestly believe it to be true.

b) There was a misrepresentation of fact: Misrepresentation must relate to a fact and not to a mere opinion. If, a seller states that his property is worth Rs.1 lakh is a mere opinion which may or may not be accepted by the buyer and when he states that he has paid Rs.1 lakh for the property. It is a statement of fact. If it is false, contract becomes voidable.

c) Misrepresentation should be made regarding material facts of the contract.

d) Misrepresentation as to Law: It does not affect the validity of a contract. But a deliberate misrepresentation in a matter of law is certainly a cause for avoiding a contract.

e) Misrepresentation must have been made without any intention to deceive the other party.

f) Misrepresentation should be made before or at the time of entering into a contract.

g) Misrepresentation must have been addressed to the party to the contract.

h) Misrepresentation must induce the other party to enter into a contract.

A, on the strength of somebody’s information, (without reasonable grounds to believe it) positively stated to B that certain third party is going to be the Director of a company which is yet to be incorporated. B bought the shares on the faith of such statement. This is a case of misrepresentation by A.

Mohanlal Vs. Shri Gungaji Cotton Mills Co. (1899) 4 Cal. CWN 369



Effect of Misrepresentation:

1. Right to rescind the contract: The party whose consent was caused by misrepresentation can rescind (cancel) the contract.

2. Right to insist upon performance: The party whose consent was caused by misrepresentation may insist that the contract shall be performed and that he shall be put in the position in which he would have been if the representation made was true.

3. Further, law does not provide any remedy to the aggrieved party if the reality of misrepresented fact can be discovered by ordinary observation.

Burden of Proof: In case of misrepresentation, burden of proving the fact of misrepresentation lies upon the party who wants to get relief in the court of law.


Q.No.6. What is meant by Mistake? State the Effect of Mistake on the Validity of Contract.

Mistake:

a) Mistake may be defined as an erroneous belief about something.

b) Mistake in a contract may occur in any of the following ways:

Mistake of law - Indian law - Foreign law

Mistake of fact - Unilateral - Bilateral

Mistake of Law: 'Ignorantia juris non excusat' i.e. Ignorance of law is no excuse. It is a well settled rule of law. A person is presumed to know the ordinary law of land and he can’t take the plea of ignorance. But he is not supposed to have knowledge of the laws applicable in the entire world. Mistake of Indian Law: Everyone is supposed to know the law of the country. If a person does not know the law of his country, then he must suffer the consequences. Thus, a mistake of Indian law will not affect the validity of the contract.

Note: But, if a person enters into a contract by making a mistake of law through the inducement of another, whether innocent or otherwise, the contract may be avoided. Mistake of Foreign Law: A mistake of foreign law is treated as a mistake of fact which is discussed below in detail. Mistake of Fact: A mistake of fact occurs when a party believes something to be true, but his belief is not in accordance with the real facts. If both the parties are mistaken it is called bilateral mistake. If only one of the parties is mistaken, then it is called unilateral mistake. Effect of Mistakes as to Law (Section 21): A contract is not a voidable because it was caused by a mistake as to any law in force in India but a mistake as to a law not in force in India has the same effect as a mistake of fact.

A, a widow was entitled to certain occupancy rights. She remarried and thought that she lost her occupancy rights due to her second marriage. Under this mistake, she agreed to take the lease of the same land from Z, the Zamindar. Later on, she came to know about her occupancy rights. Now, A wanted to revoke the lease agreement with Z. Court held that A could not revoke the lease agreement because there was a mistake of Indian law.

Sahiban Bibi Vs. Madho Lal (1906) 4 All LJ 475



Q.No.7. Write about Unilateral Mistake.

a) A unilateral mistake, that is to say, mistake of one party, does not render the agreement void

(Sec.22).

b) When only one party to an agreement is mistaken as to the contents of the agreement, it is termed as unilateral mistake. Generally, a unilateral mistake does not affect the validity of an agreement. However, in case of unilateral mistake, a contract can be avoided, if it can be proved that it was caused by fraud or misrepresentation on the part of the other party.

Effect of Unilateral Mistake: In case of unilateral mistake the validity of the contract is not affected generally i.e. contract is valid.

Exceptions to Unilateral Mistake: A unilateral mistake is generally not allowed as a defence in avoiding a contract. But in certain cases, the consent is given by a party under an error or mistake which is so fundamental as goes to the root of the agreement. In such cases the agreement is void. Thus in the following cases, even though there is a unilateral mistake, the agreement is void.

On the basis of judicial decisions, they may be of following types:

a) Mistake as to the identity of the person contracted with.

b) Mistake as to the nature of contract.


Q.No.8. Write about Bilateral Mistake.

Definition:

a) According to Sec.20, "Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is altogether void".

b) The Court will enforce a voidable contract if not avoided, but will not recognise an agreement that is void.

Essential Conditions of Bilateral Mistake: The following conditions must be satisfied before declaring an agreement to be void under this section:

a) Both the parties must be under a mistake.

Ex: A agreed to purchase B's motor cycle which was lying in a garage. But both the parties don't know that the motor cycle and garage were already destroyed in a fire accident. Thus the agreement is void.

b) Mistake must relate to an essential fact.

Exception: An erroneous opinion as to the value of the thing which forms the subject matter of the agreement, is not deemed to be a mistake as to matter of fact.

E.g.: A buys a painting from B at a price of Rs. 20,000. Both A and B believed it to be the work of a known artist but B did not make any representation or warranty about it. Later A comes to know that it was a new one and worth only Rs.1,000. A is bound by the contract.

Cases Which Fall Under Bilateral Mistake:

1. Mistake about subject-matter: Where both the parties are under a mistake regarding the subject matter, the agreement is void. Following cases fall under this sub-heading:

J was the highest bidder at an auction sale of a public plot. At the time when he made his bid, he believed that certain field was a part of the plot offered for sale. There was no misdescription or ambiguity in the particulars of the plot. Here J was bound by the contract and he can't avoid it.



a) Mistake as to the existence of subject-matter: At the time of contract the subject-matter may cease to exist or it may have never been in existence and the parties do not know about it. In such a case the agreement is void.

b) Mistake about the title of the subject-matter: Unknown to the parties, the buyer is already the

owner of the article which he wants to purchase. Such an agreement is void.

c) Mistake as to the identity of subject-matter: Where both the parties are mistaken as to the identity of subject-matter, the agreement is void. In this case one party thinks about one thing and the other thinks about something else.

d) Mistake as to the quantity of subject-matter: If both the parties are under a mistake about

the quantity of subject-matter, the contract is void. This is because the mistake is about an essential fact of the agreement i.e. quantity. The result is the same even if the mistake was caused by the negligence of a third party.

e) Mistake as to the price of subject-matter: Sometimes there may be a genuine mistake as to the price of the article for sale. In this case the agreement is void.

E.g.: A agreed with B to let out his house for a monthly rent of Rs.530. However, in the lease deed it was written as Rs.350. Held, the contract was void.

f) Mistake as to the quality of subject-matter: If the subject matter is something essentially different from what the parties thought, the agreement is void.

Table napkins were sold at an auction by the description “The authentic property of that monarch". In fact the napkins were Georgian. Held, the agreement was void as there was a mistake as to the quality of the subject-matter.

Nicholson & Venn Vs. Smith Marriott (1947) 177 LT 180

‘P’ wrote to ‘H’ enquiring about the price of rifles and suggested that he might buy as many as 50 rifles. On receipt of reply, he sent a telegram ‘Send three rifles’. Due to mistake of telegraph office the message sent was ‘Send the rifles’. H dispatched 50 rifles. Held there was no contract between the parties.

Henkel Vs. Pape (1807) LR 6 EX. 7

W agreed to buy from R a cargo of cotton. There were two ships named “Peerless” sailing from Bombay, one sailing in October and the other in December. W thought about former ship but R thought about the latter ship. Held, there was a mutual or bilateral mistake and there was no contract.

Raffles Vs. Whichelhaus (1864) 2 H & C 906

An uncle told to the nephew that he (uncle) was entitled to a fishery and the nephew entered into an agreement with uncle’s daughter to rent the fishery. Unknown to both, the fishery actually belonged to the nephew. The agreement was held void.

Cooper vs. Phibbs (1867) LR 2 HL 149

A agreed to sell a cargo of corn. At the time of contract the cargo was supposed to be in transit from Salonica to United Kingdom. Both the parties don't know that the corn had already become fermented (damaged). Held, the agreement was void and the buyer was not liable for the price.

Couturier Vs. Hastie (1856) 5 HLC 673



2. Mistake about possibility of performance: Sometimes both the parties may believe that the

contract can be performed but actually it is impossible to perform. In this case both the parties were not aware that the contract is impossible to perform. In such a case the agreement is void. Impossibility may be:

a) Physical impossibility b) Legal impossibility


1. Notice that the mistake must be as to a fact, not law. However a question of foreign law is, a question of fact.

2. Again, the existence of a particular private right Is a matter of fact, though depending on rules of law. Thus, a man’s promise to buy property which, unknown to him already belongs to him is not binding on him.

3. Further, the mistake must be as to an essential fact. Whether the fact is essential or not depends on whether a reasonable man would regard the fact as an essential in the circumstances. A mere wrong opinion as to the value is not an essential fact. For instance, A and B both believe that a particular kind of rice is being sold in the market at Rs.1,780 per quintal and A sells rice of that kind to B at Rs.1780 per quintal. But, in fact, the market price was Rs.1,900. The contract is valid.

Effect of Bilateral Mistake: When there is a bilateral mistake of fact, no contract exists at all, i.e., the contract is void. Bilateral Mistake renders the agreement void and neither party can enforce the contract against the other.


Q.No.1. X beats Y and compels him to sell his house for Rs. 1,00,000. Y agrees to sell his house to X. Y signs the necessary documents for the sale of house and receives the payment. Later on, Y wants to avoid the contract? Will he succeed?

Fact of the case: X compels Y to sell his house for Rs. 100000 by beating. Y agrees and sell the house, later Y wants to avoid the contract, Issue/Question Involved: Whether ‘Y’ can avoid the contract? Law/Provision: Sec 15 of Indian contract Act, 1872, defined what is coercion as “Coercion is the committing or threatening to commit, any act forbidden by the Indian penal code, 1860, or unlawful detaining or threatening to detain, any property, to the prejudices of any person whatever, with the intention of causing any person to enter into an agreement. Analysis: Sec 15 applies to the given problem. The definition implies a committing or threatening to commit some act which is contrary to law .A clear illustration would be consent obtained at the point of pistol, or by threatening to cause hurt, or by intimidation or by threatening to burn a man’s house. When the consent is obtained by these techniques of causing coercion the contract becomes voidable. The aggrieved then, repudiate or avoid the contract and in such a situation he must restore the benefit obtained under voidable contact (sec 64). Conclusion: In the given problem ‘X’ obtained the consent of ‘Y’ by beating him to sell the home. It amounts to coercion U/S 15 as beating someone is prohibited and is an offence under Indian penal code. Therefore, when the contract is obtained by coercion, the contract becomes voidable as there is no free consent. Here, the aggrieved party ‘Y’ can avoid the contract, but he must restore Rs. 1, 00, 000 to ‘X’.

PRACTICAL QUESTIONS



Q.No.2. X, by a threat to commit suicide induced Y, his wife, and Z, his son, to execute a release deed in favour of his brother in respect of certain property. Are Y and Z bound by such release deed?

Facts of the case: X by inducing Y (his wife) and Z (his son), to execute a release deed in favour of his brother in respect of certain property. Issue/Question Involved: Is there a coercion u/s 15 and are they bound by release dead? Law / Provision: Sec. 15 of Indian contract Act, 1872 defined what is coercion as “Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code, 1860 or unlawful detaining or threatening to detain, any property, to the prejudices of any person whatever, with the intention of causing any person to enter into an agreement. Analysis: The facts of the given problem are similar to the case of chikham Amiraju vs. chikham seshamma, wherein it was held that the “threat of suicide amounted to coercion within the meaning of Sec 15 and the release deed was, therefore, voidable. Conclusion: Therefore, for the reasons mentioned above, the contact is voidable at the option of ‘X’ and they are not bound by the release deed, so they can avoid the contract.

Q.No.3. X, an illiterate old man of about 90 years, physically infirm and mentally in distress, executed a gift deed of his properties in favour of Y, his nearest relative who was looking after his daily needs and managing his cultivation. Is X bound by this gift deed.

Facts of the case: X an illiterate old man, who is infirm and mentally in distress, executed a gift deed of his properties in favour of Y because of looking his daily needs and managing cultivation. Issue/Question Involved: Can ‘X’ avoid the contract on the ground of ‘Undue influence’. Law / Provision: Sec 16

Sec 16 defines ‘undue influence’. A contract is said to be induced by ‘undue influence’ where the relation subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

A person is said to be able to dominate the will of another where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. Analysis: The category of person (Sec 16(2)) whose will is vulnerable to all sorts of influence is that of “persons in mental distress”. A person is said to be in distress when his mental capacity in temporarily or permanently affected .It may be due to extreme old age or mental or bodily illness or any other cause. Such a person is easily persuaded to give consent to a contract which may be unfavorable to him. Accordingly if a contract is made with him by taking advantage of his distress, it is voidable on the ground of undue influence. Conclusion: In the given problem, the contract is with a person (X) of an illiterate of 90 years old, physically infirm and mentally in distress .Therefore, the contract is voidable on the ground of ‘undue influence’, he can avoid the contract and he is not bound by the gift deed.

Q.No.4. X sells by auction to Y a horse which X knows to be unsound. The horse appears to be sound but X knows about the unsoundness of the horse. Is this contract valid in each of the following alternative cases:

Case (a): X says nothing about the unsoundness of the horse to Y.

Case (b): if X says nothing about it to Y who is X’s daughter who has just come of age.

Case (c): If Y says to X ”If you do not deny it, I shall assume that the horse is sound”. X says nothing.



Solution: Section to which the given problem relates: Section 17.

Case (a):

Decision: This contract is valid.

Reason: Mere silence as to the facts likely to affect the willingness of a person to enter into a contract is not fraud. Here, it is not the duty of the seller to disclose defects.

Case (b):

Decision: This contract is not valid.

Reason: It becomes X’s duty to tell Y about the unsoundness of the horse because a fiduciary relationship exists between X and his daughter Y. Here, X’s silence is equivalent to speech and hence amounts to fraud.

Case (c):

Decision: This contract is not valid.

Reason: Here, X’s silence is equivalent to speech and hence amounts to fraud.

Q.No.5. X has two horses, a white and another black. X offers to sell his horse to Y. Y not knowing that X has two horses, thinks of white horse and agrees to buy the horse. Is this agreement valid?

Facts of the case: X having two horses white and black. X offers to sell his black horse, but Y has no knowledge that X has two horses, thinks of white horse and agreed to buy the horse.

Law / Provision: Sec 20 - Mistake

This section provides “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, then the agreement is void”.

Analysis: Sec 20 will come into play

1. When both the parties to an agreement are mistaken

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

3. The fact about which they are mistaken is essential to the agreement .

Broadly speaking certain facts are essential to every agreement .They are:

1. The identity of parties;

2. The identity and nature of the subject-matter of the contract; and

3. The nature and contract of the promise itself.

Conclusion: For the Problem given above, Sec 20 will apply. Here, both the parties are under mistaken belief or mistake about the subject-matter of the contract i.e., the horse X thinks one horse and Y has in his mind another horse. Therefore, the agreement is void as the consent of both the parties is defeated.

Q.No.6. P inquired about the price of rifles from H suggested that he might buy fifty rifles. On receiving the information, P telegraphed “send three rifles”. But because of the mistake of the telegraph authorities, the message transmitted was “Send the rifles”, H dispatched fifty rifles. P accepted three rifles and returned the remaining forty – seven rifles. Is this agreement valid?

Facts of the case: P inquired H about the price of rifles that he might buy fifty rifles. After receiving the information about the rate P ordered for three rifles through telegraph. Due to the mistake occurred by telegraph authorities H dispatches fifty rifles. P accepted the three rifles and returned remaining rifles to H.

Issue/Question Involved: Whether the agreement is valid?

Law/Provision: Sec 20 Mistake-as above in the problem-5 mistakes as to subject matter –mistakes as to quantity of the subject –matter of the contract.



Analysis: Where both the parties are under mistake as to identity of subject matter the agreement is void this may include 1) quality of subject matter 2) quantity of subject matter 3) Title of the subject matter and 4) Price of the subject matter.

Result is the same even if the mistake as to quantity was caused by the negligence of a third party.

Conclusion: In the given problem by mistake of the telegraph clerk the message transmitted to ‘H’ was “send the riffles”.’H’ sent sixty riffles .But ‘P’ accepted only three riffles, and sent back rest. Therefore, due to mistakes of third party both the contracting parties are under a mistake as to quantity of subject matter. The agreement is void.

Q.No.7. X buys a painting believing it to be worth Rs. 1,00,000 while in fact it is worth only Rs. 10,000. Is it a valid contract?

Facts of the case: X buys a painting believing it to be worth Rs. 1,00,000 while in fact it is worth only Rs. 10,000.

Issue/Question Involved: Whether the contract is induced by undue influence?

Law/Provision: Sec 16 undue influence. Sec. 16(3) –Where a person who is in a position to dominate the will of another enters into a contract with him, and the transaction appears on the face of it or on evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a dominate position the will of the other. Analysis: Where one of the parties to a contract is in a position to dominate the will of other and the contract is apparently unconscionable, that is, unfair, the law presumes that consent must have been obtained by undue influence. The presumptions of undue influence on the ground of unconscionableness of the bargain is raised only when one of the parties is in a position to dominate the will of the other. As between parties on equal tooling the mere unconscionableness of the bargain does not create the presumption of under influence.

Conclusion: In this problem, the transaction appears to be not unconscionable transaction. Therefore this contract is not induced by undue influence and valid.

Q.No.8. “A” applies to a banker for a loan at a time where there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. Whether the contract is induced by undue influence? Decide. (N 02 – 4M)

Facts of the case: A approaches the banker for a loan at the time where there is money stringency in the market. The banker grants loan at an unusually high rate of interest.

Provision & Analysis: This is a transaction in the ordinary course of business, and the contract is not induced by undue influence, as between parties on an equal footing, the court will not hold a bargain to be unconscionable merely on the ground of high interest. Only where the lender is in a position to dominate the will of the borrower, the relief is granted on the ground of undue influence.

Conclusion: In this case A intentionally accepts the loan; therefore the contract is not induced by undue influence.

Q.No.9. Sohan induced Suraj to buy his motorcycle saying that it was in a very good condition. After taking the motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan proposed to get it repaired and promised to pay 40% cost of repairs. After a few days, the motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide giving reasons. (N 03 – 4M)

Facts of the case: Sohan induced Suraj to buy his motorcycle; misrepresenting that it was in a good condition. Later Suraj complained that there are many defects in it. Sohan accepted 40% of the expenses incurred on repairs. In a meantime the motorcycle did not work at all.

Case law: Long v. Lloyd.



Provision: Sec.19 – Voidability of Agreements without free consent

Analysis: Sec.19 of Indian Contract Act, 1872 states that the aggrieved party in case of misrepresentation by the other party can avoid or rescind the contract. The aggrieved party losses the right to rescind the contract if he, after becoming aware of the misrepresentation, takes a benefit under the contract or in some way affirms it. Accordingly in the given case Suraj buys motorcycle in the absence of defects could not rescind the contract, as his acceptance to the offer of Sohan to bear 40% of the cost of repairs impliedly amount to final acceptance of the sale .

Q.No.10. Do the following statements amount to involvement of fraud?

i. Where the vendor of a piece of land told a prospective purchaser that, in his opinion, the land can support 2000 heads of sheep whereas, in truth, the land could support only 1500 sheep.

ii. X bought shares in a company on the faith of a prospectus which contained an untrue statement that Z was a director of the company. X had never heard of Z and the untrue statement of Z being a director was immaterial from his point of view. Can X claim damages on grounds of fraud?

i. The problem is based on the facts of the case Bisset vs Wilkinson (1927). In the given problem the vendor says that in his opinion the land could support 2000 heads of sheep. This statement is only an opinion and not a representation and hence cannot amount to fraud.

ii. The problem is based on the facts of the case Smith vs Chadwick (1884). In the problem though the prospectus contains an untrue statement that untrue statement was not the one that induced X to purchase the shares. Hence X cannot claim damages.

Q.No.11. A student was induced by his teacher to sell his brand new car to the later at less than the purchase price to secure more marks in the examination. Accordingly the car was sold. However, the father of the student persuaded him to sue his teacher. State whether the student can sue the teacher

Yes, a can sue his teacher on the ground of undue influence under the provisions of Indian contract Act, 1872. A contract brought as a result of coercion, undue influence, fraud or misrepresentation would be voidable at the option of the person whose consent was caused.

Q.No.12. M purchased a wrist watch from N, both believed that it was made with gold plaque. Hence M paid a very high price for that. Later it was found that the wrist watch was not made so. State the validity of the contract.

The contract is absolutely void as there is a mutual mistake of both parties. In case of bilateral mistake of essential fact, the agreement is void-ab-initio, as per section 20 of the Indian contract act, 1872.

Q.No.13. X buys from Y a painting which both believes to be the work of an old master and for which X pays a high price. The painting turns out to be only a modern copy. Discuss the validity of the contract

The contract is absolutely void as there is a mutual mistake of both the parties as to the substance or quality of the subject-matter going to be the vary root of the contract. In case of bilateral mistake of essential fact, the agreement is void-ab-initio, as per section 20 of the Indian contract act 1872

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Q.No.1. State the Legal Provisions relating to Agreements in Restraint of Marriage.

Sec.26 of the Act provides that, “Every agreement in restraint of marriage of any person, other than a minor, is void.” The Restraint may be Complete (or) Partial:

1. Complete Restraint: If a person, being a major, agrees for good consideration, not to marry (complete restraint) then such promise is not binding.

2. Partial Restraint: Also, an agreement which puts any restriction on the freedom of marriage (i.e. partial restraint), like preventing somebody from marrying a particular person, or a particular class of persons, or during a fixed period, etc. is also void.

Note: An agreement which provides for a penalty upon remarriage may not be considered as a restraint of marriage. E.g.: Two co-widows entered in to an agreement that if one of them remarried, she should forfeit her share in the property of deceased husband. This agreement is valid because no restraint was imposed upon either of the two widows from remarrying.

Q.No.2. State the Legal Provisions relating to Agreements in Restraint of Trade.

According to Sec.27 of the Indian Contract Act, 1872, “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." The Restraint may be Complete (or) Partial:

a) Complete Restraint: A complete restraint is one which prevents any person from carrying on any kind of business at all.



b) Partial Restraint: Partial restraint prevents a person from carrying on a particular kind of

business within a particular locality or for a particular period of time, etc.

E.g: X, a shop keeper, in a particular locality agrees to pay Y his rival in business certain compensation, if Y close his business in that locality the agreement is void

Note: Whether restraint is complete or partial, agreement is void.


Q.No.3. State the Exceptions to the rule that Agreements in Restraint of Trade are Void.

In the following cases restraints on trade are considered as good and do not make the agreement void

Exceptions under the Indian Contract Act:

1. Sale of goodwill: An agreement which restricts the seller of the goodwill from carrying on a business is valid if the following conditions are satisfied:

a) Such restriction must relate to a similar business.

b) Such restriction must be within specified local limits.

c) Such restriction must be for the time so long as the buyer or his successor in interest carries on a like business.

d) Such specified local limits must be reasonable depending on the nature of business. Exceptions Under the Partnership Act, 1932:

1. Restraint on a continuing partner from carrying on any business: A continuing partner may agree not to carry on any business other than that of partnership, so long as he remains as a partner. [Sec.11(2) of the Partnership Act].

2. Restraint on outgoing partner from carrying on a similar business: Under Section 36 of the IPA, 1932 if an outgoing partner makes an agreement with the continuing partners with reasonable conditions, though in restraint of trade, will be valid, if the restrictions imposed are reasonable.

3. Restraint in anticipation of dissolution: The partners of a firm may enter into an agreement, upon or in anticipation of the dissolution of the firm that some or all of them will not carry on similar business within a specified period or within the specified local limits, provided the restrictions imposed are reasonable.

4. Restraint when goodwill is sold, in case of Partnership: When a person buys goodwill of a firm, he may enter into an agreement restraining the partners of the firm from carrying on business similar to that of the firm within a specified period or specified local limits, provided the restrictions imposed are reasonable.

Exceptions established by Judicial Decisions:

1. Restraint upon employees: Agreements of service generally contain some negative conditions preventing the employee from working elsewhere during the period of agreement. If these conditions are reasonable then they are valid. Some important observations are -

C, a doctor practicing in Zanzibar employed M, an assistant for 3 years. M was restrained by the terms of the agreement from practicing on his own account during the term of the agreement. M left the service of C after one year and started practicing on his own account in the Zanzibar itself. The court held that M could not practice in Zanzibar on his own account for three years. The restraint was valid.

Charlesworth Vs. Mac Donald ILR (1898) 23 Bom 103



2. Restraint in trade combinations: Trade combinations are made by the traders or manufacturers in the same line of business to carry on their trade in an organised way. The primary object of such associations is to regulate business and not to restrain it.

3. Restraint in sole trading agreements: Sole trading agreement is an agreement by which a person agrees to sell only the products of/to a particular manufacturer, and not to sell or distribute the products of/to any other manufacturer. The negative conditions in such agreements are valid.


Q.No.4. State the Legal Provisions relating to Agreements in Restraint of Legal Proceedings

Every person has freedom to enforce his legal rights. An agreement which interferes with the course of justice is void. Individuals by agreement can’t alter the provisions of any law. According to Sec.28, the following two agreements are in the nature of restraint of legal proceedings and thus, void to that extent.

1. Agreement restricting enforcement of rights:

a) An agreement by which any party is restricted absolutely from enforcing his legal rights under or in respect of any contract through a Court or which abridges the usual period for starting legal proceedings is void to that extent. Such an agreement is also void under section 23 of the Indian Contract Act, because its object is to defeat the provisions of the Indian Limitation Act.

b) However, restrictions must be absolute. partial restrictions do not render an agreement void.

2. Agreements limiting the period of limitation: The Indian Limitation Act provides that an action for the breach of contract may be brought within 3 years from the date of breach. Such period of limitation cannot be curtailed by the parties to the contract.

Exceptions:

1. A contract by which the parties agree that any dispute between them in respect of any subject shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable is a valid contract.

2. Similarly, a contract by which the parties agree to refer to arbitration any question between them which has already arisen or which may arise in future, is valid; but such a contract must be in writing.


Q.No.5. State the Legal Provisions relating to Uncertain Agreements.

1. An uncertain agreement means an agreement the meaning of which is not certain or capable of

being made certain. Such agreements are void. The uncertainty may be as to (i) existence of (ii) quantity of (iii) quality of (iv) price of (v) title to the subject matter.

2. An agreement, the meaning of which is not certain, is void, but where the meaning thereof is capable of being made certain, the agreement is valid.


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Q.No.6. Write about Wagering Agreements.

What is a Wager?

1. A wager occurs when the parties agree that a payment will take place between them depending upon the outcome of an uncertain event

2. An agreement by way of a wager is void.

3. The essence of a wager is that each side should stand to win or lose,

4. “Wagering agreement is a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event’ – Sir William Anson

Essentials of a Wager:

1. Uncertain event: It is either a future event the outcome of which is uncertain or it may be a past event, about which the parties to the agreement have no knowledge.

2. Win or lose situation: Each party must be in a situation where it may win or lose depending upon the issue of the event. If either of the parties may win but can’t lose, or may lose but can’t win, it is not a wagering agreement.

3. No other interest: Neither party should have any interest in the happening of the event other than the stake money. This is the difference between a wagering agreement and a contract of insurance.

4. No control over the event: Neither party should have any control over the event in one way or the other.

5. There must be a promise to pay money or money’s worth. Effect of Wagering Agreements:

1. Main transaction: Sec.30 of the Act provides that, “Agreements by way of wager are void, and no suit shall be brought for recovering anything won. Thus, the agreements by way of wager are void. The winner in wager cannot recover the stake money from the other party.

2. Collateral transaction: Wagering agreements are void, but not illegal (except in the States of Gujarat and Maharashtra). So, the transactions collateral / incidental to them are valid and hence enforceable.

Note: a promise made by the loser of a wager to pay the amount lost in consideration of the winner’s forbearance to sue him as defaulter can be enforced as a fresh contract, separate and distinct from original wagering contract though collateral to it

3. Suit to recover money deposited: Money deposited with a person (called stakeholder), to be paid to the party winning upon a wager can’t be recovered by the winner. On the other hand, the loser can recover his deposit from the stakeholder. But where the stakeholder pays the money to the winner, the loser can’t recover it from him.

Some Important Points to be Remembered:

1. Speculative transactions: Though wagering transactions are void, speculative transactions are generally valid. It is, however, sometimes difficult to distinguish between a speculative transaction and a wagering transaction.

A speculative transaction essentially, must have two elements, namely, (1) mutual intention of the contracting parties to acquire or deliver, as the case may be, the commodities; and (2) the undertaking or risk arising from movement in prices.

A wager, on the other hand, postulates only the incurring of risk. The essential character of a speculative transaction is stated below.



E.g.: A buys from B 100 bales of jute at Rs.150 per bale for forward delivery after six months. At the time of delivery, the price of jute is Rs.200. In these circumstances, at the end of six months, A can either demand delivery of 100 bales or collect the difference in price at Rs.50 per bale. On the other hand, if the price has gone down to Rs.125 per bale, A will be able to settle the transaction by paying B at Rs.25 per bale. In this case, it will be observed that the original intention of the parties was to purchase and sell the bales of jute. Merely because subsequently they transact by payment or receipt of the difference in price, the original character of the transaction is not thereby altered. If, however, the mutual intention was only to settle the transaction by payment or receipt of the difference in price, the transaction would be wagering contract which would be void.

2. Lotteries (Including government authorized lotteries): A wagering contract amounting to lottery is not only void but also illegal. and all transactions in connection with a lottery remain illegal even if government has authorized the holding of lottery. The only effect of such permission is that the persons conducting lottery will not be punished.

3. Horse race (Sec.30): A subscription or contribution or an agreement to subscribe or contribute towards any plate, prize, or sum of money of Rs.500/- or more to be awarded to the winners of the horse race is not unlawful.

4. Contracts of insurance policy: Insurance policy is a valid contract. But if an insurance policy is taken by a person who has no insurable interest, then it is void. For instance a person who has no insurable interest in a ship, takes a policy against it being sunk, then the contract is void.

5. Promissory notes on a wagering contract: while a wagering contract is void ab initio, hence the promissory note given out of a wagering contract is not enforceable by way of a suit. A promissory note of this character is one without consideration and hence is null and void

6. Crossword puzzles or literary competitions:

a) If skill plays an important role then such competitions are not wager.

b) However, if the crossword puzzle prizes depend upon the matching of the solution with the previously prepared solution kept with the organiser or newspaper editor, it is a lottery and hence wager.


Q.No.7. State the Legal Provisions relating to Agreements to do Impossible Acts.

Sec.56 of the Act provides that “an agreement to do an impossible act is void.”

E.g.: A agrees with B to discover treasure by magic. The agreement is void.

It may happen that an event becomes impossible after the contract is made. In such a case, the contract becomes void from the date of occurrence of such event.

Q.No.8. Explain the term Quasi Contract and State its Characteristics. (M 13 – 4M, M 15 - 8M)

1. Even in the absence of a contract, certain social relationships give rise to certain specific obligations to be performed by certain persons. These are known as quasi contracts as they create same obligations as in the case of regular contract.

2. Quasi contracts are based on the principles of equity, justice and good conscience.

3. In such cases, Law creates legal relations on the ground of equity saying that the person receiving the benefit must make compensation to the other. The maxim used is “no man must grow rich out of another person’s cost / loss”. Quasi contracts are also called as 'constructive contracts' under the English law and ’.



4. When an obligation created by a Quasi-contract is not discharged, the injured party can claim

damages from the other party as if it is an ordinary contract.

Features: The salient features of quasi contractual right, are as follows:

a) In the furst place, such a right is always a right of money and generally, though not always, to a liquidated sum of money.

b) Secondly, it does not arise from any agreement of the parties concerned, but it imposed by the law

c) Thirdly, it is a right which is available not against all the world, but against a particular person or persons only, so that in this respect it resembles a contractual right.

Kinds of Quasi Contracts:

a) Claim for necessaries supplied to a person incapable of contracting or on his behalf (Sec.68)

b) Reimbursement of money paid, due by another (Sec.69)

c) Obligation of persons enjoying benefits of non-gratuitous act (Sec.70)

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

e) Liability for money paid or things delivered by mistake or under coercion (Sec.72)

In each of the above cases, contractual liability is the creation of law and does not depend upon any mutual agreement between the parties. Similar Question: What do you understand by “Quasi – Contract” ? Discuss. Ans: Write above question and explain briefly about kinds of Quasi Contract.

Q.No.9. Explain the Concept of Payment of Lawful Dues by Interested Persons.

Sec.69 of the Act provides that, “A person who is interested in the payment of money which another person is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.” Under this section, a person making the payment on behalf of someone else, to safeguard / protect his own interest, can claim it from such other person who was bound to pay.

Conditions to be satisfied:

1. The person who made the payment should have interest in such payment.

2. The person who made the payment can’t recover the same, if the payment is made voluntarily.

3. The payment must be such that the other party was bound by law to pay: The words ‘bound by law’ do not mean that the liability should only be statutory. The person may be bound to make the payment by ‘law’ or by ‘contract’.

4. The person who made the payment was not himself legally bound to pay the amount.

5. The payment must not be made to self.


A was the owner of a warehouse. B imported certain goods and kept them in A’s warehouse without paying the customs duty. The customs authorities made a demand on A, and he had to pay the duty on those goods. Here B was bound by law to pay the customs duty. A is entitled to recover amount from B.

Brook’s Wharf & Bill Wharf Ltd. Vs. Goodman Brothers, (1963) 3 All ET 696



Q.No.10. Discuss the Position of a Finder of Lost Goods.

Such responsibility arises under Section 71 which is reproduced below:

a) “A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility of a Bailee.”

Duties of finder:

1. A finder of lost goods has no legal duty to take charge of them (whatever their value is). If however, he takes charge of the lost goods, he is liable to:

a) try and find out the true owner,

b) not to appropriate the property to his own use, and

c) when the real owner is traced, he must restore the property to him.

2. Further, he must take as much care of the goods found as a man of ordinary prudence would, under similar circumstances, take care of his own goods of the same bulk, quantity and value as those of the goods found. [Sec.151]

Rights of the finder: Refer Bailment and pledge chapter

Q.No.11. Explain the Liability for Money paid or thing delivered by mistake or under Coercion?

Section 72 of the act state that “A person to whom money has been paid, or anything delivered, by mistake or under coercion must repay or return it.”

A payment to municipal tax made under mistaken belief or because of mis-understanding of the terms of lease can be recovered from municipal authorities.

Similarly any money paid by coercion is also recoverable. The word coercion is not necessarily governed by section 15 of the act. The word is interpreted to mean and include oppression, extortion, or such other means

Ex: T was travelling without ticked in a tram car and on checking he was asked to pay Rs.5/- as penalty to compound transaction. T filed a suit against the corporation for recovery on the ground that it was extorted from him. The suit was decreed in his favour.

Q.No.12. Supply of Necessaries to Incapable Persons. This question is already covered in Chapter No.4. So no need to discuss here. Students are advised to read that question once again here.

Q.No.13. What is a Contingent Contract? And State the Legal Provisions relating to Contingent Contracts.

a) A contract may be absolute or contingent.

b) Section 31 of the Act defines contingent contract as “a contract to do or not to do something, if some event collateral to such contract, does or does not happen”. Contracts of insurance, guarantee, and indemnity are of this class.

Ex: A contracts to pay B Rs.1,00,000 if B’s house is destroyed by fire. This is a contingent contract.

Essentials Characteristics of Contingent Contracts: There are three essential characteristics of a contingent contract.



1. Its performance depends upon the happening or non happening of some future event. A contract

may be subject to a condition precedent or subsequent.

2. The event must be uncertain. If the event is bound to happen and the contract is bound to be performed, it is not a contingent contract.

3. The event on which the performance is made to depend, is an event collateral to the contract, i.e. it does not form part of the reciprocal promises which constitute the contract.

4. Thus, the event should neither be a performance promised, nor the consideration for a promise

Ex: Thus, where A agrees to deliver 100 bags of wheat and B agrees to pay the price afterwards, the contract is a conditional contract and not contingent; because the event on which B’s obligation is made to depend is part of the promise itself and not a collateral event.

5. The contingent event should not be the mere will of the promisor. For instance, if A promises to pay B Rs.10,000, if he chooses so, it is not a contingent contract. (In fact, it is not a contract at all).

However, where the event is within the Promisor’s will but not merely his will, it may be Contingent contract.

E.g.: If A promises to pay B Rs.10,000 if A left Delhi for Bombay on a particular day, it is a contingent contract, because going to Bombay is an event no doubt within A’s will, but is not merely his will.

Rules regarding Enforcement of Contingent Contracts:

1. Enforcement of contracts contingent on an event ‘happening’: [Sec.32]: Where a contingent contract is made to do or not to do anything if an uncertain future event happens, it cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.

Ex: X entered into a contract with Y to purchase Y’s buffalo, if X survived Z. In view of the said principle of law, the contract, in the instant case, could not be enforced by law unless and until Z dies during the life-time of X.

2. Enforcement of contracts contingent on an event ‘not-happening’: [Sec.33]: Where a contingent contract is made to do or not do anything if an uncertain future event does not happen, it can be enforced only when the happening of that event becomes impossible and not before.

E.g.: P agreed to pay Q a sum of money, if a certain ship does not return. The ship was sunk. The contract could be enforced as the ship would never return in the circumstance

3. When shall an event on which contract is contingent be deemed impossible, if it is the

future conduct of a living person [Sec.34]: Suppose, the future event on which a contract is contingent is the way in which a person will act at an unspecified time. In such a case, the event shall be considered to have become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies.

E.g.: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may afterwards marry B.

4. Agreements contingent upon impossible event. [Sec.36]: A contingent agreement to do or not to do anything, if an impossible event happens, is void. The impossibility of the event may be or may not be known to the parties to the agreement at the time when they entered into it. Ex: A agree to pay B one lakh rupees if sun rises in the west next morning. This is an impossible event and hence void

5. Contracts contingent on happening of specified event within the fixed time: [Sec.35]: Contracts contingent upon the happening of an uncertain specified event within the fixed time, becomes void, if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.



6. Contract contingent on specified event not happening within fixed time: [Sec.35]: Contract contingent upon non-happening of a specified event within a fixed time may be enforced, when the time fixed has expired and such event has not happened or before the time fixed, if it becomes certain that such event will not happen.

Similar Question : what are contingent contract? Explain the rules for enforcement. How does it differ from wagering agreement Ans: Write above question interdiction and Rules regarding Enforcement of Contingent Contracts:


Q.No.14. What is meant by Void Agreement and State the Agreements that are Expressly declared to be Void.

Definition: According to Sec.2(g) of the Indian Contract Act, 1872, a void agreement is an agreement which is not enforceable by law. These agreements are not enforceable by law, right from the beginning i.e. these agreements are void-ab-initio. The Following Types Of Agreements Are Expressly Declared As Void Under Various Sections Of The Indian Contract Act 1872:

a) Agreements by or with persons incompetent to contract (Section 11).

b) Agreements entered into through a mutual mistake of fact between the parties (Sec 20).

c) Agreement, the object or consideration of which is unlawful (Section 23).

d) Agreement, the consideration or object of which is partly unlawful (Section 24).

e) Agreement made without consideration (Section 25).

f) Agreements in restraint of marriage (Section 26).

g) Agreements in restraint of trade (Section 27).

h) Agreements in restraint of legal proceedings (Section 28).

i) Agreements the meaning of which is uncertain. (Sec.29)

j) Wagering agreements (Section 30).

k) Agreements contingent upon impossible events. (Sec.36)

l) Impossible agreements (Section 56).

m) An agreement to enter into an agreement in the future.


Q.No.15. State the Legal Provisions relating to Restitution.

Obligations of person who has received advantage under Void Agreement or one becoming void:

a) “When an agreement is discovered to be void or when a contract becomes void, any person who received any advantage under such agreement or contract must restore it, makes compensation for it to the person from whom he received it”




This restoration of the benefit is called restitution. When an aggrieved party rescinds voidable (Sec 64) /void (Sec 65) contract, the other party need not perform his obligations.

b) Though generally the benefit received under an agreement which is subsequently found to be void, must be returned, such a course may not be necessary when the benefit has been received by the corporation. It is because contract with a corporation usually is required to be entered into a special form, in the absence where of the contract becomes void. The argument in support of this view is that the agreement in this case becomes void due to the negligence of the promisor.

Q.No.16. Explain the Concept of Non-Gratuitous Act?

a) Non-gratuitous act means an act which is not intended to be done freely.

b) Sec.70 of the Indian Contract Act, provides that, “Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is bound to make the compensation to the former in respect of, or to restore, the thing so done or delivered.”

c) Thus, if a person enjoys benefit of a non-gratuitous act then he is liable to compensate the other person or restore the thing.

d) To recover benefit of non-gratuitous act the plaintiff must prove:

i) That he had done the act or had delivered the thing lawfully;

ii) That he did not do so gratuitously; and

iii) That the other person enjoyed the benefit.

The above Provision Applies, when:

1. A person has lawfully done something, or delivered something to the other: Here ‘lawfully done’ denotes that the act or service done for somebody is not imposed upon him or her.

2. It has been done by a person not intending to act gratuitously: The person providing goods or services must plan for the payment from the very beginning. If his intention is not to charge any money for goods or services then he can’t recover for his work or goods.

3. The other person has enjoyed the benefits of goods or services so provided: The benefit must be a direct benefit which is accepted voluntarily by the person to whom it is provided.

Q.No.1. X employed Y. The terms of service agreement are – a. The employee has to serve the organisation for 5 years b. The employee shall not accept any other similar engagement during the term of agreement. c. The employee shall not accept similar engagement after the termination of service. d. The employee shall not compete with his employer after the termination of service. State the legal position of the terms of service agreement.

Solution: Section to which the given problem relates: Section 27. Decision: First two terms (a) and (b) are not in restraint of trade and hence valid. Next two terms (c) and (d) are in restraint of trade and hence void.

Q.No.2. X and Y were rival traders in South Delhi. X agreed to pay Y Rs. 5,00,000 if Y closes his business in that locality. Y accordingly did so but X refused to pay. Can Y claim Rs. 5,00,000?

Issue/Question involved: Can Y claim Rs.5, 00, 000/-?

PRACTICAL QUESTIONS



Law/Provision: Sec.27 – Restraint of trade.

“Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”.

Freedom of trade and commerce is a right protected by the constitution of India. The principle of law is that “Public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the state of his labour or skill or talent, by any contract that he enters into”

Analysis: In the given question, X restrained Y by an agreement from carrying his lawful business. This agreement, according to Sec.27 of this Act, is in restraint of trade and hence it is void.

Conclusion: Therefore, as this agreement is void, Y cannot recover any amount from X.

Q.No.3. X sold his business including goodwill to Y for Rs. 5,00,000 by an agreement. The agreement provided that X shall not engage himself in the similar business in the whole of India for the next 10 years. X started the same business in the same city after 1 month. State the legal position.

Issue/Question involved: Whether restrictions imposed by Y are reasonable? Can Y recover anything from X?

Law/provision: Restraint of trade and its exception – Sec.27.

Exception: goodwill – one who sells the goodwill of a business may agree with the buyer to restrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him carrying on a like business therein provided that such limits appears to the court reasonable, regard being had to the nature of the business.

The only exception to the restraint of trade provided in Sec.27 itself is “Sale of goodwill”. It is difficult to prevent that when the goodwill and the trade of a retail shop were sold, the vendor might the next day set up a shop within a few days and draw off all customers. Therefore, some restrictions on the liberty of the seller become necessary. But the restrictions should be reasonable in respect of locality, length of period and nature of business.

Analysis: In the given question, there is a sale of goodwill. So, it protects the interest of the buyer as some restrictions were imposed on the seller. He shall not engage himself in the similar business in the whole of India for the next 10 years. These restrictions regarding place and period were unreasonable in relation to the nature of business and value of goodwill. Conclusion: Therefore, these restrictions imposed are not reasonable. Hence, on the basis of analysis mentioned above, the agreement becomes void. So, Y cannot recover anything from X.

Q.No.4. A clause in a life insurance policy was that “No suit to recover under the policy shall be brought after one year from the date of death of assured”. X died and his legal representatives filed a suit to recover the assured sum after two and half years. Is this suit maintainable?

Issue/Question involved: Whether the suit is maintainable? Law/provision: Restraint of legal proceedings – limitations – Sec.28 “Every agreement, by which any party thereto, is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights, is void to that extent. Where, by an agreement, an attempt made by the parties to restrict the time within which an action may be brought so as to make it shorter than that prescribed by law of limitation, the agreement is void.



Analysis: In the given problem, a clause which provides that “No suit to recover under the policy shall be brought after one year from the date of the assured amounts” to restraining the period of limitation prescribed by limitation Act. Hence, it will come under the purview of sec.28 of the Act, and the agreement is void.

Conclusion: For the reasons mentioned above, agreement restraining the period of limitation is void. Therefore, the suit is maintainable and legal representatives can recover the policy amount.

Q.No.5. X agrees to sell to Y ”one hundred tons of oil”. State the legal position of this agreement in each of the following alternative cases: Case (a) If X, who is a dealer in coconut oil only, decides to sell @ Rs.1,00,000 per ton. Case (b) If X, is a dealer in coconut oil and price is not fixed. Case (c) If X, is a dealer in coconut oil and price is to be fixed by Z. Case (d) If X, who is a dealer in coconut oil agrees to sell Rs. 10,000 per ton or Rs. 11,000 per ton. Case (e) If X is a dealer in coconut oil and mustard oil.


Case Decision Reason

a) Valid There is no uncertainty as to the description of oil because the nature of X’s trade indicates that this contract is for sale of coconut oil.

b) Valid There is no uncertainty because in this case a reasonable price shall be payable according to Section 2 of the sale of Goods Act, 1930.

c) Valid There is no uncertainty because in this case the price fixed by Z shall by payable

d) Void There is no certainty as to which of the two price shall be payable.

e) Void There is no certainty as to which of the two oils has been sold.

Q.No.6. X instructed Y to enter on his behalf a wagering transaction. Y lost Rs. 10,000 in that transaction and paid from his pocket. Y claimed Rs 10,000 from X who refused on the ground of wagering transaction. State the legal position if wagering transaction was entered into (a) Delhi (b) Mumbai (c) Ahmedabad.

Issue/Question involved: What is the legal position of wagering agreements and its collateral agreements in Delhi, Mumbai and Ahmadabad. Law/Provision: Sec.30 Agreements by way of wager are void and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any games or other uncertain event on any wager is made. Analysis: Though a wager is void and unenforceable, it is not forbidden by law. Hence, a wagering agreement is not unlawful, and therefore, the transactions collateral to main transaction is enforceable. Conclusion: Therefore, an agent who paid the losses on wagering transactions is entitled to recover the amount paid by him from principal. In case of Delhi, where wagering agreement are not unlawful but only void. Collateral transactions are not affected. In Maharashtra and Gujarat, wagering agreements are declared as illegal, collateral transactions also become illegal, and Y cannot recover the amount.



Q.No.7. M lost a sum of Rs. 8,500 to L & Co. on bets on horse races, and on his failure to pay was reported to the race course club. M subsequently executed in favour of L & Co. a Hundi for Rs. 8,500 in consideration of their withdrawing his name from the club and thereby his being posted as a defaulter. When L & Co. demanded the payment, M pleaded that the consideration was unlawful. Decide.

Issue/Question involved: Subsequent promise made by M whether amounts to wagering agreements and whether M is liable to pay. Law/Provision: Sec.30

Agreements by way of wager are void and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any games or other uncertain event on any wager is made. A subsequent substituted agreement of the same consideration, namely, the amount won on wager, is also not enforceable. In other words, a new promise to pay money won upon a wager is equally void. Analysis: M, subsequently made a new promise to pay Rs.8, 500 won upon a wager by L & co. This new promise to pay money won upon a wager is also void. Conclusion: For the reasons mentioned above, L & co. is not entitled to recover money from M as it is also a wagering agreement.

Q.No.8. A agrees to pay B Rs. 50,000 if B marries C within 1 year. State the legal position in each of the following alternative case:

Case (a) If B marries C after 1 year.

Case (b) If B marries C within 1 year.

Case (c) If B marries D within 6 months of agreement.

Case (d) If B marries D within 6 months of agreement, Subsequently, D dies and B marries C within 6 months of marriage D.

Case (a):

Solution: Section to which the given problem relates: Section 35. Decision: B cannot recover anything from A.

Reason: The contract becomes void on the expiry of 1 year.

Case (b):

Solution: Section to which the given problem relates: Sec 35.

Decision: B can recover Rs. 50,000 from A.

Reason: The contract can be enforced by law when the event has happened (i.e. the marriage of B to C)

Case (c):

Solution: Section to which the given problem relates: Section 34, 35

Decision: B cannot recover anything from A.

Reason: The contract becomes void because the event (i.e. the marriage of B to C has become impossible).

Case (d):

Solution: Section to which the given problem relates: Sec 34.

Copyrights Reserved




Decision: B cannot recover Rs. 50,000 from A when he marries C.

Reason: The contract can be enforced by law when the event has happened (i.e., the marriage of B to C) (Or) The moment B marries D, the performance of agreement of marriage of B and C becomes impossible.

Q.No.9. A agrees to pay B Rs. 1,00,000 if a certain ship returns within a year. State the legal position in each of the following alternative cases:

Case (a) If the ship returns within the year.

Case (b) If the ship returns after the expiry of 1 year.

Case (c) If the ship is burnt with in year.

Solution: Section to which the given problem relates: Section 35. Case (a):

Decision: B can recover Rs. 1,00,000 from A.

Reason: The contract can be enforced by law when the event has happened (i.e., return of ship). Case (b):


Reason: The contract becomes void on the expiry of the fixed time if the event does not happen. Case (c):


Reason: The contract becomes void when such event becomes impossible.

Q.No.10. A agreed to pay B Rs. 50,000 if B marries C. C was already married D at the time of agreement. State the legal position.

Issue/Question involved: Is the agreement void? Law/Provision: Sec.36 states, contingent agreements to do or not to do anything, if an impossible event happens, are void, whereas the impossibility of the event is known or not to the parties of agreement at the time when it is made. Analysis: In the question, at the time when the contract is made between A and B, to pay Rs. 50,000 to B if he marries C, where C was already married D. The event of marrying C by B is become impossible, whether it is known to parties or not. Conclusion: For the analysis given before, marriage of B is impossible. Therefore, the agreement is void.

Q.No.11. M promised to pay N for his services at his (M) sole discretion found to be fair and reasonable. However, N dissatisfied with the payment made by M and wanted to sue him. Decide whether N can sue M under the provisions of the Indian Contract Act, 1872?

N’s suit will not be valid because the performance of a promise is contingent upon the mere will and pleasure of the promisor; hence, there is no contract. As per section 29 of the Indian Contract Act, 1872 – agreements, the meaning of which is not certain, or capable of being made certain, are void”.



Q.No.12. ‘X' agreed to become an assistant for 5 years to 'Y' who was a Doctor practicing at Ludhiana. It was also agreed that during the term of agreement 'X' will not practice on his own account in Ludhiana. At the end of one year, ‘X' left the assistantship of 'Y' and began to practice on his own account. Referring to the provisions of the Indian Contract Act, 1872, decide whether ‘X' could be restrained from doing so? (N 13 – 5M) (RTP M 15, MTP M 15 )

An agreement in restraint of trade/business/profession is void under Section 27 of the Indian Contract Act, 1872. But an agreement of service by which a person binds himself during the term of the agreement not to take service with anyone else directly or indirectly to promote any business in direct competition with that of his employer is not in restraint of trade. Therefore X can be restrained by an injunction from practicing on his own account in Ludhiana.

Q.No.13. Point out with reason whether the following agreements are valid or void: i. Kamala promises Ramesh to lend Rs 50,000 in lieu of consideration that Ramesh gets Kamala’s

marriage dissolved and he himself marries her. ii. Sohan agrees with Mohan to sell his black horse. Unknown to both the parties, the horse was

dead at the time of agreement. iii. Ram sells the goodwill of his shop to Shyam for Rs 4,00,000 and promises not to carry on such

business forever and anywhere in India. iv. In an agreement between Prakash and Girish, there is a condition that they will not institute legal

proceedings against each other without consent. v. Ramamurthy, who is a citizen of India, enters into an agreement with an alien friend.

Validity of agreements:

i. Void Agreement: As per Section 23 of the Indian Contract Act, 1872 an agreement is void if the object or consideration is against the public policy.

ii. Void Agreement: As per Section 20 of the Indian Contract Act, 1872 the contracts caused by mistake of fact are void. There is mistake of fact as to the existence of subject-matter.

iii. Void Agreement: As per Section 27 of the Indian Contract Act, 1872 an agreement in restraint of trade is void. However, a buyer can put such a condition on the seller of good will, not to carry on same business. However, the conditions must be reasonable regarding the duration and the place of the business.

iv. Void Agreement: An agreement in restraint of legal proceedings is void as per Section 28 of the Indian Contract Act, 1872.

v. Valid Agreement: An agreement with alien friend is valid, but an agreement with alien enemy is void.

Q.No.14. Y holds agricultural land in Gujarat on a lease granted by X, the owner. The land revenue payable by X of the Government being in arrear, his land is advertised for sale by the Government. Under the Revenue law, the consequence of such sale will be termination of Y’s lease. Y, in order to prevent the sale and the consequent termination of his own lease, pays the Government, the sum due from X Referring to the provisions of the Indian Contract Act, 1872 decide whether X is liable to make good to Y, the amount so paid? (M 07 – 5M)

Facts of the case: Y holds the agricultural land in Gujarat on a lease by X, the owner. But X’s land is advertised for sale, due to arrears in the payment of land revenue, it consequents to termination of Y’s lease. Therefore, to avoid such consequences, Y paid the sum due from X to the Government. Issue/Question involved: Whether X is liable to make good to the amount so paid? Law/Provision: Sec.69 – Reimburse of person paying money due by another in payment of which he is interested. A person who is interested in payment of money which another is bound by law to pay and who, therefore, pays it, is entitled to be reimbursable by the other.



Analysis: The conditions for liability under this section are i. The person making the payment should be interested in making such payment. ii. It is necessary that he himself should not be bound to pay. iii. The other person should have been bound by law to pay. iv. He should have made the payment to another person and not to himself.

Applying these conditions to the given question, X is bound to pay revenue. If not, land may be sold by the court result of which is the termination of lease of Y in which he has interest. Therefore, to protect his interest in lease, he made the payment which is bound by law to pay by the land owner.

Conclusion: For the reasons mentioned above, Y is entitled to get reimbursement from X.

Q.No.15. Miss X, a film actress to work exclusively for a period of two years, for a film production company. However, during the said period she enters into a contract to work for another film producer. Discuss the rights of the aggrieved film production company under the Indian contract Act. 1872. (N 05 – 4M)

Facts of the case: Miss X, a film actress agreed to work exclusively for a period of two years, but she enters into a contract to work for another film producer during the said period.

Issue/Question involved: What are the rights of aggrieved film Production Company? Law/Provision: Sec.27 –Every agreement, by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

However in case of service agreement restraint of the nature mentioned in the given problem shall be valid if reasonable

Analysis: the agreement between Miss X and the production company to work exclusively for a period of 2 years is reasonable restriction, thus the agreement is valid

Conclusion: In this case the aggrieved film production company can restrain Miss X, the film actress to enter into a contract and work for another film producer

Q.No.16. Z rent out his house situated in Mumbai to W for a rent of Rs. 10,000 per month. A sum of Rs. 5,00,000 the house tax payable by Z to the municipal corporation being in arrears, his house in advertised for sale by the corporation. W pays the corporation, the sum due from Z to avoid legal consequences. Referring to the provisions of the Indian contract Act,1872 decide whether W is entitled to get the reimbursement of the said amount from Z (M 10 – 5M)

Facts of the case: Z rent out his house situated at Mumbai to W for rent of Rs. 10,000 pm. A Sum of Rs. 5.00.000, the house tax payable by Z to the municipal corporation being in arrears, thus his house is advertised for sale by the corporation. W pays the corporation the sum due from Z to avoid legal consequences.

Issue/Question involved: Whether W is entitled to get the reimbursement of the said amount from Z

Law/Provision: Sec – 69, A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it is entitled to be reimbursed by the other

Analysis: in the given case W has made the payment of lawful dues of Z in which W had an interest.

Conclusion: W is entitled to get the reimbursement from Z (Abid Hussain Vs Ganga Sahai)

THE END



Copyrights Reserved


IPCC_33e_M.Law _Performance of Contract_______________________________97


7. PERFORMANCE OF CONTRACT


No ABC N 07 M 08 to

M 12 N 12 M 13 N 13 M 14 N 14 M 15

1 B - - - - - - - -

2 A - - - - - - - -

3 B - - - - - - - -

4 C - - - - - - - -

5 B - - - - - - - -

6 B - - - - - - - -

7 A 5 - - - - 8 - -

8 B - - - - - - - -

9 C - - - - - - - -

Q.No.1. Explain the Concept of Performance of Contract and also explain the Essentials of a Valid Tender?

Introduction:

a) A contract being an agreement enforceable by law, creates a legal obligation, which subsists until discharge. Performance of the promise or promises remaining to be performed is the principal and most usual mode of discharge.

b) The parties to a contract must either perform, or offer to perform, their respective promises unless such performance is dispensed with or excused under the provisions of the Contract Act or of any other law. (Section 37).

c) Thus from the above it can be drawn that performance may be actual or offer to perform. Types of Performance: 1. Actual performance: Where a party to a contract has done what he had undertaken to do or either

of the parties have fulfilled their obligations under the contract within the time and in the manner prescribed. When a promise is actually performed, the contract comes to an end.

2. Offer to perform or attempted performance or tender of performance: It may happen sometimes, when the performance becomes due, the promisor offers to perform his obligation but the promisee refuses to accept the performance. In such a case, it is termed as ‘offer of performance’ or ‘attempted performance’ or ‘tender of performance’.

Ex: P promises to deliver certain goods to R. P takes the goods to the appointed place business hours but R refuses to take the delivery of goods. This is an attempted performance as P the promisor has done what he was required to do under the contract.

Effects of Tender:

a) Promisor is not responsible for non-performance.

b) Promisor does not lose his rights under the contract. Types of Tender: There can be 2 types of tender as follows

1. Tender of goods or services: Where promisor offers to deliver the goods or services but promisee refuses to accept the delivery, then

a) Goods or services need not be offered again.

b) Promisor may sue the promisee for non performance.



c) Promisor is discharged from his liability.

2. Tender of money: Where promisor offers to pay the amount but promisee refuses to accept the same, then

a) Promisor is not discharged from his liability to pay the amount.

b) Promisor will not be liable to pay interest from the date of valid tender.

Essentials of a Valid Tender:

a) Unconditional b) At Proper Time , Place c) Reasonable opportunity of inspection

d) For whole obligation e) proper person f) Of exact amount and in Legal Tender.

e) By an able and willing person h) Proper form

Effect of refusal of party to perform promise: When a party to a contract has refused to perform his promise entirety or became disabled, promisee may put an end to the contract, unless he signifies, by words or conduct, his acquiescence in its continuance (Section 39). From language of Section 39 it is clear that in the case under consideration, the following two rights accrue to the aggrieved party, namely, (a) to terminate the contract; (b) to indicate by words or by conduct that he is interested in its continuance.

In case the promisee decides to continue the contract, he would not be entitled to put an end to the contract on this ground immediately. In either case, the promisee would be able to claim damages that he suffers as a result on the breach.

When a promisee put an end to the contract being rightly entitled to do so, it shall be deemed as if he has rescinded a voidable contract. In view of sec 64 of the act the promisee, in the events of his putting an end to the contract, is bound to return all the benefits received under the contract and in turn is entitled for compensation for all damages sustained by him for breach of contract by the promisee.

Q.No.2. Who should Perform the Contract?

The persons Who Should Perform the Contract are Given Below:

1. Promisor himself:

a) The contracts which involve exercise of personal skill, or diligence, or which are founded on personal confidence between the parties must be performed by the promisor himself.

b) In such cases, death of the promisor puts an end to the contract.

c) In case of other contracts, if it is clearly stated that contract should be performed by promisor himself then it should be performed by him personally and can't be delegated.

Ex: A promises to paint a picture for B for a certain price. A is bound to perform the promise himself. He cannot ask some other painter to paint the picture on his behalf. If A dies before painting the picture, the contract cannot be enforced either by A’s representative or by B.

2. Legal representatives of the promisor:

a) A contract which involves the use of personal skill or is founded on personal consideration comes to an end on the death of the promisor. The rule of law is "actio personalis moritur cum persona" i.e. a personal action dies with the person.

b) As regards any other contract the legal representatives of the deceased promisor are bound to perform it unless a contrary intention appears from the contract (Section 37, para 2). But their liability under a contract is limited to the value of the property they inherit from the deceased.

3. Agent: Where personal consideration is not the foundation of a contract, the promisor or his representative may employ a competent person to perform it.



4. Third persons: When a contract is performed by a stranger to the contract, promisee has an option either to accept or to reject it. That is, performance by a stranger, if accepted by the promisee, results in discharging the promisor, although the latter has neither authorised nor ratified the act of the third party.

Ex: A delivered certain goods to B for a promise to Rs.5,000. Later on B expresses his inability to clear the dues. C, who is known to B, pays Rs.2,000 to A on behalf of B. Before making this payment C did not tell B about it. Now A can sue B only for the balance and not the whole amount.

5. Joint Promisors: If two or more persons have made a joint promise, ordinarily all of them during their life-time must jointly fulfill the promise. After death of any one of them, his legal representative jointly with the survivor or survivors should do so (Sec. 42). After the death of the last survivor the legal representatives of all the original co-promisors must fulfil the promise.

Ex: A promises to B to pay Rs.1,000 on delivery of certain goods. A may perform this promise either himself or causing someone else to pay the money to B. If A dies before the time appointed for payment, his representative must pay the money or employ some other person to pay the money. If B dies before the time appointed for the delivery of goods, B’s representative shall be bound to deliver the goods to A and A is bound to pay Rs.1,000 to B’s representative.


Q.No.3. Who can Demand Performance of the Contract?

The persons who can demand performance are given below:

a) Promisee: Promisee is the only person who demands the performance of the contract.

b) Legal Representatives: In case of death of promisee, his legal representatives can demand performance unless a contrary intention appears from the contract or the contract is of personal nature.

c) Third Party: A third party can also demand the performance of the contract in some exceptional cases. For example, a beneficiary in case of trust, the person for whose benefit some provision is made in family arrangements.

d) Joint Promisees: “When a person has made a promise to two or more persons jointly, then unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and after the death of any of them with the representatives of such deceased person jointly with the survivor or survivors, and after the death of the last survivor, with the representatives of all jointly”.


Q.No.4. State the Rules regarding Time and Place of Performance of a Contract.

The law on the subject is contained in Sections 46 to 50 provisions whereof are summarized below:

1. Where no time is specified and no application is to be made: Where a contract does not specify any time for its performance and promisee is not required to ask for performance, the contract must be performed within a reasonable time. The expression reasonable time is to be interpreted having regard to the facts and circumstances of a particular case.

2. Where promise is to be performed on a specified date but no time is mentioned: the promise can be performed during the usual hours of business on that specified day. The promisee may refuse to accept delivery , if it is delivered after business hours.

the usual business hours are, between 10 a.m. and 5 p.m.



3. Where day is specified and application is to be made: Sometimes, the day for performance is

specified in the contract and the promisor has to perform it only when asked by promisee. In such a case, promisee must demand the performance at proper time and place and within usual hours of business. The term ‘proper time and place’ is a question of fact in each case.

4. Where no place is specified and no application is to be made: it is the duty of the promisor to ask the promisee to fix a reasonable place. No distinction is made betweenan obligation to pay money and an obligation to deliver goods or discharge any other obligation. But generally the promise must be prerformed or goods must be delivered at the usual place of business.

5. Where the manner and time for performance is prescribed by the promisee: Sec.50 of the Act provides that, “The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions.’

Q.No.5. What is the Effect of Failure to Perform the Contract in Time?

The parties to a contract may specify that the contract is to be performed within certain period of time. If one party fails to perform his obligation within such specified time, the other party:

1. Can avoid the contract, if time is the essence of the contract.

2. If time is not the essence of contract, the other party can't avoid it. When the time is considered as essence of contract? Whether time is the essence of a contract or not depends upon:

1. The terms of the contract

2. The intention of the parties, which can be gathered from:

a) Circumstances, b) subject matter of the contract, C) Construction of the contract.

3. The object of entering into the contract. Some well settled presumptions:

a) In mercantile transactions, conditions of giving or taking delivery of goods are presumed to be the essence but condition as to time of payment is not considered as the essence of the contract.

In cases other than commercial or mercantile contracts, the presumption is that time is not the essence of the contract.

b) In contracts of sale of immovable property, generally, time is not an essence of contract. But where circumstances show that time is essence of the contract, it is treated as essence of the contract.

Effect of failure to perform in the fixed time, when time is the essence of contract: In such cases, the contract becomes voidable at the option of promisee. If he chooses to rescind the contract, the contract comes to an end and he can sue for damages. If he chooses to accept the performance, there may be two possible alternatives:

a) He can accept the performance without any objection. In such a case he cannot claim compensation for any loss caused to him by such non-performance in time.

b) He accepts the performance but at the time of such acceptance, he gives a notice to the promisor that he is going to claim compensation for the damages.

Effect of failure to perform when time is not the essence of contract: In such cases, contract does not become voidable at the option of the promisee. However, he has a right to receive compensation from the other party for any loss caused to him by such delayed performance. But it must be remembered that even where time is not essential it must be performed within a reasonable time; otherwise it becomes voidable at the option of the promisee.



But ordinarily, from an examination of a contract, it is difficult to ascertain whether time is intended to be of essence by the parties at the time of its formation. In every case, the intention is to be gathered from the terms of the contract.

In mercantile contract, as business world is ruled by ‘time’ and ‘money’ any stipulation as to ‘time’ and ‘money’ is an essential condition.

The general principles that are followed can be enunciated as under.

1. In transaction on sale of gold, silver, blue chip shares, time of delivery is of essence. Here time will be treated as essence of contract

2. In transaction involving sale of land, redemption of mortgages, though certain time frame is fixed, any delay is not valued seriously provided justice can be done to parties. Of course even in sale of land, time can be made as on essence of contract by express words.

Effect of acceptance of performance out of time: Even where time is essential the promisee may waive his right to repudiate the contract, when the promisor fails to perform the promise within the stipulated time. In that case, he may accept performance at any time other than that agreed. In such an event, he cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless at the time of acceptance of the performance he has given a notice to the promisor of his intention to claim compensation.

Q.No.6. State the Legal Provisions relating to Appropriation of Payments.

When a debtor, owing several distinct debts to one person, makes a payment, which is not sufficient to discharge all the debts, the question arises to which particular debt the payment is to be applied. The Act in sections 59 to 61 lays down the underlying principles. 1. Application of Payment where debt to be discharged is indicated: The law on the subject is

contained in Section 59 which says, “Where a debtor, owing several distinct debts to one person, makes a payment to him either with express intimation or under circumstances implying that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly”. The Latin maxim is "quicquid solvitur, solvitur secundum modum solventis”. The meaning of the maxim is that whatever is paid, is paid according to the intention or manner of the party paying. The right of debtor to decide the appropriation is also known as decision in clayton’s case.

Ex: A owes several debts to B. Among them there is a debt for Rs.1,000 which falls due on 1st June. There is no other debt of that amount. On 1st June A pays Rs.1,000 to B. The payment should be appropriated against the above stated debt of Rs.1,000 only. Here the intention of debtor can be gathered from the circumstances.

2. Where the debt to be discharged is not indicated and circumstances are not indicative: Sec.60 of the Indian Contract Act provides that, where debtor does not specify the debt to be appropriated, the right of appropriation is left to the creditor. The creditor can even adjust the payment, which is not likely to be recovered. The law has given a privilege to him to appropriate the payment even against time barred debts. However, creditor can't apply the payment against a disputed or unlawful debt.

A singer agreed to perform at a theatre and to be present at least six days before this engagement. But he reported only two days before. The theatre owner wanted to put an end to the contract. Court held that this delay is not going to affect the substance of the contract. Hence the contract could not be put to an end. However, the theatre owner was allowed to recover compensation for any loss suffered by him due to such delay.

Bettini Vs. Gye



E.g.: A owed several debts to B. Among them, there was a debt amounting to Rs.5,000 which became time barred (i.e., time limit to sue for recovery of debt was expired). A paid Rs.10,000 to B without specifying anything. B has a right to appropriate Rs.5,000 towards the time barred debt, and rest Rs.5,000 towards other debts as per his choice.

3. Application of payment where neither party appropriates: The law on the subject is contained in Section 61, reproduced below: “Where neither party makes any appropriation,

1. the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation.

2. If the debts are of equal standing the payment shall be applied in discharge of each proportionately.”

The aforesaid rule is to be applied when there is nothing to show the intention of the parties. If the debts are of the same date the payment shall be applied in discharge of each proportionately. Ex: There are two debts one of Rs.500 and the other of Rs.700 that were incurred on the same date the debtor pays Rs.600. Out of this sum, a sum of Rs.250 should be applied in discharge of the first debt and the balance of Rs.350 in discharge of the second debt.

In case of current account, the appropriation of payment is made as per the provisions of Section 61 i.e. first debit entry is offset against first credit entry.

Principal and interest: Where there is a debt carrying interest and money is received without any definite appropriation then such money should be applied first for interest, then to capital

Q.No.7. State the Legal Provisions relating to Devolution of Joint Rights and Joint Liabilities

Devolution: Devolution means passing over from one person to another.

Devolution of Joint Liabilities [Section 42]: The liabilities of joint promisors pass to their legal representatives (in case of death). In case of several promisors, the persons who are liable to perform the promise were already covered in Q.No.2.

Rules regarding Performance of Joint Promises [Sec. 43 & 44]: We have seen that Section 42 deals with voluntary discharge of obligations by joint promisors. But if they do not discharge their obligation on their own volition, what will happen ? This is what Section 43 resolves. Accordingly,

a) Joint and Several liability of Joint Promisors: When two or more persons make a joint promise, in the absence of agreement to the contrary, the liability of joint promisors is joint and several. Thus promisee may compel any one or more of such joint promisors to perform the whole of the promise.

E.g.: A, B & C jointly promise to pay Rs.3,000 to D. D may compel either A or B or C to pay him Rs.3,000.

b) Right to claim contribution: Every joint promisor may compel other joint promisors to contribute equally to the performance of the promise, unless a contrary intention appears from the contract.

If a joint promisor is compelled to perform the whole promise then he may compel the other joint promisors to bear such amount equally, along with him, unless a contrary intention appears from the contract.

This rule applies where parties have a running account between them. According to this rule in the absence of any contract to the contrary an item of receipt side must be appropriated against the items of payment side in the order of date.

Rule in Clayton's case



E.g.: A, B and C jointly execute a promissory note for Rs. 3,000 in favour of D. A is compelled to pay the whole amount. A, in such a case would be able to realise Rs. 1,000 each from B and C. This rule may, however, be modified by mutual agreement between the joint promisors.

c) Sharing of loss by default in contribution: If any one of the joint promisors makes any default in such contribution then remaining joint promisors must bear such loss equally.

E.g.: where A, B and C jointly executed the promissory note for ` 3,000 and if C was unable to pay anything, then A would be able to realise from B by way of contribution Rs.1,500 instead of Rs.1,000.

d) Effect of Release of one Joint Promisor Sec (44): If a promisee discharges / releases one among several joint promisors, it does not discharge other joint promisors. In addition, the joint promisor so discharged is still liable to other joint promisors.

E.g.: A, B and C jointly promise to pay D Rs.3,000. D releases A from his liability and sues B and C for payment. Here, B&C are still liable to D. On the other hand A is still liable to B & C.

However, under English law, the liability of joint promisors is only joint and not 'joint and several'. Thus, if one joint promisor is released then all other joint promisors will also be released from their liability.

Meaning of Devolution of Joint Rights [Sec. 45]: The law is contained in Section 45 which is already covered in Q.No. 3

(IMMEDIATELY REFER PRACTICAL QUESTION NO.3, 4, 5, 7, 8)

Q.No.8. State the Legal Provisions relating to Reciprocal Promises.

Meaning of Reciprocal Promises [Sec.2(f)]: Promises which form the consideration or part of the consideration for each other are called ‘reciprocal promises’. Types of Reciprocal Promises: Lord Mansfield in Jones v. Barkley case has classified the reciprocal promises as under:

1. Mutual & Independent: When promises are to be performed by each party independently, without waiting for the performance of other party then such promises are called mutual and independent.

2. Mutual & dependent: When the performance of one party depends on the prior performance of the other party then such promises are called mutual & dependent.

3. Mutual & Concurrent: When promises are to be performed simultaneously then such promises are called mutual and concurrent.

Rules regarding Performance of Reciprocal Promises: The law on the subject is contained in Sections 51 to 54. The provisions thereof are summarized below:

a) General observations: A contract may consist of an act and a promise, or it may consist of two promises, one being the consideration for the other. Thus, when A sells 500 quintals of rice to B who promises to pay the price after a month, the contract would consist of an act performed by A and a promise made by B. On the other hand, if A promises to deliver 500 quintals of rice and B promises to pay the price on delivery, the contract would consist of two promises, one made by A to B and the other given by B to A. Such promises are called reciprocal promises..

b) Simultaneous performance of reciprocal promises [Sec.51]: Reciprocal promises may have to be performed simultaneously, or one after the other. Where A promises to deliver rice and B promises to pay the price on delivery, both the promises are to be performed simultaneously, and both A and B must be ready and willing to perform their respective promises. Such promises constitute concurrent conditions and the performance of one of the promises is conditional on the performance of the other. If one of the promises is not performed the other too need not be performed.



E.g.: If A, in the above-mentioned example, is unwilling to deliver the rice on payment, A will be guilty of breach of promise and the breach would relieve B of the obligation to perform his promise and would enable B to treat the contract as at an end.

c) Performance of reciprocal promises when the order of performance is expressly fixed [Sec.52]: Where the order in which reciprocal promises are to be performed is expressly agreed in the contract, they must be performed in that order.

E.g.: A and B agreed that A shall build a house for B at a fixed price. A’s promise to build the house must be performed before B’s promise to pay for it. The promise being dependent on each other, any breach thereof by A would relieve B of the obligation to keep up his own promises, and would enable B to avoid the contract.

d) Performance of reciprocal promises when the order of performance is fixed by implication: The order of performance may sometimes be indicated not expressly, but by the nature of the transaction.

E.g.: A and B contract that A shall make over his stock-in-trade to B at a fixed price, and B promises to give security for the payment of the price. A’s promise to make over his stock need not be performed, until the security is given by B, for the nature of the transaction required that A should have the security from B before he delivers his stock.

e) Effect of one party preventing another from performing promise: [Sec.53]: When in a contract, consisting of reciprocal promises, one party prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented. The latter becomes entitled to get compensation from the other party for any loss he sustains in consequence of the non-performance of the contract.

E.g.: In a contract for the sale of standing timber, the seller is to cut and cord it, whereupon buyer is to take it away and pay for it. The seller cords only a part of the timber and neglects to cord the rest. In that event the buyer may avoid the contract and claim compensation from the seller for any loss which he may have sustained for the non-performance of the contract.

f) Effects of non-performance in case of Mutual and Dependent Reciprocal Promises [Sec 54]: Where the performance of one party depends on the prior performance of the other party and the party who is liable to perform first, fails to perform it then such party cannot claim the performance from the other party and must pay compensation to the other party for any loss which the other party may incur by the non-performance of the contract.

E.g.: A contracts with B to execute certain builder’s work for a fixed price. B agreed to supply the required scaffolding and timber. B refuses to provide any scaffolding or timber. In such a case A need not execute the work and B is to pay compensation to A for any loss caused to him by the non-performance of the contract.

g) Reciprocal promise to do certain things that are legal, and also some other things that are illegal [Section 57]: When people make reciprocal promises firstly to do certain legal things and secondly to do certain illegal things under specified circumstances then the first part is a contract, but the second part is a void agreement.

h) ‘Alternative promise’ one branch being illegal [Section 58]: The law on this point is contained in Section 58 which says that “In the case of the alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced”.

Q.No.9. State the Provisions relating to Assignment of Contract.

Assignment of Contract: Assignment of a contract means transfer of contractual rights and liabilities to a third party.




Modes of Assignment of contract: Assignment of a contract may take place in any of the following ways:

a) Assignment by act of parties b) Assignment by operation of law. Assignment by act of parties: Assignment by act of parties takes place when the parties themselves make the assignment. Such an assignment are subject to the following rules:

1. Assignment of contractual liabilities : Refer Q no 2.

2. Assignment of contractual rights: Refer Q.no 3.

Assignment by Operation of Law: Assignment by operation of law takes place when the law intervenes (=interfere). Such assignment takes place in the following cases:

a) In case of death of any party: The rights and obligations (other than those of personal nature) of the deceased person will pass on to his legal representatives.

b) In case of insolvency of any party: The rights and obligations (other than those of personal nature) of the insolvent person will pass on to the Official Receiver or Assignee.

Q.No.1. W promises X, Y and Z jointly to repay a sum of Rs. 9,000. Who can demand the performance of the promise in each of the following alternative cases: (a) If X dies (b) If Y dies (c) If Z dies (d) If X, Y and Z dies?

Solution: When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests with the following persons:

a) If all the joint promisees are alive - all of them can claim performance of contract.

b) If anyone or some of the joint promisees die – representative/s of such deceased person/s can claim performance of contract along with survivor/s.

c) If all the joint promisees die - representatives of all promisees can jointly claim performance of the contract

Conclusion:

Case (a) If X dies, Legal representatives of X jointly with Y and Z.

Case (b) If Y dies, Legal representatives of Y jointly with X and Z.

Case (c) If Z dies, Legal representatives of Z jointly with X and Y.

Case (d) If X, Y and Z dies, Legal representatives of X, Y and Z jointly.

Q.No.2. X, Y and Z jointly promises to pay Rs. 9,000 to W. Who is liable to pay the amount to W in each of the following alternatives cases: Case (a) If X dies, Case (b) X, Y and Z die? Solution: In case of several promisors, unless a contrary intention appears, the following persons must perform the promise:

a) If all the joint promisors are alive - all the promisors jointly.

b) In case of death of any of the joint promisors - Representatives of the deceased promisor jointly with the surviving promisor(s).

c) In case of death of all joint promisors - Representatives of all of them jointly.

Conclusion: Case (a) If X dies, Legal representatives of X jointly with Y and Z. Case (b) If X, Y and Z dies, Legal representatives of X, Y and Z jointly.

PRACTICAL QUESTIONS



Q.No.3. X, Y and Z jointly promises to pay Rs. 9,000 to W. Can W compel X to pay him in full?

Facts of the case: X, Y and Z Jointly Promised to Pay Rs.9,000 to W. Later W Compel ‘X’ to pay him in full.

Issue/Question involved: Can W compel X to pay him in full?

Law/Provision: Sec.43 – when two or more persons make a joint promise, the promisor may, in the absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the promise. Analysis: When a joint promise is made, and there is no express agreement to the contrary, the promisee may compel any one or more of the joint promisors to perform the whole of the promise. Here, in the question X, Y and Z are jointly promised to pay Rs.9, 000 to W. Now according to Sec.43 mentioned above W may compel any one of joint promisors to pay the whole amount.

Conclusion: For the reasons mentioned above, W may compel X to pay the whole amount of Rs.9, 000.

Q.No.4. X, Y and Z jointly promises to pay Rs. 9,000 to W. W compelled X to pay the whole amount. Can X recover anything from Y and Z (a) if both Y and Z are solvent, (b) if Y solvent and Z being insolvent pay only 60 Paise in a rupee?

Facts of the case: X, Y and Z jointly promise to pay Rs. 9,000 to W, but W compelled X to pay the whole amount. Issue/Question involved: Can X compel other promisors to contribute? Law/Provision: Sec.43 – Contribution – Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract. Sharing of loss by default in contribution – If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. Analysis: A joint promisor, who has been compelled to perform the whole of the promise, may require the other joint promisors to make an equal contribution to the performance of the promise. According to sec.43, if any one of the promisors makes a default in such contributions, the remaining joint promisors must bear the deficiency in equal shares. In the question, when W compels X to pay the whole amount, X may compel the other joint promisors to contribute equally. If any one of them makes default in contribution, the remaining joint promisors must bear the deficiency in equal shares. Conclusion: Applying the above stated principles, we many conclude that Case (a): If the both Y and Z are solvent, X can recover Rs.3, 000 each. Case (b): If Z becomes insolvent and able to pay 60 paisa per one rupee, X can recover Rs.1800 from Z and Rs.3600 from Y.



Q.No.5. X, Y and Z jointly borrowed Rs. 50,000 from A, the whole amount was paid to A by Y. Decide in the light of the Indian Contract Act, 1972, whether: (N 07 – 5M) a. Y can recover the contribution from X and Z. b. Legal representatives of X are liable in case of death of X. c. Y can recover the contribution from the assets, in case Z become insolvent.

Facts of the case: X, Y and Z jointly borrowed Rs.50,000 from A. Later Y paid the whole amount to A Law/Provision: Sec.42 and 43 This question relates to the provisions of Sec.42 and sec.43 – which states Sec.42 – According to this section joint promisors must, during their joint lives, fulfill the promise. And if any of them dies, his representations must, jointly with the survival promisors, fulfill the promise and so on. On the death of the last survivor, the representatives of all of them must fulfill the promise. Sec.43 – This section lays down three rules

i) When a joint promise is made, and there is no express agreement to the contrary, the promisor may compel any one or more of the joint promisors to perform the whole of the promise.

ii) A joint promisor who has been compelled to perform the promise, may require the other joint promisors to make an equal contribution to the performance of the promise.

iii) If any one of the promisors makes a default in the contribution, the remaining joint promisors must bear the deficiency in equal shares.

Analysis: By applying the above stated rules of Sec.42 and Sec.43 – Y has paid the whole amount. Therefore, Y is entitled to contribution from other promisors i.e. X and Y.

In case of death of X - X’s legal representatives along with survivals to contribute and in case of default i.e. Z’s insolvency, his estate is liable. Conclusion: For the reasons mentioned above –

i. Y can recover the contributions from X and Z ii. Legal representatives of X are liable to pay the contributions to the extent of the property inherited. iii. Y also can recover the contributions from Z’s estate.

Q.No.6. A received certain goods from B promising to pay Rs 10,000/-. Later on, A expressed his inability to make payment. C, who is known to A, pays Rs, 6000/- to B on behalf of A. However, A was not aware of the payment. Now B is intending to sue A for the amount of Rs 10000/-. Can B do so? Advise.

As per section 41 of the Indian Contract Act, 1872, when a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. That is, performance by a stranger, accepted by the promisee, produces the result of discharging the promisor, although the latter has neither authorised nor ratified the act of the third party. Therefore B can sue A only for Rs 4000.

Q.No.7. ‘A’, ‘B’ and ‘C’ are partners in a firm. They jointly promise to pay Rs 1,50,000 to ‘P’. C became insolvent and his private assets are sufficient to pay only 1/5 of his share of debts. A is compelled to pay the whole amount to P. Examining the provisions of the Indian Contract Act, 1872, decide the extent to which A can recover the amount from B. (N 07 – 5M) , (Similar M 14 – 8M)

When two or more persons make a joint promise, the promisee may in the absence of express agreement to the contrary, compel anyone or more of such joint promisors to perform the whole of the promise.

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In such a situation the performing promisor can enforce contribution from other joint promisors (Section 43 of the Indian Contract Act). If anyone or more joint promisors make default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal share. Hence in the instant case, A is entitled to receive (a) from C’s assets - Rs,10,000 (1/5th of Rs 50,000) and (Rs 50,000 is the amount to be contributed by C being 1/3rd of Rs 1,50,000), (b) from B - Rs 70,000 (Rs 50,000 being his own share + ½ (50,000-10,000) i.e. Rs 20,000 being one half share of total loss of Rs 40,000 due to C's insolvency). A can recover Rs 70,000 from B.

Q.No.8. Ajay, Vijay and Sanjay are partners of software business and jointly promises to pay Rs 60, 000 to Kartik. Over a period of time Vijay became insolvent, but his assets are sufficient to pay one-fourth of his debts. Sanjay is compelled to pay the whole. Decide whether Sanjay is required to pay whole amount himself to Kartik in discharging joint promise.

According Section 43 of the Indian Contract Act, 1872 when two or more persons make a joint promise, the promisee may, in absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the promise. Further, if any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. Therefore, in this case, Sanjay is entitled to receive 5,000 from Vijay’s assets and 27,500 from Ajay.

THE END



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GOOD FRIENDS ARE HARD TO FIND, HARDER TO LEAVE,

AND IMPOSSIBLE TO FORGET.

IPCC_33e_M.Law _Discharge of a Contract________________________________109


8. DISCHARGE OF A CONTRACT


No ABC M 06 N 06 to

M 11 N 11

M 12 to

M 13 N 13 M 14 N 14 M 15

1 C - - 5 - - - - -

2 C - - - - - - - -

3 A 5 - - - - - 8 -

4 B - - - - - - - -

5 C - - - - - - - -

6 C - - - - - - - -

7 A - - - - - - - -

Q.No.1. What is meant by Discharge of a Contract? State Different Modes of Discharge of a Contract. (N 11 – 5M)

Discharge of a contract means termination of the contractual relationship between the parties. A contract is discharged when rights and obligations created by it comes to an end.

Following are the different ways in which discharge or termination of a contract can take place:

a) Performance

b) Impossibility of Performance (Initial Impossibility, Supervening Impossibility)

c) Mutual Agreement

d) Lapse of Time

e) Operation of Law

f) Breach of Contract

Similar Question: State in brief, the grounds on the basis of which a contract is discharged under the provisions of the Indian contract Act, 1872

Ans: explain briefly about different modes of discharge.

Q.No.2. Explain how the Contract is Discharged through Performance?

Discharge by performance: It takes place when the parties to the contract fulfil their obligations arising under the contract within the time and in the manner prescribed. Discharge by performance may be (1) actual performance or (2) attempted performance.

Discharge of Contract through Performance:

1. By Actual Performance: Actual performance is said to have taken place, when each of the parties has done what he had agreed to do under the agreement.

2. By Attempted Performance: When the promisor offers to perform his obligation, but the promisee refuses to accept the performance, it amounts to attempted performance or tender.

Q.No.3. Explain how the Contract is Discharged through Impossibility of Performance? (M 06 – 5M, N 14 – 8M)

Discharge by impossibility of performance: Section 56 contemplates various circumstances under which agreement may be void, since it is impossible to carry it out. The Section is reproduced below:

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“An agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”. If an agreement contains an undertaking to perform an impossible thing then such agreement is void-abinitio. This rule is based on the following maxims:

a) “lex non cogit ad impossibilia” i.e. the law does not recognise what is impossible.

b) “Impossibilium nulla obligato est” i.e. what is impossible does not create any obligation.

Sec.56 deals with the question of Impossibility of Performance. According to this section, there are two kinds of Impossibilities:

a) Initial Impossibility: Where impossibility is existent at the time of entering into contract.

b) Subsequent Impossibility: Where impossibility arises subsequently i.e. after the formation of contract (Supervening Impossibility).

Initial Impossibility i.e. Where impossibility exists at the time of entering into contract:

When the parties agree upon doing of something which is obviously impossible in itself the agreement would be void. This is also known as pre-contractual impossibility or initial impossibility. Such agreement does not come into existence. Thus there is no question of discharge of a contract which never existed.

Following are Various Alternative Situations in this Context:

a) If known to the parties: This is also known as absolute impossibility. Such agreement is void-ab-initio.

E.g. ‘B’ promises to pay ‘A’ sum of Rs. 5,000 if he is able to swim across the Indian Ocean from Bombay to Aden within a week. In this case, there is no real agreement, since both the parties are quite certain in their mind that the act is impossible of achievement. Therefore, the agreement, being impossible in itself, is void.

b) If unknown to the parties: Where both the promisor and the promisee are ignorant of the impossibility of performance, the contract is void.

c) If known to the promisor only: Where the promisor alone knows about the impossibility of performance, or even if he does not know though he should have known it with reasonable diligence, the promisee is entitled to claim compensation for any loss he suffered on account of non-performance.

Subsequent Impossibility/Supervening Impossibility i.e. Where impossibility arises subsequent to the formation of contract:

a) When performance of promise become impossible or illegal by occurrence of an unexpected event or a change of circumstances beyond the contemplation of parties, the contract becomes void.

b) This is known as ‘Doctrine of Supervening Impossibility’ or 'Post - Contractual Impossibility'. English Law recognises it as ‘Doctrine of Frustration’.

Cases where Contract is Discharged on the ground of Supervening Impossibility / Subsequent Impossibility:

1. Destruction of the subject matter: After the formation of the contract if the subject matter is destroyed, the contract is discharged due to impossibility of performance.

C agreed to let out a music hall to T for a series of concerts. The hall was destroyed by fire before the date of first concert. Now T could not perform his concerts and sued C for breach of contract. The court held that both the parties were free from their contractual obligations because the contract became void due to impossibility of performance.

Taylor Vs. Caldwell



Where only a part of the subject matter of the contract is destroyed, the promisor is still liable, in respect of that part.

2. Failure of the Ultimate Purpose: Where the ultimate purpose for which the contract is entered into fails, the contract becomes void. This kind of failure of the object of a contract is often called as 'frustration of the contract'.

3. Death or Personal Incapacity of the Promisor: If personal performance is required under the contract, it is excused by the serious illness or death of the promisor.

4. A Change in Law or Government Policy: Another common situation in which performance becomes impossible is, change in law or regulation that makes the performance illegal.

5. Outbreak of War: Out break of war may affect the enforceability of contracts in many ways like a) Emergency legislation controlling price b) Relaxation of trade restrictions c) Prohibiting or restraining transaction with alien ememy.

Effects of Doctrine of Supervening Impossibility:

a) The contract becomes void and stands discharged.

b) Where one contracting party has obtained a valuable benefit before the time of discharge of contract, the other party can recover certain sum, as the court considers just. (Restoring).

Cases where Contract is not discharged on the ground of Supervening Impossibility (Exceptions to the Doctrine of Supervening Impossibility):

a) Difficulty in Performance: If the event becomes difficult to perform, but not impossible, then the parties are not excused from performance.

E.g.: A promised to B that he would arrange for B’s marriage with his daughter. A could not persuade his daughter to marry B. B sued A who pleaded on the ground of impossibility that he is not liable for any damages. But it was held that there was no ground of impossibility. It was held that A should not have promised what he could not have accomplished. Further A had chosen to answer for voluntary act of his daughter and hence he was liable.

b) Commercial Hardships: A party is not discharged from the performance of a contract simply because the performance has become burdensome or non-profitable. For example, abnormal rise or fall in prices of inputs (raw material) or increase in overhead costs (wages, transport costs) etc.

E.g.: There was a sharp increase in the prices of goods. In this case, A is not discharged from his liability to supply the goods at the price decided in the contract.

c) Impossibility due to failure of a third party: Impossibility created by the failure of a third person, on whose work the promisor relied, cannot become a ground to excuse performance.

E.g.: A agreed to sell certain goods to B which are to be procured from C, a manufacturer of these goods. C did not manufacture the goods and A failed to supply the goods to B. In this case, A could not be discharged from his liability to perform and he was held liable for damages to B.

An artist undertook to sing at a theatre on a particular day. But the artist being too ill and could not sing on the day fixed for performance. It was held that the contract was discharged due to personal incapacity of the artist. Thus he was not liable to pay damages for non-performance.

Robinson Vs. Davison

H agreed to hire K’s flat for the purpose of watching the procession of Edward VII. As a result of the king’s illness, the procession was cancelled. Now K filed a suit on H for the recovery of rent. H said that the contract was discharged because of failure of very purpose of contract and he was not liable to pay the rent. The court supported the view of H.

Krell Vs. Henry



d) Strikes and Lock-Outs: All such events do not discharge the contracts unless specifically

provided by the parties.

e) Failure of one of the objects or Partial Impossibility: If a contract has several objects, failure of one of them does not discharge the contract.

f) Self-induced Impossibility: A Contract is not discharged in case of self induced impossibility by either of the party.

g) Extent of the work involved or absence of any definite period of time agreed: the contract could not be treated as impossibility of performance because of extent of the work involved or absence of any definite period of time agreed

Similar Question: Explain the circumstances whereunder a party to a contract may be exempted from the performance of contract on the ground of “supervening impossibility”: under the Indian Contract Act, 1872.

Ans: Refer points above under Cases where Contract is Discharged on the ground of Supervening Impossibility / Subsequent Impossibility:

(IMMEDIATELY REFER PRACTICAL QUESTION NO.1, 2, 3, 4, 6, 8, 10, 11, 12)

Q.No.4. Explain how the Contract is Discharged through Mutual Agreement?

A contract is created by the parties to it. Therefore, it can also come to an end by their mutual agreement.

Contracts which need not be performed: Under this heading, we shall discuss the principles of Novation, Rescission and Alteration and Remission. The law is contained in Sections 62 to 67 of the Contract Act.

“If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed”( Section 62)

1. Novation: The parties to a contract may substitute a new contract for the old. If they do so, it will be a case of novation. On novation, the old contract is discharged and consequently it need not be performed. Thus it is a case where there being a contract in existence some new contract is substituted for it either between the same parties or between different parties the consideration mutually being the discharge of old contract. Novation can take place only by mutual agreement between the parties.

Mr.X had agreed to purchase immediately after outbreak of war a plot of land from Mr.Y. this plot of land was part of a scheme undertaken by the Mr. Y who had agreed to sell after completing construction of drains, roads etc., however the said plot of land was requisitioned for war purpose. Mr. Y there upon wrote to Mr. X asking him to take back of earnest money deposit, thinking that the contract cannot be performed as it has become impossible of being performed. Mr. X brought a suit against the defendant that he was entitled for conveyance of the plot of land under condition specified in the contract. It was held that the requisition order did not make the performance impossible

Satyabrat Ghosh Vs Mugneeram Bangur & co.

H agreed to hire from the H.B.S. Co. a boat for the purpose of taking passengers from Herne Bay to watch the Royal Naval Review, and to cruise round the fleet. Owing to the King’s illness, the review was cancelled, and H decided not to continue with the proposed trip. The court held that the contract was not discharged. The review was not the sole purpose of the contract. The fleet was still lying in the port and the cruise was still possible. The H.B.S. Co., was, therefore entitled to the hiring fee.

HB Steamboat Co. Vs. Hutton



Ex: A owes B Rs.100. A, B and C agree that C will pay B and he will accept Rs.100 from C in lieu of the sum due from A. A’s liability thereby shall come to an end, and the old contract between A and B will be substituted by the new contract between B and C.

2. Alteration:

a) Alteration means change in one or more of the terms of a contract. When a contract is altered by the mutual consent of the parties, parties to the contract remain same, but the contract is altered. A valid alteration discharges the original contract, and the parties become bound by the new contract (i.e., contract with altered terms).

b) As in the case of novation and rescission so also in a case where the parties to a contract agree to alter it, the original contract is rescinded, with the result that it need not be performed. In other words, a contract is also discharged by alteration. The terms of contract may be so altered by mutual agreement that the alteration may have the effect of substituting a new contract for the old one. In other words, the distinction between novation and alteration is very slender.

3. Rescission: Rescission means cancellation. In the case of rescission, only the old contract is cancelled and no new contract comes to exist in its place.

Rescission may occur in any of the following manners:

a) When contracting parties mutually agree to rescind the contract.

b) When one party fails to perform his obligations, the other party may rescind the contract and can claim compensation for such breach of contract.

Note: A person breaking the contract cannot rescind it.

c) When a person at whose option a contract is voidable, rescinds it.

Following are the General Rules of Rescission:

a) No partial rescission

b) Rules relating to communication of rescission is same as to communication of offer

c) law of restitution will apply

4. Promisee may waive or remit performance of promise: “Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance or may accept instead of its any satisfaction which he thinks fit” (Section 63).

It should be noted that novation, rescission or alteration cannot take place without consideration. But in the case of partial or complete remission, no consideration is required. The promisee can dispense with performance without consideration and without a new agreement.

E.g: A owes B Rs. 50,000. A pays to B Rs.30,000 who accepts it in full satisfaction of the debt. The whole is discharged.

The promisee under the Act can also extend the time for the performance of the promise. Time can be extended only for the benefit of the promisor and not for the benefit of the promisee.

E.g: A promises B that he would deliver certain goods by a certain date, B can extend the time but he cannot take advantage to charge interest on the extended time.

Similarly, a promisee can accept instead of the stipulated performance, any satisfaction which he thinks fit.

E.g: A sells his horse to B who promises to pay Rs.500 for the horse. A may accept, instead of Rs.500 a necklace as the price of the horse.

Important points to be remembered in Remission:

a) A remission need not be supported by consideration.

b) A remission once made is irrevocable.

c) Remission may be conditional. In such a case, the promisor is released only on fulfillment of the condition. If the condition is not fulfilled, the creditor may enforce all his rights.



E.g.: A owed Rs.10,000 to B. B offered to remit liability of A by Rs.5,000 if A gives his house to C on rent. Here if A rents his house to C, then only the remission would be affected. Otherwise, the liability of A to repay will remain as before.

5. Waiver: Waiver means intentional relinquishment of a right under the contract. Thus, it amounts to releasing a person of certain legal obligation under a contract. Waiver takes place when the parties to a contract agree that they shall no longer be bound by the contract. This amounts to a mutual abandonment of rights by the parties to the contract. Consideration is not necessary for waiver.

E.g.: A promises to supply goods to Y. Subsequently, Y exempts X from carrying out the promise. This amounts to waiving the right of performance on the part of Y.


Q.No.5. Discuss the Rules regarding the Discharge of a Contract by Lapse of Time.

1. A contract should be performed within a specified period as prescribed by the Limitation Act, 1963. If it is not performed and if no action is taken by the promisee within the specified period of limitation, he is deprived of remedy at law. For example, if a creditor does not file a suit against the buyer for recovery of the price within three years, the debt becomes time-barred and hence irrecoverable.

2. Every contract must be performed within a stipulated period of time or within a reasonable time according to the nature of contract. If such time is lapsed, the contract is discharged.

E.g.: On 1st July 2001 X sold goods to Y for Rs.1,00,000 and Y has made no payment till August, 2004. State the legal position as on 1st August, 2004 if

a) No credit period was allowed. b) Credit period of two months was allowed.

Sol:

a) The contract is discharged by lapse of time (i.e. 3 years) from 1st July 2001 because the debt has become time barred and hence X can't exercise his right to recover this debt.

b) The contract is not discharged by lapse of time because the period of limitation is yet to expire on 31st August 2004 (i.e. 3 years from the expiry of the credit period).

Q.No.6. When a Contract gets Discharged by Operation of Law?

A contract is Discharged by Operation of Law in the Following Cases:

a) Death: In contracts of personal nature, death of the promisor discharges the contract.

b) Insolvency: When a person is declared as insolvent by law, he is discharged from all the liabilities incurred, prior to that date. His rights and liabilities are transferred to an ‘official assignee’ appointed by the court.

c) Merger: When an inferior right of a party under a contract merges into a superior right of the same person, inferior right vanishes into the superior right. This is known as merger.

E.g.: A took a land on lease from B. Subsequently, A purchases that very land. Now, A becomes the owner of the land and the ownership rights being superior to rights of a lessee, the earlier contract of lease stands terminated.

d) Unauthorised Material Alteration: When an alteration to a material term of contract is made by a party to the contract, without the consent of the other party, both the parties are discharged from the contract by operation of law.

Note: An alteration which is not material or which is made to carry out the common intention of parties does not affect the validity of the contract.



e) By identity of Promisor and Promisee i.e. Rights and Liabilities under a Contract vest in the same person: When promisor becomes promisee then other parties are discharged.

E.g.: X draws a bill receivable on Y who accepts the same. X endorses the bill in favour of Z who in turn endorses it in favour of Y. Here Y is both promisor and promisee and hence the other parties are discharged.

f) Loss of Evidence of Contract: Where the evidence of the existence of the contract is lost or vanished, the contract is discharged.

g) Order of the Court: Sometimes by an order of Court, the performance of contract may be stayed. In such a case, so long as the injunction is in force, the contract cannot be enforced.

h) When a promisee neglects or refuses to afford the promisor reasonable facilities for the performance of the promise, the promisor is excused by such neglect or refusal (Sec 67).

Q.No.7. What do you mean by Breach of Contract? What is the difference between Actual Breach and Anticipatory Breach of Contract?

Breach means failure of a party to perform his or her obligation under a contract. When one party commits breach, the aggrieved party has not only a right of action for damages but he is also discharged from performing his part of the contract (Section 64). Therefore, it operates as a mode of discharge of the contract.

Breach of Contract can be classified in to two types:

1. Actual Breach of Contract

2. Anticipatory Breach of Contract

1. Actual Breach of Contract: In contrast to anticipatory breach, it is a case of refusal to perform the promise on the scheduled date or during the performance. The parties to a lawful contract are bound to perform their respective promises. But when one of the parties breaks the contract by refusing to perform his promise, he is said to have committed a breach. In that case, the other party to the contract obtains a right of action against the one who has refused to perform his promise.

Actual breach of Contract may be committed:

a) At the time when the performance of the contract is due.

b) During the performance of the contract: Actual breach of contract also occurs when during the performance of the contract, one party fails or refuses to perform his obligation under it by express or implied act.

Effect of Actual Breach:

a) When one party commits breach of contract, the aggrieved party can rescind the contract and can sue for damages.

b) When time is the essence of contract, the aggrieved party can rescind the contract and can claim damages.

c) When time is not the essence of contract, the aggrieved party cannot rescind the contract, but he can claim damages caused by delayed performance.

2. Anticipatory Breach of Contract: When the promisor refuses altogether to perform his promise and signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory Breach.

A promisee, instead of putting an end to the contract forthwith may keep the contract alive upto the time when the contract is to be executed. But the amount of damages in one case may be different from that in the other. Anticipatory breach of contract is also called as "constructive breach of contract".

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It may happen in any of the following two ways:

a) Express Breach by words spoken or written: Where a party to the contract communicates to other party, before the due date of performance, about his intention of not performing contract.

b) Implied Breach: Where a party, by his acts, communicates his intention of not performing the contract.

Effect of Anticipatory Breach: Section 39 deals with the effects of anticipatory breach of contract which states, "When a party to a contract has refused to perform or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct his acquiescence in its continuance."

1. The aggrieved party may treat the anticipatory breach as actual breach. In this case, he is discharged from performance of his promise under the contract, and can claim damages. The aggrieved party can file a suit for breach of contract without waiting for the due date of performance.

E.g.: A engaged B, a courier, to accompany him on a tour to commence on 1st June. About a month before the date, A wrote to B that he had changed his mind and does not require his services. B immediately sued him for damages, for breach of contract. A argued that there could not be breach of contract, before the due date of performance. It was held that B can sue before the due date of performance. [Hochester Vs. De La Tour].

2. The aggrieved party may decide to ignore the anticipatory breach and can wait for the due date of performance. If he elects this option, the effects are as under:

a) The contract will remain operative for both the parties. The promisor has a right to perform the contract on or before the agreed date and promisee will be bound to accept the performance.

b) If any thing happens which make the performance of the contract impossible then the contract will be discharged. In such a case, the party at default may take the advantage of such discharge. Consequently, the promisee loses his right to sue for damages against the promisor for the breach of contract.

Ex: X agrees to sell to Y a certain quantity of say, wheat at Rs. 100/- per quintal to be delivered, say, on the 3rd March. On the 2nd February, X gives notice expressing his unwillingness to sell wheat; and the price of wheat on the date is Rs. 110/- per quintal. If Y repudiates the contract forthwith (which he is entitled to do at his option), he would be able to recover damages @ Rs. 10/- per quintal, being the difference between market price on the 2nd February and the contract price. If instead of taking the action forthwith, he keeps the contract alive till the 3rd March and in the mean time, the price increases to Rs. 125/- per quintal on the date. Y would be able or recover damages @ Rs. 25/- per quintal. If, on the other hand, during the intervening period between 2nd February and 3rd March, private sale of wheat is prohibited by the Government, the contract would become void, and Y would not be able to recover any damages whatever. Thus you observe that if the promisee keeps the contract alive, he does so not only for his own benefit but also for the benefit of the promisor.

3. Doctrine of anticipatory breach does not apply to promises to pay money debts, such as those found in promissory notes and bonds.

The date of breach of contract in case of anticipatory breach will be the date on which the promisee elects to treat the contract as discharged.


Q.No.1. X undertakes to put life into the dead wife of Y and takes his fees Rs. 5000 in advance. X fails to do so. Y claim Rs. 5000. Is Y’s claim valid?

PRACTICAL QUESTIONS



Solution: Section to which the given problem relates Section 56 (Para 1), and Section 65.

Decision: Y’s claim is valid

Reason:

a) The agreement is void ab – initio [section 56 (Para 1)].

b) The person who received any advantage under a void agreement, is bound to restore it [Section 65]

Q.No.2. X of Delhi agreed to sell 100 bales of cotton @ Rs.1000 per bale and to deliver within a fortnight at buyer’s godown at Labore. X failed to supply these goods. State the legal position in each of the following alternatives cases:

Case (a) If, unknown to both the parties, the goods were destroyed by fire at the time of agreement

Case (b) If, X knew that goods were destroyed by fire at the time of agreement.

Case (c) If the goods were destroyed by fire after the formation of agreement.

Case (d) If war is declared between India and Pakistan

Case (e) If these goods were to be manufactured by Z who is ready to supply @ Rs. 1100 per bale because of unexpected increase in the cost of material and labour.

Case (f) If these goods could not be delivered because of strike of transport operators.

Solution: Section to which the given problem relates: Section 56. Decision and reasons:

Case (a) Contract is void on the ground of mutual mistake.

Case (b) Contract is void but X, the promisor, must compensate the buyer for any loss which promisee sustains through the non – performance of the promise.

Case (c) & (d) : Contract has become void on the ground of supervening impossibility.

Case (e) Contract is not discharged because of commercial impossibility.

Case (f) Contract is not discharged because of default of third party.

Case (g) Contract is not discharge because of non – performance due to strikes, lock – out or civil disturbances.

Q.No.3. Mr. X, a Hindu contracts to marry Y, a Muslim. State the legal position in each of the following alternative cases: Case (a) If Mr. X is a already married to Z who lives with X Case (b) If Mr. X goes mad before the date fixed for marriage Case (c) If Mr. X dies before the date fixed for marriage.

Solution: Section to which given problem relates: Section 56.

Decision and Reason:

Case (a) The contract is void ab – initio because such contract is forbidden by law. X must compensate Y for the loss caused to her by the non – performance of the promise.

Case (b) The contract becomes void because of change in the state of things which formed the basis of the contract.

Case (c) The contract is discharged on the death of X.

Q.No.4. X, a singer enters into a contract with Y, the manager of a theatre, to sing at his theatre two nights every week during the next two months and Y engages to pay her at the rate of Rs. 100 for each night on completion of the contract. State the legal position in each of the following alternative cases:

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Case (a) On sixth night if X willfully absents herself from the theatre and wants to sing on the seventh night but Y does not allow her to sing on the seventh night.

Case (b) On the sixth night if X willfully absents herself from the theatre and Y allows X to sing on seventh night.

Case (c) On sixth night, X is too ill to sing.

Case (d) On sixth night, X dies before she sings.

Solution: Section to which the given problem relates: Section 39 & 56.


Case (a) Y can rescind the contract and can claim the damages for the breach of contract [Section 39]

Case (b) Y cannot rescind the contract but can claim the compensation for the damages sustained by him through X’s failure to sing on the sixth night [Section 39].

Case (c) & (d) X is discharged on the sixth night because of her incapability to sing and Y cannot claim the compensation for the damages sustained by him through Y’s failure to sing on the sixth night.

Q.No.5. On 1st June, X contracted to supply Y 1000 cubic feet of Finland Timber @ Rs. 500 per cubic feet to be delivered at Mumbai from 1st July to 30th Sept. On 15th June, X informs that he could not supply those goods. The rates of timber per cubic feet on various dates were – on 15th June Rs. 1,200, on 1st July Rs. 1,300, on 30th Sept. Rs. 1,400. State the legal position in each of the following alternative cases:

Case (a) If Y filed a suit for breach of contract on 15th June.

Case (b) If Y filed a suit for breach of contract on 30th Sept.

Case (c) If on 29th Sept. the import of such goods was banned and Y filed a suit for breach of contract on 30th Sept.

Solution: Section to which the given problem relates: Sections 73 and 56.


Case (a) Y is entitled to claim Rs. 7, 00,000 being the difference between the market price on the date of repudiation of contract (i.e. on 15th June) and the contract price [Section 73].

Case (b) Y is entitled to claim Rs. 9,00,000 being the difference between the market price on the date of repudiation of contract (i.e. on 30th Sept) and the contract price [section 73].

Case (c) Y is not entitled to claim anything because the contract has already been discharged by supervening illegality [Section 56].

Q.No.6. A owned a room in a hotel which was hired to B for watching the coronation procession of King Edward II, at £ 141 payable at the time of the contract. £ 100 was paid in cash. But before the balance was paid, the procession was cancelled. B filed a suit for the recovery of the amount he had paid. Decide.

Hint: B can recover £ 100 were paid in cash and is not bound to pay the balance £ 41. But if incurred some expense in partial performance of the contract, he can claim compensation of £ 41.

Q.No.7. A was due to perform a contract on 1st May, 1991, but on 20th April he repudiated his obligation. On 29th April the contract became illegal through a change in the law. B, the other party to the contract, filed a suit for breach of contract on 30th April, 1991. Discuss.

Hint: B has no remedy against A as when B files a suit for breach of contract, the contract has already been discharged by supervening illegality.



Q.No.8. A contracted to make and deliver 500 pairs of shoes to B by January 1st, A strike of A’s employees prevented him from fulfilling his contract. In a suit by B for breach of contract, A contract was terminated by impossibility of performance. Was his defence good? (Similar RTP N 14 )

Hint: No, further A is liable to B in damages

Q.No.9. A contracts to supply a specific car to B a month after the date of the contract. Within the month A sells the car to C. Thereupon, B sues A for the breach of contract. A contends that he could still perform the contract by repurchasing the car from C. Is C’s contention valid?

Hint: No. The sale of the car by amounts to an anticipatory breach of contract by implied repudiation (Lovelock v. Franklyn)

Q.No.10. P hired a godown from D for a period of twelve months and paid the whole rent to him in advance. After six months the godown was destroyed by fire and P claimed a refund of a proportionate amount of the rent. Is the claim valid?

Hint: In this case the contract becomes void subsequent to its formation (para 2 of sec.56). Under Sec.65 P can recover rent of the unexpired part of the term (Dharamsay v.Ahamedbhai)

Q.No.11. The unloading of a ship was delayed beyond the date agreed with the ship owners owing to a strike of dock labourers. On a suit by the ship owners for damages, the plea of impossibility was raised. Advise the ship owners.

Hint: The ship owners can claim damages.

Q.No.12. Akhilesh entered into an agreement with Shekhar to deliver him (Shekhar) 5,000 bags to be manufactured in his factory. The bags could not be manufactured because of strike by the workers and Akhilesh failed to supply the said bags to Shekhar. Decide whether Akhilesh can be exempted from liability under the provisions of the Indian Contract Act, 1872.

Delivery of Bags: According to Section 56 (Para 2) of the Indian Contract Act, 1872 when the performance of a contract becomes impossible or unlawful subsequent to its formation, the contract becomes void, this is termed as ‘supervening impossibility’.

But impossibility of performance is, as a rule, not an excuse from performance. It means that when a person has promised to do something, he must perform his promise unless the performance becomes absolutely impossible.

The performance does not become absolutely impossible on account of strikes, lockout and civil disturbances and the contract in such a case is not discharged unless otherwise agreed by the parties to the contract (Budget V Bennington; Jacobs V Credit Lyonnais). In this case Mr. Akhilesh could not deliver the bags as promised because of strike by the workers.

This difficulty in performance cannot be considered as impossible of performance attracting Section 56 (Para 2) and hence Mr. Akhilesh is liable to Mr. Shekhar for nonperformance of contract.

Q.No.13. M owes money to N under a contract. It is agreed between M, N and O that N shall henceforth accept O as his debtor instead of M. Referring to the provisions of the Indian Contract Act, 1872, state whether N can claim payment from O? (RTP N 14)

Yes, a contract need not be performed when the parties to it agree to substitute a new contract for it or to rescind or alter it. (Section 62, Indian Contract Act, 1872). Here, in the given problem, novation has taken place as one of the parties has been replaced with a third party. Therefore, N can claim the money from O.

THE END



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9. REMEDIES FOR BREACH OF CONTRACT


No ABC N 04 M 05 N 05 to

N 06 M 07

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2 A 6 6 - 5 - 5 - 5

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4 C - - - - - - - -

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Q.No.1. What do you mean by Rescission of Contract? What are the consequences of Rescission?

Rescission means a right not to perform the contract. When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case he is absolved or discharged from all his obligations under the contract and is entitled to compensation for any damages that he might have suffered.

Rescission may take place in any of the following manner:

1. Mutual agreement: When parties to a contract agree to rescind the contract, no legal consequences will arise.

2. Breach: When one party fails to perform his promise properly, other party can rescind the contract. In such a case parties are discharged and aggrieved party can claim damages.

3. Option given by law: When one party’s consent is not free, the contract becomes voidable and law gives an option to the aggrieved party to rescind the contract. In such a case, parties are discharged from their liabilities.

Consequences of Rescission:

1. Both the parties are relieved from their contractual duties and the injured party can still claim damages.

2. The person who is rescinding the contract can claim damages which he has suffered through non fulfillment of the contract. [Section 75].

3. rescinding voidable contract shall restore benefits received by him under the contract.

However, Court may refuse to rescind the contract in the following cases:

a) The plaintiff has expressly or impliedly ratified the contract ; or

b) Due to change of circumstances (not due to any act of the defendant), the parties cannot be restored to their original position; or

c) Third parties have, during the subsistence of the contract, acquired rights in good faith and for value; or

d) Only a part of the contract is required to be rescinded and such part is not severable from the rest of the contract.


Q.No.2. What is meant by Damages and what Kind of Damages may be awarded in case of Breach of Contract under the Law of Contract? (M 11 – 5M)

1. Damages may be defined as monetary compensation in respect of loss suffered as a result of

breach. Breach of contract entitles the injured party to file a suit for damages,



2. The Act, in Section 73, has laid down the rules as to how the amount of compensation is to be determined.

3. Damages for breach of contract must be such loss or damage as naturally arise, in the usual course of things or which had been reasonably supposed to have been in contemplation of the parties when they made the contract, as the probable result of the breach.

Kinds of Damages: The liability for the damages may be classified as under:

1. Compensatory damages: These damages are compensatory in nature. These damages are not allotted to punish the party who has breached the contract.

a) General damages / Liability for ordinary damages: These damages arise in the ordinary course of events from the breach of contract. These Damages constitute the direct loss suffered by the injured party. The measure of ordinary damages is the difference between the contract price and the market price on the date of the breach.

Thus general damages are related to the direct consequences and not to the indirect losses or consequences of the breach of contract.

b) Special damages / Liability for special damages: Where a party to a contract receives a notice of special circumstances affecting the contract, he will be liable not only for damages arising naturally and directly from the breach, but also for special damages. Compensation can also be claimed for any loss or damage which the party knew when they entered into the contract, as likely to result from the breach. That is to say, special damage can be claimed only on a previous notice.

If the special circumstances were already known to the other party then it is not necessary to communicate the same to such other party.

2. Nominal damages: Nominal damages are awarded where the plaintiff has proved that there has been a breach of contract but he has not in fact suffered any real damage. In such a situation, injured party is awarded nominal damages. It is awarded just to establish the right to decree for the breach of contract and is of very small amount. The amount may be a rupee or even 10 paise.

3. Liquidated damages and penalty:

a) Sometimes the contracting parties may agree to pay certain sum of money in case of breach of contract by either party. It may be termed as either ‘liquidated damages’ or ‘penalty’ depending upon the purpose to fix the sum.

b) The purpose of fixing a sum as ‘liquidated damages’ is to compensate the injured party for the loss to be incurred by the breach of the other party. Thus it is an estimate of the loss to be caused by non-performance of the contract.

c) The purpose of providing a ‘penalty’ in a contract is to discourage a party from breaching it and to provide a special punishment if the contract is breached any way. Thus it is a sum which has no relation to the probable loss.

d) But the sum named in the contract is not awarded as damages. It is left to the court to ascertain the actual loss. However it does not exceed the sum named in the contract.

e) The courts in India allow only reasonable compensation not exceeding the specified sum (Sec. 74).

S, a manufacturer used to exhibit samples of his equipment at agricultural exhibitions. He delivered his samples to Railway Company to be exhibited at New Castle. On the consignment he wrote “must reach at New Castle on Monday certain”. On account of negligence on the part of Railway Company, the samples reached only after the exhibition was over. S claimed damages from Railway Company for his loss of profits from exhibition. The court held that the railway company was liable to pay these damages as it had the knowledge of special circumstances.

Simpson Vs. London & N.W. Railway Co. (1876) 1 Q.B.D. 274



4. Stipulation for Interest: The largest number of cases decided under Sec.74 are related to

stipulations in a contract providing for payment of Interest. The following rules are observed with regard to payment of interest:

a) Payment of interest in case of default: A stipulation for payment of interest in case of default is not in the nature of a penalty, if the interest is reasonable. If the court finds that the rate of interest is exorbitant and is penal in nature, it may grant relief.

b) Payment of interest at higher rate:

i) From the date of the bond: A stipulation for higher rate of interest from the date of the bond and not from the date of default is always in the nature of a penalty and hence relief is granted against it.

ii) From the date of default: A stipulation for higher rate of interest from the date of default may be a stipulation in the nature of penalty. When it is so, relief is granted against it. Whether such a stipulation is a penalty or not depends upon the terms of the contract and the circumstances of each case.

c) Payment of compound interest on default:

i) At the same rate as simple interest: A stipulation in a bond for payment of compound interest on failure to pay simple interest at the same rate as payable upon the principal is not a penalty.

ii) At the rate higher than simple interest: A stipulation in a bond for payment of compound interest at a rate higher than that of simple interest is a penalty and relief will be granted against it.

d) Payment of interest at a lower rate if interest is paid on due date: Where a bond provides for payment of interest say, at 24% p.a., with a provision that if the debtor pays interest punctually at the end of every year, the creditor would accept interest at a lower rate say 18% p.a. Such a clause is not in the nature of penalty.

5. Vindictive or Exemplary damages / Liability to pay Vindictive or Exemplary damages:

Vindictive damages are awarded as a punishment to the wrong doer. Such damages are unusual and quite heavy in amount. The concept is borrowed from the English Law. Generally speaking, these damages are not awarded in ordinary course of breach of contract.

However, in the following two kinds of contracts Indian courts award vindictive damages / These damages may be awarded only in two cases, viz (i) for breach of promise to marry; and (ii) wrongful dishonour by a banker of his customer’s cheque:

a) Breach of promise to marry: In a breach of promise to marry, exemplary damages may be awarded to the other party taking into consideration the injury caused to his or her feelings.

b) Wrongful dishonour by a banker of his customer’s cheque: Where a banker refuses to honour the cheque of a customer while having sufficient funds in the account and the customer thereby suffers loss of reputation. The amount of damages recoverable by the drawer of cheque from his banker in case of wrongful dishonour of his cheque may be quite heavy, depending upon the loss of credit and reputation suffered on that account.

In this case, lesser the amount of cheque, higher the amount of damages will be awarded.

6. Damages for deterioration caused by delay: In the case of deterioration caused to goods by delay, damages can be recovered from carrier even without notice. The word ‘deterioration’ not only implies physical damages to the goods but it may also mean loss of special opportunity for sale.

7. Remote or Indirect Damages: The remote or indirect damages are not due to natural and probable consequences of the breach of the contract, i.e., these are the damages which arise indirectly from the breach. These damages are not in contemplation of the parties at the time of making the contract, and are not recoverable. No compensation is payable for any remote or indirect loss.



Similar Question: What is the law relating to determination of compensation, on breach o f contract, contained in sec 73 of the Indian Contract Act. 1872?

Ans: Explain briefly above question and write Q.No 7

(IMMEDIATELY REFER PRACTICAL QUESTION NO.1, 2, 3, 4, 5, 6, 8, 9, 11, 12, 13, 14, 15)

Q.No.3. State the Provisions relating to Suit for Specific Performance.

Where damages are not an adequate remedy in the case of breach of contract, the court may in its discretion on a suit for specific performance direct party in breach, to carry out his promise according to the terms of the contract.

It gives the courts discretionary power to order specific performance instead of or in addition to damages.

E.g.: Things like valuable works of art, patents, and copyrights that are unique are generally subject to the remedy of specific performance.

Q.No.4. State the Provisions relating to Suit for Injunction.

Where a party to a contract is negativating the terms of a contract, the court may by issuing an ‘injunction order’ restrain him from doing what he promised not to do.

E.g.: N, a film star, agreed to act exclusively for a particular producer, for one year. During the year she contracted to act for some other producer. Held, she could be restrained by an injunction.

Q.No.5. Write a Short Notes on Quantum Meruit and Restitution.

‘Quantum Meruit’: The phrase ‘quantum meruit’ literally means “as much as is earned” or “according to the quantity of work done”. When a person has begun the work and before he could complete it, the other party terminates the contract or does something which make it impossible for the other party to complete the contract, he can claim for the work done under the contract.

Following are the cases in which a claim or quantum meruit may arise:

a) Where an agreement is discovered to be void: Where the work has been done and accepted under a contract which is subsequently discovered to be void, in such a case, the person who has performed the part of the contract is entitled to recover the amount for the work done and the party, who receives and accepts the benefit under such contract, must make compensation to the other party.

b) Where something is done or delivered without intention to do gratuitously: Where a person does some act or delivers something to another person with the intention of receiving payments for the same (i.e. non-gratuitous act), in such a case, the other person is bound to make payment if he accepts such services or goods, or enjoys their benefit.

c) Where the contract is divisible: The compensation for the work done may be recovered on the basis of quantum meruit, where the contract is divisible and a party performs part of the contract and refuses to perform the remaining part. In such a case, the party in default may sue the other party who has enjoyed the benefits of the part performance.

Restitution: Then term ‘restitution’ may be defined as an act of restoring back to the rightful owner, that which has been taken away or lost.

Generalizations based upon the doctrine of ‘Quantum Meruit’ & ‘Restitution’: Considering the doctrine of ‘Quantum Meruit’ and ‘Restitution’ under different circumstances, following generalizations can be made:

1. Breach of contract: When there is a breach of contract, not only the injured party, but the defaulting party is also entitled to claim reasonable compensation for what he has done under the contract.



2. Suit by a party who has not breached: When a person has begun the work and before he could

complete it, the other party terminates the contract or does something which make it impossible for the other party to complete the contract, he can claim for the work done under the contract.

3. Void contract: ‘When an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, to the person from whom he received it.”

4. No contract: Sec.70 of the Contract Act says that when services are rendered or goods are supplied to a person without any intention to do so gratuitously, and benefit of the same is enjoyed by the other person, the latter must compensate the former. This compensation may be by way of ‘Quantum Meruit’ or ‘Restitution’ or both.

Similar Question : Mr.X agrees to write a book with a publisher but X dies in an accident.(RTP M 14)

Ans: Refer Above point - Quantum Meruit


Q.No.6. Discuss the remedies available for a Breach of Contract.

When one party fails or refuses to perform the obligations imposed upon him by the contract, this is known as Breach of Contract. In such a case law will try to protect the other party. Law provides various remedies to the aggrieved party, which can be used in different circumstances. They are:

a) Rescission,

b) Claim for Damages,

c) Demand for specific performance,

d) Injunction,

e) Restitution, and

f) Quantum Meruit.

Q.No.7. How to Calculate the Damage?

Under a contract for the sale of goods, the measure of damages, when the buyer breaks the contract, is the difference between the contract price and the market price at the date of breach. If the contract is broken by the seller, the buyer is entitled to recover from the seller the difference between the market price and the contract price at the date of breach.

Where if the seller retains the goods after the contract has been broken by the buyer. There the seller cannot recover from the buyer any further loss even if the market falls. Again he is not liable to have the damages reduce if the market rises.

Duty to mitigate the loss: You will perhaps recollect that the party who suffers in consequence of the breach of contract must take all reasonable steps to mitigate the loss/minimize the loss from such a breach. He cannot claim as damages any loss which he has suffered due to his own negligence.

Q.No.1. X contracts to repair Y’s house in a certain manner and receives payment in advance. X repairs the house but not according to the contract. Y incurs Rs. 1,000 to rectify the defect. Can Y recover Rs. 1,000 from X.

Facts of the case: X enters into a contract with Y that he will repair Y’s house in a certain manner, and receive some advance. Later repairs have completed but not in the manner that discussed. Y incurs Rs. 1000 to rectify the defect.


PRACTICAL QUESTIONS

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Issue/Question involved: Can Y recover Rs.1, 000 from X?

Law/provision: Sec.73 – When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of timings from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

Analysis: Where a party suffers a loss or damage in consequence of breach of contract is entitled to receive compensation from the party breaching the contract. In this question given above, there is a breach of contract by X and Y suffered a loss of Rs.1, 000.

Conclusion: Y can recover loss from X.

Q.No.2. X sells certain merchandise to Y warranting it to be of a particular quality, and Y in reliance upon this warranty, sells to Z with a similar warranty. The goods proved to be not according to the warranty, and Y becomes liable to pay Z Rs. 1,000 by way of compensation. Can Y recover Rs. 1,000 from X?

Facts of the case: X sells certain merchandise to Y by giving warranty that it is of particular quality. Based upon the reliance of X, Y sells it to Z by giving the same warranty. Later it was approved that goods are not according to the warranty.

Issue/Question involved: Can Y recover Rs.1, 000 from X?

Law/provision: Sec.73 – When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of timings from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

Analysis: In case of breach of warranty as to the quality of the goods sold, the measure of damages is the difference between what the goods are worth and what they would have been if there is of no breach of warranty. Where there is market value, the actual contract price or the price for which goods have been resold will be the damage. But there is rarely any market price for damaged or defeated goods and thus the price at which the buyer resold the goods may be evidence of their value.

Conclusion: On the basis of above mentioned reasons, Y can recover loss from X.

Q.No.3. A, a ship owner, contracts with B to convey him from Calcutta to Sydney in A’s ship, sailing on the first of January, and B pays to A, by way of deposit, one – half of his passage – money. The ship does not sail on the first of January, and B, after being, in consequence, detained in Calcutta, for sometime, and there by put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, loses a sum of money. Is A liable to pay anything to B?

Facts of the case: A enters into a contract with B that, he will convey B in his ship from Calcutta to Sydney starts at the first of January. B pays one – half of his passage money. Later the ship doesn’t starts from Calcutta on the first January. In the mean while B detained in Calcutta, for sometime and met some expenses, later he proceed to Sydney in an another vessel. Due to the consequences of arriving too late B loses a sum of money. Issue/Question involved: Is A liable to pay losses to B.

Law/provision: Sec.73

The party, who is injured by the breach of the contract, may bring an action for damages. Every action for damages raises two problems. The first one is the problem of “Reasonableness of damages” and the second one is that “Measure of damages”.

Theoretically, the consequences of breach of contract may be endless, but there must be an end to liability. The defendant cannot be liable for all that follows the breach. There must be a limit to liability and beyond that limit the damage is said to be remote and thus, irrevocable.

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Analysis: Notice of the special circumstances will make the defendant liable for the unusal loss if in all those circumstances, a reasonable sum would consider himself to have taken the risk when he made the contract. In the illustration given above, A has to defend B’s action on the contract, and it seems to be assumed that A does not know B’s particular reason for wanting to be at Sydney by a certain date.

Conclusion: For the reasons mentioned above, A is liable to repay to B his deposit, with interest, and expenses to which he is put by his detention in Calcutta, and the excess, if any, of the money paid for the second ship over the agreed upon the first, but not the sum of money which B lost arriving Sydney too late.

Q.No.4. X borrows Rs. 1,00,000 from Y @ 12% p.a. interest payable by five half – yearly installments of Rs. 20,000 each. State the legal position in each of the following alternative stipulations: Case (a) “In case of default in payment of any installments, interest rate shall be raised to 15% p.a.” Case (b) “In case of default in payment of any installments, interest rate shall be raised to 75% from the date of default” Case (c) “In case of default in payment of any installments, the interest shall be calculated @ 12% p.a. on monthly compounding basis.” Case (d) “In case of default in payment of any installments, the interest shall be calculated @ 15% p.a. on monthly compounding basic.” Case (e) “In case of no default, the interest rate shall be 9% p.a. Case (f) “In case of default in payment of any installment, the whole sum shall become due.”



Case (a), (b), (c) and (d) Y is entitled to recover from X such compensation as the court considers reasonable because the stipulation is in the nature of a penalty.

Case (e) Y is entitled to recover from X as per stipulation because the stipulation is not in the nature of a penalty.

Case (f) The contract may be enforced according to its terms because the stipulation is not in the nature of a penalty.

Q.No.5. X contracts with Y to pay Rs. 1,000 if he fails to pay Y Rs. 500 on a given day. X fails to pay Rs.500 on that day. Can Y recover Rs. 1,000?

Facts of the case: X contracts with Y, if he fails to pay Rs. 500 in a stipulated time, then he will pay Rs. 1000 to Y.

Issue/Question involved: Is thus a penalty? Can Y recover Rs.1000?

Law/provision: Sec.74 – When a contract has been broken, if a sum is named in the contract as the amount to be paid in the case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damages or loss in proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Analysis: Sec. 74 declares the law as to liability upon breach of contract where compensation is by the agreement of the parties predetermined or there is a stipulation as to penalty. This section does not confer any special benefit upon any party. It merely declares the law that notwithstanding anything contained in the contract for determining the damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated for.

Conclusion: Therefore, B is entitled to recover such compensation, not exceeding Rs.1000, as the court consider reasonable.



Q.No.6. X borrows Rs. 100 from Y and gives him a bond for Rs. 200 payable by five yearly installments of Rs. 40 with a stipulation that in default of payment of any installment, the whole sum shall become due. Discuss the legal position.

Facts of the case: X borrows a sum of Rs. 100 and gives him a bond that he will pay Rs. 200 by five yearly installments amounts to Rs. 40 with a stipulation that, if he fails to pay any of the installments, the whole amount become due.

Issue/Question involved: Is there a penalty? Is Y entitled to any compensation?

Law/provision: Sec.74 – When a contract has been broken, if a sum is named in the contract as the amount to be paid in the case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damages or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Analysis: Sec. 74 declares the law as to liability upon breach of contract where compensation is by the agreement of the parties predetermined or there is a stipulation as to penalty. This section does not confer any special benefit upon any party. It merely declares the law that notwithstanding anything contained in the contract for determining the damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated for.

Conclusion: There is a stipulation by way of penalty. Therefore, Y is entitled to get compensation as the court considers reasonable.

Q.No.7. A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months and engages to pay her Rs. 100 for each night’s performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract.

Facts of the case: A contracts with B that he will sing at B’s theatre for two nights in every week during the next two months and engages to pay her Rs. 100 for each night’s performance. On the sixth night A willfully absents from the theatre and B in consequences rescinds the contract.

Issue/Question involved: Whether B is entitled to rescind the contract and claim damages?

Law/provision: Sec.75 – A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non fulfillment of the contract. Analysis: This section provides that a party who rightfully rescinds a contract shall be entitled to compensation for damage caused by non fulfillment of the contract.

Conclusion: In the problem given above, A willfully breach the contact, and B, in consequence, has a right to rescind the contract and entitled to claim compensation for the damage which he has sustained through the non – fulfillment of the contract.

Q.No.8. M Ltd., contracts with Shanti Traders to make and deliver certain machinery to them by 30.6.2008 for Rs. 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and deliver the machinery to Shanti Traders. Later, Shanti Traders produced the machinery from another manufacturer for Rs. 12.75 lakhs. Shanti Traders was also prevented from performing a contract which it had made with Zenith Traders at the time of their contract with M Ltd. and were compelled to pay compensation for breach of contract. Advise Shanti Traders the amount of compensation which it can claim from M Ltd., referring to the legal provisions of the Indian Contract Act. (M 05 - 6M)

Answer: Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of contract. According to it, when a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage



caused to him there by which naturally arose in the usual course of things from such breach or which the parties knew when they made the contract, to be likely to result from the breach of it. Such compensation is not given for any remote and indirect loss or damage sustained by reason of the breach. It is further provided in the explanation to the section that in estimating the loss or damage from a breach of contract, the means which existed of remedying the inconvenience caused by the non – performance of the contract must be taken into account.

Applying the above principle of law to the present case, M Ltd is obliged to compensates for the loss of Rs. 1.25 lakhs (i.e., Rs. 12.75 minus Rs. 11.50 = Rs. 1.25 lakhs) which had naturally arisen due to default in performing the contract by the specified date.

Regarding the amount of compensation which Shanti Traders were compelled to make to Zenith Traders, it depends upon whether M Ltd knew about the contract of Shanti Traders for supply of the contracted machinery to Zenith Traders on the specified date. If so, M Ltd is also obliged to reimburse the compensation which Shanti Traders had to pay to Zenith Traders for breach of contract. Otherwise M Ltd is not liable.

Q.No.9. X lends Rs. 10,000 to Y without interest for one month with a stipulation that in case of default, interest shall be payable. State the legal position if rate of interest is (a) 2% p.m. (b) 3% p.m.

Facts of the case: X lends Rs. 10,000 to Y without interest for one month with a stipulation that in case of default, interest shall be payable.

Provision & Analysis: Section 74 relates to stipulations in a contract providing for payment of interest. Where a bond provides for payment of interest, say, at 24 percent per annum with a provision that if the debtor pay interest punctually at the end of every year the creditor can accept at lower rate of 18 percent per annum.

Decision and Reason: Case (a) & (b) X is entitled to recover from Y such compensation as the court considers reasonable because the stipulation is in the nature of a penalty.

Q.No.10. X contracted with Y to write a book in 12 volumes for Rs. 1,00,000 payable on the completion of the whole work. Discuss the legal position in each of the following alternative cases: a. If after completion and delivery of six volumes, Y abandoned the publication. b. If after completion and delivery of six volumes, X died.

Facts of the case:

Solution: X contracted with Y to write a book in 12 volumes for Rs. 1,00,000 payable on the completion of the whole work.

Leading case: Planche v. Colburn

Conclusion:

Case (a) X is entitled to claim compensation for the work already done on quantum meruit basis.

Case (b) X’s legal representatives are not entitled to claim compensation for the work already done by X because the contract to write a book in 12 volumes is an indivisible contract.

Q.No.11. Mr. Dubious textile enters into a contract with Retail Garments Show Room for supply of 1,000 pieces of Cotton Shirts at Rs 300 per shirt to be supplied on or before 31st December, 2004. However, on 1st November, 2004 Dubious Textiles informs the Retail Garments Show Room that he is not willing to supply the goods as the price of Cotton shirts in the meantime has gone upto Rs 350 per shirt. Examine the rights of the Retail Garments Show Room in this regard (N 04 – 6M)

In the given problem Dubious Textiles has indicated its unwillingness to supply the cotton shirts on 1st November 2004 itself when it has time upto 31st December 2004 for performance of the contract of supply of goods. It is therefore called anticipatory breach of contract. Thus Retail Garments show room can claim damages from Dubious Textiles immediately after 1st November, 2004, without waiting upto 31st December 2004. The damages will be calculated at the rate of Rs 50 per shirt i.e. the difference between Rs 350/- (the price prevailing on 1s1 November) and Rs 300/- the contracted price.



Q.No.12. Mr. Ramaswamy of Chennai placed an order with Mr. Shah of Ahmedabad for supply of Urid Dhall on 10.11.2006 at a contracted price of Rs 40 per kg. The order was for the supply of 10 tonnes within a month’s time viz. before 09.12.2006. On 04.12.2006 Mr. Shah wrote a letter to Mr. Ramaswamy stating that the price of Urid Dhall was sky rocketing to Rs 50 Per. Kg. and he would not be able to supply as per original contract. The price of Urid Dhall rose to Rs 53 on 09.12.06 Advise Mr. Ramaswamy citing the legal position. (M 07 – 5M)

The stated problem falls under the head ‘anticipatory breach of contract’ defined in Section 39 of the Indian Contract Act, 1872.

The case law applicable here is Frost vs. Knight. As per details in the problem, price as contracted Rs 40 per kg on 10.11. 2006 rose to Rs 50 per kg as on 4.12.2006 and finally to Rs 53 per kg, on 09.12.2006.

The answer to the problem is that

1. Mr. Ramaswamy can repudiate the contract on 04.12.2006 and can claim damages of Rs 10 per kg viz. Rs 1,00,000.

2. He could wait till 09.12.2006 and claim Rs 1,30,000 i.e. Rs 13 per kg.

3. If the Government, in the interim period i.e. between 04.12.2006 and 09.12. 2006 imposes a ban on the movement of the commodity to arrest rise of prices, the contract becomes void and Mr. Ramaswamy will not be able to recover any damages whatsoever.

Q.No.13. A contracted with B to supply him (B) 500 tons of iron-steel @ Rs 5,000 per ton, to be delivered at a specified time. Thereafter, A contracts with C for the purchase of 500 tons of iron-steel @ Rs 4,800 per ton, and at the same time told ‘C’ that he did so for the purpose of performing his contract entered into with B. C failed to perform his contract in due course. Consequently, A could not procure any iron-steel and B rescinded the contract. What would be the amount of damages which A could claim from C in the circumstances ? Explain with reference to the provisions of the Indian Contract Act, 1872. (Similar M 15 – 5M)

The problem in the question is based on the provisions of the Indian Contract Act, 1872 as contained in Section 73. Section 73 provides that when a contract has been broken the party who suffers by such breach is entitled to receive from the party who has broken the contract compensation for any loss or damage caused to him thereby which naturally arose in the usual course of things from such breach or which the parties knew when they made the contract to be likely to result from the breach of it. The leading case on this point is Hadley Vs. Baxendale.

In “Hadley vs. Baxendale” it was decided that if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.

In the instant case ‘A’ had intimated to ‘C’ that he was procuring iron steel from him for the purpose of performing his contract with ‘B’. Thus, C had the knowledge of the special circumstance. Therefore, ‘A’ is entitled to claim from ‘C’ Rs 1,00,000 (difference between the procuring price of iron steel and contracted selling price to ‘B’) being the amount of profit ‘A’ would have made by the performance of his contract with ‘B’. If A had not told C of B’s contract then the amount of damages would have been the difference between the contract price and the market price on the day of default.

Q.No.14. X agreed to sell to Y 100 bags of price @Rs 500 per bag, the entire price to be paid at the time of delivery. Before it is delivered, the price of rice per bag goes up by Rs 50 per bag, X refuses to deliver unless and until Y agrees to the increased price. Y sues X for damages for the breach of contract. What Y can claim as damages?

In a Contract of sale of Goods, the damages for the breach of contract is measured by the difference in contract price and market price of the goods on the date of breach. In this problem Y can claim Rs 50 per bag (Rs 550-500) as ordinary damages.



Q.No.15. A, a shopkeeper enters into contract with a wholesaler of a fire works for the supply of crackers of worth Rs. 50,000 on the occasion of the Diwali festive. A also makes known to the wholesaler that if he fails to supply the festive season. A supplies crackers on the same day of the festival. State briefly the legal position in the light of the Indian contract Act, 1872 (RTP N 13 ).

The problem is based on the special damages given in the Indian contract act 1872. These are the damages which are resulted from the breach of the contract under special circumstances. They constitute indirect loss suffered by the aggrieved party on account of breach of the contract. They can be recovered only on special circumstances, responsible for the special losses when were made known to the party at the time of making of the contract. Thus special damages can be recovered only when it is expressly stipulated in the contract. The promisors must make the contract with knowledge, that promisee is entering into the contract for a special purpose. The breach of the contract may result into a special loss. Thus accordingly in the instance, A contracts with the wholesaler for the supply of the crackers for the Diwali festive and the wholesaler was well versed with the condition that delay in supply of the crackers within a reasonable time during the festive season will result a special loss to the A. Therefore, delay in supply entitles A to claim the loss and get special damages.

THE END



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