PREFACE

CHAPTER 6INDIAN CONTRACT ACT,1872

6.1 FORMATION OF VALID CONTRACTThe law relating to the contracts is contained in the Indian Contract Act; 1872.It is that branch of law, which lays down the essentials of valid contracts, different modes of discharging the contract and remedies available to the aggrieved party in case of breach of contract. It is the most important branch of business law. It is very important to people in any trade, business and industry as bulk of their business transactions are based on the contracts. A contract is an agreement between two or more parties, which the law will enforce. Section 2 (h) of the Indian Contract Act, 1872 defines contact as An agreement enforceable by law. Secondly, Section 10 lays down that all agreements are contract 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 declared to be void. The word agreement which creates legal relations between the parties is a contract between the parties. Mere social or moral relations between the parties do not create a contract between the parties. Thus for e.g. A and B agreed to go to restaurant. Here A proposed to meet at 5 oclock and B accepted it. This proposal + acceptance = agreement. If A or B failed to perform his part of the obligation, the other party could not, with the help of law, force him to perform it. Similarly A and B entered into a contract whereby A proposed to sell his property for Rs. 5,00,000/- to B. B accepted the proposal. Here also, there is a proposal and acceptance. But this agreement is coupled with an intention of the parties to respectively bind each other to the agreement. Hence one of the parties fail to perform his part of the agreement, the other party can, with the help of law, force him to perform his part of the obligation under the agreement. It is the intention of the party, which binds them to their agreement. Where the obligation created between the parties is of social nature, there being no intention at that time of agreement to legally bind each other, it would only remain as an agreement. But if there was an intention between the parties to legally bind each other on the agreement, the agreement could be enforceable by law. Such an agreement that is enforceable by law could be said to be contract. Thus, an agreement which is created between the parties with an intention to legally bind each other, could be said to be a contract while an agreement which an agreement which has social binding only shall be an agreement only between the parties and not a contract. The intention to create a legal relation may not be expressly stated by the parties. Such intention may be implied depending upon the facts of the case. The conclusion is that all agreements are not contract but all contracts are agreements which means agreement enforceable by law are contracts. Hence for an agreement to become a contract, following, are the essentials:1. Two parties: There must be two parties for a valid contract i.e. promisor or proposer and promisee or proposee.2. Offer and acceptance: The offer by one party to another must be lawful. The offer must be absolute and not conditional. Acceptance by the other party to the agreement must be lawful. It must be absolute and not conditional. 3. Consensus-ad-idem or identity of minds: The parties to the contract must have agreed about the subject matter of the contract at the same time and in the same sense. E.g. A has two properties, one at Pune and other at Mumbai. A has offered to sell one property to B. B accepts thinking to purchase the Mumbai property, while A, when he offers, has in his mind to dispose of house at pune. There is no Consensus-ad-idem. 4. Agreement must be enforceable by law: The parties entering into the agreement must do so with an intention to legally bind each other to the agreement. Intention may be expressed or implied depending upon the facts of the case. Where such intention is absent in the agreement, the agreement will not be enforceable by law. Hence an agreement will not be a contract but only an agreement.5. Consideration: It means something in return. Every contract must be supported by consideration. Consideration may be in- Cash Kind Forbearance A promise to do or not to do something Consideration may also be in the Past Present FutureConsideration may also be Real Something more than mere consideration Lawful consideration6. Capacity: The parties to the contact must be competent to contract. Section 11 defines 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. This means any person who is A major Sound mind Not disqualified under any law7. Free consent: The consent of the parties must be free from any law. Section 14 states that consent is said to be free when it is not caused by: Coercion section 15 Undue influence- Section 16 Fraud- Section 17 Misrepresentation- Section 18 Mistake- Section 20,21,and 228. The object of the consent must be lawful: The agreement must be lawful object or for lawful purpose. The object of the agreement is lawful, unless- It is forbidden by law; or It would defeat the provisions of any law; or It is fraudulent; or It involves or implies injury to the person or property of another; or The court regards it as immoral or opposed to public policy.9. Agreement must not be declared to be void: The Indian contract Act, 1872 lays down the following agreements expressly as void- Agreement where both parties are under mistake as to matter of fact-Section 20. Agreement in restraint of marriage- Section 26. Agreement in restraint of trade Section 27. Agreement in restraint of judicial proceedings- Section 28. Agreement where the terms are not certain Section 29. Agreement of wager- Section 30. Agreement to do an impossible thing- Section 56.

10. Legal formalities: A valid contract may be oral or written. But certain agreements are required by the act or law to be in writing. Legal formalities like registration; attestation etc may be required by law. If the legal formalities are not complied it could not be enforceable by law. Therefore could not be termed as valid contract. An agreement that does not contain the above essentials shall not be enforceable by law. It will be only as an agreement and not a valid contract.

6.2 CLASSIFICATION OF CONTRACTS

VALIDITY FORMATION PERFORMANCE

1. CLASSIFICATION ACCORDING TO VALIDITYA contract is based on an agreement. An agreement becomes a contract when all the essential elements referred to above are present. In such a case the contract is a valid contract. If one or more of these elements are missing, the contract is voidable, void, illegal, or unenforceable. a. VOIDABLE CONTRACTSection 2(i) defines An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract. Example: A promises to sell his farm to B for Rs. 10 lakhs. His consent is obtained by force. The contract is voidable at the option of the A. He may avoid the contract. b. VOID COTRACT A contract that is not enforceable by law is void contract. Example: A contract entered into by a minor is void.c. ILLEGAL AGREEMENT An illegal agreement is one which is criminal in nature or which is immoral. Such an agreement is a void. Illegal agreements are void but all void agreements or contracts are not necessarily illegal.d. UNENFORCEABLE CONTRACT An unenforceable contract is one that cannot be enforced in a court of law because of some technical defect. Example: In the case of recovery of loan time barred debt is unenforceable.2. CLASSIFICATION ACCORDING TO FORMATIONa. EXPRESS CONTRACT If the terms of a contract are expressly agreed upon whether by words spoken or written at the time of the formation of the contract, the contract is said to be an express contract. Example: Guarantee card issued by a seller to the purchaser is an express contract. b. IMPLIED CONTRACT An implied contract is one that is inferred from the acts or conduct of the parties or course of dealings between them. It is not the result of any express promise or promises by the parties but of their particular act. Example: A boards the bus from V.T and gets down at Dadar. It is an implied contract that he has to purchase the ticket.3. CLASSIFICATION ACCORDING TO PERFORMANCE a. EXECUTED CONTRACT An executed contract is one which both the parties have performed their respective obligations. Example: A agrees to deliver a book to B for Rs. 200/-. When A delivers the book and B pays the price for the book, the contract is said to be executed. b. EXECUTORY CONTRACT An executory contract is one in which both the parties have yet to perform their obligations. Example: If A agrees to deliver the goods at a future date and B agrees to pay the price in future, it is termed as executory contract.c. UNILATERAL CONTRACT A unilateral contract is one which only one party has to fulfill his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract comes into existence.d. BILARERAL CONTRACT A bilateral contract is one in which the obligations on the part of both the parties to the contract are outstanding at the time of the formation of the contract. It is similar to executory contract. 6.3 OFFER The first essential of a contract is proposal or offer. An offer or acceptance or an acceptance may be express or implied. An implied offer and acceptance is valid in the eyes of law. Express offer means communicated in words either oral or written. Section 9 of Indian Contract, 1872, states, In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. Section 2(a) of Indian Contract Act, defines an offer or proposal as, When one person signifies his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. The person making the proposal is called the proposer or offeror and the person to whom the proposal is made is called offeree. a. LEGAL RULES RELATING TO OFFER 1. It must contain definite terms. If the terms are ambiguous it shall not be binding on the parties.2. It must intend to give rise to legal consequences. Balfour Vs Balfour: Husband promise to pay Rs. 1000/- per month to his wife, staying away from him. Held promise was never intended to enforce in law. 3. It must be distinguished from quotation or an invitation to offer. Where the offer is made with such finality that the offer is only waiting for the acceptance of the other party it is an offer. Where the offeror only proposes certain terms on which he is willing to discuss but has not expressed his final decision or willingness to obtain the acceptance of the other person he does not make an offer. He has only invited the other party to make an offer. In Harvey Vs Facie 1893 AC 552 Facie owned a Bumper Hall Pen (a large piece of land for horse and cattle breeding). Harvey telegraphed to Facie will you sell us BHP. Telegraph lowest price. Facie also replied by telegram, lowest price for BHP 900. Harvey again telegraphed we agree to purchase BHP for 900 Facie did not reply and refuse to sell the land at that price. The court held that Harvey asked two questions in his first telegram. The first question was whether Facie was willing to sell. The second question was an enquiry about the lowest price. Facie had only suggested only the lowest price. Infact what Facie had done was he had invited an offer from Harvey. Hence Facie was not bound to sell at that price.4. An offer may be made to an individual or to the world at large. An offer is called a specific offer when it is made to an individual. Carlill Vs Carbolic Smoke Ball Co. 1893 IQ B 256. The company has offered by advertisement, a reward 100 to anybody contracting influenza after using their smoke ball according to their direction. Mrs. Carlill used it as directed but still had an attack of influenza. Hence, she sued for the award of 100. It was held that she was entitled to the award since an offer made at large, can ripen itself into a contract with anybody who performs the terms of the offer.5. An offer is different from a tender. The word tender means offer. The person inviting tender is not the offerer. The person making the tender is an offeror. The person inviting the tender may accept it or not. E.g. A offers to sell the goods to B at a particular price for a particular period from certain trade. If B accepts it, it is called a tender. It becomes an acceptance only when B places an order for a part of the goods. 6. An offer must be communicated to the offeree. In Lalman Vs Gauridutt, (1913) II A.L.J. 489 L was in employment of G. Gs nephew was lost. G offered reward to anyone who might find the missing boy, L did not know of the offer when he found out the boy. Held, L was not entitled for the reward as the offer, it was not communicated to L. He was ignorant about the offer. Section 4 lays down that the communication of an offer is complete only when it reaches the offeree. So an offer binds the offeror only when the offeree has the knowledge of the offer. 7. An offer must be kept open until It has been accepted It has been rejected It has been revoked It has lapsed8. An offer may be accepted until It has been revoked It has lapsed

6.4 ACCEPTANCE Section 2(b) of the Indian Contract Act defines acceptance as, When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. An offer when accepted becomes a contract. Section 2 (c) of the Indian Contract Act states, The person making the proposal is called the promisor or proposer and the person accepting the proposal is called the promisee or proposee. a. ESSENTIALS OF VALID ACCEPTANCE1. Acceptance must be communicated in usual and reasonable manner. It may be made by express words, spoken or written or by conduct of parties, i.e. by doing an act that amounts to acceptance according to the terms of the offer or by the offeree accepting the benefit offered by the offeror. Any method can be prescribed for the communication of acceptance. But silence can never be prescribed as method of communication. Hence mere mental assent without expressing it and communicating it by means of words or an act is not sufficient. 2. Communication of acceptance may be waived by the offeror. This rule is established in the case of Carlill Vs Carbolic Smoke Ball Co. 1893 IQB 256, the company advertised that having used their medicine person shall not suffer from influenza. If the person suffered from the attack of influenza after consuming their medicine they would be paid a reward of 100. Carlill used their medicine and even then suffered from influenza. Held she was entitled to recover 100, as the acceptance was complete the moment Carlill performed the condition of using the medicine. No separate intimation of acceptance to the company was necessary. 3. Acceptance should be made before the offer lapses or is rejected. 4. Acceptance must be absolute and unconditional and should correspond with the terms of the offeror. Otherwise it amount to terms of offer that may be accepted or rejected by the offeror. In the case of Hyde Vs Wrench 1840 3 BEAN V 334 Hyde offered to sell his farm for 1000. Wrench offered instead 950, Hyde refused this offer. After that Wrench offered to purchase the farm for 1000 and Hyde refused. Held, by giving counter offer of 950, Wrench in effect rejected or refused the original offer of 1000. Second time Wrench offered 1000, which Hyde refused. It was held that offer once refused or rejected couldnt be revived by subsequent acceptance of the same. Refusal of offer may be express or implied. Where the offeree by express words, spoken or written, refuses to accept the offer it is called express refusal. Implied refusal may be by counter offer and conditional acceptance. 5.Various modes of acceptance: Written Spoken Post Telegram Conduct Prescribed manner6.Mental acceptance is not sufficient in law. Silence cannot be taken to mean acceptance of a proposal. There must be communication by words or conduct by an offeree.7.Acceptance must be made by a certain person. An offer may be made to world at large. But a contract may rise only if an individual accepts it.8. An act done in ignorance of the proposal is not acceptance, as held in the case of Lalman Vs Gauridutt. Communication of an offer, Acceptance and Revocation Sections 4,5 &6Section 4 of the Indian Contract Act, 1872 defines The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. 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. As against the acceptor when it comes to the knowledge of the proposer.The communication of a revocation is complete As against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;As against the person to whom it is made, when it comes to the knowledge.E.g. A offers to sell a plot of land to B for Rs.1, 00,000/-. The communication of proposal is complete when B receives the letter. B accepts the letter send by A by courier. The communication of the acceptance is complete as against A, when the letter is posted as against B when A receives the letter. A revokes his proposal by telegram. The revocation is complete as against A, when the telegram is despatched and as against A, when it reaches him.

Revocation of proposal and Acceptance:Section 5 of Indian Contract Act, 1872, defines A proposal may be revoked at any time before the communication of its acceptance is complete as against the acceptor, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.E.g. A offers to sell B his plot of land situate at pune for Rs. 5,00,000/- by post. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the time when B posts his letter of acceptance but not, afterwards.B may revoke his acceptance at any time before or at the time when the letter communicating it reaches A, but not afterwards.

Section 6 of Indian Contract Act, states, and a proposal is revoked: - By the communication of notice of revocation by the proposer to the other party. By the lapse of the time prescribed in such proposal for its acceptance or, if no time is so prescribed by the lapse of a reasonable time without communication of the acceptance. By non-fulfillment of the condition precedent to acceptance. By the death or insanity or insolvency of the proposer if the fact is known to the knowledge of the acceptor before acceptance.

6.5 CONSIDERATIONConsideration means something in return. Consideration is the price offered by one party for which the promise of the other is bought and the promise thus given for value is enforceable. Blackstone defines consideration as the recompense given by the party contracting to the other. According to the Indian Law, consideration is some act done or promised to be done at the desire of the promisor. Section 2(d) of the Indian Contract Act defines consideration 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 a consideration for the promise. Consideration is an essential feature of a contract. A promise for promise is consideration. The Kolkatta High Court has said that consideration is the price of a promise, or Quid Pro quo or Nudum pactum or No consideration no contract or Ex nudo pacto non oritur action which means that consideration is the price for promise. Consideration must have some value and should not be illusory or imaginary. Without consideration a contract is void i.e. it is not enforceable in the eyes of law.

A. LEGAL REQUIREMENTS OF CONSIDERATION:1. Consideration must proceed at the desire of the promisor: Hence act done voluntarily or at the request of third parties do not constitute a valid consideration. DurgaPrasad Vs Baldev: A built a market at the request of the collector of the place. B promised to pay A, commission on the articles sold in the market. It was held that Bs promise to pay commission did nit constitute a valid consideration because A did not build the market at the request of B. 2. Consideration may be given by the promisee or any other person:Consideration may move from promisee or any other person. Any person refers to third party. Hence a stranger to a contract cannot sue but a beneficiary to the contract can sue. In Chinnaya Vs Rammaya (1882), 4 Mad. 137, Mrs. A an old lady, by a deed of gift, gifted away certain property to B her daughter, with a direction that she must pay an annuity of Rs. 653/- to her maternal uncle Mr.C. B promised to pay to the said sum of Rs. 653/- to Mr.C. However B did not fulfill her promise and Mr.C sued B. B pleaded to the court that she entered into a contract with Mrs.A and not with Mr.C. was a stranger to a contract and cannot maintain suit. The court held that in the definition of consideration in sec 2(d) promisee or any other person indicates that a stranger to contract can sue provided he or she is a beneficiary to the consideration. Hence Mr. C could file a suit against B.3. Consideration may be past, present, and future: Consideration has done or abstained from doing can also be termed as executed consideration i.e. an act or forbearance made or suffered for the promise given, Consideration may be executory i.e. a promise to act or abstain from doing in future, Consideration may be past, i.e. an act or forbearance already taken place before the contract was entered into.4. Consideration need not be adequate: Consideration may not be adequate. But it must be real and lawful. E.g. A agrees to sell a horse worth Rs.1200 for Rs.50/-. He has given his consent freely. The agreement is a contract though consideration is inadequate. 5. Consideration must be real not illusory: An illusory consideration has no value in the eyes of law. An agreement to do something, which the promisor is already under a duty to do, either under the general law, or under an existing contract, is no consideration at all. 6. Forbearance to sue is a good consideration: Abstaining from an act in the future is good consideration within the meaning of section 2(d). Where a wife agrees not to sue her divorced husband for maintenance allowance, when the ex-husband promises to pay her monthly allowance, is a valid contract. Her forbearance to sue is a good consideration in the eyes of the law.6.6 EXCEPTIONS TO THE RULE,NO CONSIDERATION, NO CONTRACTAn agreement made without consideration is void. But the following are exceptions: 1. An agreement made on account of natural love and affection. Section 25 (1). An agreement made without consideration is void unless it is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between the parties standing to in a near relation to each other. Section 25 (1). An agreement may be enforceable even though there is no consideration provided- The agreement is in writing; The agreement is registered; The agreement is made on account of natural love and affection between the parties standing in near relation to each other. The love and affection must be due to near relation between the parties e.g. father and son, husband and wife, etc.CASE STUDY: RAJLUCKHY DABEE V/S BHOOTHNATH (1900) 4 C. W.N. 488. In this case the husband, Bhoothnath, was not on good terms with his wife, Dabee.He entered into a contract with her in whom he promised to give her a separate residence and maintenance. There was no consideration from the wife.The contract was made in writing and registered. The husband however did not give a separate residence and maintenance. The wife filed a suit. But it was held that contract was not enforceable by law, as there was no consideration from wife. The contract did not fall within the exception of Section 25 (1), though they were husband and wife there was no natural love and affection between the two.2. Agreement for compensation for voluntary service-Section 25 (2) An agreement made without Consideration is void unless it is a promise to compensate, wholly or in a part, a person who has already voluntarily done something for the promisor, or something for the promisor was legally compellable to do. A promise to pay for a past voluntary service is binding on the promisor. The service must have been done voluntarily and probably without the knowledge of the promisor. The promisor must have been in existence when the voluntary service was rendered. E.g. A has lost his purse. B finds the purse and returns it to A promise to pay a reward of Rs.500/-. The promise is binding on A. 3. Promise to pay a time barred debt- Section 25 (3). An agreement made without consideration is void unless it is a promise made in writing and signed by the person to be charged therewith or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.The promise to pay a time barred debt must be made in writing and signed by the promisor or his agent authorized in that behalf. The promise must be an express promise.4. No consideration is necessary to create an agency Section 185. Generally, an agent is remunerated by way of commission for service rendered. Hence no consideration is immediately necessary at the time of appointment. 5. Gift.An agreement by which a gift is made needs no consideration.

6.7 VOID AND VOIDABLE AGREEMENTa. Voidable Agreement-Section 2(i)An agreement, which is enforceable by law at the option of one or more, parties thereto, but not at the option of the other or others, is a voidable contract. An agreement which can be avoided or set-aside as not enforceable at the option of one or more parties to it at his their option but the other party or parties cannot avoid it is said to be voidable contract i.e. one of the parties is able to call such agreement as void and hence voidable. If the parties decide to treat the contract as valid contract, then such party can enforce the voidable contract against the other party who does not have the option to treat the agreement as void. Agreement in which, free consent between the parties is absent, are voidable contracts. Thus agreement brought about by Coercion-Section 15 Undue Influence-Section 16 Fraud Section 17 Misrepresentation Section 18

b. Void Agreement Section 2(g)An agreement not enforceable by law is said to be void. A void agreement is ineffective and inoperative and has no legal effect at all. It does not create any legal obligations.

A . The consideration or object of an agreement is Unlawful: A contract must have a lawful object. The word object means purpose or design. In some cases, consideration for an agreement may be lawful but the purpose for which the agreement is entered into may be unlawful. In such cases the agreement must be lawful. Otherwise the agreement is void. Void object are as follows:1. If law forbids the object If an act or any part of a series of acts agreed upon between parties infringes any legislative Act made by a lawful authority, the act of the party would amount to be an act forbidden by law. Example: A promises to obtain for B an employment in the public service and B promises to pay Rs. 50,000/- to A. The agreement is void, as the consideration is unlawful. 2. If the object were permitted, it would defeat the provisions of any law:Example: A agreed to enter a companys service in consideration of a weekly wage of Rs. 150/- and an allowance of Rs. 100/- per week. Both the parties knew that this arrangement was made to evade tax. Held the agreement was unlawful. 3. If the object is fraudulent: An agreement that is made for a fraudulent purpose is void. Thus an agreement in fraud of creditors with a view to defeating their rights is void. 4. If the court regards the object as immoral:Example: A agrees to let her daughter, B for concubine to C (state of living together as man and wife without being married). The agreement is unlawful, being immoral.5.Court regards it as opposed to public policy: If the consideration or object of the agreement is immoral or opposed to public policy, the agreement is void. The object may be opposed to public policy. The terms of public policy is very vague and covers a wide range of topics. The doctrine of public policy is not to be extended beyond the following heads: Trading with enemy Interference with course of justice Agreement tending to create interest against duty Sale of public office Agreement tending to create monopolies Agreement not to bid Agreement of waiver of illegality.

B. UNLAWFUL AND ILLEGAL AGREEMENTS An unlawful agreement is one, which like a void agreement, is not enforceable by law. An illegal agreement is not only void as between the immediate parties but has further effect that the collateral transactions to it also become tainted with illegality. Example: A lends Rs. 50,000/- to B to help him to purchase some prohibited goods from C, an alien enemy. If B enters into an agreement with C, the agreement will be illegal and the agreement between B and A shall also become illegal, because it is collateral to the main transaction. A cannot, therefore, recover the amount.

C. AGREEMENT OPPOSED TO PUBLIC POLICY An agreement is said to be opposed to public policy when it is harmful to the public welfare. Some of the agreements that are opposed to public policy and unlawful are as follows: Agreements of trading with enemy: An agreement made with an alien enemy in time of war is illegal on the ground of public policy. An agreement to commit a crime: Where the consideration in an agreement is to commit a crime, the agreement is opposed to public policy. The court will not enforce such an agreement. Agreements which interfere with administration of justice: An agreement the object of which is to interfere with the administration of justice is unlawful, being opposed to public policy. It may take any of the following forms:1. Interference with the course of justice: An agreement, which obstructs the ordinary process of justice, is unlawful.2. Stifling prosecution: It is in public interest that if a person has committed a crime, he must be prosecuted and punished. Agreements in restraint of legal proceedings: Section 28 which deals with these agreements: Agreements restricting enforcement of rights: An agreement that wholly or partially prohibits any party from enforcing his right under or in respect of any contract is void to that extent. Agreements curtailing period of limitation: Agreements that curtail the period of limitation prescribed by the law of limitation are void because their object is to defeat the provision of law. Trafficking in public offices and titles: Agreements for the sale or transfer of public offices and titles Agreements for the sale or transfer of public offices and titles or for the procurement of a public recognition like Padma Vibushan or ParamaVeer Chakra for monetary consideration are unlawful, being opposed to public policy. Example: R paid a sum of RS. 2,50,000/- to A who agreed to obtain a seat for Rs Son in a Medical college. On As failure to get the seat, R filed a suit for the refund of Rs.2, 00,000/-. Held, the agreement was against public policy. Agreements tending to create interest opposed to duty: If a person enters into an agreement whereby he is bound to do something which is against his public or professional duty, the agreement is void on the ground of public property. Agreements in restraint of paternal rights: A father, and in his absence the mother, is the legal guardian of his or her minor child. This right of guardianship cannot be bartered away by any agreement. Agreements restricting personal liberty: Agreements that unduly restrict the personal freedom of the parties to it are void as being against public policy. Agreements in restraint of marriage: Every agreement in restraint of the marriage of any person, other than a minor, is void (sec 26). This is because the law regards marriage and married status as the right of every individual. Marriage brokerage agreement: An agreement by which a person for a monetary consideration promises in return to procure the marriage of another is void, being opposed to pu8blic policy. Agreement interfering with marital duties: Any agreement that interferes with the performance of marital duties is void, being opposed to public policy. Such agreements have been held to include the following: 1. A promise by a married person to marry, during the lifetime or after the death of spouse.2. An agreement in contemplation of divorce, e.g. an agreement to lend money to married woman in consideration of her getting divorce and marrying the lender.3. An agreement that the husband and wife will always stay at the wifes parents house and that the wife will never leave her parental house. Agreement to defraud creditors or revenue authorities: An agreement the object of which is to defraud the creditors or the revenue authorities is not enforceable, being opposed to public policy. Agreement in restraint of trade: An agreement that interferes with the liberty of a person to engage him in any lawful trade, profession or vocation is called an agreement in restraint of trade.

c. VOID AGREEMENTS Section. 2(g). A void agreement is one, which is not enforceable by law [sec.2 (g)]. Such an agreement does not give rise to any legal consequences and is void ab initio. The following agreements have been expressly declared to be void by the Contract Act: 1. Agreements by incompetent parties Sec.112.Agreements made under a mutual mistake of fact Sec. 203.Agreements the consideration or object of which is unlawful Sec.23 4.Agreements the consideration or object of which is unlawful in part Sec.245.Agreements made without consideration Sec.256.Agreements in restraint of marriage Sec.26 7.Agreements in restraint of trade Sec.27 8.Agreements in restraint of legal proceedings Sec.28 9.Agreements the meaning of which is uncertain Sec.29 10.Agreements by way of wager Sec.30 11.Agreements Contingent on impossible events Sec.36 12.An agreement to do impossible acts Sec.56 13.Agreements of reciprocal promises to do things legal and also other things illegal. The second set of reciprocal promises is void agreements Sec. 57 The aforesaid mentioned agreements are explained in under relevant topics.

d. WAGERING AGREEMENTS OR WAGER A wager is an agreement between two parties by which one promises to pay money or moneys worth on the happening of some uncertain event in consideration of the other partys promise to pay if the event does not happen. Thus if A and B enter into an agreement that A shall pay B Rs.500/- if it rains on Sunday at 3.00 pm, and that B shall pay A the same amount if it does not rain, it is a wagering agreement.Essentials of Wagering Agreement Promise to pay money or moneys worth: The wagering agreement must contain a promise to pay money or moneys worth. Uncertain event: The promise must be conditional on an event happening or not happening. Each party stand to win or loose: Upon the determination of the contemplated event, each party should stand to win or loose. No control over the event: Neither party should have control over the happening of the event one-way or the other. No other interest in the event: Neither party should have any interest in the happening or non-happening of the event other than the sum or stake he will win or loose.

6.8 CAPACITY TO CONTRACT An agreement to be enforceable by law, the parties to the agreement must be competent to contract. SECTION 11 Every person is competent to enter into a contract who is of the age of majority according to 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. INCOMPETENT PERSON- Section 11

Minor Person of unsound mind Person disqualified by law

Foreign Sovereigns Alien Enemy Convict Bankrupt Artificial Person

A. Minor Section 3 of the Indian Majority Act, 1875 states that a person becomes a major on the completion of 18 years of his or her age. Any person who has not completed 18 years of age is, therefore, a minor. However, a minor shall not become a major, under the act, unless he has completed 21 years of age where- The court has appointed a guardian to the person or property of the minor before he attained the age of 18 years; or A court of wards has assumed superintendence over the minors property.According to law minors agreement is void-ab-initio or void agreement. This rule has been substantiated in the case Mohoriri Bibee VS. Dharmodas Ghose (1903) 30 Cal 539 PC, in this case a minor executed a mortgage for RS. 20,000/- out of which he received Rs. 8000/- from the mortgagee. Subsequently the minor sued for setting aside the mortgage. The mortgagee claimed refund of Rs. 8000/- paid by him. The Privy Council held that a minors agreement is void-ab-initio. Council refused to order the return of money advanced to the minor because it was held that the mortgagee knew that the mortgagor was a minor, in which case justice required that the mortgagee should suffer for it. Even if the minor mirepresent his age at the time of entering the contract, the contract is void.

MINOR IN INDIAN LAW A minor is a person who is not a major. He attains majority on completion of 21 years in England and 18 years in India. Even In India, he attains majority on completion of 21 years when his property is managed by a court of wards or a guardian. 1. In Indian law, a contract by a minor is void. It cannot be even ratified by him after attaining majority.2. A contract entered into by fraudulently misrepresenting his age is void.3. Minors can have no privileges to cheat men, though law protects them, so that people may not exploit their tender age. So, if a minor receives goods on credit while payment cannot be enforced, goods can be recovered, if restitution is possible.4. Property of a minor is liable for the necessaries supplied to him, provided the goods are suitable to the condition of his life and status. Even here he is not personally liable; but his estate is only liable.5. While sale or mortgage by a minor is void, a sale or mortgage in favour of a minor is enforceable by him.6. A contract by a guardian on behalf of the minor is enforceable by or against the minor, provided the guardian is competent to contract and the contract is beneficial to the minor. But he cannot purchase immovable property without obtaining the consent of court.7. Under Section 30 of the Indian partnership Act, a minor may be admitted to the benefit of partnership with the consent of all the partners.

B. PERSON OF UNSOUND MIND Section 12 A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and forming a rational judgment as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind may make a contract when he is of sound mind A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of sound mind. A contract by a person of unsound mind is void. He is incompetent to contract. A drunkard who cannot: - Understand the terms of the contract, Form a rational judgment as to its effect on his interests, is competent to contract. In Inder Singh Vs Parmeshwardhri Singh A.I.R. (1957) Pat 491, a property worth Rs.25, 000/- was agreed to be sold by a person for 7000/- only. His mother proved that he was an idiot (insane by birth), incapable of understanding the transaction. It was held he was incapable of forming a judgment of his own, as to whether the act he was about to do was in his own interest or not. He was incapable of exercising his own judgment. A drunken person is in the same category of a person of unsound mind. In a state of drunkenness, he cannot understand the terms of a contract whilst such drunkenness lasts.A person, who is usually of unsound mind, but occasionally of sound mind, is competent to contract during the period that he is of sound mind. Such period during which an insane person is of sound mind is known as Lucid intervals.

DISQUALIFIED PERSON INCAPACITY ARISING OUT OF STATUS1. Foreign Sovereigns and Ambassadors They may enter into contracts. But they cannot be sued except with the permission of the Central Government. 2.Alien EnemyThe enemys status is to be determined by the place of residence of the individual but not by his nationality. If a contract is already entered into before the declaration of war, its performance will be suspended during the period of war and in case the war continues for a long period, the contract becomes void on the ground of impossibility of performance of the contract.3. Convict A person is not competent to contract during the period of his imprisonment or sentence.4. Artificial Person: Corporation It is a person in the eye of law. It is a legal entity. It can purchase properties, enter into contracts, sue and be sued on such contracts. Its contractual capacity is limited. For example, it cannot enter into contract to marry or which is ultra vires its powers. 5. BankruptHe cannot enter into contract and bind his property, as his property shall be vested in the official receiver when he is adjudged an insolvent.

6.9 FREE CONSENT Consent: Section 13 defines Two or more person are said to consent when they agree upon the same thing at the same sense. Free Consent: Section 14 Consent is said to be free when it is not caused by- Coercion (Section 15) Undue influence (Section 16) Fraud (Section 17) Misrepresentation (Section 18) Mistake (Section 20, 21,and 22) When there is no consent, there is no contract. Example: A is forced to sign a promissory note at the point of pistol. A knows what he is signing but his consent is not free. The contract in this case is voidable at option of A. FLAW IN CONSENT

Coercion Undue influence Fraud misrepresentation Mistake Willful or Intentional Innocent or Unintentional

Mistake of law Mistake of fact

A. COERCION: Section 15 When a person is compelled to enter into a contract by the use of force by the other party or under a threat,coercion is said to be employed. Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code, 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. Illustration: A, on board an English ship on the High seas Causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code. A afterwards sues B for breach of contract at Mumbai. A has employed coercion although Section 506 of the Indian Penal Code was not in force at the time when or at the place where, the act was done.The Indian Penal Code must forbid the act i.e. it is punishable under the code. E.g.murder, assault or kidnapping, etc. Such act must be actually committed or threatened to be committed in future. B.UNLAWFUL DETAINING

Actual detaining Threatening to detain in future Illustration: A has lawful possession of the house belonging to B under a leave and licence agreement. Under the agreement, A must deliver the possession of the house after six months. Meanwhile A, threatens B that he shall not vacate the house (unlawful detaining of the property) even after the expiry of the leave and licence agreement. Merely committing or threatening to commit an act forbidden by the Indian Penal Code or Unlawfully detaining the property does not amount to coercion. The person does with the intention to cause any other person to enter into an agreement.

D.UNDUE INFLUENCE- Section 16Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. This happens when a special kind of relationship exists between the parties such that one party is in a dominant position to exercise undue influence over the other.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 unfair advantage over the other. E.g.Teacher and student, Doctor and patient, Advocate and client.The essential of undue influence are as fallows: One of the parties to a contract is in a position to dominate the will of the other; He uses his position to obtain unfair advantage over the other. There is a real or apparent authority over the other. They stand in a fiduciary (means trust, loyal, faithful, confidence, etc.) relation to the other. Mental capacity temporarily or permanently affected. Burden of proof lies on the person raising the dispute. The presumption of undue influence applies whenever the relationship between the parties is such that one of them is, by reason of confidence reposed on him by the other, able to take unfair advantage over the other.

CONSEQUENCES OF UNDUEINFLUENCE-SECTION (19-A)When consent to an agreement is obtained by undue influence, the agreement is a contract voidable at the option of the party whose consent was so obtained. Any such contract may be set aside either absolutely or if the party who is entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just and equitable. DIFFERENCE BETWEEN COERCION AND UNDUEINFLUENCE NO. Coercion Undue Influence . 1. The consent is given under the threat The consent is given by a person who is so of an offence. situated in relation to another that the other person is in a position to dominate his will.

2. Coercion is mainly of a physical Undue influence is of moral character. It character. It involves mostly use of involves use of moral force or mental

NO. Coercion Undue Influence

physical or violent force. pressure.

3. There must be an intention of causing Here the influencing party uses its position to any person to enter into a contract. obtain an unfair advantage over the other party.

4. It involves a criminal act. No criminal act is involved.

FRAUD- Section 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 intent to deceive another party thereto or his agent or to induce him to enter into contract:> The suggestion as a fact, of that which is not true by one who does not believe it to be true;> The active concealment of a fact by one having knowledge or belief of the fact;> Promise made without any intention of performing it;> Any other act fitted to deceive;> Any such act or omission as the law specially declares to be fraudulent. Essentials of fraud: - Fraud exist when it is shown that a false representation has been made: Knowingly or Without belief in its truth, or Recklessly not caring whether it is true or false, or With the intension to make other party to act upon it.Mere silence as to facts likely to affect willingness of a person to enter into a contract is not fraud, unless circumstances of the case are such that regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is in itself, equivalent to speech. E.g. A sells, by auction, to B, a horse that A knows to be unsound. A says nothing to B about the horses unsoundness. That is not fraud. Similarly, B says to A if you do not deny it, I shall assume that the horse is sound. A says nothing. Here As silence is equivalent to speech. Here the relationship between the parties would make it As duty to tell B if the horse is unsound mind or not. Where consent to an agreement is caused by fraud, the contract is voidable at the option of the party whose consent is obtained by fraud- Section 19.

D.MISREPRESENTATION 18. Misrepresentation is a false statement that the person making it honestly believes to be true or which he does not know to be false. It also includes non-disclosure of a material fact without any intent to deceive the other party. Misrepresentation means and includes- The positive assertion, in a manner not warranted by information of the person making it, of that which is not true, though he believes it to be true; Any breach of duty which without intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming under him; Causing, however, innocently a party to an agreement to make a mistake as to the substance of thing that is the subject of the agreement. Therefore where a person makes a statement not warranted by this information (i.e. without reasonable ground). Under an honest belief that it is true, though it is false, it will be construed as misrepresentation. For alleging misrepresentation four things must be fulfilled: - A representation must be made innocently, with a belief in its truth, without the intention to deceive the other party. That representation must relate to facts material to the contract and not mere opinion or hearsay. The representation must be untrue statement. The representation must have induced the other to give his consent and enter into the Contract.A misrepresentation of law does not vitiate free consent it is related to a foreign law. This is because ignorance juris non excusat. Contract entered into because of misrepresentation is voidable at the option of the party whose consent was so caused.DISTINCTION BETWEEN FRAUD AND MISREPRESENTATION

NO. FRAUDMISREPRESENTATION

1. A person making the suggestion does The person making suggestion believes it not believe it to be true. to be true. 2. Intention to deceive is present. There is no intention to deceive.

3. A false statement deliberately made The false statement is innocently made to deceive is fraud. without any intention to deceive.

4. Contract is voidable and the person Voidable and entitled to compensationcan be held liable for damages. for damage, if any, due to non fulfillment of the contract.

E. MISTAKE SECTION 20Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement the agreement is void. Erroneous belief concerning something relating to that contract: - Mistake of fact which is material to the contract vitiates free consent; Mistake of law cannot be a ground for setting aside a contract. But mistake as to law that is not in force in India amounts to mistake of fact. Where both the parties are under a mistake as to fact essential to the agreement, it is a bilateral mistake and in such a case there is no contract. Where only one party to a contract is under a mistake it is unilateral mistake. Unilateral mistake makes a contract voidable only under certain exceptional circumstances. Unilateral mistake the contract is valid and enforceable. A unilateral mistake is not usually allowed as a defence in avoiding the contract.

F.MISTAKE OF LAW

Mistake of law of the country Mistake of law of a foreign country Mistake of law of the country: Ignorantia juris non excusat, i.e. ignorance of law is no excuse, is a well settled rule of law. A party cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of law. A mistake of law is, therefore, no excuse, and the contract cannot be avoided. E.g. A and B enter into a contract on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. Mistake of law of a foreign country: Such a mistake is treated, as mistake of fact and the agreement in such a case is void. (Sec.21).

G. MISTAKE OF FACT

Bilateral Mistake Unilateral Mistake(i) Bilateral MistakeWhere both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake. In such a case, the agreement is void (sec 20). The following two conditions have to be fulfilled for the application of sec. 20: The mistake must be mutual i.e. both the parties must misunderstand each other and should be at cross-purposes. E.g. A agreed to purchase Bs horse which is in Bs farmhouse. Unknown to either party, the horse died due to some disease a day before the contract was entered into. The agreement is void.The mistake must relate to matter of fact essential to the agreement. As to what facts are essential in an agreement will depend upon the nature of the promise in each case.(ii) Unilateral MistakeWhen in a contract only one of the parties is mistaken regarding the subject matter or in expressing or understanding the terms or the legal effect of the agreement, the mistake is a unilateral mistake. According to sec. 22, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact. A unilateral mistake is not allowed as a defence in avoiding a contract unless the mistake is brought about by the other partys fraud or misrepresentation. E.g. A draws a cheque for Rs.44, 000/- instead of Rs.40, 000/-. He cannot plead mistake as defence.

(iii) Mistake of law of the country and foreign country: A mistake of law is no excuse as the latin maxim says ignorentia juris non excusat i.e. an agreement cannot be avoided because it was entered into due to ignorance of the law.This is based on the argument that a citizen must know atleast so much law as concerns him and if he is ignorant or does not understand he should take professional advice and understand the law. A person is expected or presumed to know the law of his own country and if he does not know it must suffer the consequences. This section further clarifies where the mistake is as to law not in force in India. The rule is foreign law can be treated as mistake of fact and not law. Where there is mistake as to matter of fact i.e. where there is ignorance of a fact it can be excused under section 20. The latin maxim, in support, states that, ignorentia facti excusat. I.e. ignorance of fact can be excused. Ignorance of a foreign law is treated as ignorance of fact and thus excused. This is because although a person is bound to know the law of a foreign country. Thus e.g. A and B enter into a contract, in India, grounded on the erroneous belief that a particular debt is barred by the English law of limitation. The contract is void, because the mistake is as to law not in force in India and therefore, has the same effect as a mistake of fact.

6.10 PERFORMANCE OF CONTRACTPerformance of a contract takes place when the parties to the contract fulfill their obligations arising under the contract within the time and in the manner prescribed. 1. OFFER TO PERFORM At times the promisor offers to perform his obligation under the contract at the proper time and place but the promisee does not accept the performance. This is known as attempted performance or tender. 2. REQUISITES OF A VALID TENDER SECTION 38 It must be unconditional. It becomes conditional when it is not in accordance with the terms of the contract. It must be of the whole quantity contracted for or of the whole obligation. A tender of an instalment when the contract stipulates payment in full is not a valid tender. It must be by a person who is in a position, and is willing, to perform the promise. It must be made at the proper time and place. A tender of goods after the business hours or of goods or money before the due date is not a valid tender. It must be made to proper person, i.e. the promise or his duly authorized agent. It must also be in proper form. It may be made to one of the several joint promises. In such a case it has the same effect as a tender to all of them. In case of tender of goods, it must give a reasonable opportunity to the promisee for inspection of goods. In case of tender or money, the debtor must make a valid tender in the legal tender money.3. Effect of refusal of party to perform promise wholly- Section 39 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. Illustration: A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next three months and B engages to pay Rs.500/- for each nights performance. On the seventh night A willfully absents herself from the theatre. B is at a liberty to put an end to the contract. 4. Person by whom promise is to be performed- Sec.40 By a promisor only- where the contract involves personal skill, taste or credit, the promisor himself must perform the contract. E.g. An artist, musician, etc. By promisor or his agent- In case of sale of goods, lending money etc. the promisor or his agent or duly appointed employee can perform. By legal representative- In case of death of the promisor, his legal representative becomes liable to perform subject to contrary intention in the contract. By the third person- Where promisee has accepted performance by any third person, he cannot later on demand performance from the promisor himself. By any of the joint promisors- In case of joint promisee, any one or more of them can validly perform whole of the promise, unless each has a separate contractual obligation allotted by the promisor. 5. Effect of accepting performance from third person- Section 41.When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.

6.11 DEVOLUTION OF JOINT LIABILITIES AND RIGHTS 1. Devolution of Joint Liabilities (Section 42 to 44) Devolution means passing over from one person to another.When two or more persons have made a joint promise, they are known as joint promisors. Unless a contrary intention appears from the contract, all joint promisors must jointly fulfill the promise. If any of them dies, his legal representatives must, jointly with the surviving promisors, fulfill the promise. If all of them die, the legal representative must, jointly with the surviving promisors, fulfill the promise. If all of them die, the legal representatives of all of them must fulfill the promise jointly (Sec.42). This section deals with voluntary discharge of obligations. If the parties do not discharge their obligations, sec.43 lays down three rules as regards performance of joint promises: -i) Any one of the joint promisors may be compelled to perform (Sec.43 Para 1). When two or more persons make a joint promise 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. This means the liability of joint promisors is joint and several. E.g. A, B and C jointly to pay D RS.5000/-. D may compel all or any or either A or B or C to pay him Rs.5000/-. ii) A joint promisor compelled to perform may claim contribution (Section 43 Para) When a joint promisor has been compelled to perform the whole of the promise, he may compel the other joint promisors to contribute equally with himself to the performance of the promise, unless the contrary intention appears from the contract. E.g. A, B and C is under a joint promise to pay D Rs.1200/-. A is compelled to pay the whole amount to D. He may recover Rs.400/- each from B and C. iii) Sharing of loss arising from default (Section 43 Para 3). If any one of the joint promisors makes default in the contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. The same principle applies in the case of recovery of a loan by a creditor from the heirs who by operation of law become joint promisors after the death of the single promisor. E.g. A, B and C is under a joint promise to pay D Rs. 5000/-. C is unable to pay anything and A is compelled to pay the whole sum. A is entitled to receive Rs.2500/- from B. 2) Release of a Joint Promisor (Sec 44) A release by the promisee of any of the joint promisors does not discharge the other joint promisors from liability. The released joint promisor also continues to be liable to the other joint promisors.3. Devolution of Joint Rights (Section 45) When a person has made a promise to several persons these persons are known as joint promisees. Unless a contrary intention appears from the contract, the right to claim performance rest with all the joint promisees. When one of the joint promisees dies, the right to claim performance rests with his legal representatives jointly with the surviving joint promisees. When all the joint promisees die, the right to claim performance rests with their legal representatives jointly. E.g. B and C jointly lend Rs.10000/- to A, who in turn promises B and C jointly to repay them that sum with interest on a day specified. B dies. The right to claim performance rests with Bs representatives jointly with C during Cs life. After the death of C, the right to claim performance rest with the representatives of B and C jointly.The partners of a firm, the members of joint Hindu family, co- sharers, or mortgagees are all joint promisees when a person, say a debtor, makes a promise in their favour. Unless a contrary intention appears from the contract, a suit to enforce such promise must be instituted by all the joint promises. 4. RECIPROCAL PROMISES Promises that form the consideration or part of the consideration for each other are called reciprocal promises [Section 2(f)]. A promise to do or not to do something in consideration of Bs promise to do or not to do something, the promises is reciprocal.

6.12 Classification of promises

Mutual and Independent Conditional and Dependent Mutual and Consenta. Mutual and Independent: Where each party must perform his promise independently and irrespective of the fact whether the other party has performed, or is willing to perform, his promise or not, the promises are mutual and independent. E.g. In a contract of sale, B agrees to pay the price of goods on 10th instant. S promises to supply the goods on 20th instant. The promises are mutual and independent.b.Conditional and Dependent: Where the performance of the promise by one party depends on the prior performance of the promise by the other party, the promise is conditional and dependent. E.g. A promises to remove certain garbage lying beside Bs farm provided B render some help in removing the garbage. The promise in this case is conditional and dependent. A need not perform his promise if B fails to render him a helping hand.c. Mutual and Consent: Where the promises of both the parties are to be performed simultaneously, they are said to be mutual and concurrent. The example of such promise may be sale of goods for cash.Rules Regarding Performance of Reciprocal Promises Simultaneous performance of reciprocal promises. Order of performance of reciprocal promises. Effect of one party preventing another from performing promise. Effect of default as to promise to be performed first. Reciprocal promise to do things legal and also other things illegal.

6.13TIME AS THE ESSENCE OF THE CONTRACT The expression time is of the essence of the contract means that a breach of the condition as to the time for performance will entitle the innocent party to consider the breach as a repudiation of the contract.Time as the essence of contract- Section 55

When time is of the essence When time is not of the essence

A. When time is of the essence: In a contract, in which time is of the essence of the contract, if there is a failure on the part of the promisor to perform his obligation within the fixed time, the contract becomes voidable at the option of the promisee. If in such a case, the promisee accepts performance of the promise after the fixed time, he cannot claim compensation for any loss occasioned by the non-performance of the promise at the agreed time. But if at the time of accepting the delayed performance he gives notice to the promisor of his intention to claim compensation, he can do so. In commercial or mercantile contracts that provide for performance within a specified time, time is ordinarily the essence of contract. This is so because businessmen want certainty. In a contract for the sale or purchase of goods the price of which fluctuate rapidly in the market, the time of delivery and payment are considered to be the essence of the contract. When time is not of the essence: In a contract in which time is not of the essence of the contract, failure on the part of the promisor to perform his obligation within the fixed time does not make the contract voidable, but the promisee is entitled to compensation for any loss sustained by him due to such failure. Intention to make time as the essence of the contract, if expressed in writing, must be in a language, which is not vague. Facts are stated are mentioned in the contract that does not necessitate the time factor. If the contract includes clauses providing for extention of time in certain contingencies or for payment of fine or penalty for every day or week the work undertaken remains unfinished on the expiry of time provided in the contract, such clauses are construed as rendering ineffective the express provision relating to the time being the essence of the contract.

6.14 APPROPRIATION OF PAYMENT A debtor may owe several debts to a creditor. Such debtor may make payment to the creditor and instruct him to apply or appropriate the payment to a particular debt and the creditor must apply it accordingly as mentioned under Section 59 to 61. Following are the principles laid down under the appropriation of payment: -1) Application of payment where debt to be discharged is indicated- Section 59. 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, must be applied accordingly. Section 59 gives the right of appropriation to the debtor. A debtor at his option may decide whatever payments he makes to the creditor to be applied against the debts that he chooses. Where he owes several distinct debts to the same creditor and makes payment, he has the right to request the creditor to apply the payment to the discharge of a particular debt. In such a case, the creditor has no choice; if he accepts the payment, he must apply it according to the directions of the debtor.Illustrations: A owes B, among other debts Rs.1000/- upon a promissory note which falls due on the 1st June. He owes no other debt of that amount. On 1st June A pays to B Rs.1000/- The payment is to be applied to the discharge of the promissory note. 2) Application of payment where debt to be discharged is not indicated- Section 60 If the debtor does not make any appropriation at the time when he makes the payment, the creditor may apply the payment at his discretion to any debt that is due. He may even use it in payment of a time barred debt or he may apply it to a debt that carries a lesser rate of interest 3) Application of payment where neither party appropriates- Section- 61 Where the debtor and the creditor have not expressed their intention or desire to appropriate the payment to any particular debt or in particular order, the law gets the right to appropriate and the payment shall be applied in discharge of the debts in order of time i.e. the oldest debt shall be discharged first. A time-barred debt may also be discharged. Where there are two debts equally old, the payment shall be applied in discharge of each equally.

6.15 Rule in Claytons Case This rule is applicable where the parties have a current account, i.e. a running account between them. In such a case appropriation impliedly takes place in the order in which the receipts and payments take place and are carried into the account. It is the first item on the debit side of the account that is discharged or reduced by the first item on the credit side; the appropriation is made by the very act of setting the two items against each other. In simple words, it means that, unless there is a contrary intention, the items on the credit of an account must be appropriated against the items on the debit in order of date.Hence the following rules are applicable: - The debtor has, at the time of payment, the right of appropriating the payment; In default of debtor, the creditor has the option of election; In default of either, the law will allow appropriation of debts in order of time. 6.16 TERMINATION AND DISCHARGE OF CONTRACTDischarge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate, i.e. when the rights and obligations created by it comes to an end. A contract may be discharged by the following ways: -By Performance By Agreement or Consent By Impossibility By lapse of Time By Operation of Law By Breach of Contract1. Discharge by Performance:Performance means the doing of that which is required by a contract. Discharge by performance takes place when the parties to the contract fulfill their obligations arising under the contract within the time and in the manner prescribed. Performance of a contract is the most usual mode of its discharge. It may be > Actual performance: When both the parties perform their promises, the contract is is discharged. Performance should be complete, precise and according to the terms of the agreement.> Attempted performance or Tender: Tender is not actual performance, but is only an offer to perform the obligation under the contract.2. Discharge by Agreement or Consent: Section 62 lays down that if the parties to the contract agree to substitute a new contract for it, or to rescind or to alter it, the original contract is discharged and need not be performed.The various cases of discharge of contract by mutual agreement are dealt under Sections 62 and 63, which are stated as under: -(a) Novation (Sec. 62): Where the parties to a contract agree to substitute the existing contract with a new contract, it is called novation. Novation may be either substitution of one debtor for another or of an existing debt by creation of new one. Novation therefore may be classified as: Involving change of parties: Where there is a change of parties the consent of all the parties to such change is necessary. E.g. Admission of a new partner into an existing business and he accepts the liabilities of the old business prior to his admission. In such a case the old firm is discharged of its liabilities and the new firm accepts the liability. Involving substitution of a new contract in place of old: Where the parties to a contract agree to substitute a new contract in place of old contract, the old contract is discharged and need not be performed.

(b) Rescission (Sec. 62): When the original contract is discharged in order that a new contract be brought in its place it would be rescission of the contract by mutual consent of the parties to the contract. Example: A promises to supply certain goods to B three months after date. During this period the demand for the goods reduces from the market. A and B may rescind the contract.(c) Alteration (Sec 62): Where the terms of the contract are changed but there is no change in the parties it is alteration of the agreement.Example: A enters into a contract with B for the supply of 100 bags of cement at his shop within 10 days. A and B may alter the terms of contract by mutual consent.(d) Remission (Sec.63): Remission means acceptance of a lesser fulfillment of the promise made, i.e. acceptance of a lesser sum than was contracted for, in discharge of whole of the debt. Example: A owes B 10000 rupees and B accepts in satisfaction of the whole debt, 5000 rupees at the time and place at which 10000 rupees were payable. The whole debt is discharged.(e) Waiver: 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.(f) Merger: Merger takes place when an inferior right accruing to a party under a contract mergers into a superior right accruing to the same party under the same or some other contract. Example: P holds a property under a lease. He later buys the property. His rights as a lessee merger into his rights as an owner. 3. Discharge by impossibility of performanceIf an agreement contains an undertaking to perform impossibility, it is void-ab- initio. This rule is based on the following maxims:a) Impossibility existing at the time of agreement: Sec.56 lays down that an agreement to do an impossible act itself is void. This is known as pre-contractual or initial impossibility.b) Impossibility arising subsequent to the formation of contract: Impossibility that arises subsequent to the formation of a contract (which could be performed at the time when the contract was entered into) is called post-contractual or supervening impossibility. 4. Discharge by supervening impossibilityA contract is discharged by supervising impossibility in the following cases: Destruction of subject matter of contract: When the subject- matter of a contract, subsequent to its formation, is destroyed without any fault of the parties to the contract, the contract is discharged. Example: Taylor Vs Caldwell (1863) 3 B & S 826, C let a music hall to T between certain dates for the purpose of holding a concert there. But before the first day a concert was to be given; the hall was destroyed by fire without the fault of either party. T claimed damages for their loss; it was held that as the performances of the contract depended upon the continued existence of the hall, it is an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the things without any fault of either party. Non-existence or Non-occurrence of a particular state of things: Sometimes, a contract is entered into between two parties on the basis of continued existence or occurrence of a particular state of things. If there is any change in the state of things that ought to have occurred does not occur, the contract is discharged.Example: Krell Vs Henry (1903) 3KB 740, CA, H agreed to hire from K a flat for Two specific days, on which days it has been announced that the coronation procession would pass along that place. A part of the rent was paid in advance. The king however fell ill and the procession had to be cancelled. H refused to pay the balance. K sued him. It was held that the real object of the contract, which both the parties to the contract recognized, was to have the proper view of the coronation procession. The coronation procession was, therefore, the object or the foundation of the contract. Since this object or contract had failed or frustrated by the non-happening of the coronation K could not recover the balance. This is known as doctrine of frustration. Death or Incapacity for personal service: Where the performance of a contract depends on the personal skill or qualification of a party, contract is discharged on the illness or incapacity or death of that party. The mans life is an implied condition of the contract. Example: An artist undertook to perform at a concert for a certain price. Before She could perform she fell ill. She was discharged due to her illness. Change of law: When subsequent to the formation of a contract, change of law takes place, and the performance of the contract becomes impossible, the contract is discharged. Example: A enters into a contract with B on 1st January 2000, for the supply of Certain chemicals on 1st June 2000, on 1st April 2000, an act was passed by parliament, the import of such chemical is banned. The contract is discharged. Out break of war: A contract entered into with an alien enemy during war is unlawful. Therefore impossible for performance. Contract entered before the war are suspended and revived after the settlement of the war.4. Discharge by lapse of time The Limitation Act, 1963 lays down that a contract should be performed within a specific period, called period of limitation. If it is not performed, and if no action is taken by the promisee within the period of limitation, he is deprived of his remedy at law. E.g. price of the goods sold without any stipulation as to credit should be paid within three years of the delivery of the goods. If the price is not paid and a creditor does not file a suit against the buyer for the recovery of price within three years, debt becomes time barred and hence irrecoverable.

5. Discharge by Operation of LawA contract may be discharged by operation of law. This includes discharge-a) By Death: In contracts involving personal skill or ability, the contract is terminated on death of the promisor. In other contracts, the rights and liabilities of a deceased person pass on to the legal representatives of the deceased person.b) By Merger: When an inferior right accruing to a party merges into a superior right accruing to the same party under the same or some other contract, the inferior right accruing to the party is said to be discharged.C) By Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his adjudication.d) By Unauthorised Alteration of the terms of a Written Agreement: Where a party to a contract makes any material alteration in the contract without the consent of the other party, the other party can avoid the contract. A material alteration is one that changes, in a significant manner, the legal identity or character of the contract or the rights and liabilities of the parties to the contract.e) By rights and Liabilities becoming vested in the same person: Where the rights and liabilities under a contract vested in the same person, for example when a bill gets into the hands of the acceptor, the other parties are discharged.6. Discharge by Breach of contractBreach of contract means a breaking of the obligation that a contract imposes. It occurs when a party to the contract without lawful excuse does not fulfill his contractual obligation under it. It confers the right of action for damages on the injured party. This is also known as doctrine of anticipatory breach of contract. An anticipatory breach is said to take place, when the promisor repudiates the contract even before the date of performance of contract, that he does not intend to perform his part of the contract. In such a situation, the promisee may put an end to the contract immediately by treating the repudiation of the contract by the promisor as an immediate breach. The promisee may in addition sue for damages.The promisee has the option to treat the communication of the intention of the promisor in the above case as inoperative and wait till the time when the contract is to be executed and then hold the other party responsible for all the consequences of non-performance. The disadvantages in such a situation is that the contract is kept alive for the benefit of the promisee as well as the promisor. This would enable the promisor to complete the contract, if so advised, even though he had previously repudiated it. The promisor may take advantage of any supervening circumstance that would justify him in declining to complete it. E.g. Before the date of performance of the contract if a war broke out it may render performance of the contract illegal. The promisor would not be liable then, as the contract has ended by frustration and not by breach.Thus, if the promisee does not end the contract and keeps the contract alive by treating the notice intention communicated by the promisor as inoperative, the result will be- The promisor gets a second chance to choose to perform the contract when the time comes and the promisee is bound to accept; The contract is kept alive and some event may happen which may discharge the contract by operation of law and by repudiation; for example, by supervening impossibility or frustration where the promisor will take advantage of the changed circumstances.Example: Avery Vs Bowden (1855) 5 E & B 714, A chartered B ship and agreed to load it with cargo at Odessa within 45 days. On arrival of the ship there, A told the captain of the ship that he had no cargo to load. The captain, however, stayed there in the hope that A would fulfill the contract. But before expiry of 45 days, a war broke out which rendered the performance illegal. It was held that since the captain did not end the contract, the contract was alive when the war broke and A was entitled to take advantage of it. The contract was held to be ended by frustration and not by breach of contract by A. The doctrine of anticipatory breach of contract was recognized in Hochester Vs De La Tour (1853) 2.E. & B 678. H was a courier (servant employed to make traveling arrangements). He was engaged by D to accompany him on tour to commence on June 1, 1852. Nearly a month before this date D, wrote to H that he has changed his mind, and declined his service. H sued D for damages for breach. D argued that H should have waited till June 1st before bringing his action, till then. It was held, however, that the contract had been broken by express renunciation and H was not bound to wait till the day of performance. 6.17 REMEDIES FOR BREACH OF CONTRACTWhen a contract is broken, the injured party has one or more of the following remedies: Rescission of the contract Suit for damages Suit upon quantum meruit Suit for specific performance of the contract Suit for injunction.(1) Rescission of the contractWhen one party breaks a contract, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case, he is absolved of all his obligations under the contract. When a party treats the contract as rescinded, he makes himself liable to restore any benefits he has received under the contract to the party from whom such a benefits were received. But if a person rightfully rescinds a contract he is entitled to compensation for any damage that he has sustained through non-fulfilment of the contract by the other party.

(2) Suit for Damages Damages are a monetary compensation allowed to the injured party by the court for the loss or injury suffered by him by the breach of a contract is to put the injured party in the same position, so far as money can do it, as if he has not been injured, i.e. in the position in which he would have been had there been performance and not breach. This is called doctrine of restitution.Following are the rules relating to damages: Damages arising naturally- Ordinary damagesWhen a contract has been broken, the injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach of contract. These damages are known as ordinary damages. E.g. A contracts to sell and deliver 100 K.gs. of rice to B at Rs. 20/- per K.g. the price to be paid at the time of the delivery. The price of rice rises to Rs. 25/- per K.g. and refuses to sell at the original price. B can claim damages at the rate of Rs. 5/- per K.g. Damages in contemplation of the parties- Special damages Special damages can be claimed only under the special circumstances that would result in a special loss in case of breach of contract. Such damages known, as special damages cannot be claimed as a matter of right. E.g. A contracts to build a factory building and erect machinery for B by 31st December 2004, in order to enable B to commence his business on time But on 31st December, the building collapse and B suffers damages. A must make compensation to B for the cost of rebuilding the factory and the damages caused to the machinery. Vindictive or Exemplary Damages Damages for the breach of contract are given by way of compensation for loss suffered, and not by way of punishment for wrong inflicted. Hence, vindictive or exemplary damages have no place in the law of contract because they are punitive by nature. But in case of breach of promise to marry or when a banker wrongfully dishonour the cheque of a customer when he possess sufficient funds in his account, the court may award exemplary damages. Nominal DamagesWhere the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages recoverable by him are nominal. These damages merely acknowledge that the plaintiff has proved his case and won. Damages for loss of reputation. Damages for loss of reputation in case of breach of a contract are generally not recoverable. An exemption to this rule exists in the case of a banker who wrongfully refuses to honour a customers cheque. If the customer happens to be a tradesman, he can recover damage in respect of any loss is smaller the amount of cheque dishonoured, the larger the amount of damages awarded. But if the customer is not a tradesman, he can recover only nominal damages. Damages for inconvenience and discomfortDamages can be recovered for physical inconvenience and discomfort. The general rule in this connection is that the measures of damages are not affected by the motive or the manner of the breach. E.g. B dismissed A from the employment without prior notice. A could recover a sum representing his of wages for the period notice and the commission which he would have earned during that period; but he could not recover anything for his injured feelings or for the loss sustained from the fact that his dismissal made it more difficult for him to obtain employment. Mitigation of damages It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach. He cannot claim to be compensated by the party in default for loss that he ought reasonably to have avoided. That is he cannot claim compensation for the loss that is really due not to the breach, but due to his own neglect to mitigate the loss after the breach.Difficulty of Assessment Certain damages that are incapable of assessment cannot be recovered; the fact that they are difficult to assess with certainty or precision does not prevent the aggrieved party from recovering the damages. The court must do its best to estimate the loss and a contingency may be taken into account. Cost of DecreeThe aggr