Q. Distinguish between proposal and invitation to proposal. Section 2(a) says that when a person signifies to another, his willingness to do or to abstain from doing something with a view to obtaining the assent of that another to such act or abstinence, he is said to make a proposal. Thus, when an offer is made with such finality that the only thing remaining is the assent of the party to whom it is proposed, it is called a proposal. If the offer does not reflect such finality, it is merely an invitation to proposals. Thus, when a person advertises that he has books to sell, it is only an invitation for proposals. When a person, without expressing his final willingness, proposes certain terms on which he wishes to negotiate, he is merely making an invitation to proposals. In the case of Harvy vs Facie 1893, plaintiff telegraphed, "Will you sell Bumper Hall pen? Send lowest price." Defendants responded with "Lowest price of Bumper Hall Pen, $900". Plaintiffs then sent, "we agree to buy bumper hall pen for $900". However, defendants refused to sell. It was held that defendants had not signified a final willingness to sell. They had only told the lowest price. This, it was only an invitation to proposal and not a proposal. In the case of Pharmacutical Society of GB vs Boots Cash Chemists Ltd. 1952, it was held that display of goods is also an invitation to sell even if it is a self service shop. MC Pherson vs Appanna 1951 - Proposal to buy property at 6000/- was replied with, " won't accept less than 10000". This was not considered a proposal but an invitation to proposal. Auctions : Announcement to hold auction is not an offer. Highest bid is nothing more than an offer to buy. Definiteness of proposal: "Cocks and Hens - 25s each" is not an offer to sell. Q. Define contract. State essential elements of a valid contract. Section 2(h) of Indian Contract Act 1972 - An agreement enforceable by law is a contract. Def. by Anson - A contract consists in an actionable promise or promises. Def. by Sevigni - Contract is a combination of agreement and responsibility. Def. by Pollock - An agreement or promise enforceable by law is contract. Essential Elements Section 10 - All agreements that are made by people competent to contract, with free consent, for a lawful object and lawful consideration and not expressly declared to be void are contracts. Thus, we get the following elements - 1. There must be two or more people involved. 2. There must be an intention to contract. Balfour vs Balfour 1919 - Husband promised to send money to wife. Not a contract because there was no intention to contract. 3. There must be an agreement to do or to abstain from doing something. 4. The agreement must involve a lawful purpose, which means - agreement must not be against marriage, trade, legal proceedings, or it must not be a wagering agreement or must not be expressly prohibited by law. 5. Agreement must not be uncertain 6. Must not be impossible. Sec 56. 7. Free consent - not vitiated by coercion, undue influence, fraud, or misrepresentation. 8. Parties must be competent to contract. 9. Lawful consideration. 10. Lawful object. 11. Legal formalities 12. Must be enforceable by law, which means must not be immoral or against public policy. Q. What is a general offer? How is a contract created through general offer? Refer to leading cases. An offer may be made to the world at large. Such an offer is a general offer. However, a contract is not done with the whole world but only with the person who comes forward and accepts the offer. The acceptance might be express or implied. As per Anson, "An offer need not be made to an asertained person, but no contract can arise until it is accepted by an ascertained person". Case of Carllil vs Cabolic Smoke Ball Company. Creation of the contract - If the person performs the conditions of the offer. Thus, a person who finds a lost dog fulfills the condition of the prize 1
money and thus a contract with the owner of the dog is created. General Offer of Continuing Nature - Some offers such as finding a lost object close when it is accepted by the first person. However, some offers, such as in the Carllil case, it can be accepted by any number of persons until the closing date of offer or until it is retracted. Q. Describe the law relating to communication of proposals, their acceptance and their revocation. Section 2(a) of Indian Contract Act 1972 says that when a person signifies his willingness to do or to abstain from doing something to another, with a view to obtaining the assent of that another, he is said to make a proposal. Further, section 2(b) says that when the person to whom the proposal is made signifies his assent, the proposal is said to be accepted. The important point to note here is that the party making the proposal or the party accepting the proposal must "signify" their willingness or assent to the other party. Thus, a promise cannot come into existence unless the willingness or assent is communicated to the other party. Further, even the revocation, if any, must be communicated to the other party for it to take effect. Therefore, communication is the most critical aspect in the making of a contract. Communication Section 3 defines how a communication, acceptance, or revocation can be signified: The communication, acceptance, and revocation are deemed to be made by an act or omission of the party proposing, accepting, or revoking, by which he intends to communicate such proposal, acceptance, or revocation, or which has the effect of communicating it. Thus, a proposal may be made by any way, which has the effect of laying before another person his willingness to do nor not do something. The acceptance can be signified similarly. Section 9 specifies that a promise (i.e. a proposal and its acceptance) can be formed either by words, written or oral, is which case it is called express or by action, in which case it is called implied. In the case of Haji Mohd Ishaq vs Mohd Iqbal SCC 1978, the defendants accepted the goods supplied by the plaintiff through a go between man and also paid part of the price. It was held that the defendants were liable to pay the remaining balance because the proposal and its acceptance were signified by their actions. Section 4 specifies when a communication is complete: Communication of a proposal is complete when it comes to the knowledge of the party to whom the proposal is made. For example, if A sends a proposal in the mail to B and if the mail is lost, it can be held that the communication of the proposal is not complete. In the case of Lalman vs Gauridatta 1913, it was held that the reward for the missing child cannot be claimed by a person who traced the child without any knowledge of the announcement. There was no contract between the two in the first place because the proposal never came to the knowledge of the person who found the child and thus he could never accept it. Communication of the acceptance is complete, as against the promisor, when it is put in course of transmission to the promisor so as to be out of the power of the acceptor, as against the acceptor, when it comes to the knowledge of the promisor. For example, as soon as B drops a letter of acceptance in mail back to A, A is bound by the promise. However, B is not bound by it unless A receives the acceptance letter. In the case of Adams vs Lindsell 1818, it was held that a contract arose as soon as the acceptance was posted by the acceptor. In this case, the plaintiff received the offer to sell wool on 5th and they posted an acceptance, which was received on 9th by the defendants. The defendants, however, had already sold the wool on 8th. The court observed that the contract must arise as soon as the acceptance is posted and is gone out of the reach of acceptor otherwise this will result in an infinite loop. Communication of a revocation is complete as against the party who makes it when it is put in course of transmission to the party to whom it is made, so as to be out of the power of the party who makes it; as against the party to whom it is made, when it comes to the knowledge of the party to whom it is made. For example, if A sends a letter revoking his proposal, it will be complete against A as soon as the letter is dropped in the mailbox and is out of his control. However, the revocation will be held complete against B only when B receives the letter. Further, if B revokes his acceptance by telegram, it will he deemed complete against B as soon as he dispatches the telegram. It will be held complete against A, when A receives the telegram. Section 5 specifies when a proposal and acceptance can be revoked: A proposal can be revoked anytime before the communication of its acceptance is complete as against the proposer but not afterwards. 2
For example, if A propose to B through a letter, A can revoke the proposal as long as B has not posted a letter of acceptance to A. In the case of Henthorn vs Fraser 1862, an offer to sell a property was made to a person. This person was to reply to it within 14 days. He lived in another town and he posted an acceptance at 3.50PM, which reached the offerer at 8.30 PM. Meanwhile, the offerer posted the revocation letter at 1 PM, which reached the person at 5.30PM. Thus, the revocation did not reach the offeree before the communication of the acceptance was complete as against the offerer. Thus, the revocation was held ineffective. An acceptance may be revoked anytime before its communication is complete as against the acceptor. For example, B can revoke his acceptance that was sent by letter, by a telegram that reaches A before the acceptance letter. In the case of Union of India vs Bhimsen Walaiti Ram 1969, the defendant won an auction for a liquor shop and paid 1/6 of the cost upfront. However, the bid was supposed to be finalized by the financial commissioner, which he had not done. Meanwhile, the defendant failed to pay the remaining amount and the commissioner ordered a re-auction. In the re-auction, less money was realized and the plaintiff sued to recover the shortfall. However, SC held that since the commissioner had not given is final approval for the bid, the communication of acceptance was not complete against the defendant, thus the defendant was free to withdraw or revoke his proposal (i.e the bid). Section 6 specifies how a revocation can be made: A proposal is revoked o by the communication of the notice of revocation by the proposer to the other party. o by the lapse of prescribed time in the proposal for acceptance or if no time is prescribed, by the lapse of a reasonable time in communication of the acceptance. o by the failure of the acceptor to perform a condition precedent to acceptance. o by death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance. Acceptance Section 7 specifies that an acceptance must be absolute and unqualified. A partial acceptance or a clarification regarding a proposal, or specifying a condition on acceptance is no acceptance. In the case of Hyde vs Wrench 1840, an offer was made to sell a farm for #1000, which was rejected by an plaintiff, who counter offered #950 for it. This was rejected by the defendant, upon which the plaintiff agreed to pay #1000. However, it was held than the defendant was not bound by any such second acceptance. Section 7 further says that the acceptance must be in some usual and reasonable manner, unless the proposal prescribes the manner in which the acceptance should be made. If the proposal prescribes the manner, and if the acceptance is not done in that manner, the proposer may insist that the acceptance be made in the manner prescribed, and if he fails to do so, he accepts the acceptance. Thus, if the acceptance is sent by any way other than what is prescribed by the proposal, the proposer must reject it in a reasonable time otherwise the proposer accepts it. This is markedly different from English law where a proposal must be accepted in the manner required in the proposal otherwise, the acceptance is invalid. In the case of Elliason vs Henshaw 1819, it was held that an acceptance sent by mail instead of through the wagon that brought the offer, was not valid. Section 8 specifies that a proposal is accepted when the acceptor performs conditions prescribed for the acceptance or when he accepts the consideration given along with the offer for a reciprocal promise. When acceptance consists of an act as in the case of State of Bihar vs Bengal C & P Works 1954, it was held that, when an order is sent for goods, the posting of goods itself is equivalent to acceptance. No further communication of acceptance is necessary. In the case of Carlill vs Carbolic smoke ball co 1893, it was held that, purchasing and consuming the medicine performs the condition of the proposal. Requirements for an acceptance 1. Acceptance must be from a person to whom the proposal was made. In the case of Powel vs Lee 1908, it was held that communication of an acceptance from an unauthorized person is invalid. 2. Acceptance must be signified to the proposer. In the case of Felthouse vs Bindley 1863, it was held that unless an acceptance is given to the offerer, it is no acceptance. 3. It is required that there be an act that signifies the acceptance. As held in the case of Bhagvandas Goverdhandas Kedia vs Girdharilal Pursottamdas & Co SC AIR 1966, for an acceptance to be completed, a mere mental decision is not sufficient. An external manifestation of the decision is a must. 3
Communication and acceptance of General Offers A general offer, such as an advertisement for the sale of an article at a fixed price, or to give prize to the one that does something first, is not made to a particular person. Whoever the contract is done with the person who responds or who does the task first. Communication of such as offer is done through public media such as a newspaper. S general offer can be perpetual or end as soon as the condition is fulfilled. No explicit acceptance of such offers is usually required. Performing the conditions specified in the offer acts as the acceptance of the offer. For example, in the case of Carlill vs Carbolic Smoke Ball Company 1893, it was held that it was a general offer and anybody who fulfilled the condition was eligible for the $100 compensation as advertised. Revocation of General Offers A general offer can be revoked in the same manner as it was made. For example, by printing a revocation in a newspaper. It will be considered complete, even if a person who is ignorant of the revocation, performs the conditions after the revocation is published. Q. "An agreement enforceable by law is a contract" as per section 2(h) of Indian Contract Act 1872 but "agreements enforceable by law have been defined in section 10". Discuss the statement. Write essential elements of a valid contract. In our regular day to day life we make several comments and statements. We say several things to people whom we talk to. Most of these are not with any intention to create any legal obligation. For example, if we say to someone that we will go to lunch with him, it is not a legal obligation. But some, which are related to business or civil matters, are understood to be in a serious mood and have a potential to be legally enforceable. For example, when we hire an Auto-rickshaw for going from point A to point B, we are legally bound to pay and the driver is legally bound to take us from A to B. Indian Contract Act 1872 defines these activities in precise terms in Section 2. Definition of Terms Sec. 2 (a) When a person signifies to the other, to do something or to abstain from doing something, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a Proposal. Sec. 2 (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. An accepted proposal becomes a promise. Sec. 2 (c) The person making the promise is called Promisor, while the person accepting the promise is called Promisee. Sec. 2 (d) When, at the desire of the Promisor, the Pomisee 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 is called a consideration for the promise. Sec. 2 (e) Every Promise and every set of Promises forming a consideration for each other, is an Agreement. Sec. 2 (f) Promises which form the consideration or part of consideration for each other are "Reciprocal Promises". Sec. 2 (g) An agreement not enforceable by law is void. Sec. 2 (h) An agreement enforceable by law is a Contract. Sec. 2 (i) An agreement that is enforceable by law at the option of one or more of the parties thereto but not at the other or others is a voidable Contract. Sec. 2 (j) A Contract that ceases to be enforceable by law becomes void when it ceases to be enforceable by law. From sec 2(e) and 2(h), it is clear that Agreement and Contract are two different things. For an agreement to become a contract, it has to be enforceable by law. Section 10 states that all agreements that are made by free consent of the people who are competent to contract, for a legal object and legal consideration, and are not hereby expressly declared to by void, are contracts and are thus legally enforceable. Thus, there are five factors that determine whether an agreement can be legally enforced or not. These are discussed below: 1. Competency of the people doing the agreement. (What do you understand by competency to contract? Who are competent to contract? What protections are offered to minors?) All the parties doing the agreement must be competent to contract. Section 11 determines who are competent to contract. As per this section, person who has attained the age of majority according to the law to which is subject, who is of sound mind, and who is not prohibited/disqualified from contracting by law to which he is subject. Majority is 18 years except when a guardian is appointed by the court in which case it is 21 yrs. In the case of Mohoribibee vs Dharmodas Ghosh in 1903, a minor had taken a loan and then he sued to avoid the contract. Privy Council council held that any contract with a minor is void ab initio and so the loaner cannot get any money that he gave as advance back. This rule is adopted all over India whether or not it benefits the minor. In the case of Mir Sarwarjan vs Fakhruddin Mohd. Chaudhary 1912, a contract to purchase a property was done on behalf of minor. It was held that the minor could not sue for getting the possession of property. However, since in today's times minors are coming a lot in public life, it is not always possible to consider an agreement with a minor to be always void. Therefore, in the case of Srikakulam Sbhramanyam vs Kurra Sabha Rao 1949, Privy Council held that a sale of inherited property of a minor to pay off inherited debt effected by the guardian was binding on the minor. 4
Protections offered to minors: No estoppel against minor - It has now been settled that a minor who enters into a contract by misrepresenting his age can later on tell his correct age and avoid the contract. No liability in tort or in contract arising out of a contract - If a minor enters into a contract, he can neither be held liable in contract nor in torts. In the case of Jennings vs Rundall 1799, when an infant hired a horse for riding short distance but rode it for long distance resulting in injury to horse, he was not held liable because it was a contractual obligation. In the case of Hari Mohan vs Dulu Mia 1934, Calcutta HC held minor not liable in tort for money lent on bond. However, in absence of a contract, a minor may be liable in tort. Thus, in the case of Burnard vs Haggis 1863, when a minor "borrowed" a mare only for riding and then lent it to a friend who jumped her and killed her, he was held liable in tort. Doctrine of restitution - If a minor obtains property or goods by misrepresenting his age, he can be forced to return it but only as long as the goods are traceable in the minor's possession. This is called doctrine of equitable restitution. If the minor sells or converts the property, the value of the goods cannot be retrieved because that would amount to enforcing a void contract. In the case of Leslie vs Sheill, a minor got 400 pounds from money lenders by misrepresenting his age. The money lenders could not recover it under any of fraud, quasi-contract, or doctrine of restitution. This was followed in the case of Mohoribibee vs Dharmodas Ghosh as well.. Beneficial Contracts - In contract where a minor has already supplied consideration, the minor can enforce the contract. Thus, in the case of Ulfat Rai vs Gauri Shakar 1911, it was held that a minor can sue to take possession of a property for which he has already paid. But where the contract is still executor and consideration has not been given, the principle adopted in Mohoribibee will prevail. Thus, in the case of Raj Rani vs Prem Adib 1949, it was held that the film producer was not bound by a contract with minor's father to give a role to minor in his movie. This is because minor could not be forced to give consideration and father had not given any consideration. However, a contract of marriage of a minor enter into by the father is not void for want of consideration because it is for the benefit of the minor. Liabilities for necessities (Section 68) - If a minor is supplied with necessaries that are in accordance with his living standard, the supplier can get paid through the minors property. Persons of unsound mind Section 12 says that a person is of sound mind for the purpose of contracting if at the time of contracting, he is capable of understanding the contract and capable of making a rational judgement as to the effects of the contract upon his interests. A person who is usually of sound mind but sometimes of unsound mind may not make a contract when he is of unsound mind, while a person who is usually of unsound mind but sometime of sound mind may make a contract when he is of sound mind. Thus, a person, who is too drunk, or who is temporarily delirious due to sickness such as high fever, may not make a contract at that time. A patient in a lunatic asylum, who is at intervals of sound mind may make a contract when he is of sound mind. In India, a contract done by a person of unsound mind is absolutely void ab initio. In the case of Indersingh vs Parmeshwardhari Singh Patna HC in 1957 held that a contract to sell property worth 25000 in 7000, was voidable because the mother claimed that her son was of unsound mind and did not understand the implications. 2. Consent and Free Consent Section 13 defines that two or more people are said to consent when they agree upon the same thing in the same sense. However, many a times, a consent may not reflect the true intentions of a party. For example, one party may give consent because of being financially pressured or criminally threatened. Thus, such a consent should not make the agreement enforceable. Section 14 determines what factors can vitiate a consent and when a consent is considered free of any complication that affects the enforceability of an agreement. It states that a consent that is not obtained through coercion, undue influence, fraud, misrepresentation, or mistake subject to section 20, 21, and 22, is a free consent. a. Coercion (Sec 15): Coercion is committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawful detaining or threatening to detain the property, to the prejudice of any other person, with an intention to cause that other person to enter into an agreement. It is immaterial whether IPC is or is not in force where coercion is applied. Thus, an act that is unlawful as per IPC but not as per England law and that has been used to induce the consent, will be considered coercion. A clear example would be force someone to consent on gun point or by hurting or threatening to hurt. In Chikham Amiraju vs Chikham Seshamma Madras HC 1912 held that threatening to commit suicide is coercion. In the case of Astley vs Reynolds 1771, the plaintiff had pledged his plate for #20 and when he went to claim it back, the defendant asked for #10 more as interest. To redeem his plate, the plaintiff paid the money but later sued to recover #10. The court allowed it. b. Undue Influence (Sec 16): Undue influence occurs when because of the nature of the relationship that exists between the parties, one party is able to dominate the will of the other and uses this dominance to obtain unfair advantage over the other. A person is in a dominant position when he holds a real or apparent position of authority for example manager employee, or stands in a fiduciary relationship with the other for example money lender and loanee. A person could also be in a dominant position if the mental capacity of other party is temporarily or permanently effected due or illness, age, or distress. The burden of proof that undue influence has not occurred is on the person who is in the dominant position, if the agreement is unconscionable 5
otherwise it is on the party that alleges undue influence. Examples: Father (A) give some money to son (B) when B was a minor. Upon majority, A makes B execute a bond for a much larger amount. A person (A) who is old and sick is induced into paying an unreasonably large amount of sum to his doctor (B). A village moneylender (A) lends money to a villager (B), who is already in debt, at a very high interest. It lies on A to prove that he has not used undue influence to induce the contract. At a time of financial crises, a bank manager gives loan to a person at a substantially higher rate. This is not considered to be undue influence but a simple business transaction. In Mannu singh vs Umadat Pandey Allahbad HC 1890, a guru induced his devotee into giving all the devotee's property to himself. This was considered undue influence. c. Fraud (Sec 17): When a person intentionally tries to cheat another person, it is called as fraud in a general sense. Section 17 defines fraud precisely as such - Fraud means and includes any of the following activities done by a party or by his connivance or by his agent, with an intent to deceive another party or his agent, or as to induce the other party to enter into the contract. 1. the suggestion of a fact, of that which is not true, by the one who does not believe it to be true. 2. active concealment of a fact by one who knowledge or belief of the fact. 3. making a promise without an intention to perform. 4. any act fitted to deceive 5. any such act or omission that the law declares to be fraudulent. Mere silence as to facts likely to affect the willingness of a person to enter into the contract is not fraud unless, according to the circumstances of the case, it is the duty of the person keeping silence to speak or unless his silence itself is considered as speech. Examples: A sells a horse to B by auction without telling B that horse is unsound. This is not fraud. B is A's daughter who has just come off age, then it is A's duty to tell B about the fact. So this is fraud. B says to A, "if you do not deny it, I will assume that horse is sound". Here, silence is considered as speech so this is fraud. A and B, being traders, enter into a contract. A has private pricing information that will cause B to not enter the contract. A is not bound to inform this to B. This is not fraud. Concealing the disease history while obtaining insurance is fraud because it is the duty of the insured to give this information to the insurer. Derry vs Peek 1889 was not fraud, because the company honestly believed in what they said and there was no intentional misrepresentation, which is the essence of fraud. Sri Krishan vs. Kurukshetra Univ., AIR 1976 SC the student was not found to be fraud. Even though he knew that he was short on attendance, he did not disclose it on examination form. He was let off because 'mere silence' is not fraud. d. Misrepresentation (Sec 18): When a person makes an unwarranted statement, however innocently, which the person believes to be true, and which turns out to be false, it is misrepresentation. Any breach of duty, without an intention to deceive, that gains an advantage to the person committing it or to the person claiming under him, by misleading the other person to his prejudice or to person claiming under him, is also misrepresentation. Further, causing a party to an agreement to make a mistake regarding the subject matter of the agreement, however innocently, is also misrepresentation. Examples: A claimed to B that the ship being considered under an agreement was below 2800 tonnage. But in reality it turned out to be more than 3000 tonnage. It was held to be misrepresentation and B was entitled to avoid the contract. Oceanic Steam Navigation vs Soonderdas Dharmasey. Bom HC 1980. A land was purchased expressly for constructing duplexes. The seller claimed that he saw no permissioning problems. However, later on the permission was denied. This was held to be misrepresentation and even though the claim was innocent, the buyer was allowed to avoid the sale Where the seller of a car stated the mileage of the car to be 20000, which turned out to be wrong, the buyer of the car was allowed to recover compensation for misrepresentation. Section 19 declares that a contract induced due to coercion, fraud, or misrepresentation is voidable at the option or the party whose consent was obtained by coercion. An exception is that when the consent is obtained by silence fraudulent under sec 17, and when the affected party had the means of discovering the truth with ordinary diligence. In this case, the contract is not voidable. Further, if the fraud or misrepresentation did not cause the party on which they were practiced to give consent, then the contract will not be voidable. Section 19A declares that the party whose consent was obtained by undue influence has the option to avoid the contract. 3. and 4. Legal Object and Legal Consideration When four dacoits enter into an agreement to share the loot equally and if two of them take more share than the other two, there is nothing that law can do, except arrest them for dacoity. Needless to say, the objects and considerations involved in the the agreement have to be legally valid. Section 24 declares that agreements are void if consideration and object are unlawful in part. If any part of a single consideration for one or more 6
objects, or any one or any part of one of several considerations for a single object, is unlawful, the agreement is void. Thus, if the unlawful part cannot be severed from the object or consideration, the whole agreement becomes void. However, if the unlawful part can be severed, the remaining part can still be enforced. For example, A enters into an agreement with B to get 1 Gram of Cocain with 1 Kg or Rice for 10 Rs for rice and 1000 Rs for Cocain, then a part of the object that is 1 gm of cocain and 1000Rs is severable from the agreement without affecting the lawful part. In this case, the agreement can be enforced partially. In another example, A man enters into an agreement with a married women to clean his house and live with him in adultery, which is unlawful, for a sum per month, the whole agreement is void because it is not possible to divide the sum properly between lawful and unlawful objects. What objects or considerations are unlawful Section 23 declares that any object or consideration is lawful, unless - it is forbidden by law, or is of the nature that if permitted, defeats the provisions of any law, or is fraudulent, or implies or involves injury to the person or property of another, or is determined by the court to be immoral or against public policy. Thus, an agreement to rent an apartment for prostitution or gambling is void. 5. Agreements expressly declared to be void by this act Some other agreements that satisfy all the four conditions given is section 10 can still be void. Such agreements are: Sec 20 : when both the parties are under mistake as to the matter of fact, the agreement is void. Sec 24 : agreement in which any part of a single consideration for one or more objects, or any consideration or part of a consideration out one or more considerations for a single object is unlawful, is void. Sec 25 : agreement without any consideration except if it is registered, or a promise to pay for something already done, or is a promise to pay time barred debt. Sec 26: agreement in restraint of marriage. Sec 27 : agreement in restraint of trade. Sec 28 : agreement against legal proceedings. Sec 29 : agreement that is uncertain Sec 30 : agreement by way of wager. Sec 56 : agreement to do impossible act is void. If an act becomes impossible after the contract it done, the contract becomes void when the act becomes impossible to do. Legal formalities: Certain agreements such as agreement for the sale of immovable property, or agreement for insurance become a contract only when they are properly registered. For such agreements, the procedure prescribed by law must be followed to make them a contract. Q. Explain - Coercion, Undue Influence, Fraud, and Misrepresentation. According to Section 10, free consent is an integral part of a contract. An agreement cannot become a contract unless it is done by free consent of parties. Section 14 says that a consent is free when it is not vitiated by coercion, undue influence, fraud, misrepresentation, or by mistake subject section 20, 21, 22. Coercion Section 15 defines coercion as follows - Coercion is committing or threatening to commit an act that is prohibited by IPC, or any unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with an intention of causing any person into entering a contract. It is immaterial whether IPC is in operation at a place where such act took place. Illustrations A threatens B at gun point to sell his land to A. A while in an English ship on high seas enter into a contract with B by intimidating B that is unlawful in India. Later on A sues B of breach of contract in Calcutta. This is coercion. Chikham Amiraju vs Chikham Seshamma 1912 - Husband threatened to suicide unless wife gave property to his brother. This was held coercion. Askari Mirza vs Bibi Jai Kishori 1912 - Threatening a criminal prosecution is not coercion per se. It could be coercion if the threat is to file false charges. Astley vs Reynolds 1731 - Plaintiff had pledged his place for $10. When he went to take it back, pledgee asked for $10 more. He paid the additional $10, but sued to get recover it back. It was held coercion. Andhra Sugars vs State of AP 1968 - A factory was bound to take the sugar cane from the farmer under an act. This was not held to be coercion. Undue Influence Section 16 defines Undue Influence as follows - 7
A contract is said to be induced by Undue Influence when the relationship between the parties is such that one party is able to dominate his will on the others and uses that position to gain an unfair advantage. A person is deemed to be in the position of dominating the will of the other if - if the person holds a real or apparent position of power If stands in a fiduciary relationship with the other. if the other person is mentally weak because of sickness, disease, or economic distress It further says that if a contract is unconscionable the burden of proof lies of the person in whose favor the contract is to prove that it was not induced by Undue Influence, other wise the burden of proof is on the one who alleges it. Illustrations A advances some money to his minor son B. Upon majority, A makes B sign a contract to pay back more than the sum advanced. A is sick and physically feeble and is attended by his nurse B. B influences A to enter a contract to pay him an unreasonable amount for his professional services. A being in debt of B, the village money lender goes to B for getting a loan. B gives the loan on terms that are unconscionable. It lies on B to prove that undue influence was not used to create the contract. A applies for loan to a banker B while there is a stringent crises in the money market. B declines to give the loan only at a very high rate. This is not coercion but simple business transaction. Ability to dominate the will Mannu Singh vs Umadat Pandey 1890 - Spiritual guru induced the plaintiff, his devotee, to gift all his property to the guru. Relations of dominion over other - parties are not on equal footing. Williams vs Baylex 1866 - father being afraid of bank manager, entered into a contract to mortgage his house. This was held voidable. Real of Aparant authority Income tax office, magistrate, police officer etc. It may not be real but if a person shows off as such then also it is applicable. Fiduciary Relation Every relationship of trust and confidence is a fiduciary relationship. Solicitor - client, doctor - patient, spiritual guru - devotee. Mental Distress Ranee Annapurni vs Swaminatha 1910 - A poor widow who was in dire need to money to establish her right to maintenance, was persuaded by a money lender to take loan at the rate of 100%. It was held to be undue influence while a person was under mental distress and the court reduced the rate to 24%. Burden of Proof - The person must show that the other party was in position of dominating the will and that he used that position to gain advantage. Presumption of undue influence In certain cases, when it is established that the defendant was in a position to dominate the will of the plaintiff, it will be presumed that he must have used his position to obtain an unfair advantage. Thus, it will be up to the defendant to prove that the plaintiff freely consented. Lancashire Loans Ltd. vs Black 1934 : It was held that a daughter may not necessarily be independent and may be under the influence of the mother. Presumption is raised in the following cases - 1. Unconscionable bargains Wajid Khan vs Raja Ewaz Ali Khan 1891 - An old illiterate woman conferred upon her managing agent a bug pecuniary benefit without any valuable consideration under the guise of a trust. This was held to be under undue influence. 2. Inequality in bargaining power LLoyd's Bank vs Bundy - Farmer pledged his farmhouse for securing a loan for his son. Later bank tried to take possession of the house. It was held that the contract might have been done under undue influence. 3. Contracts with Pardanashin women 8
A contract with a pardanashin woman is presumed to have been induced by undue influence. However, such a woman must be totally secluded from ordinary society. In the case of Ismail vs Amir Bibi 1902, a lady stood as witness, put tenants, collected rents in respect of her house. She was held not a pardanashin woman. Coercion - Section 15 Undue Influence - Section 16 There is a clear threat involved and the person being coerced knows it. No relationship has to exist. There is no outward sign on undue influence and the person being influenced may not realize it. A relationship that allows a person to dominate the will of other must exist. Contract induced by coercion is voidable under section 19 Contract induced by undue influence is voidable under section 19-A If an act, which is unlawful under IPC, has been used to force a person into contract, it is immaterial where it has taken place, contract will still be voidable in India. Fraud Section 17 defines fraud as follows: Fraud means and includes any of the following acts done by a party to a contract, or by his connivance, or by his agent, to decieve another party thereto or his agent, or to induce him to enter the contract. Such acts include- 1. the suggestion, as a fact, that of which the party knows or has reason to believe to be not true. 2. active concealment of a fact by the one who knows or has reason to believe to be true. 3. Making a promise he does not intend to fulfill. 4. any act fitted to deceive. 5. any act or omission as the law specifically declares to be fraudulent. Illustrations A sells, by auction, to B a horse which A knows to be unsound but does not tell anything to B. This is not fraud. B is A's daughter who has just come of age. In this case, it is A's duty to tell B that the horse is unsound. B says to A, "If you do not deny it, I will assume that the horse is good.". Here, A's silence is equivalent to speech. A and B are both traders and A has private information about change in prices, which would affect B's willingness to proceed with contract. This is not fraud. Intention to deceive is required to constitute fraud. Suggestion of a fact Derry vs Peek 1889, it was held not to be fraud because the defendants truly believe that permission would be granted by the board of trade because parliament had approved it. Active concealment Active concealment is different from passive concealment. Passive concealment merely means silence as to material facts. However, active concealment means making efforts to prevent the facts from reaching a party and this is fraud. B R Chaudhary vs IOC 2004 - A dealer concealed his previous employment under govt. to get dealership. SC allowed the contract to be terminated. Concealment by mere silence is not fraud Sri Krishan vs Univ. of Kurukshetra 1976 - the candidate knew that he was short of attendance but did not write anything on the examination form. It was held not fraud because it was the job of the university to scrutinize the forms. Silence may become fraud in certain cases - Duty to speak, Half truth, change of circumstances. Making a promise without any intention to perform DDA vs Skipper Construction Company 2000- A builder collected deposit money from more number of people than there were flats. SC held that since the builder knew that he cannot perform his promise and still took the money, he was doing fraud. He was held liable to pay interest even though there was no provision of interest on deposit. Any other act fitted to deceive 9
Ningawwa vs Byrappa 1968 - Husband got his illiterate wife to sign papers saying that he was mortgaging her two lands but actually he mortgaged four. This act was obviously done to deceive and was held to be fraud. Misrepresentation Section 18 defines misrepresentation as follows: Misrepresentation means and includes 1. making a statement in a manner that is unwarranted by the information of the person making it, of that which is not true, though he believes it to be true. 2. any breach of duty which, without an intention 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 anyone claiming under him. 3. causing, however innocently, another party to commit a mistake as to the substance of the thing which is the subject of the agreement. Thus, when there is no intention to deceive but still a wrong statement has been made, or a duty has not been performed, or a mistake has been induced, it is misrepresentation. Unwarranted Statements Oceanic Steam Navigation vs Soonderdas Dharmasey 1980 - the defendants charted a ship from a company. The plaintiff had made a claim that the ship was not more than 2800 tonnage even though the plaintiff had not known about it. In reality the ship turned out to be more than 3000 tonnes. It was held to be misrepresentation and the defendants were allowed to avoid the contract. Breach of Duty Thake vs Maurice 1986 - Husband was not informed of the risks and failure rate of vasectomy before the operation. Later on wife became pregnant and the hospital was held guilty of misrepresentation and was ordered to pay compensation for all the pains and expenses of delivery. Inducing mistake about subject matter The subject matter of the contract is supposed by the parties to be of a certain value or quality. If one party, however innocently, leads another party to make a mistake as to the value of subject matter, it is misrepresentation. Farrand vs Lazarus 2002 - A car dealer put a notice on a car that the mileage is incorrect even though he knew that the reading was grossly incorrect. This was held to be misrepresentation. Suppression of Material and Vital Facts R vs Kylsant 1932- Company prospectus said that company was regularly paying dividends, which implied that is was making profit. However, it did not say that company was making losses and dividends were being paid from war time accumulated profits. Expression of Opinion Merely expressing an opinion is not misrepresentation. Bisset vs Wilkinsen 1927 - The seller was aware that the land was being purchased for sheep farming and he expressed an opinion that the land could carry 200 sheep. It turned out that the land was no suitable for sheep farming. The seller was not held liable. Section 19 says that any contract which is induced by Coercion, Fraud, or Misrepresentation is voidable at the option of the party whose consent was caused due to coercion, fraud, or misrepresentation. However, if the consent is obtained by misrepresentation of a fact or silence amounting to fraud, the contract is not voidable if the party whose consent was so caused was able to discover it with due diligence. Also, a fraud or misrepresentation that did not cause a party to give consent, does not render a contract voidable. Section 19 A says that when an agreement is created due to a consent induced by undue influence, such an agreement is a contract voidable at the option of the contract whose consent is so caused. Fraud - Section 17 Misrepresentation - Section 18 There is intention to deceive. A contract involving fraud is liable for action in tort for damages. Defence of ordinary diligence is not available for fraud except for fraud by silence. No intention to deceive. No action in tort. Can be defended on the ground that the person could find out the truth by ordinary diligence. Similarity in Fraud and Misrepresentation 10
1. Both contain false representation. 2. Both render a contract voidable. 3. In both the cases, the consent must have been caused due to that fraud or misrepresentation. 4. Defense of ordinary diligence is available to fraud by silence and misrepresentation. Q. What are different types of mistakes? Explain their effects on the validity of the contract. There can be two types of mistakes - a mistake that misleads the parties to an agreement to consent and a mistake that defeats the consent itself. For example, A contracts with B for purchasing goods coming by a ship. However, unknown to both, the ship has already drowned at the time of the contract. In this case, there was a mistake of a fact, which lead the parties to consent. This type of mistake is covered by sections 20, 21, and 22. In another example, A enters into a agreement with B thinking that he is C. In this case, there was no consent from A at all because of mistake in identities. As another example, A agrees to sell to B his stock and B agrees to pay 5000Rs for A's stock. However, A was thinking about his livestock (i.e. cattle) and B was thinking about shares of a corporation. In this case, there was no consent because they agreed on the same thing but not in in the same sense. These mistakes defeat the consent itself. There is no real consent here at all. This type of mistakes is covered by section 13, which says that when two persons agree to the same thing in the same sense, they are said to consent. Agreement on the same thing in the same sense is true consent and is called consensus ad idem. If there is no consensus ad idem, there is no agreement, and hence no contract. Section 20 says that an agreement is void when both the parties are under mistake as to matter of fact that is essential to the contract. Illustrations A agrees to buy a horse from B. At the time of agreement the horse was dead but no one knew about it. The agreement is void. A, being entitled an estate for the life of B, sells it to C. B was dead at the time of contract but both the parties were ignorant of the fact. The agreement is void. Section 21 says that a contract is not voidable if it was caused by mistake as to law in India. However, mistake as to law outside India has the same effect as mistake of fact. Section 22 says that contract is not voidable merely because one of the parties was under mistake as to fact. Thus, for an agreement to be voidable due to a mistakes three conditions are required - 1. Both the parties are under mistake. 2. Mistake is of a fact. 3. fact is essential to the agreement. Which facts are essential to the agreement? This depends on the nature of the promise in each case. Something that is remotely linked to the agreement is not an essential fact. For example, A agrees to hire B for taking his goods to a city. They came to know later that there is no electricity. This fact is not essential to the contract. However, it they come to know later that all transporters are on strike, this would be a fact essential to the agreement. There are three types of things that are essential facts to an agreement - identity of the parties, identity and nature of the subject matter of the contract, and nature and content of the promise itself. Mistake as to identity Mistake as to identity can occur due to assumption of a false name taking over a business fraud In the case of Cundy vs Lindsay 1878, a fraudster, who had a similar name as that of the defendant, sent an order to the plaintiff. Plaintiff supplied the order which went to the defendant. It was held that since there was a mistake as to identity, there was no contract between the parties. 11
In cases where identity of the offeree is important to the offerer, a contract cannot arise in the case of mistake as to identity. In the case of Said vs Butt 1920, the plaintiff got the tickets for a show through a friend but the defendant, the manager of the theater did not allow him to enter. It was held that since the manager did not give the ticket for the plaintiff, there was no contract between them. Mistake as to Subject matter This can occur due to Non existent subject matter Mistake as to title or ownership Different subject matters in mind Mistake as to quality of subject matter. Raffles vs Witchlehaus -Parties had different ships in mind but both were named peerless. It was held that there was no consensus ad idem and so the contract must be set aside. Smith vs Huges - Buyer wanted to buy old oats for his horse. The seller showed him the sample but didn't say anything about the age. The buyer kept the sample for 24 hrs and then ordered. Later on he rejected the order saying that the oats were new. It was held that buyer had no right to reject. Mistake as to the nature of promise When a deed of one character is signed under the belief that it is of another character, the agreement is wholly void. Sarat Chandra vs Kanailal - A gift deed was signed under the impression that it is only power of attorney. It was held void. Limitations Both Parties According to Section 20 both the parties must be under a mistake for the agreement to be void. This is further supplanted by article 22 that an agreement is not void if only one party is under mistake. Erroneous Opinion Explanation to section 20 says that an erroneous opinion regarding the subject matter does not render an agreement void. This was reflected in the case of Smith vs Huges. Mistake of fact and not of law Section 2 1 says that mistake of law does not render an agreement void. Thus, the mistake must be of a fact. A mistake of foreign law will be treated as a mistake of fact. Q. What is a lawful consideration? When would a consideration or object of an agreement unlawful? Explain with illustration. Section 23 says that a consideration or an object of an agreement is lawful unless, 1. it is prohibited by law. 2. it is of such nature that, if permitted, defeats the provisions of a law. 3. it is fraudulent. 4. it involves or implies injury to another person or property of another. 5. it is immoral or against public policy. Illustrations 1. A promises to sell his house to B for 10000 Rs. The object is the house and the consideration is 10000/- both are lawful. 2. A promises to pay B 1000/- if C fails to pay his debt to B within next 6 months. B upon this promise give 6 more months to C repaying debt. 3. A promises to B to superintend B's manufacture of Indigo, which is lawful, as well as a trade in illegal items for a monthly salary of 5000/. Unlawful. 4. A promises to pay 5000/- per month to B to clean his house and live with him in an adulterous relationship. So on... Forbidden by Law - Means any law in force, including Hindu and Muslim personal laws. 12