CONTENT UNIT I - Law of Contract - Agreement and Contract o Definition o Essential Elements o Their kinds - Formation of contract o Proposal and Acceptance o Communication and Revocation - Important Questions UNIT II - Capacity to Contract - Consent - Consideration o Its need, kinds o Essential Elements o Exceptions of consideration Important Questions UNIT III - Void Agreement - Unlawful Agreements - Voidable Contract - Effects of Void, voidable and Unlawful agreements Important Questions UNIT IV - Contingent Contract - Quasi Contract - Discharge of Contract - Performance of Contract Important Questions
UNIT V - Breach of Contract and its remedies - Anticipatory breach and present breach - Impossibility of performance- pecific grounds of frustration Important Questions uggested Readings
trictly for Internal Circulation - KCL LAW OF CONTRACT UNIT I Introduction: Contract law is a very important part of commercial law. We enter into many contracts daily knowingly or unknowingly; for example When we travel in a bus or in a rickshaw, when we give our dresses to press or iron to laundryman, or when we purchase daily routine items from a shop, we enter into a contract. This is an important aspect of human behaviour. In India, Indian Contract Act, 1872 (Act IX of 1872) is in force today. This Act came into force on 151 day of eptember, 1872. At beginning, it contained 11 (eleven) chapters out of which chapter VII (sale of goods) having ection 76 - ection 123 and chapter XI (of Partnership) having 239 are repealed from this Act and two new Legislations dealing with these topics came into existence, the ale of goods Act, 1930 and Indian Partnership Act, 1932. Indian Contract Act, 1872 has genera! principles of contract (ection 1 to 75) and it deals with some specific contract also such as contracts of Indemnity and contract of guarantee (ection 124-147), Bailment (ection 148-181), Agency (ection 182-238). This paper, contract-i, deals with general principles of contract (ection 1-75) only. In Indian law, it is not necessary that every contract must be in writing. This means a contract may be- (i) (ii) Oral contract Contract in writing. But if there is a law which requires the agreement in writing, then it must be in writing. In Indian contract Act, 1872 no form has been prescribed for a valid contract. It is well settled that the court in order to continue an agreement has to look to the substance or essence of it rather than its form but when any law specifically provides a form of contract, then it must be entered into such form. For example: According to Article 299 of the constitution of India, certain formalities are required when a contract is entered into by or with the central or state government. When a contract entered is not in the form required by Article 299(1) of the constitution, it is void. AGREEMENT AND CONTRACT Agreement: The word "Agreement" implies that there are two or more persons who commit each letter to do a particular thing. A person alone cannot enter into an agreement or contract with himself. Ordinarily two or more persons are required in the formation of an agreement. The first step in the li:irr1ation of an agreement is the making of a proposal. One person makes the proposal and another accepts it. 1
trictly for Internal Circulation - KCL Proposal Acceptance Promise Promise Consideration Agreement Agreement Enforceability by law Contract The person who makes the proposal is known as proposer and the person who accepts the proposal is known as acceptor. When a proposal is accepted, it becomes promise but to turn a promise into an agreement, consideration is also required. Definition: ection 2(e) of Indian Contract Act 1872 defines an Agreement as "Every promise and every set of promises forming consideration for each other, is an agreement." Essential Elements: According to the above mentioned definition, there are two essential elements of an agreement 1. There must be a promise or a set of promises 2. There must be consideration for both the parties. Now the question arises, what is Promise? As explained earlier Proposal + Acceptance? Promise. Hence we can say that Proposal + Acceptance + Consideration? Agreement The term "proposal" is defined in ec. 2(a) of Indian Contract Act, 1872 as - "When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal." When a proposal is accepted, it becomes promise. (ection 2(b) of Indian Contract Act 1872) Kinds of Agreement On the basis of Mode of Creation: 1) Express Agreement, 2) Implied Agreement On the basis of Execution: 1) Unilateral Agreement 2) Bilateral Agreement There are many other kinds of agreement which are not defined in Indian Contract Act. 1872 such as Illegal Agreement, Unenforceable Contract etc. 1. Express agreement: When one person or party proposes to another party orally or in writing and that the other party gives his acceptance accordingly this type of agreement is known as express agreement. For example: A proposes in writing to B to sell his horse for 500 rupees and B accepts the proposal of A. This is express agreement. 2
trictly for Internal Circulation - KCL 2. Implied agreement: When one person or a party does not put his proposal in words, whether oral or in writing, then it is implied by his conduct or usage or custom of society or trade that he has made the proposal by his conduct then it is called implied agreement. 3. Unilateral agreement: An agreement in which one party fulfills his obligation created under agreement but the other party's obligations remain to be fulfilled in future, is known as unilateral agreement. 4. Bilateral agreement: An agreement in which both parties are under obligation to fulfill their part in future is known as bilateral agreement. 5. Illegal agreement: The term 'illegal agreement' is not defined in Indian Contract Act 1872. Illegal agreement is one which is expressly declared illegal by law of the land or which defeats the provisions of any law. All illegal agreements are void but all void agreement are not illegal. Hence "Void agreement" is a wider term than "illegal agreement". 6. Unenforceable agreement: unenforceable agreements are those agreements in which lawful rights and duties are created but due to some technical defect, the courts are unable to enforce those rights and duties. These agreements are not void or voidable. Under certain circumstances the law gives permission to remove those defects and after such removal of defects the law enforces them. For Example : Time barred-claim, insufficient stamps under stamps Act etc. Contract: A contract is a bilateral transaction between two or more than two parties. Every contract has to go through several stages starting from proposal. Definition: Anson has defined the term "Contract" in his book LAW OF CONTRACT as - "A contract consists in an actionable promise or promises. Every such promise involves two parties, a promisor and a promisee, and an expression of a common intention and of expectation as to the act or forbearance promised." Essential Elements of Contract: According to the above mentioned definition of contract in Indian Contract Act 1872, a contract has following essentials - 1. There must be a promise or a set of promises 2. There must be consideration for both the parties. As we know agreement is a promise or set of promises forming consideration for each other. But the question arises - what kinds of agreement are enforceable by law? An agreement to be enforceable by law must fulfill the conditions laid down in ection 10 of the Indian Contract Act 1872. According to ection 10 of Indian Contract Act, 1872- 'All agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void." 3
trictly for Internal Circulation - KCL Nothing herein contained shall affect any law in force in India and not hererby expressly repealed, by which any contract is required to be made in writing or in the presence of witness, or any law relating to tile registration of documents. At last, On the basis of Combined Analysis of ection 2(h) and ection 10 we can say that the following are the elements of a valid contract - 1. Promise or a set of promises. 2. Consideration for both the parties. 3. Parties must be competent to contract. 4. Free consent of the parties to the agreement. 5. Consideration and object must be lawful. 6. The agreement must not have been expressly declared to be void under the contract Act or any other Act. 7. Must be in writing or registered, if necessary. Kinds of Contract: There are two kinds of contract - 1) Voidable Contract [ection 2(i)] 2) Void Contract [ection 20)] According to ection 2(i) of Indian Contract Act, 1872/ a voidable contract is - "An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the others, is a voidable contract." ection 20) defines "Void contract" as "A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable." On the basis of both the definitions we may differentiate between two as : Difference between void and voidable contract 1. An agreement which can not be enforced The agreement which is enforceable by law at the by law. option of the aggrieved party but not on the option of the other party. 2. It is void from the very beginning and It is lawful at the very beginning but remains void till last. becomes void after declaration at the option of the party aggrieved. 3. The parties of such contract can not make It the aggrieved party does not object to the it valid by their consensus. contract then it remains valid and enforceable. 4
trictly for Internal Circulation - KCL 4. Under void contract, no party can claim The aggrieved party can claim damages. damages. 5. Agreement which ceases to be Enforceable at the option of one or more enforceable by law. No party can enforce parties. it. 6. It has no contract of legality when it ceases It is enforceable till aggrieved party does not get it declared void. 7. It can not become legal by consent of both The aggrieved party may make it void or the parties. legal as he wishes. There may be other different kinds of contract also - On the basis of Parties - On the basis of Expression - On the basis of Execution - FORMATION OF CONTRACT 1) Unilateral Contract 2) Bi-Iateral Contract 1) Express Contract 2) Implied Contract 1) Executed Contract 2) Executor Contract Generally, two or more persons are required to make a contract. The first step in the formation of contract is proposal. One person proposes to other and the other accepts that proposal. then promise occurs. And a promise coupled with consideration and enforceability by law becomes contract. PROPOAL In English Law, proposal is known as "Offer". In Indian Contract Act, 1872 ection 2(a) defines proposal as - "When one person signifies to another hi~ 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." Essentials of Proposal: According to the abovementioned definition, the essentials of a valid proposal are 1. The proposal must be communicated by the proposer to the acceptor. 2. It must be made with a view to take consent of acceptor and to create legal relations. 3. The proposal must be to do an act or to abstain from doing anything. This means it must be certain and definite. Communication of Proposal: A promise is the result of meeting of two minds. When the proposal comes to the knowledge of the person to whom it is made, then he may give his assent to it. This means communication of proposal to the person to whom it is made is compulsory. A proposal can be accepted then. Communication may be expressed or implied. This fact can be gathered from ec. 9 of the Indian Contract 5
trictly for Internal Circulation - KCL Act 1872. 1. According to ection 9 of I.C. Act, 1872- "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." Communication of Proposal completes when it comes to the knowledge of the person to whom it is made. In this case, the plaintiff filed the suit to claim the reward of R.501 from defendant as he discovered the defendant's nephew having absconded from home. Plaintiff was the servant of defendant. The defendant announced the reward of R.501 to anyone who discovered his nephew but this fact came to the knowledge of plaintiff only after he had already handed over the boy to the defendant. The court held that the proposal was not communicated to the servant and he came to know of it after he had already discovered the boy hence he is not entitled to any reward. uit dismissed accordingly. 2. To Create Legal Relations: The intention in the proposal is very important. The proposal should be made with intent to create legal relations. In the case of Balfour vs. Balfour (1919) 2 K. B. 571 Lord Atkin held that the wife is not entitled to recover the arrears because there was no intention to create legal relations. The objective test is applied to judge whether the parties intended to create legal relations. 3. The Proposal must be certain and definite: The terms of the contract should not be vague. If there is some ambiguity in the contract, the court has to interpret it but the court can not make contract between the parties. If the meaning of the agreement is uncertain or unable to make it certain, the Agreement is void under ection 29 of Indian Contract Act, 1872. Kinds of Proposal The proposal may be 1) Generla 2) pecific General Proposal: A proposal that is not made to an ascertained person but it is made to the general public is called general proposal. But it is necessary that it should be accepted by an ascertained person. In this case, the court held that the plaintiff lady is entitled to claim the reward because the advertisement is made to the whole world and it becomes a promise only when it is accepted by an ascertained person and the court also held that the notification of acceptance in such cases is not necessary. In India, the decision of this case is followed in the case of Hindustan Insurance Corporation ociety vs. hyam under AIR (1952) Cal. 691 and in the case of Union of India vs. M/s. Rameshwar Lal Bhagchand AIR 1973 Gauhati 111. 6
trictly for Internal Circulation - KCL pecific Proposal: When a proposal is made to an ascertained person then it is called specific proposal. This proposal can be accepted by that person only to whom it is made and none else. Acceptance: When a proposal is made to the general public or to an ascertained person, it must be accepted to convert it into promise. Anson has said - "Acceptance is to offer what a lighted match is to a train of gunpowder." According to ec. 2 (b) of I.C. Act, 1872- "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. Communication of Proposal: According to ec. 2(a) of I.C. Act, 1872, the proposal must be signified to another i.e. must be communicated to another it may be express or implied. A proposal can be accepted only when it comes to the knowledge of the person to whom it is made. Hence communication of proposal is complete when it comes to the knowledge of the person to whom it is made. Communication of Proposal: When complete A proposal is not converted into a promise until and unless it is accepted by the person to whom it is made and the offeree can accept it when it comes to his knowledge. According to ection 4 of I.C. Act, 1872- "The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. For Example: A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. Thus the first essential of a valid proposal is that it must be communicated. Revocation of Proposal REVOCATION OF PROPOAL When a proposal is communicated by the offeror to the offeree, it becomes agreement as and when it is accepted but a proposal can be taken back or revoked before its acceptance. ection 4 of I.C. Act, 1872 deals with the communication of revocation of proposal. According to ection 4 of I.C. Act, 1872 '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 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 his knowiedge. Mode of Revocation: The proposal may be revoked by any mode given in ection 6 of IC Act, 1872. According to ection 6 of I.C. Act, 1872- A proposal is revoked- 1. by the communication of notice of revocation by the proposer to the other party. 2. by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, 7
trictly for Internal Circulation - KCL by the lapse of reasonable time, without communication of the acceptance; 3. by the failure of the acceptor to fulfil a condition precedent to acceptance; or 4. by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Acceptance: When a proposal is given to a person, the other party must accept it in the mode and manner which is prescribed by the proposer. An acceptance is necessary to convert a proposal into a contract. Acceptance must be absolute; this means the person to whom the proposal is made can not put a condition in acceptance. If he puts the condition or changes the terms and conditions of the proposal then he is said to be making a counter proposal. According to ection 7 of the Indian Contract Act, 1872 - "In order to convert a proposal into a promise, the acceptance must - 1. be absolute and unqualified; 2. be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance. A proposal will be accepted by performing conditions or by receiving consideration. This means the acceptance may be by conduct it is not necessary to accept the proposal in words, whether oral or in writing. According to ection 8 of Indian Contract Act, 1872 - Performance of the conditions of proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. Communication of Acceptance: The first rule of acceptance is that the acceptance must be communicated to the proposer or to his agent then it becomes binding on proposer. An intention to accept or even a mental resolve to accept a proposal does not give rise to a contract. Expression of Acceptance is necessary. In the case of Felt house vs. Bindley (1863) 7 L.T. 835 the court held that communication of acceptance must be made to the proposer himself or to his agent. The communication of acceptance to stranger will not be a valid communication. In this case it is also held that the proposer can not impose upon the offeree the obligation of refusal. The decision of this case is followed in India in the famous case of Bhagwan Das vs. Girdhari Lal & Co. AIR 1966 C 543. The second rule is that the acceptance must be communicated by the offeree himself or by his authorized agent. In the case of Powell Vs. Lee (1908) 99 L.T. 284 The court held that communication of acceptance from an unauthorized person will not be valid. 8
trictly for Internal Circulation - KCL But the offerer may waive the communication of acceptance in his benefit as in the case of Carlill vs. Carbolic moke Ball Co. (1893) 1 O.B. 256 The third rule of acceptance is that the acceptance must be absolute and unconditional. According to ec. 7(1) of Indian Contract Act 1872 "In order to convert a proposal into a promise, the acceptance must be absolute and unqualified." Revocation of Acceptance: When the acceptance of the offeree comes within the knowledge of the proposer, it turns the whole transition into agreement but an acceptance may also be revoked. According to ection 5 of I.C. Act 1872- "An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. For Example: A, proposes by letter sent by post to sell his house to B. B accepts the proposal by a letter sent by post. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards. In the case of Baroda Oil Cakes Traders Vs Purushottam Narain Das Bagulia AI R 1954 Born. 491, the upreme Court held that so far as the making of the contract is concerned, the proposer is bound as soon as the acceptance is posted subject to the right of the acceptor to revoke his acceptance. The decision of this case is followed and approved later on by the Hon'ble upreme Court in the case of Bhagwan Das Vs Girdharilal AIR 1966 C 543. Till the offer was accepted, there was no contract between the parties and the proposer may withdraw his offer. The proposer is not bound to keep the offer open indefinitely. According to ection 5 I.C. Act, 1872 'A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards." Illustration: A proposer, by a letter sent by post proposes to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. In the case of Payne Vs Cave (1789) 3 TR 148, the court held that in case of an auction, the bidder is entitled to revoke his bid at any time before the fall of the hammer or before the property is finally knocked down. In the case of MIs J.K. Enterprises Vs tate of M.P. AIR 1997 MP 68, the M.P. High Court held that the revocation of proposal must be communicated to the offeree, not to the' other person. Where the communication of revocation is sent by fax message on wrong number, the revocation would not be effective. 9
trictly for Internal Circulation - KCL IMPORTANT QUETION Q.1. When does an agreement become a contract? Q.2. Q.3. Q.4. "Acceptance must be absolute and unqualified". Explain. Define 'Proposal'. Also explain the different legal rules relating to it with the help of case law. Define a Contract. Discuss the essential elements of a valid Contract. Q.5. Q.6. Q.7. Q.8. Q.9. Q.10. Distinguish between the following i. Void and voidable Contracts. ii. Illegal and unenforceable contracts. "All contracts are agreements but all agreements are not contracts." Explain. Define 'Proposal'. Discuss essential features of a valid proposal offer. What is the difference between proposal and invitation to offer? Explain. Define Acceptance. Discuss the essentials of a valid acceptance. "Acceptance to an offer is what a lighted match is to a train of gun powder." comments. How is a communication of an offer and acceptance complete? And how and when are their revocation made? Explain. "An agreement enforceable by law is a contract." Comment. Discuss the essentials of a valid contract in brief. 10
trictly for Internal Circulation - KCL UNIT - II CAPACITY OF CONTRACT According to ection 10 of I.C. Act, 1872, one of the essential requirements of a valid contract is that the parties must be competent to contract. ection 11 of I.C. Act, 1872, contains the provision regarding competency to contract. It states that "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. Hence, the following persons cannot enter into a valid contract- 1. Persons of unsound mind 2. Persons disqualified from contracting by any law to which they are subject. 3. Minors i.e. a person under the age of 18 years or if a guardian of a minor's person or property is appointed by the court, then under the age of 21 years (according to ection 3 of Indian Majority Act, 1875). Now the question arises- What will be the nature of contract if it is entered by an incompetent person. The Indian contract Act 1872 is fully silent about the nature of contract entered by incompetent person. Legal position (nature) of minor's contract: Before the year of 1903, there was a great controversy in India whether a minor's contract is void or voidable but in the year of 1903, In the case of Mohri Bibi Vs Dharmodas Ghose ILR (1903) 30 Cal. 539 PC, the Privy Council finally settled the issue and held that a minor's contract is wholly void i.e. void-ab-initio. But if the contract is in the intent of the minor, court may declare such a contract as valid. In the case of rikakulam ubramanyam Vs Kurra abha Rao (1949) 75 IA 115, the privy council held that if the guardian transfers property inherited by minor in lieu of the payment of debt, the transfer shall be binding. This means that a guardian can enter into a contract on behalf of the minor and if it is in the interest of minor, the contract is valid in the eyes of law. Effect of Minor's Contract: It is clear from the above discussion that a minor's contract is void-abinitio and has no existence in law. But a pertinent question arises-what will happen of the benefits which have been derived by a minor under a void contract? In Mohri Bibi's case, ection 64 and 65 of Indian Contract Act, 1872 and ection 41 of specific Relief Act, 11
trictly for Internal Circulation - KCL 1877 was argued against minor. The privy council did not apply ection 64 of I.C. Act, 1872, as it deals with the consequences of rescission of voidable contracts. Hence P.C. held that ection 64 and ection 65 refer to contracts made by persons competent to contract and therefore it did not apply to minor's contract. As regards ection 41 of pecific Relief Act, 1877 the Privy Council held that this section gives discretion to the court to make any compensation to the other which justice may require but the court did not order restitution in this case because the appellant had advanced the loan to Dharmodas Ghose while knowing that he was a minor. But generally, if a minor obtains some property by misrepresenting his age, he can be ordered to restore the property or goods thus obtained, but the minor may be compelled to restore the goods or property so long as they are traceable. In the case of Leslie Vs hell (1914) 3 KB 607, the defendant minor induced the plaintiff to lend him two sums of 200 each by fraudulently misrepresenting himself as major. The plaintiff filed the suit to recover the amount with interest. The court dismissed the suit because the minor had spent the money received. ince money was not traceable, the minor could not be asked to restore it. But in the case of Khan Gul Vs. Lakha ingh (1928) 9 Lah. 701. A Lahore full Bench did not follow the rule laid down in Leslie Vs heill. Rut Later on in the case of Ajudhia Prasad Vs. Chandan Lal AIR 1937 All. 610 (FB) The Allahabad High Courtfollowed the rule laid down in Leslie Vs. hell. Then the controversy was finally resolved in 1963 by the inclusion of ection 33 (2)(b) in the specific Relief Act, 1963. According to ec. 33(2) (b) of pecific Relief Act, 1963 - "the agreement sought to be enforced against him in the suit is void by reason of his not having been competent to contract under section 11 of the Indian Contract Act, 1872. The court may, if the defendant has received any benefit under the agreement from the other party, require him to restore, so far as may be, such benefit to that party, to the extent to which he or his estate has been benefited thereby." Hence it is clear from the provision that the decision of Khan Gul Vs. Lakha ingh has been finally adopted. Application of Principle of Estoppel, in case of a minor's contract Now the question is whether the principle of estoppel applies if a minor fraudulently misrepresents himself to be major and later on asserts that contract is void because he was a minor when he contracted. In the case of Mohri Bibi Vs. Dharmodas Ghosh ILR (1903) 30 Cal. 539(PC), The PC held that there can be no estoppel where the truth of the matter is known to both the parties. In this case the moneylender had received the information through his agent Kedarnath about the defendent's minority. In the case of Khan Gul Vs. Lakha ingh ILR (1928) 9 Lah. 701 and in case of Ajudhia Prasad Vs Chandan Lal AIR 1937 All. 610 (FB) it was held that no estoppel can be pleaded against the statute and rule of estoppel is not applied because a minor's contract is void-ab-initio. 12
trictly for Internal Circulation - KCL Rule of Ratification whether applicable to minor's contract? A minor's contract can not be validated by ratification after attaining majority because it is void-ab-initio as held in Mohri Bibi Vs. Dharmodas Ghosh ILR (1903) 30 Cal. 539(PC). Legal position (Nature) of contract entered by a person of unsound mind: A person of unsound mind is also incompetent to contract. ection 12 of the Indian Contract Act. 1872 provides as to what is a sound mind for the purpose of contract. According to section 12 of I.C. Act, 1872 - "A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind". For example: (a) A patient in a lunatic asylum who is at intervals of sound mind, may contract during those intervals. (b) A sane man, who is delirious from fever or who is so drunk that he can not understand the terms of a contract or form a rational judgement as to its effect on his interests, can not contract whilst such delirium or drunkenness lasts. Under English Law, a contract by a person of unsound mind or a lunatic is not void but voidable. But in India, however, a contract entered into by a person of unsound mind is absolutely void in the same way as a contract entered into by a minor is void. Persons disqualified from contracting by any law: Besides minors and persons of unsound mind, a person may also be disqualified from contracting by any law to which he is subject. For example, a contract entered by alien enemy or an adjudged insolvent will be void, According to ection 10, free consent is one of the essential elements of a contract. ection 13 defines the word 'consent' and ection 14 defines the word 'free consent'. According to ection 13 of IC Act 1872 - "Two or more persons are said to consent when they agree upon the same thing in the same sense." Free consent: According to ection 14 of Indian Contract Act, 1872, consent is said to be free when it is not caused by- (i) Coercion, as defined in ection 15, or (ii) Undue influence, as defined in ection 16, or (iii) Fraud, as defined in ec. 17, or (iv) Misrepresentation, as defined in ection 18, or (v) Mistake, subject to the provisions of sections 20, 21 and 22". 13
trictly for Internal Circulation - KCL This means that every consent is free Under ection 14 unless it has been obtained by coercion, undue influence, mistake, fraud or misrepresentation. Coercion: ection 15 of Indian Contract Act. 1872 defines coercion as: "Coercion" is the committing or threatening to commit any act. forbidden by the Indian Penal Code (Act XIV of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement." Explanation: "It is immaterial whether the Indian Penal Code (Act XLV of 1860) is or is not in force in the place whose the coercion is employed." In English Law the word "duress" is used which is equivalent to the word "coercion". Hence, in India Under ection 15, coercion can be aimed not only against a person but also against his property, and coercion may be caused by a third person or a person who is not a party to the contract. The scope of the term coercion is far wider than the term duress under English Law. Essential elements of Coercion: Following are the essential ingredients of coercion: (i) Committing or threatening to commit any act forbidden by the IPC; or (ii) The unlawful detaining or threatening to detain any property to the prejudice of any person whatever; or (iii) With the intention of causing any person to enter into an agreement. In the case of Rangnayakamma vis Alwar etti (1890), 13 Mad 214 The husband of a girl of 13 years died and she was forced to adopt a child of their choice [by her deceased husband's relative]. The Madras H.C. held that consent was not free and the act was prohibited under the Indian Penal Code 1860. A man gave a threat to commit suicide to his wife if they did not execute a release bond regarding some properties which the wife and son claimed as their own. The Madras High Court held that release deed was caused by coercion. But an act done under the compulsion of law is no coercion within the meaning of ection 15 of the Indian Contract Act 1872. Effect of Coercion: According to ection 19 of Indian Contract Act 1872 "when consent to an agreement is caused by coercion, fraud or misrepresentation the agreement is a contract voidable at the option of the party whose consent was so caused." Undue Influence: Undue influence is also a reason that vitiates free consent. ection 16 of Indian Contract Act. 1872 has the provision of undue influence. According to ection 16 (1) of the Indian Contract Act 1872- A contract is said to be influenced by undue 14
trictly for Internal Circulation - KCL influence" where the relations subsisting between the parties are such that one of the parties is in position to dominate the will of the other, and uses that position to obtain an unfair advantage over the other. Essentials of undue influence 1. Relationship between the parties of such a nature that one of the parties is in a position to dominate the will of the other. 2. uch party uses that position to obtain unfair advantage over the other. In the case of Allcard Vs kinner (1887) 36 Ch. D. 145 A woman (plaintiff) was induced by her spiritual advisor (defendant) to became a sister. he took the vow of poverty, chastity and obedience and she surrendered all her individual property forever according to vow. Later on she left the sister-hood. he filed the suit to recover a part of her property. The court of Appeal held that the plaintiff could not recover the property because she had left the sister-hood in 1879 but filed the suit in 1885 and her claim had become failed due to her neglect and acquiescence. In the case of Mst. ethani Vs Bhana AI R 1993 C 956 A Registered sale deed was executed by an illiterate, old, blind tribal lady, Putlibai and the question was whether she executed the sale deed under undue influence of the defendant respondent Bhana. The upreme Court held that in this case the onus lies on respondent to prove that the sale deed was executed under no undue influence and no evidence was led by the respondent to discharge the onus. Hence appeal was allowed accordingly. Burden of Proof: According to ection 16(3) I.C. Act, 1872 the burden of proving that such a contract was not induced by undue influence, shall lie upon the person who is in a position to dominate the will of the other. According to ection 16(2) a person is deemed to be in a position to dominate the will of the other where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other, or There he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress. Effect of Undue Influence: As per ection 19-A of I.C. Act, 1872 when consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Fraud: ection 17 of I.C. Act. 1872 defines fraud as- Fraud' means and includes any of the following acts committed by the party to a contract, or with the connivance or by his agent, with intent to deceive another party thereto or his agent or to induce him to enter into the contract- 1. The suggestion as to a fact of that which is not true by one who does not believe it to be true; 2. The active concealment of a fact by one having knowledge or belief of the fact; 15
trictly for Internal Circulation - KCL 3. A promise made without any intention of performing it; 4. Any other act fitted to deceive; Explanation: "Mere silence as to facts likely to affect the willingness of a person to enter into contract is not fraud, unless the circumstances of the case are such that regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech." In the case of hri Krishna Vs the Kurukshetra University, Kurukshetra AIR 1976 C 376 The upreme Court held that where a person on whom fraud is committed is in a position to discover the truth by due diligence, fraud is not proved. In the leading case of Derry Vs Peek (1889) 14 AC 337 it was held that fraud is proved when it is shown that a false representation has been made knowingly or without belief in its truth or recklessly careless whether it be true or false. Can mere silence be fraud? According to explanation appended to ection 17 of I.C. Act, 1872 Mere silence is not fraud, unless, it is the duty of the person keeping silence to speak, or unless his silence is, in itself equivalent to speech. For example- If A says to B if you do not oppose it, I shall assume that the house is without any encumbrances. The house is in fact under mortgage but B says nothing. Here B's silence is equivalent to fraud. Effect of Fraud: As per provisions of ection 19 of I.C. Act, 1872, when consent to an agreement is caused by fraud, the agreement is a contract voidable at the option of the party whose consent was so caused by fraud. Misrepresentation: ection 18 of IC Act 1872 defines misrepresentation as- The positive assertion in a matter not warranted by the information of the person making it, of that in which is not true, though he believes it to be true; any breach of duty which, without an intent to deceive, gains an advantage to the person committing it or anyone claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him; causing, however innocently, a party to an agreement to make a mistake as to the substances of the thing which is the subject of the agreement. As per the above mentioned definition of misrepresentation, the followings are the essential elements of misrepresentation - 1. Making of unwarranted statements which are not true although the person making it believes it to be true. 2. Any breach of duty giving advantage to the person committing it and thereby misleading another to his prejudice; and 16
trictly for Internal Circulation - KCL 3. Causing a party to an agreement to make mistake as to the substance of the thing which is the subject-matter of the agreement. Misrepresentation generally means mis-statement of a fact material to the contract. This section includes the following kinds of misrepresentation- 1. Unwarranted statements 2. Breach of duty 3. Inducing mistake about subject-matter. In the case of R. Vs Kylsant (1932) 1 KB442 A company stated in its prospectus that the company had regularly paid dividends, which created the impression that the company was making profits whereas the truth was that the company had been running into losses for the last several years and dividends could only be paid out of working accumulated profits. The court held that the suppression of this fact was held to be a misrepresentation. In the case of Haji Ahmad Yarkhan Vs. Abdul Gani Khan AI R 1937 Nag. 270: In the negotiations for a marriage contract, those speaking for the girl failed to disclose that she was suffering from epileptic fits, the engagement was held to be voidable, a very material fact having been suppressed. The suppression of this fact was held to be a misrepresentation. Mistake: The term 'mistake' is not defined in I.C. Act, 1872; mistake may operate upon a contract in two ways: 1. Defeat the consent altogether that the parties are supposed to have given; 2. The mistake may mislead the parties as to the purpose which they contemplated. Where the mistake does not defeat consent, but only misleads the parties, ection 20 of I.C. Act, 1872 shall apply. ection 20 of I.C. Act, 1872 will come into play- a. When both the parties to an agreement are mistaken. b. Their mistake is as to a matter of fact, and c. The fact about which they are mistaken is essential to the agreement. In this case the agreement is void. Mistake as to law: ection 21 of I. C. Act, 1872, applies where the mistake relates with law. According to l'1is section - A contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in India has the same effect as a mistake of fact. Where only one party is mistaken (unilateral mistake) section 22 of I.C. Act, 1872, applies. According to ection 22 of I.C. Act, 1872, - A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. 17
trictly for Internal Circulation - KCL CONIDERATION As we have already discussed lawful consideration is one of the essential elements of a valid and legal contract. ection 10 of I.C. Act, 1872, says that it is a "cardinal necessity of the formation of contract." ection 25 of I.C. Act 1872, also states that an Agreement without consideration is void. For Example- A enters into a contract with B that he will pay R.1 0000 to B if his house is destroyed by fire. B's house is destroyed by fire and A claims R.10000. A is not entitled to get R.10000 from B because there is no consideration from the side of A. Definition: ection 2(d) of I.C. Act 1872 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 abstain from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise." According to this definition consideration should be given by the promisee or any other person at the desire of the promisor. An act done at the desire of a third person will not constitute a good consideration within the meaning of ection 2(d) of the IC Act, 1872. In the famous case of Durga Prasad Vs Baldeo ILR (1880) 2 All. 221 : The plaintiff built a market at the desire of the district collector. The defendant occupied a shop in the market and agreed to pay commission on sale to the plaintiff.. The court dismissed the plaintiff's suit on the ground that the plaintiff built the market at the desire of the collector and not of the defendant and hence the promise was without consideration. In India, the consideration may be given by the promisee or any other person. But in English law, consideration must move from the promisee only. In the case of Dutton Vs Poole (1677) 2 Lev. 210: The plaintiff's father decided to cut the family tree for the marriage of his daughter, the plaintiff. His son (the defendant) promised to pay 1000 for plaintiff's, marriage and asked his father not to cut the family tree. The plaintiff's father accepted the proposal. Later on the plaintiff sued the defendant to recover the money. It was held that the plaintiff was entitled to recover the money from the defendant although the plaintiff was not a party to the contract. But this rule was not followed in the case of Tweddle Vs Atkinson (1861) 1 B 393. In this case it was held that no stranger to the consideration can take advantage of a contract although made for his benefit. The Principle enunciated in Tweedle Vs Atkinson was affirmed by the House of Lords in the case of Dunlop Pneumatic Tyre Co. Ltd. Vs. elfiridge & Co. Ltd. (1915) AC 847. Thus from the abovementioned cases, it is clear that under English law consideration must move from the promisee. But under Indian Law, it may flow from promisee or any other person. Consideration: its Need: According to ection 10 of Indian Contract Act, 1872, consideration is essential to convert an agreement in to a contract. Without consideration an agreement is void, as given in ection 25 of 18
trictly for Internal Circulation - KCL the Indian Contract Act. But ection 25 has some exceptions also. Consideration should be for both the parties of the contract. It may be past or present or future as given in ection 2(d) of Indian Contract Act, 1872. The consideration must flow at the desire of the promisor and it may be given by the promisee or any other person. Consideration or its Kinds: As given in section 2(d) of Indian Contract At, 1872, the consideration may be present, past or future because the wording of ection 2(d) "has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing something" shows that unlike English Law, in India past consideration is a also a good consideration. Adequacy of Consideration: It is a well settled principle that the courts will not inquire into the 'inadequacy of consideration'. The consideration need not be adequate to the promise although it must be of some value in the eyes of the law. In the case of Bolton Vs Madden (1873) LR 55 the court held that it was not for the courts but for the parties while making the agreement to consider the adequacy of consideration. In India also the general rule is that the consideration need not be adequate. This is clear from illustration (f) of ection 25 of the IC Act, 1872 which states as- A agrees to sell a horse worth Rs. 1000 for Rs. 10. A's consent to the agreement was freely given. The agreement is contract, notwithstanding the inadequacy of the consideration. Although the courts will not look to the adequacy of consideration it must be real and must have some value in the eyes of law. Indian contract Act, 1872, does not have such provision but the courts in India generally followed the English law on this point. Exceptions to consideration: While ection 25 lays down a general rule that an agreement without consideration is void, it also provides the exceptions to this general rule. ection 185 I.C. Act, 1872 is also an exception to this rule which provides that "No consideration is necessary to create an agency". These exceptions are - 1. Agreement made on account of natural love and affection between parties. 2. A promise to compensate for something done voluntarily. 3. Promise to pay a time-barred debt. 1. Natural love and affection: Written and registered agreement based on natural love and affection between near relatives is enforceable without consideration. An important case on this point is- Raj Lukhy Devi Vs Bhootnath Mukhedee (1900) 4 Cal WN 488 The defendant promised to pay his wife a monthly fixed payment for her separate residence and maintenance. They separated due to certain quarrels and disagreements that was in black and white in a deed. The Calcutta H.C. held that the agreement did not come within exception. There was no love and affection between the parties whose quarrels had compelled them to separate. 2. Past Voluntary ervice: A promise to pay for a past voluntary service is binding. 19
trictly for Internal Circulation - KCL In the case of Karam Chand Vs Basant Kaur (1911) Punjab records, No. 31 p. 91, the court held that a promise made after attaining majority to pay for goods supplied to the promisor during minority comes within this exception. 3. Time-barred debt: The promise to pay time-barred debt should be in writing and also be signed by the promisor or "by his agent generally or specially authorised in that behalf." 4. No consideration necessary for the creation of agency: ection 185 of IC Act, 1872, recognises one more exception for consideration in respect of the creation of agency. It provides, "No consideration is necessary to create an agency". IMPORTANT QUETION Q.1. Q.2. Q.3. Q.4. Q.5. Q.6. Q.7. Q.8. Q.9. Define consideration. Is the existence of consideration necessary for every valid contract? Write exceptions also. "Minors are incapable to enter into contract." Discuss. OR A contract with a minor is void in India. Explain What do you understand by coercion? What is its effect on a contract? Explain. Define fraud. Discuss its essential elements and explain, what is effect of fraud on a contract. Differentiate between fraud and misrepresentation also. Define consideration. Under what circumstances the object and consideration of a contract is deemed unlawful? Give examples. "No Consideration, no Contract." What are the exceptions to this rule? What do you understand by capacity to contract? Who are competent and who are not competent to contract under the Indian contract Act, 1872? Explain. What do you understand by Consent? Is Consensus ad idem between parties necessary for a valid contract? When a consent is free? What do you understand by mistake? What are the kinds of mistake? Discuss the mistake of Law and its effect on Contract. 20