Contract act

MERCANTILE LAW NOTES 5

“Don’t stop until, you find The GOAL”

Chapter 1 INTRODUCTION

We enter into contracts every day. Taking a seat in a bus amounts to entering into a contract.

When you put a coin in the slot of a weighing machine, you have entered into a contract. You go

to a restaurant and take snacks; you have entered into a contract. In such cases, we do not even

realise that we are making a contract. In the case of people engaged in trade, commerce and

industry, they carry on business by entering into contracts. The law relating to contracts is to be

found in the Indian Contract Act, 1872.

1. DEFINITIONS

A. CONTRACT Anson – Legally binding agreement between two or more person

by which rights are acquired by one or more to Act or forbearance

on the part of the other.

Salmond – an agreement creating and defining obligation between

parties

Pollock – Every agreement and promise enforceable at law is a

contract

Sec.2(h)An agreement enforceable by law is a Contract.

B.AGREEMENT Sec.2

(e)

Every promise and every set of promises forming consideration for

each other.

Agreement = Offer + Acceptance of offer

C. ENFORCEABILITY

BY LAW

An agreement is said to be enforceable by law if it creates a legal

obligation on the part of parties.

If an agreement is incapable of creating a duty enforceable by law,

it is not a contract.

D. PROMISE Sec.2 (b) A proposal when accepted becomes a promise.

Example :Ram offers to sell his car for Rs 1,00,000 to Shyam.

Shyam accepts this offer. This offer after acceptance becomes

promise and this promise is treated as an agreement between Ram

and Shyam.

E. CONSIDERATION Price paid by the one party for the promise of the other. Technical

word meaning ‘QUID PRO QUO’ i.e. something in return

“All contracts are agreement but all agreements are not contracts”.

Agreements of moral, religious or social nature are not contracts

they are not likely to create a duty enforceable by law

parties never intend to create a legal obligation.

Ex;

o X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for

the dinner, X cannot go to the court to claim his loss.

o A father promises to pay his son Rs 1000 as pocket allowance. Later he refuses to

pay. The son cannot recover as it is a domestic agreement and there is no intention on

the part of the parties to create legal relations.

o Balfour vs Balfour [(1919) 2 K.B. 571] – A promise by the husband to pay his wife

30 pounds every month was held unenforceable as parties never intended it to be

bound by legal obligations.

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‘Believe in “EFFORTS” rather than miracles’

2. ESSENTIAL ELEMENTS OF A VALID CONTRACT

We have seen above that the two elements of a contract are: (1) an agreement; (2) legal

obligation. Section 10 of the Act provides for some more elements which are essential in order to

constitute a valid contract. It reads as follows:

“All agreements are contracts if they are made by 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.”

Thus, the essential elements of a valid contract can be summed up as follows

1. Agreement.

2. Intention to create legal relationship.

3. Free and genuine consent.

4. Parties competent to contract.

5. Lawful consideration.

6. Lawful object.

7. Agreements not declared void or illegal.

8. Certainty of meaning.

9. Possibility of performance.

10. Necessary Legal Formalities.

These essential elements are explained briefly.

1. AGREEMENT

As already mentioned, to constitute a contract there must be an agreement. An agreement is

composed of two elements—offer and acceptance. The party making the offer is known as the

offeror, the party to whom the offer is made is known as the offeree. Thus, there are essentially to

be two parties to an agreement. They both must be thinking of the same thing in the same sense.

In other words, there must be consensus-ad-idem.

Thus, where ‘A’ who owns 2 cars x and y wishes to sell car ‘x’ for Rs. 30,000. ‘B’, an

acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also. He thinks that ‘A’ owns only car

‘y’ and is offering to sell the same for the stated price. He gives his acceptance to buy the same.

There is no contract because the contracting parties have not agreed on the same thing at the

same time, ‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no consensus-

ad-idem.

Distinction between an agreement and a contract

Agreement Offer and its acceptance constitute an

agreement

An agreement may or may not create a

legal obligation

Every agreement need not necessarily

be a contract

Agreement is not concluded or binding

contract

Contract Agreement and its enforceability

constitute a contract

A contract necessarily create a legal

obligation

All contracts are necessarily

agreements.

Contract is concluded and binding on

the concerned parties

2. INTENTION TO CREATE LEGAL RELATIONSHIP

There should be an intention on the part of the parties to the agreement to create a legal

relationship. An agreement of a purely social or domestic nature is not a contract.



However, even in the case of agreements of purely social or domestic nature, there may be

intention of the parties to create legal obligations. In that case, the social agreement is intended to

have legal consequences and, therefore, becomes a contract. Whether or not such an agreement is

intended to have legal consequences will be determined with reference to the facts of the case. In

commercial or business agreements an intention to create legal relations is presumed. Thus, an

agreement to buy and sell goods intends to create legal relationship, hence is a contract, provided

other requisites of a valid contract are present. But if the parties have expressly declared their

resolve is not to create a legal obligation, even a business agreement does not amount to a

contract.

Examples

(1) There was an agreement between Rose Company and Crompton Company, where of the

former were appointed selling agents in North America for the latter. One of the clauses included

in the agreement was: “This arrangement is not... a formal or legal agreement and shall not be

subject to legal jurisdiction in the law courts”.

Held that: This agreement was not a legally binding contract as the parties intended not to have

legal consequences [Rose and Frank Co. v. J.R. Crompton and Bros. Ltd. (1925) A.C. 445].

(2) An aged couple (C and his wife) held out a promise by correspondence to their niece and her

husband (Mrs. and Mr. P.) that C would leave them a portion of his estate in his will, if Mrs. and

Mr. P would sell their cottage and come to live with the aged couple and to share the household

and other expenses. The young couple sold their cottage and started living with the aged couple.

But the two couples subsequently quaralled and the aged couple repudiated the agreement by

requiring the young couple to stay somewhere else. The young couple filed a suit against the aged

couple for the breach of promise.

Held: That there was intention to create legal relations and the young couple could recover

damages [Parker v. Clark (1960) 1 W.L.R. 286].

3. FREE AND GENUINE CONSENT

The consent of the parties to the agreement must be free and genuine. The consent of the parties

should not be obtained by misrepresentation, fraud, undue influence, coercion or mistake. If the

consent is obtained by any of these flaws, then the contract is not valid.

4. PARTIES COMPETENT TO CONTRACT

The parties to a contract should be competent to enter into a contract. According to Section 11,

every person is competent to contract if he (i) is of the age of majority, (ii) is of sound mind, and

(iii) is not disqualified from contracting by any law to which he is subject. Thus, there may be a

flaw in capacity of parties to the contract. The flaw in capacity may be due to minority, lunacy,

idiocy, drunkenness or status. If a party to a contract suffers from any of these flaws, the contract

is unenforceable except in certain exceptional circumstances.

5. LAWFUL CONSIDERATION

The agreement must be supported by consideration on both sides. Each party to the agreement

must give or promise something and receive something or a promise in return. Consideration is

the price for which the promise of the other is sought. However, this price need not be in terms of

money. In case the promise is not supported by consideration, the promise will be nudum pactum

(a bare promise) and is not enforceable at law.

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Moreover, the consideration must be real and lawful. Consideration must not be unlawful,

immoral or opposed to the public policy.

Examples:

Unlawful: -A agrees to sell narcotics to B for a sum of Rs. 100000. This agreement is not valid

because the consideration is unlawful.

Immoral: - An agreement for letting a house to a prostitute for carrying on her vocation there.

Opposed to public policy: - Trading with enemy, Agreement in restraint of marriage, trade, legal

proceedings etc.

6. LAWFUL OBJECT

The object of the agreement must be lawful and not one which the law disapproves.

Example

A, B and C enter into an agreement for the division among them of gains acquired or to be

acquired by them by fraud. The agreement is void because its object is unlawful.

7. AGREEMENTS NOT DECLARED ILLEGAL OR VOID

There are certain agreements which have been expressly declared illegal or void by the law. In

such cases, even if the agreement possesses all the elements of a valid agreement, the agreement

will not be enforceable at law.

Example:- Agreement in restraint of trade, marriage or legal proceedings are expressly declared

void by the law and hence not enforceable.

8. CERTAINTY OF MEANING

The meaning of the agreement must be certain or capable of being made certain otherwise the

agreement will not be enforceable at law. For instance, A agrees to sell 10 metres of cloth. There

is nothing whatever to show what type of cloth was intended. The agreement is not enforceable

for want of certainty of meaning. If, on the other hand, the special description of the cloth is

expressly stated, say Terrycot (80 : 20), the agreement would be enforceable as there is no

uncertainly as to its meaning. However, an agreement to agree is not a concluded contract [Punit

Beriwala v. Suva Sanyal AIR 1998 Cal. 44].

9. POSSIBILITY OF PERFORMANCE

The terms of the agreement should be capable of performance. An agreement to do an act

impossible in itself cannot be enforced. For instance, A agrees with B to discover treasure by

magic. The agreement cannot be enforced.

10. NECESSARY LEGAL FORMALITIES

A contract may be oral or in writing. If, however, a particular type of contract is required by law

to be in writing, it must comply with the necessary formalities as to writing, registration and

attestation, if necessary. If these legal formalities are not carried out, then the contract is not

enforceable at law.



3.

*VALID *EXECUTED

*VOID *IMPLIED *EXECUTORY

*VOIDABLE *EXPRESS *BILATERAL

*UNENFORCEABLE *UNILATERAL

*ILLIGAL

1. VALID CONTRACT

A contract to constitute a valid contract must have all the essential elements discussed earlier. If

one or more of these elements is/are missing, the contract is voidable, void, illegal or

unenforceable.

2. VOID CONTRACT

An agreement which is not enforceable by either of the parties to it is void [Section 2(i)]. Such an

agreement is without any legal effect ab initio (from the very beginning). Under the law, an

agreement with a minor is void (Section 11).*

A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable

[Section 2(i)].

Examples

(1) A and B contract to marry each other. Before the lime fixed for the marriage, A goes mad.

The contract becomes void.

(2) A contracts to take indigo for B to a foreign port. A’s government afterwards declares war

against the country in which the port is situated. The contract becomes void when war is declared.

In the above two examples, the contracts were valid at the time of formation. They became void

afterwards. In example (1) the contract became void by subsequent impossibility. In example (2)

the contract became void by subsequent illegality.*

TYPES OF CONTRACTS

ENFORCEABILITY CREATION

EXPRESS CONTRACTS IMPLIED CONTRACTS QUASI COVALID CONTRACTS

VOID CONTRACT VOID AGREEMENTS VOIDABLE CONTRACTS UNFORCEABLE CONTRACTS ILLEGAL CONTRACTS NTRACTS

EXECUTION ENGLISH LAW

CLASSIFICATION

EXECUTORY CONTRACTS EXECUTED CONTRACTS

FORMAL

CONTRACTS SIMPLE

CONTRACTS

CONTRACT

OF RECORD

CONTRACT

UNDER SEAL

JUDGEMENT

OF COURT

RECOGNISANCE

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It is misnomer to use ‘a void contract’ as originally entered into. In fact, in that case there is no

contract at all. It may be called a void agreement. However, a contract originally valid may

become void later.

* Other instances of void agreements are:

(a) Agreements entered into through a mutual mistake of fact between the parties (Section 20).

(b) Agreements, the object or consideration of which is unlawful (Section 23).

(c) Agreements, part of the consideration or object of which is unlawful (Section 21).

(d) Agreements made without consideration (Section 25).

(e) Agreements in restraint of marriage (Section 26).

(f) Agreements in restraint or trade (Section 27).

(g) Agreements in restraint of legal proceedings (Section 28).

(h) Uncertain agreements (Section 29).

(i) Wagering agreements (Section 30).

(j) Impossible agreements (Section 56).

(k) An agreement to enter into an agreement in the future.

3. VOIDABLE CONTRACTS

As per Section 2 (i) a voidable contract is one which may be repudiated at the will of one of the

parties, but until it is so repudiated it remains valid and binding. It is affected by a flaw (e.g.,

simple misrepresentation, fraud, coercion, undue influence), and the presence of anyone of these

defects enables the party aggrieved to take steps to repudiate the contract. It shows that the

consent of the party who has the discretion to repudiate it was not free.

Example

Mr. A, at knife - point, asks B to sell his scooter for Rs. 50. Mr. B gives consent. The agreement

is voidable at the option of B, whose consent is not free.

A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical

attendant to agree to pay B an unreasonable sum for his professional services. B employs undue

influence. A’s consent is not free; he can take steps to set the contract aside.

4. ILLEGAL CONTRACTS

An illegal agreement is one the consideration or object of which (1) is forbidden by law; or (2)

defeats the provisions of any law; or (3) is fraudulent; or (4) involves or implies injury to the

person or property of another; or (5) the court regards it as immoral, or opposed to public policy.

Examples

(1) A, B and C enter into an agreement for the division among them of gains acquired or to be

acquired, by them by fraud. The agreement is illegal.

(2) A promises to obtain for B an employment in the public service, and B promises to pay Rs.

1,000 to A. The agreement is illegal.

Every agreement of which the object or consideration is unlawful is not only void as between

immediate parties but also taints the collateral transactions with illegality.

5. UNENFORCEABLE CONTRACT

An unenforceable contract is neither void nor voidable, but it cannot be enforced in the court

because it lacks some item of evidence such as writing, registration or stamping. For instance, an



agreement which is required to be stamped will be unenforceable if the same is not stamped at all

or is under-stamped. In such a case, if the stamp is required merely for revenue purposes, as in

the case of a receipt for payment of cash, the required stamp may be affixed on payment of

penalty and the defect is then cured and the contract becomes enforceable. If, however, the

technical defect cannot be cured the contract remains unenforceable, e.g., in the case of an

unstamped bill of exchange or promissory note.

6. EXPRESS CONTRACT

A contract which is created either by word spoken or written.

Example: - If ‘A’ of Agra offers to sell his car for Rs. 150000 to ‘B’ of Delhi by a letter and ‘B’

accepts the offer by writing a letter. Thus the contract between ‘A’ and ‘B’ is said to be an

express contract.

7. IMPLIED CONTRACTS

The terms of a contract may be inferred from the conduct of the parties or from the circumstances

of the case. This is an implied contract (Section 9).

Example

If A enters into a bus for going to his destination and takes a seat, the law will imply a contract

from the very nature of the circumstances, and the commuter will be obliged to pay for the

journey.

We have seen that the essence of a valid contract is that it is based on agreement of the parties.

Sometimes, however, obligations are created by law (regardless of agreement) whereby an

obligation is imposed on a party and an action is allowed to be brought by another party. These

obligations are known as quasi-contracts. The Indian Contract Act, 1872 (Chapter V Sections 68–

72) describes them as “certain relations resembling those created by contract”.

Examples

(1) A supplies B, a minor, with necessaries suitable to his condition in life. A is entitled to be

reimbursed from B’s property.

(2) A supplies the wife and children of B, a minor, with necessaries suitable to their condition in

life. A is entitled to be reimbursed from B’s property.

(3) A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. B is

bound to pay A for them.

In all the above cases, the law implies a contract and a person who has got benefit is under an

obligation to reimburse the other.

A contract which is inferred from the conduct of the parties is said to be tacit contract.

For example: - Obtaining cash form ATM

8. E-CONTRACT

An e-contract is one, which is entered into between two parties via internet.

9. EXECUTED CONTRACT

An executed contract is one wholly performed. Nothing remains to be done in terms of the

contract.

Example

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A contracts to buy a bicycle from B for cash. A pays cash. B delivers the bicycle.

10. EXECUTORY CONTRACT

An executory contract is one which is wholly unperformed, or in which there remains something

further to be done.

Example

On June 1, A agrees to buy a bicycle from B. The contract is to be performed on June 15. The

executory contract becomes an executed one when completely performed. For instance, in the

above example, if both A and B perform their obligations on June 15, the contract becomes

executed. However, if in terms of the contract performance of promise by one party is to precede

performance by another party then the contract is still executory, though it has been performed by

one party.

11. UNILATERAL CONTRACT

A Unilateral Contract is one wherein at the time the contract is concluded there is an obligation

to perform on the part of one party only.

Example

A makes payment for bus fare for his journey from Bombay to Pune. He has performed his

promise. It is now for the transport company to perform the promise.

12. BILATERAL CONTRACT

A Bilateral Contract is one wherein there is an obligation on the part of both to do or to refrain

from doing a particular thing. In this sense, Bilateral contracts are similar to executory contracts.



Chapter 2

OFFER & ACCEPTANCE

PROPOSAL [Sec 2(a)]:-

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

either to such act or abstinence,

He is said to make a proposal.

Examples

(1) A proposes, by letter, to sell a house to B at a certain price. This is an offer by an act by

written words (i.e., letter). This is also an express offer.

(2) D said to E, “I want to sell my bike to you.” This is an offer “to do something”.

(3) A owns a motor boat for taking people from Bombay to Goa. The boat is in the waters at the

Gateway of India. This is an offer by conduct to take passengers from Bombay to Goa. He need

not speak or call the passengers. The very fact that his motor boat is in the waters near Gateway

of India signifies his willingness to do an act with a view to obtaining the assent of the other. This

is an example of an implied offer.

(4) A offers not to file a suit against B, if the latter pays A the amount of Rs. 200 outstanding.

This is an offer by abstinence or omission to do something.

Essential Requirements of a Valid Offer

1. Must be made with a view to obtain acceptance.

2. Must be made with the intention of creating legal relations.

3. Terms of offer must be definite, unambigous and certain or capable of being made certain.

4. It must be distinguished from mere declaration of intention or an invitation to offer.

5. It must be communicated to the offeree.

6. The offer must not contain a term the non-compliance of which may be assumed to amount to

acceptance.

7. A tender is an offer as it is in response to an invitation to offer.

8. The Special terms, forming part of the offer, must be duly brought to the notice of the offeree

at the time the offer is made.

9. Two identical cross-offers do not make a contract.

Examples for point 3:

(1) A offers to sell to B “a hundred quintals of oil”. There is nothing whatever to show what kind

of oil was intended. The offer is not capable of being accepted for want of certainty.

(2) A who is a dealer in coconut oil only, offers to sell to B “one hundred quintals of oil”. The

nature of A’s trade affords an indication of the meaning of the words, and there is a valid offer.

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(3)‘A’ has two Maruti cars, one is red and other blue. He offers to sell his car to ‘B’. In this case,

which car he is offering to sell is not clear. Therefore the offer is not valid one.

Example for point 4:

(4) Examples of Invitation to Offer

1. Window display of goods by a shopkeeper.

2. Quotations, Catalogue, Price list.

3. Advertisement in a newspaper for sale of an article.

Example:- Goods are sold in a shop under ‘self service’ system. Customer selects the goods in

the shop and takes them to the cashier for payment of price. Cashier refuses to accept the

payment. Held that customer cannot bind the shopkeeper for delivery of goods.

(Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. )


G sent S, his servant, to trace his missing nephew. Subsequently, G announced a reward for

information relating to the boy. S, traced the boy in ignorance of the announcement regarding

reward and informed G. Later, when S came to know of the reward, he claimed it. Held, he was

not entitled to the reward on the ground that he could not accept the offer unless he had

knowledge of it [Lalman Shukla v. Gauri Dutt, II, A.L.J. 489].


A tells B ‘I offer to sell my dog to you for Rs. 45. If you do not send in your reply, I shall assume

that you have accepted my offer’. The offer is not a valid one.


A invites tenders for the supply of 10 quintals of sugar. B, C, and D submit their tenders. B’s

tender is accepted. The contract is formed immediately the tender is accepted.


P, a passenger deposited a bag in the cloakroom at a Railway Station. The acknowledgement

receipt given to him bore, on the face of it, the words “See back”. One of the conditions printed

on the back limited the liability of the Railways for any package to £10. The bag was lost, and P

claimed £24. 10s, its value, pleading that he had not read the conditions on the back of the

receipt.

Held: P was bound by the conditions printed on the back as the company gave reasonable notice

on the face of the receipt as to the conditions at the back of the document [Parker v. South

Eastern Rly. Co. (1877) 2 C.P.D. 416].


In (Tinn Vs. Hoffmann 1873), A wrote to B indicating his willingness to sell 800 tons of iron at

69 s. per ton. On the same day B also wrote to A offering to buy 800 tons of iron at the same

rate of 69 s. per ton. The two letters crossed each other in post. B brought an action against A

for the supply of iron contending that a valid contract had been created between the two parties.

It was held that in this case there were only two cross offers and the offer of neither of the parties

having been accepted by the other, there was no contract which could be enforced

TYPES OF OFFER

SPECIFIC AND GENERAL OFFER



An offer can be made either:

1. to a definite person or a group of persons, or

2. to the public at large.

The first mode of making offer is known as specific offer and the second is known as a general

offer. In case of the specific offer, it may be accepted by that person or group of persons to whom

the same has been made. The general offer may be accepted by any one by complying with the

terms of the offer.

Examples

(1) A offers to sell his house to B at a certain price. The offer has been made to a definite person,

i.e., B. It is only B who can accept it [Boulton v. Jones (1857) 2H. and N. 564].

(2) In Carbolic Smoke Ball Co.’s case (supra), the patent-medicine company advertised that it

would give a reward of £100 to anyone who contracted influenza after using the smoke balls of

the company for a certain period according to the printed directions. Mrs. Carlill purchased the

advertised smoke ball and contracted influenza in spite of using the smoke ball according to the

printed instructions. She claimed the reward of £100. The claim was resisted by the company on

the ground that offer was not made to her and that in any case she had not communicated her

acceptance of the offer. She filed a suit for the recovery of the reward.

Held: She could recover the reward as she had accepted the offer by complying with the terms of

the offer.

CROSS OFFERS

When the offers made by two persons to each other containing similar terms of bargain cross

each other in post they are known as cross offers. For example, on 1st January A offers to sell his

radio set to B for Rs. 500/- through a letter sent by post. On the same date B also writes to A

making an offer to purchase A’s radio set for Rs. 500 /- When A or B send their letters they

do not know about the offer which is being made by the other side. In these cross offers, even

though both the parties intend the same bargain, there arises no contract. A contract could arise

only if either A or B , after having the knowledge of the offer, had accepted the same.

COUNTER OFFER

A qualified acceptance to the offer subject to modifications and variations in the terms of original

offer. Counter offer amounts to rejection of the original offer.

When in place of accepting the terms of an offer as they are, the offeree accepts the same subject

to certain condition or qualification, he is said to make a counter-offer. The following have been

held to be counter-offers:

(i) Where an offer to purchase a house with a condition that possession shall be given on a

particular day was accepted varying the date for possession [Routledge v. Grant (1828)].

(ii) An offer to sell rice was accepted with an endorsement on the sold and bought note that

yellow and wet grain will not be accepted [All Shain v. Moothia Chetty, 2 Bom L.R. 556].

STANDING, OPEN OR CONTINUING OFFER

An offer which is allowed to remain open for acceptance over a period of time is known as a

sanding, open or a continuing offer. For example, an offer to supply 1,000 bags of wheat from

1st January to 31st December, in accordance with the orders which may be placed from time to

time to time, is a standing offer. As and when the orders are placed that amounts to acceptance of

the offer to that extent. In the above stated illustration if an order for the supply of 100 bags of

16 CA NAVEEN BAID


wheat is placed on 15th January, there is acceptance of the offer to that extent and the offeror

becomes bound to supply those 100 bags of wheat. So far as the remaining quantity is concerned

this offer can be revoked just like any other offer.

Tender for supply of goods is a kind of standing offer. An advertisement inviting tenders is

merely invitation for quotations. When the tender is approved it becomes a standing offer.

In Bengal Coal Co. Vs. Homie Wadia & Co., the defendants (Bengal Coal Co.) agreed to

supply coal to the plaintiff (Homie Wadia & Co. ) up to a certain quantity at an agreed price for a

period of 12 months, as may be required by the plaintiffs from time to time. The plaintiffs placed

orders for the supply of coal and the same were complied with. Before the expiry of 12 months,

the defendants withdrew their offer to supply further coal, and refused to comply with the orders

to supply further coal, and refused to comply with the orders placed thereafter. They were sued

for breach of contract. There was simply a continuing offer to supply coal. They were bound to

supply coal only as regards orders which had already been placed, but were free to revoke their

offer for supply of coal thereafter

LAPSE (Revocation) OF AN OFFER

On expiry of stipulated or reasonable time.

By not accepting in mode prescribed.

By rejection by the offeree.

By death or insanity of the offerer or offeree before acceptance.

By revocation by the offeror at any time before acceptance.

Revocation of standing offer at any time by giving notice to the offeree.

Revocation by non fulfillment of condition precedent to acceptance.

By subsequent illegality or destruction of subject matter.

In case of sale by auction the bids made at the auction are offers, and the highest offer may be

accepted by the auctioneer. In such a case the sale is complete when the auctioneer announces its

completion by the fall of the hammer or in any other customary manner ; and , until such

announcement is made, any bidder may retract his bid.

Submission of a tender to supply or purchase goods at a stated price is making an offer. Person

submitting the tender may withdraw his tender before the same has been approved. Even after

the tender has been approved that remains only a standing offer, which is capable of being

revoked before a contract arises by placing of orders. In Rajendra Kumar Verma Vs. State of

Madhya Pradesh AIR 1972.

ACCEPTANCE:- Sec.2(b)

When the person to whom proposal is made signifies his assent thereto, the proposal is

said to be accepted. A proposal when accepted becomes a promise

LEGAL RULES AS TO VALID ACCEPTANCE



Acceptance must be

absolute and unqualified Offeree should be assented to all terms & conditions of the offer. A

qualified acceptance amounts to counter offer.

Acceptance must be

communicated

Mere mental acceptance is not acceptance. Acceptance cannot be

made in ignorance of the offer. Mere silence is not acceptance.

Acceptance to Whom Acceptance must be communicated to the offeror i.e. the person who

made the offer.

Mode of Acceptance Acceptance must be in the mode prescribed in the proposal. If no

mode prescribed in the proposal, the acceptance must be according to

some usual and reasonable mode.

Time for Acceptance Acceptance must be given within specified time limits given in the

offer. In case no time is specified in the offer, offer must be accepted

within reasonable time and before the offer lapses.

Example:- A person applied for shares in a company in june. He

cannot be bound by the allotment made late in November since

delay of 6 months in acceptance of application for shares was

unreasonable.(Ramsgate Victoria Hotels v. Montefiore )

Acceptance by conduct By performance of an act intended by the proposer.

COMMUNICATION OF OFFER & ACCEPTANCE ( Section 4 )

Communication of Offer The communication of offer is complete when it comes to the

knowledge of the person to whom it is made.

(B) Communication of

Acceptance

The communication of acceptance is complete-

(a) As against the

Proposer

When it is put into the course of transmission to

him so as to be out of power of the acceptor to

withdraw the same .

(b) As against the

Acceptor

When it comes to the knowledge of the

proposer.

For instance in response to my offer sent by post to you, you post the letter of acceptance

to me. As soon you have posted the letter my power to revoke comes to an end. This

may be made further clear by referring to the following illustration:

A proposes, by a letter sent by post, to sell his house to B . B accepts the proposal by a

letter sent by post. A may revoke his proposal at any time before or at the moment when

B posts his letter of acceptance, but not afterwards.

B accepts A’s proposal by a letter sent by post. The communication of the acceptance is

complete, --

As against A :- when the letter is posted ;

As against B :- when the letter is received by A.

In Dunlop Vs. Higgins (1848), Dunlop & Co. offered to sell 200 tons of pig iron at 65 sh.

Per ton to Higgins & Co. through their letters dated 22nd and 28th January, Higgins &

Co. received the letters on 28th and 30th January and replied on the same indicating their

acceptance to purchase the pig iron in accordance with the offer. Due to frosty weather

there was disruption in the train services and the letter of acceptance instead of reaching

on 31st January reached Dunlop & Co. on 1st February. Dunlop & Co. refused to supply

pig iron on the ground that the receipt of the letter of acceptance by them had been

18 CA NAVEEN BAID


delayed. It was held that Dunlop & Co. had become bound by the contract as soon as the

letter of acceptance was posted to them.

COMMUNICATION OF ACCEPTANCE TO A WRONG PERSON

It has already been seen that the offeror becomes bound as soon as the letter of acceptance is

posted to him. If the letter of acceptance is posted at the wrong address or to a wrong person, that

will not bind the offeror. In this connection reference may be made to the decision of the court in

the case of Karan Singh Vs. The Collector, Chhatarpur to explain the point. In that case in an

auction of the quarry lease the petitioner’s bid of Rs. 1,800 was the highest bid. In accordance

with the auction conditions the petitioner deposited the security deposit and earnest money of Rs.

540. The bid was not accepted at the auction. The bid was subsequently accepted by the collector,

but instead of sending the communication of acceptance to the petitioner the same was wrongly

sent to somebody else. The officer concerned realised the mistake after the expiry of the period

of lease. Then a demand notice was sent to the petitioner asking him to pay the lease money.

The petitioner, on the other hand, demanded the refund of the security deposit of Rs. 540.

It was held that the petitioner’s bid, which was an offer, although accepted on file, did not

result in a contract as no intimation was sent to the petitioner which was received by him. The

demand notice for recovering the lease money was quashed and the respondents were directed to

refund the security deposit.

REVOCATION OF OFFER & ACCEPTANCE ( Section 4 )

The communication of revocation is complete-

As against the person who

makes it

When it is put into the course of transmission to the person to

whom it is made so as to be out of power of the person who

makes it.

As against the person to whom

it is made

When it comes to his knowledge.

REVOCATION OF ACCEPTANCE (INDIA)

In India, since the acceptor does not become bound immediately on posting his letter of

acceptance, he is free to revoke the acceptance by adopting speedier mode of communication,

whereby his communication of revocation of acceptance may reach earlier than his letter of

acceptance. Section 5 expressly permits the revocation of acceptance through the following

provision :

“An acceptance may be revoked at any time before the communication of the acceptance is

complete as against the acceptor, but not afterwards.”

Illustration : A proposes, by a 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.

REVOCATION OF ACCEPTANCE (ENGLAND)

Under the English law, once the letter of acceptance is posted it binds both the parties and

there appears to be no scope of revocation of acceptance by sending a telegram or through a



Chapter 3

phone call. Although there are no English cases on the subject are of the view that the posting of

the letter of acceptance once posted cannot be revoked.

TIME FOR REVOCATION ( Section 5 )

Revocation of Offer An offer can be revoked at any time before the communication

of acceptance is complete as against the proposer.

Revocation of Acceptance An acceptance can be revoked at any time before the

communication of acceptance is complete as against the

offeree.

CONSIDERATION

CONSIDERATION: - “QUID PRO QUO” – i.e. something in return. Consideration is the

price agreed to be paid by the promisee for the obligation of the promisor.

When, at the desire of the promisor,

the promisee or any other person

has done or abstained from doing or

does or abstains from doing or

promise to do or to abstain from doing something,

such act or abstinence or promise is called consideration for the promise.[Section2(d)]

20 CA NAVEEN BAID


LEGAL REQUIREMENTS REGARDING CONSIDERATION

A. Consideration must

move at the desire of the

promisor

Consideration must move at the desire or request of the promisor. Any act

done at the desire of a third party is not consideration.

Example:- D constructed a market at the desire of the collector of the district.

B, a shopkeeper of the market promised to pay commission to D on the sales

effected by him. Later on B denies to pay the promised amount. D filed a suit

in the court for the recovery of the amount.

The court held that D cannot recover the amount from B because D has

constructed the market at the desire of the collector , not at the desire of the

promisor i.e. B. ( Durga Prasad V. Baldeo )

B. Consideration may

move from the promisee

or any other person

Consideration may move from the promisee or any other person who is not a

party to the contract. Thus, there can be a stranger to a consideration.

Example:- A, by a deed of gift transferred certain property to her daughter

with the direction that daughter should pay an annuity to her sister .

The daughter executed a writing in favour of her sister agreeing to pay the

annuity.

Later on, she refused to pay the amount to her sister taking a plea that no

consideration is given to her in return from her sister.

The court held that consideration need not necessarily move from the

promisee. Hence, she is bound to pay the promised amount to her sister.

( Chinnayya V. Rammayya )

C. Executed and

Executory consideration

If consideration under the contract has been given, it is said to be executed. If

consideration under the contract is to be moved in future, it is called

executory consideration.

D. Consideration may

be past, present or future

Past

consideration

The words “has done or abstained from doing” indicates

past consideration. Past consideration is no consideration

in England.

Present

consideration

The words “does or abstains from doing” indicates present

consideration. Consideration which moves simultaneously

with the promise.

Example:- Cash Sales.

Future

consideration

The words “promise to do or to abstain from doing”

indicates future consideration. Consideration which is to

be performed in future.

Example:- A get booked an air ticket from Delhi to Goa.

The flight is to be take off on the next day. In this case the

consideration from A is a Past consideration and

consideration is pending on the part of Airlines which is to

be performed in future.

E. Consideration should be real, not illusory If consideration is an illusory one, then it is not valid.

F. Consideration need not be adequate Though consideration is an essence of contract, adequacy of

consideration is not regarded as an essence of contract. Courts

do not regard the adequacy of consideration, it is at the part of

promisor to consider that whether he is receiving adequate

consideration or not.

G. The performance of an act what one is legally bound to perform is not consideration for the contract

Example:- Promise to pay money to a witness.

H. Consideration must not be unlawful, immoral or opposed to the public policy

A THIRD PARTY OR A STRANGER TO A CONTRACT CANNOT SUE

A stranger to a contract means a person who is not a party to the contract. There is a privity

of contract between the parties. Therefore only a party to the contract can enforce its rights



under the contract.

EXCEPTIONS:-

i. Trust In case of trust, a beneficiary can sue upon the contract.

Example:- H sued her father in law K to recover Rs 15000 being the

arrears of allowance payable to her by K. K under an agreement made

between K and H’s father, in consideration of H’s marriage to K’s son D.

Held that she can recover the amount because she is a beneficiary under the

contract. (Khwaja Muhammad V. Hussaini Begum)

ii. Family Settlement In case of family settlement, if the terms of settlement are reduced into

writing, members who were not originally party to the contract can

also sue upon it.

iii. Marriage

Contracts

A female member can enforce a provision for marriage expenses made

on partition of HUF between male members.

iv. Acknowledgement

of Liability

Where a person admits his liability, thereafter, if he refused, he will be

estopped from denying his liability.

Example:- Where A receives money from B for paying it to C and A

admits C the receipt of that amount. Later on if he refuses, he will be

stopped from denying his liability to pay the amount.

v. Assignment In case of assignment of a contract, Where the benefit under the contract

has been assigned, the assignee (the person to whom benefits of contract

are assigned) can enforce upon the contract.

vi. Covenant running

with land

The person who purchases land with notice that the owner of land is bound

by certain duties affecting land, the covenant affecting the land may be

enforced against the successor of the seller.

NO CONSIDERATION, NO CONTRACT

The general rule of law is that an agreement without consideration is void.

EXCEPTIONS

(i) Agreement on account of Natural love and Affection

Example:- A husband by a registered document after referring to quarrels and disagreements

between himself and his wife, promised to pay his wife a sum of money for her maintenance and

separate residence, it was held that the promise was unenforceable. (Rajlukhy Devi V. Bhootnath )

(ii) Compensation for past voluntary services {Section 25 (2)}

Services rendered voluntarily.

Services rendered for the promisor.

Promisor must be in existence at the time of rendering services.

Promisor must have intended to compensate the promisee.

Example:- X finds Y’s purse and gives it to him. Y promises to give X Rs 1000. This is a valid

contract.

WRITTEN AND REGISTERED AGREEMENT

BASED ON NATURAL LOVE

AND AFFECTION

PARTIES STANDING IN

NEAR RELATION

22 CA NAVEEN BAID


Chapter 4

(iii) Promise to pay time barred debt {Section 25 (3)}

A promise to pay, wholly or in part a debt which is barred by law of limitation can be

enforced if it is :-

In writing and

Signed by the person making it or his authorized agent.

(iv) Agency

According to Section 185 of the Indian Contract Act, no consideration is necessary to

create an agency.

(v) Completed Gifts

Gifts do not require any consideration. ( Explanation 1 to Section 25)

(vi) Charity

A promise to contribute to charity, though gratuitous, would be enforceable, if on the

faith of the promised subscription, the promisee takes definite steps in furtherance of

the object and undertakes a liability, to the extent of liability incurred, not exceeding

the promised amount of subscription.(Kedarnath V. Gorie Mohammad)

(vii) Bailment

Consideration is not necessary to effect bailment.(Section 148)

Examples for Consideration:

(a) A agrees to sell his house to B for 10,000 rupees. Here B’s promise to pay the sum of 10,000

rupees is the consideration for A’s promise to sell the house, and A’s promise to sell the house is the

consideration for B’s promise to pay the 10,000 rupees. These are lawful considerations.

(b) A promises to pay B 10,000 rupees at the end of six months, if C who owes that sum to B, fails to

pay it. B promises to grant time to C accordingly. Here the promise of each party is the consideration

for the

Promise of the other party and they are lawful considerations.

(c) A promises, for a certain sum paid to him by B, to make good to B the value of his ship if it is

wrecked on a certain voyage. Here A’s promise is the consideration for B’s payment, and B’s

payment is the consideration for A’s promise, and these are lawful considerations.

(d) A promises to maintain B’s child and B promises to pay A 1,000 rupees yearly for the purpose.

Here the promise of each party is the consideration for the promise of the other party. They are lawful

considerations.

(e) A, B and C enter into an agreement for the division among them of gains acquired, or to he

acquired, by them by fraud. The agreement is void, as its object is unlawful.

(f) A promises to obtain for B an employment in the public service, and B promises to pay 1,000

rupees to A. The agreement is void, as the consideration for it is unlawful.

(g) A promises B to drop a prosecution which he has instituted against B for robbery, and B promises

to restore the value of the things taken. The agreement is void, as its object is unlawful.

(h) A, who is B’s power of attorney holder promises to exercise his influence, as such, with B in

favour of C, and C promises to pay 1,000 rupees to A. The agreement is void, because it is immoral.

CAPACITY TO CONTRACT

One of the essentials of a valid contract is the competency of the parties to make contract. Law

has laid down certain rules as to who are competent to enter into a valid contract. As per Section

11 every person is competent to contract who is of the age of majority according to the law to

which he is subject, and who is of sound mind, and is not disqualified from contracting by any

law to which he is subject.

Three tests of Competency:

Age

Soundness



Disqualification

All the three tests must be applied to determine whether a person is competent to contract or not.

From the above provisions of the section it means the following types of persons are not

competent to contract.

(a) A person who has not attained the age of majority, i,e minor.

(b) A person of unsound mind

(c) A person who is disqualified from contracting by some law.

POSITION OF MINOR:

As per section 3 of the Indian Majority Act of 1875, every person in India is a minor if he has not

attained the age of 18 years of age. However in case of a minor of whose person or property or

both a guardian has been appointed under the Guardian and Wards Act, 1890 or whose property

is under the superintendence of any court of wards before he attains 18 years if age is 21 years.

The position of Minor’s agreement and effect thereof is as under;

(a) An agreement with a minor is void ab-initio. A minor’s contract being void, any money

advanced to a minor cannot be recovered. {Mohiri Bibi V. Dharmodas Ghose (1903)}

(b) The law of estoppels does not apply against a minor. It means a minor can always his

plead his minority despite earlier misrepresenting to be a major. In other words he can not be

held liable on an agreement on the ground that since earlier he had asserted that he had attained

majority.

Example:- A, a minor by fraudulently representing himself to be a major, induce B to lend him

Rs.2000. He refused to repay it and B sued him for the money. Held that the contract was void

and A was not liable to repay the amount due.

(c) Doctrine of Restitution does not apply against a minor.

Lahore High Court held that where the contract is set aside the status quo ante should be restored

and the court may direct the minor, on equitable grounds, to restore the money or property to the

other party. Thus, in such cases, if money could be traced, the court would, on equitable grounds,

ask the minor for restitution. [KHAN GUL V. LAKHA SINGH]

(d) No Ratification on Attaining Majority. Ratification means approval or confirmation. A

minor cannot confirm an agreement made by him during minority on attaining majority. If he

wants to ratify the agreement, a fresh agreement and fresh consideration for the new agreement is

required.

Example: ‘A’, a minor makes a promissory note in favour of ‘B’. On attaining majority, he

makes out a fresh promissory note in lieu of old one. Neither the original, nor the fresh

promissory note is valid.

(e) Contract beneficial to Minor. A minor is entitled to enforce a contract which is of some

benefit to him. Minority is a personal privilege and a minor can take advantage of it and bind

other parties.

A promissory note executed in favour of a minor is valid and can be enforced by the minor. A

minor can be payee of a cheque or other negotiable instrument.

(f)A Minor cannot become a partner in a firm but he can be admitted to the benefits of the

partnership with the consent of all partners.( Section 30 of Indian Partnership Act, 1932)

(g) Minor as an agent. A minor can be appointed an agent, but he is not personally liable for any

of his acts.

24 CA NAVEEN BAID


(h) Minor’s liability for necessities. If somebody has supplied a minor or his dependents with

necessities, minor’s property is liable.

(i)Contract by minor’s guardian: A contract may be entered into on behalf of a minor by his

guardian or manager of his estate. In such a case the contract can be enforced by or against the

minor provided that the contract

(a) is within the scope of the authority of the guardian or manager, and

(b) is for the benefit of the minor.

WHAT IS A SOUND MIND FOR THE PURPOSES OF CONTRACTING? (Sec. 12)

A person is said to be of sound mind for the purposes of making a contract if, at the time when he

makes it, he is capable of understanding it and of forming a rational judgment as to its 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.

Illustrations

(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 cannot understand the

terms of a contract or form a rational judgment as to its effect on his interests, cannot contract

whilst such delirium or drunken-ness lasts.

Going by the spirit of the section it is clear that a person is sound mind if he fulfills the following

two conditions.

(a) He/she is capable of understanding the contract.

(b) He/she is capable of forming a rational judgment about the effects of such contract on his

interest.

A person not satisfying any of these two conditions is not treated a person of sound mind.

UNSOUND MIND PERSONS



Chapter 5

Other Disqualified Persons

The persons who are disqualified from entering into contract due to certain other reasons may be

from legal status, political status or corporate status. Some of such categories of persons are given

below;

(a) Alien Enemy: An agreement with an Alien Enemy is void.

(b) Foreign Sovereign and Ambassadors: Foreign sovereigns and their representatives enjoy

certain privileges and immunities in every country. They cannot enter into contract except

through their agents residing in India.

(c) Convicts: A convict can not enter into a contract while he is undergoing imprisonment.

(d) Insolvents: An insolvent person is one who is unable to discharge his liabilities and therefore

has applied for being adjudged insolvent or such proceedings have been initiated by any of his

creditors. An insolvent person cannot enter into any contract relating to his property.

(e) Company or Statutory bodies: A contract entered into by a corporate body or statutory body

will be valid only to the extent it is within its Memorandum of Association.

(f) Municipal Bodies: Municipal bodies cannot enter into acts which are beyond their statutory

powers.

FREE CONSENT

26 CA NAVEEN BAID


One of the essential elements of a valid contract is that there should be free consent of the

concerned parties to the contract. ‘Two or more persons are said to consent when they agree upon

the same thing in the same sense.’

Consent is said to be free when it is not caused by—

(1) Coercion, or

(2) Undue influence, or

(3) Fraud, or

(4) Misrepresentation, or

(5) Mistake, subject to provisions of sec 20, 21 and 22.

Consent is said to be so caused when it would not have been given but for the existence of such

coercion, undue influence, fraud, misrepresentation or mistake.

(1) COERCION [See 15]

“Coercion” is the committing or threatening to commit, any act forbidden by the Indian Penal

Code (45 of 1860), or the unlawful detaining, or threatening to detain, any property, to the

prejudice of any person whatever, with the intention of causing any person to enter into an

agreement.

Examples 1. Consent obtained at gun point is caused by coercion.

2. A threats to kill B or threats to detain B's property is committing or threatening to commit an

unlawful act. Hence the consent is caused by coercion.

Effect of coercion:

A contract induced by coercion is voidable at the option of the party whose consent was caused

by coercion.

Sec.72 states, "A person to whom money has been paid or anything delivered by mistake or

under coercion, must repay or return it."

Threat to commit suicide: Committing suicide is unlawful and forbidden by law, and hence

threatening to commit suicide is threatening to commit unlawful act. Thus, a threat to commit

suicide amounts to coercion.

(2) UNDUE INFLUENCE [See 16]

(1) A contract is said to be induced by “undue influence” where the relations subsisting between

the parties are such that one of the parties is in a position to dominate the will of the other and

uses that position to obtain an unfair advantage over the other.

(2) In particular and without prejudice to the generality of the forgoing principle, a person is

deemed to be in a position to dominate the will of another—

(a) Where he holds a real or apparent authority over the other, or where he stands in a fiduciary

relation to the other; or

(b) Where he makes a contract with a person whose mental capacity is temporarily or

permanently affected by reason of age, illness, or mental or bodily distress.

(3) Where a person, who is in a position to dominate the will of another, enters into a contract

with him, and the transaction appears, on the face of it or on the evidence adduced, to be

unconscionable, the burden of proving that such contract was not induced by undue influence

shall lie upon the person in a position to dominate the will of the other.

Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act,

1872 (1 of 1872).

There is presumption of undue influence in the following relationships:\

(i) Parent and child



(ii) Guardian and ward

(iii) Doctor and patient

(iv) Solicitor and client

(v) Trustee and beneficiary

(vi) Religious advisor and disciple

(vii) Fiance and fiancée

There is however no presumption of undue influence in case of relationship of— (i) landlord and

tenant (ii) debtor and creditor (iii) husband and wife. The wife has to be pardanashin for such

presumption. In these relationships undue influence has to be proved.

Illustrations

(a) A, having advanced money to his son, B, during his minority, upon B’s coming of age

obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in

respect of the advance. A employs undue influence.

(b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical

attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue

influence.

(c) A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which

appear to be unconscionable. It lies on B to prove that the contract was not induced by undue

influence.

(d) A applies to a banker for a loan at a time when there is stringency in the money market. The

banker declines to make the loan except at an unusually high rate of interest. A accepts the loan

on these terms.

This is a transaction in the ordinary course of business, and the contract is not induced by undue

influence.

(3) FRAUD [See 17]

“Fraud” means and includes any of the following acts committed by a party to a contract, or with

his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to

induce him to enter into the contract:—

(1) The suggestion, as 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;

(3) A promise made without any intention of performing it;

(4) Any other act fitted to deceive;

(5) Any such act or omission as the law specially declares to be fraudulent.

Explanation : Mere silence as to facts likely to affect the willingness of a person to enter into a

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.

Illustrations

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the

horse’s unsoundness. This is not fraud in A.

(b) B says to A - “If you do not deny it, I shall assume that the horse is sound”. A says nothing.

Here, A’s silence is equivalent to speech.

(c) A and B, being traders, enter upon a contract. A has private information of a change in prices

which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

(4) MISREPRESENTATION [See 18]

28 CA NAVEEN BAID


“Misrepresentation” means and includes—

(1) The positive assertion, in a manner not warranted by the information of the person making it,

of that which is not true, though he believes it to be true;

(2) Any breach of duty which, without an intent to deceive, gains an advantage to the person

committing it, or any one claiming under him, by misleading another to his prejudice or to the

prejudice of anyone claiming under him ;

(3) Causing, however innocently, a party to an agreement to make a mistake as to the substance

of the thing which is the subject of the agreement.

(5) MISTAKE

Mistake means an erroneous belief about something.

Mistake can be -

(a) Mistake of law, or

(b) Mistake of fact.

(a) MISTAKE OF LAW

When a party enters into a contract, without the knowledge of law in the country, the contract is

affected by such mistake but it is not void. A contract is not voidable because it was caused by a

mistake as to any law in force in India. The reason here is that ignorance of law is not an excuse

at all. However if a party is induced to enter into a contract by the mistake of law then such a

contract is not valid.

Illustration

A and B make a contract grounded on the erroneous belief that a particular debt is barred by the

Indian Law of Limitation; the contract is not voidable.

(b) MISTAKE OF FACT

Where both the parties to an agreement are under a mistake as to a matter of fact essential to the

agreement, the agreement is void.

Explanation: An erroneous opinion as to the value of the thing which forms the subject-matter of

the agreement is not to be deemed a mistake as to a matter of fact.

Illustrations

(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to

Bombay. It turns out that, before the day of the bargain-, the ship conveying the cargo had been

cast away and the goods lost. Neither party was aware of the facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the

bargain, though neither party was aware of the fact. The agreement is void.

(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of

the agreement, but both parties were ignorant of the fact. The agreement is void.

CONTRACT CAUSED BY MISTAKE OF ONE PARTY AS TO MATTER OF FACT

(Section 22)

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.



VOIDABILITY OF AGREEMENTS WITHOUT FREE CONSENT (Section 19)

When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement

is a contract voidable at the option of the party whose consent was so caused. A party to a

contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that

the contract shall be performed, and that he shall be put in the position in which he would have

been, if the representations made had been true.4

Exception : If such consent was caused by misrepresentation or by silence, fraudulent within the

meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was

so caused had the means of discovering the truth with ordinary diligence.

Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the

party on whom such fraud was practiced, or to whom such misrepresentation was made, does not

render a contract voidable.

Illustrations

(a) A, intending to deceive B, falsely represents that five hundred mounds of indigo are made

annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the

option of B.

(b) A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of indigo

are made annually at A’s factory. B examines the accounts of the factory, which show that only

four hundred mounds of indigo have been made. After this B buys the factory. The contract is not

voidable on account of A’s misrepresentation.

(c) A fraudulently informs B that A’s estate is free from encumbrance. B thereupon buys the

estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its

being carried out and the mortgage-debt redeemed.

(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does

conceal, the existence of the ore from A. Through A’s ignorance B is enabled to buy the estate at

an under value. The contract is voidable at the option of A.

(e) A is entitled to succeed to an estate at the death of B; B dies; C, having received intelligence

of B’s death, prevents the intelligence reaching A, and thus induces A to sell him his interest in

the estate. The sale is voidable at the option of A.

MISTAKE

MISTAKE OF FACT

UNILATERAL

ONE PARTY UNDER

MISTAKE

OF FACT

THE CONTRACT IS

VALID

BILATERAL

MISTAKE OF LAW

MISTAKE OF INDIAN LAW

MISTAKE OF FOREIGN LAW

BOTH PARTIES UNDER

MISTAKE OF FACT

THE AGREEMENT

IS VOID

THE CONTRACT IS

VALID

SAME AS MISTAKE OF

FACT

30 CA NAVEEN BAID


Chapter 6

AGREEMENTS EXPRESSLY DECLARED VOID

Agreements by incompetent parties (Sec. 11)

Agreements with unlawful object or consideration (Sec. 23)

Agreement made under mutual mistake of fact (Sec. 20)

Agreements without consideration (Sec. 25)

Agreements in restraint of marriage, trade or legal proceedings etc.

Agreements to do impossible Acts (Sec. 56)

Example:- An agreement to discover treasure by magic is void.



LAWFUL CONSIDERATION OR OBJECT [Section 23]

Consideration or object is unlawful if it is: -

A. Forbidden by

law

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

as those prohibited by regulation or orders made in exercise of the authority

conferred by the legislature.

Example:- A promises to drop prosecution which he has instituted against B for

robbery and B promises to restore the value of the things taken. The agreement

is void, as its object is unlawful.

Example:- A loan granted to the guardian of a minor to enable him to celebrate

the minor’s marriage in contravention of the Child Marriage Restraint Act is

illegal and cannot be recovered back.

Example:- A license to cut the grass is given to X by forest department under

Forest Act. The license provides for imposition of penalty in the event of X

choosing to assign his right. However if X assigns his right, the agreement

would still be valid since there is no prohibition for such assignment as the

consideration stipulating penalty is only to regulate the matter of administrative

measure.

B. Defeat the

provisions of any

law

The term ‘Law’ includes any legislative enactment or rule of the Hindu and

Muslim Laws or any other rule for the time being in force in India.

Example:- Agreement in restraint of parental rights is in violation of Hindu

Law.

C. Fraudulent Where object or consideration is unlawful on ground of fraud.

Example:-A, B and C enter into agreement for the division among them of gains

acquired or to be acquired, by them for fraud. The agreement is void as its object

is unlwful.

D. Injury to the

person or property

of another

The general term “injury” means criminal or wrongful harm. Where the object of

an agreement is to cause injury to the person or property of another.

Example:-An agreement to print a book in violation of another’s copyright is

void.

Example:-A borrowed Rs. 1000 from B. A executed a bond promising to work

for B without pay for 2 years and in case of default agreed to pay interest at a

very exorbitant rate and the principal amount at once. Held, the contract was

void (Ram Swaroop v. Bansi)

E. Immoral/opposed

to the public policy

Example: - Letting house to a prostitute knowingly.

Partial Illegality :-( Section 24) if any part of a single consideration for one or more objects, or any one

or any part of any one of several considerations for a single object, is unlawful, the agreement is void.

Example:-A promises to survive the business on behalf of B, a licensed manufacturer of some

permissible chemicals and some contraband items. B promises to pay A a salary of Rs. 100000 per

month. The agreement is void, the object of A’s promise and the consideration for B’s promise being in

part unlawful.

32 CA NAVEEN BAID


AGREEMENTS OPPOSED TO THE PUBLIC POLICY

These are the agreements which are against the moral laws of the society and contravene any

established interest of society. Following agreements are opposed to the public policy:-

(a) Trading with

enemy

Any trade with person owing allegiance to a Government at war with India

without the license of the Government of India is void, as the object is

opposed to public policy.

(b) Stifling

prosecution

An agreement to stifle prosecution tends to be a preservation or an abuse of

justice; therefore, such an agreement is void. The principle is that one should

not make a trade of felony (crime).One should not convert a crime into into

a source of profit.

Compromise of public offence is illegal.

To drop uncompoundable offence without permission of court.

Example: - A Knew that B has committed a crime. He obtains a promise

from B to pay him Rs. 20000 in consideration of not exposing B. This is a

case of stifling prosecution & therefore illegal & void.

(c) Champerty &

maintenance

Maintenance It is the promotion of litigation in which one had no interest.

Example:- A promises to pay B a sum of Rs. 10000 if B filed

a suit against C in the court. This agreement is in the nature

of maintenance and hence void.

Champerty

It is bargain whereby one party agrees to assist the other in

recovering property, with a view to sharing the profits of

litigation.

Example:- An agreement to give assistance(monetary or

otherwise) to another person to recover the property by legal

action and to share the proceeds of litigation is a champertous

agreement.

(d) Interference

with the course of

justice

An agreement whose object is to induce any judicial officer of the state to

act partially or corruptly is void.

(e) Marriage

brokerage

contracts

An agreement to negotiate marriage for reward, which is known as a

marriage brokerage contract, is void, as it is opposed to public policy.

For Example:- An agreement to pay money to a person hired to procure a

wife is opposed to public policy and therefore void.

(f) Interest

(benefit) against

obligation

Taking a benefit against the obligation.

Example:- A, who is the manager of a firm, agrees to pass a contract to X if

X pays to A Rs. 20000 privately; the agreement is void.

(g) Sale of public

office

Bribe for appointment in a public office as it interfere with the appointment

of a person best qualified for the service of public.

An agreement to pay money to a public servant in order to induce him to

retire from his office so that another person may secure the appointment is

void.

An agreement to procure a public recognition like Padma Vibhushan for

reward is void.

(h) Agreements

for creation of

monopolies

void

Agreements having their object the establishment of monopolies are

opposed to the public policy and hence void. It is also hit by MRTP Act.

Example: - A local body granted a monopoly to A to sell vegetables in a

particular locality. Held that the agreement was void.



(i) Agreement in

restraint of

marriage

Every agreement in restraint of marriage of any person, other than a minor,

is void (Sec. 26).

Example:-A promised to marry no one else except Miss B and in default pay

her a sum of Rs.100000. A married some one else and B sued A for recovery

of the sum. Held, the contract was in restraint of marriage, and as such void.

(j) Agreement in

restraint of trade

An agreement by which any person is restraint from exercising a lawful

profession, trade or business of any kind, is to that extent void.

Exceptions (i) Sale of goodwill

(ii) An agreement among the sellers of a particular commodity not to sell the

commodity for less than a fixed price is not an agreement in restraint of

trade.

(iii) An agreement between partners not to carry on competing business

during the continuance of partnership is valid. ( Section 11 of Indian

Partnership Act, 1932)

(iv) Agreement with outgoing partner not to carry on competing business for

a reasonable time will be valid.( Section 36 of Indian Partnership Act, 1932)

(v) An agreement of service by which an employee binds himself, during the

term of his agreement, not to complete with his employer is not in restraint

of trade.

Example:- B, a physician and surgeon, employs A as an assistant for a term

of three years and A agrees not to practice as a surgeon and physician

during these three years. The agreement is valid and A can be restrained by

an injunction if he starts independent practice during this period.

(vi) An agreement by a manufacturer to sell during a certain period his entire

production to a wholesale merchant is not in restraint of trade.

(k) Agreement in

restraint of legal

proceedings

It is one by which any party thereto is restricted absolutely from enforcing

his rights under a contract through a court or which abridges the usual

period for starting legal proceedings. It is void.

Exceptions –

Settlement of dispute through arbitration.

Question already arisen or which may arise in future refer to arbitration

such a contract must be in writing.

AGREEMENTS VOID FOR UNCERTAINTITY (Section 29)

Agreements, the meaning of which is not certain, or capable of being made certain, are void.

Example:

(a) A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind of

oil was intended. The agreement is void for uncertainty. A, who is a dealer in coconut oil only,

Within specified local limits

Reasonable

CONSIDERATION UNLAWFUL IN

PART CONTRACT

SEPARABLE

LEGAL PART VALID

ILLEGAL PART VOID

INSEPARABLE CONTRACT IS ALTOGETHER

VOID

34 CA NAVEEN BAID


agrees to sell to B “one hundred tons of oil”. The nature of A’s trade affords an indication of the

meaning of the words, and A has entered into a contract for the sale of one hundred tons of

coconut oil.

(b) A agrees to sell to B “all the grain in my granary at Ramnagar”; there is no uncertainty here to

make the agreement void.

AGREEMENTS BY WAY OF WAGER ARE VOID (Section 30)

Agreements by way of wager are void; and no suit shall be brought for recovering anything

alleged to be won on any wager, or entrusted to a person to abide by the result of any game or

other uncertain event on which any wager is made.

Exception in favour of certain prizes for horse-racing.—This section shall not be deemed to

render unlawful a subscription, or contribution, or agreement to subscribe or contribute, made or

entered into for or toward any plate, prize or sum of money, of the value or amount of five

hundred rupees or upwards, to be awarded to the winner or winners of any horse-race.



Chapter 7

THE PERFORMANCE OF CONTRACTS

Every Contract creates certain obligation on each of the parties involved in it. When both the

parties to the Contract fulfill their obligations towards each other, the contract is said to be

performed. When both the parties to the contract have performed their obligations, the contract is

said to be discharged by performance.

OBLIGATION OF PARTIES TO CONTRACTS (Section 37)

The parties to a contract must either perform, or offer to perform, their respective promises,

unless such

Performance is dispensed with or excused under the provisions of this Act, or of any other law.

By Whom Contract May be Performed

1. Promisor himself: If there is something in the contract to show that it was intention of the

parties that the promise should be performed by the promisor himself, such promise must be

performed by the promisor.

This means contracts which involves the exercise of personal skill & diligence or which are

founded on personal confidence between the parties must be performed by the promisor himself.

2. Agent: Where personal consideration is not the foundation of the contract, the promisor or his

representative may employ a competent person to perform it.

3. Representatives: Promises bind the representatives of the promisor in case of the death of

such promisor before performance, unless a contrary intention appears from the contract.

Illustrations

(a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that

day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000 to

A’s representatives.

(b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day.

The contract cannot be enforced either by A’s representatives or by B.

4. Third persons: Where the promisee accepts performance of the promise from a third

person, he cannot afterwards enforce it against the promisor.

5. Joint Promisors: When two or more persons have made a joint promise, then unless a

contrary intention appears from the contract, all such persons must jointly fulfill the promise.

If any of them dies, his legal representatives must, jointly with the surviving promisors, fulfill the

promise. If all of them dies, the legal representatives of all of them must fulfill the promise jointly

(Sec.42).

Illustrations

(a) A promises to pay B a sum of money. A may perform this promise, either by personally

paying the money to B or by causing it to be paid to B by another; and, if A dies before the time

appointed for payment, his representatives must perform the promise, or employ some proper

person to do so.

(b) A promises to paint a picture for B: A must perform this promise personally.

36 CA NAVEEN BAID


EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE (Section 38)

Where a promisor has made an offer of performance to the promisee, and the offer has not been

accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights

under the contract.

Every such offer must fulfill the following conditions:—

(1) it must be unconditional

(2) It must be made at proper time and place. (3 If the offer is to deliver anything to the

promisee, promisee must have reasonable opportunity to check the goods.

An offer to one of several joint promisees has the same legal consequences as an offer to all of

them.

Illustrations

A contract to deliver to B at his warehouse, on the first March, 1873,100 bales of cotton of a

particular quality. In order to make an offer of a performance with the effect stated in this section,

A must bring the cotton to B’s warehouse, on the appointed day, under such circumstances that B

may have a reasonable opportunity of satisfying himself that the thing offered is cotton of the

quality contracted for, and that there are 100 bales.

EFFECT OF REFUSAL OF PARTY TO PERFORM PROMISE [Section 39]

When a party to a contract has refused to perform, or disabled himself from performing his

promise in its entirety, the promisee may put an end to the contract, unless he has signified, by

words or conduct, his acquiescence in its continuance.

Rights to the aggrieved party

To terminate the contract.

To indicate, by words or by conduct, that he is interested in his continuance.

Right to claim damages.

Illustration

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two

nights in every week during the next two months, and B engages to pay her 100 rupees for each

night’s performance. On the sixth night A willfully absents herself from the theatre. B is at liberty

to put an end to the contract.

LIABILITY OF JOINT PROMISORS

Promisee may compel any one or more of such joint promisors to perform the whole of the

promise.

If one of the joint promisors is made to perform the whole contract, he can call for a contribution

from others.

If any of the joint promisors make a default in making his contribution the remaining joint

promisors must bear the loss arising from such default in equal shares.

Illustrations

SUCCESSION & ASSIGNMENT

(a) Succession (b) Assignment

When the benefits of a contract are succeeded to by

process of law, then both burden and benefits

attaching to the contract, may sometimes devolve on

legal heir.

Benefits of a contract can only be

assigned but not the liabilities there

under.



(a) A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B or C to pay

him 3,000 rupees.

(b) A, B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to pay the

whole. A is insolvent, but his assets are sufficient to pay one-half of his debts, C is entitled to

receive 500 rupees from A’s estate, and 2,250 rupees from B.

(c) A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay anything, and

A is compelled to pay the whole. A is entitled to receive 1,500 rupees from B.

(d) A, B and C are under a joint promise to pay D 3,000 rupees, A and B being only sureties for

C. C fails to pay. A and B are compelled to pay the whole sum. They are entitled to recover it

from C.

RIGHTS OF JOINT PROMISEES

All of them jointly have right to claim performance.

If any one of joint promisees dies, Survival promisee + Representatives of deceased promisee.

If all of them dies. Representatives of deceased promises.

Illustration

A, in consideration of 5,000 rupees, lent to him by B and C, promises B and C jointly to repay

them that sum with interest on a day specified. B dies. The right to claim performance rests with

B’s representative jointly with C during C’s life, and after the death of C with the representatives

of B and C jointly.

TIME & PLACE FOR PERFORMANCE OF THE PROMISE

No time specified for performance of promise, promise must be performed within

reasonable time.

If promise is to be performed on a specified date but hour is not mentioned, the promisor

may perform it any time during the usual hours of business, on such day .

Delivery must be made at the usual place of business.

When no place is fixed for performance of promise, it is the duty of the promisor to ask

promisee to fix a reasonable place for the performance of promise.

When the promisor has not undertaken to perform the promise without an application by

the promisee and the promise is to be performed on a certain day, it is the duty of the

promisee to apply for performance at a proper place and within the usual hours of

business.

Illustrations

(a) B owes A 2,000 rupees. A desires B to pay the amount to A’s account with C, a banker. B,

who also banks with C, orders the amount to be transferred from his account to A’s credit, and

this is done by C.

Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B.

(b) A and B are mutually indebted. A and B settle an account by setting off one item against

another, and B pays A the balance found to be due from him upon such settlement. This amounts

to a payment by A and B respectively of the sums which they owed to each other.

(c) A owes B 2,000 rupees. B accepts some of A’s goods in deduction of the debt. The delivery of

the goods operates as a part payment.

(d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is

discharged as soon as B puts into the post a letter containing the note duly addressed to A.

38 CA NAVEEN BAID


(e)A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to

appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.

TIME IS ESSENCE OF THE CONTRACT (Section 55)

When a party to a contract promises to do a certain thing at or before a specified time, or certain

things at or before specified times, and fails to do any such thing at or before the specified time,

the contract, or so much of it as has not been performed, becomes voidable at the option of the

promisee, if the intention of the parties was that time should be of the essence of the contract.

Effect of such failure when time is not essential—If it was not the intention of the parties that

time should be of the essence of the contract, the contract does not become voidable by the failure

to do such thing at or before the specified time; but the promisee is entitled to compensation from

the promisor for any loss occasioned to him by such failure.

Effect of acceptance of performance at time other than that agreed upon.—If, in case of a

contract voidable on account of the promisor’s failure to perform his promise at the time agreed,

the promisee accepts performance of such promise at any time other than that agreed, the

promisee cannot claim compensation for any loss occasioned by the non-performance of the

promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor

of his intention to do so.

PERFORMANCE OF RECIPROCAL PROMISES

Reciprocal Promises: When a contract consists of two promises, one being consideration for the

other, such promises are called Reciprocal promises.

Example – A promises to deliver 500 quintals of rice and B promises to pay the price on delivery,

the contract would consist of reciprocal promises.

Simultaneous performance of Reciprocal promises: Reciprocal promises may have to be

performed simultaneously or one after another.

Example – Where A promises to deliver 500 quintals of rice and B promises to pay the price on

delivery, both the promises are to be performed simultaneously.

Performance of Reciprocal promises where order of performance is expressly fixed

When the order of performance of the reciprocal promises is expressly fixed by the contract, they

must be performed in that order.

Example –A and B contract that A shall build a house for B at a fixed price. A’s promise to build

the house must be performed before B can be called upon to perform the promise to pay for it.

Performance of Reciprocal promises when the order of performance is fixed by implication:

The order of performance may sometimes be indicated not expressly, but by the nature of the

transaction.

Ex – A promises to make over stock for B and B promises to give security for the payment of

price. A’s promise to make over stock need not to be performed until the security is given by B.

Effect of one party preventing other from performing promise

Contract becomes voidable

Another party is entitled to claim compensation on A/c of by suffered due to non-

performance.



APPROPRIATION OF PAYMENTS

Appropriation by Debtor (Section 59): Where a debtor, owing several distinct debts to

one person, makes a payment to him, either with express intimation, or under circumstances

implying that the payment is to be applied to the discharge of some particular debt, the payment,

if accepted, must be applied accordingly.

Illustrations (a) A owes B, among other debts, 1,000 rupees upon a promissory note which falls due on the

first June. He owes B no other debt of that amount. On the first June A pays to B 1,000 rupees.

The payment is to be applied to the discharge of the promissory note.

(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment

of this sum. A sends to B 567 rupees. This payment is to be applied to the discharge of the debt of

which B had demanded payment.

Appropriation by Creditor (Section 60): Where the debtor has omitted to intimate and

there are no other circumstances indicating to which debt the payment is to be applied, the

creditor may apply it at his discretion to any lawful debt actually due and payable to him from the

debtor, whether its recovery is or is not barred by the law in force for the time being as to the

limitation of suits.

APPLICATION OF PAYMENT WHERE NEITHER PARTY APPROPRIATES (Section 61)

Where neither party makes any appropriation the payment shall be applied in discharge of the

debts in order of time, whether they are or are not barred by the law in force for the time being as

to the limitation of suits. If the debts are of equal standing, the payment shall be applied in

discharge of each proportionately.

IMPOSSIBILITY OF PERFORMANCE

Impossibility existing at the

time of contract

Known to Parties

Void

Unknown to Parties

Void

Known to the promisor only

Promisee is entitled to claim compensation for any loss suffered on a/c

of non-performance

Supervening Impossibility

Contract becomes void

40 CA NAVEEN BAID


CONTRACTS WHICH NEED NOT BE PERFORMED EFFECT OF NOVATION, RESCISSION AND ALTERATION OF CONTRACT (Section 62)

Novation When parties to a contract substitute a new contract for old. On novation, old contract

is discharged and consequently it need not to be performed. There may be change in parties.

Rescission When A contract may be discharged, before the date of performance by agreement

between the parties to the effect that it shall no longer bind them In this case, only old contract is

cancelled no new contract is formed.

Alteration Alteration of a contract means change in one or more of the material terms of a

contract, the original contract is discharged by alteration:

-No change in parties to the contract.

-Change in terms & conditions of original agreement.

PROMISEE MAY DISPENSE WITH OR REMIT PERFORMANCE OF PROMISE

(Section 63)

Every promisee may dispense with or remit, wholly or in part, the performance of the promise

made to him, or may extend the time for such performance, or may accept instead of it any

satisfaction which he thinks fit.

Illustrations (a) A promises to paint a picture for B. B afterwards forbids him to do so A is no longer bound to

perform the promise.

(b) A owes B 5,000 rupees. A pays to B, and B accepts in satisfaction of the whole debt, 2,000

rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is

discharged.

(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, in satisfaction of his

claim on A. This payment is a discharge of the whole claim.

(d) A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A

without ascertaining the amount gives to B, and B, in satisfaction thereof, accepts the sum of

2,000 rupees. This is a discharge of the whole debt, whatever may be its amount.

(e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an arrangement with

his creditors, including B, to pay them, a composition of eight annas in the rupee upon their

respective demands. Payment to B of 1,000 rupees is a discharge of B’s demand.

CONSEQUENCES OF RESCISSION OF VOIDABLE CONTRACT (Section 64)

Where a person at whose option a contract is voidable rescinds it, the other party thereto need not

perform any promise therein contained in which he is promisor. The party rescinding a voidable

contract shall, if he has received any benefit thereunder from another party to such contract,

restore such benefit, so far as may be, to the person from whom it was received.

OBLIGATION OF PERSON WHO HAS RECEIVED ADVANTAGE UNDER VOID AGREEMENT OR CONTRACT THAT BECOMES VOID (Section 65)

When an agreement is discovered to be void, or when a contract becomes void, any person who

has received any advantage under such agreement or contract is bound to restore it, or to make

compensation for it, to the person from whom he received it.

Illustrations



(a) A pays B 1,000 rupees in consideration of B’s promising to marry C, A’s daughter. C is dead

at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees.

(b) A contracts with B to deliver to him 250 maunds of rice before the 1st of May. A delivers 130

maunds only before that day, and none after. B retains the 130 maunds after the first day of May.

He is bound to pay A for them.

(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in

every week during the next two months, and B engages to pay her a hundred rupees for each

night’s performance. On the sixth night, A wilfully absents herself from the theatre, and B, in

consequence, rescinds the contract. B must pay A for the five nights on which she had sung.

42 CA NAVEEN BAID


Chapter 8

DISCHARGE OF CONTRACT

Discharge of Contract implies termination of contractual relationship among parties. When we

say a contract is discharged it means it ceases to operate and rights and obligation under it comes

to an end. A contract may be discharged by any of the following ways;—

(i) performance,

(ii) mutual consent,

(iii) subsequent impossibility of performance,

(iv) lapse of time,

(v) operation of law,

(vi) breach of contract.

1. Discharge by performance is the most usual form of discharge of a contract. A contract is said

to be performed when the parties fulfill their respective obligations.

2. A contract may be discharged by a further agreement among parties which may be expressed

or implied.

3. A contract to perform an impossible act is void ab initio. A contract is discharged if subsequent

performance becomes impossible due to factors beyond the control of the parties. Supervening

impossibility occurs in the following circumstances;-

(a) When subject matter of contract is destroyed.

(b) When state of things which form basis of contract changes.

(c) When performance depends on personal skill, incapacity of that party renders the contract

discharged.

(d) Change of law may render the performance impossible.

(e) Out break of war may make a party alien enemy. Contract with alien enemy is unlawful and

such contracts are suspended during duration of war.

It should however be noted that ‘impossibility of performance’ as a rule cannot be an excuse for

non-performance unless performance becomes absolutely impossible.

4. As per Law of Limitation, a contract should be performed within a specified time period,

called period of limitation. If not performed within ‘period of limitation’ and no action is taken

by the promisee, the contract is terminated.

5. A contract may be discharged due to operation of law by death of a party, merger, and

insolvency of a party, unauthorized alteration in terms of contract, rights and liabilities getting

vested in the same person.

6. If a party to a contract breaks his obligation under the contract , he is said to have committed

breach .

Breach of contract may be actual or anticipatory. Actual breach may occur when performance is

due or during performance. Anticipatory breach of contract occurs when a party refuses to

perform before the time of performance.



BREACH OF CONTRACT

REMEDIES FOR BREACH OF CONTRACT

In case of breach of contract, the injured party may:

(i) Rescind the contract and refuse further performance of the contract;

(ii) Sue for damages;

(iii) Sue for specific performance;

(iv) Sue for an injunction to restrain the breach of a negative term; and

(v) Sue on quantum meruit

(i) Rescission of Contract

When a party to a contract has broken the contract, the other party may treat the contract as

rescinded and he is absolved from all his obligations under the contract. Under Section 75 of the

Indian Contract Act, if a person rightfully rescinds a contract, he is entitled to a compensation for

any damage which he has sustained through the non-fulfilment of the contract by the other party.

(ii) Damages for Breach of Contract

Under Section 73 of the Indian Contract Act, when a contract has been broken, a party who

suffers by such breach is entitled to receive, from the party who has broken the contract,

compensation for any loss or damage, caused to him thereby, which naturally arose in the usual

course of things from such breach or which the parties knew, when they made the contract to be

likely to result from the breach of it. Such compensation is not to be given for any remote and

indirect loss or damage sustained by reason of the breach.

Liquidated and Unliquidated damages: Where the contracting parties agree in advance the

amount payable in the event of breach, the sum payable is called liquidated damages.

Where the amount of compensation claimed for a breach of contract is left to be assessed by the

Court, damages claimed are called unliquidated damages.

Ordinary Damages These are restricted to pecuniary compensation to put the injured party in the position he would

have been had the contract been performed. It is the estimated amount of loss actually incurred.

Thus, it applies only to the proximate consequences of the breach of the contract and the remote

consequences are not generally regarded. For example, in a contract for the sale of goods, the

• When the promisor refuses altogether to perform his promise and signifies his unwillingness, even before the time of performance has arrived, it is called Anticipatory Breach.

ANTICIPATORY BREACH OF CONTRACT

• Where the promisor refuses to perform promise on the scheduled date. When one of the parties breaks the contract by refusing to perform the promise when it falls due, it is Actual Breach.

ACTUAL BREACH OF CONTRACT

44 CA NAVEEN BAID


damages payable would be the difference between the contract price and the price at which the

goods are available on the date of the breach.

HOW TO CALCULATE THE DAMAGE

Breach by buyer Damage = Contract price - Market price at the date of breach

Breach by seller Damage = Market price at the date of Breach - Contract price

Special Damages Where party to a contract receives a notice of special circumstances affecting the contract, he

will also liable for special damages.

For example, A delivered goods to the Railway Administration to be carried to a place where an

exhibition was being held and told the goods clerk that if the goods did not reach the destination

on the stipulated date he would suffer a special loss. The goods reached late. He was entitled to

claim special damages.

Exemplary Damages

These damages are awarded to punish the defendant and are not, as a rule, granted in case of

breach of contract. In two cases, however, the court may award such damages, viz.,

(i) breach of promise to marry; and

(ii) wrongful dishonour of a customers cheque by the banker.

In a breach of promise to marry, the amount of the damages will depend upon the extent of injury

to the partys feelings. In the bankers case, the smaller the amount of the cheque dishonoured,

larger will be damages as the credit of the customer would be injured in a far greater measure, if a

cheque for a small amount is wrongfully dishonoured.

Nominal Damages

These damages are awarded where the plaintiff has proved that there has been breach of contract

but he has not in fact suffered any real damage.

These damages are awarded just to establish right to decree for breach of contract.

The amount may be a rupee or even 10 paise. Amount of damages depends upon loss of credit &

reputation suffered on that A/c

Damages for deterioration to goods caused by delay

Damages can be recovered from the carrier even without notice. “Deterioration” not only implies

physical damages but also loss of special opportunity for sale.

Liquidated Damages and Penalty

Where the contracting parties fix at the time of contract the amount of damages that would be

payable in case of breach. For example, A borrows Rs. 500 from B and promises to pay Rs. 1,000

if he fails to repay Rs. 500 on the stipulated date. On A’s failure to repay on the given date, B is

entitled to recover from A such compensation, not exceeding Rs. 1,000 as the Court may consider

reasonable. (Union of India v. Raman Iron Foundry, AIR 1974 SC 1265).

(iii) Suit for specific performance

It means the actual carrying out by the parties of their contract, and in proper cases the Court will

insist upon the parties carrying out this agreement. Where a party fails to perform the contract,

the Court may, at its discretion, order the defendant to carry out his undertaking according to the



terms of the contract. A decree for specific performance may be granted in addition to or instead

of damages.

Specific performance is usually granted in contracts connected with land, e.g., purchase of a

particular plot or house, or to take debentures in a company. In case of sale of goods, it will only

be granted if the goods are unique and cannot be purchased in the market, e.g., a particular race

horse, or one of special value to the party suing by reason of personal or family association, e.g.,

an heirloom.

Specific performance will not be ordered:

(a) Where monetary compensation is an adequate remedy;

(b) Where the Court cannot supervise the execution of the contract, e.g., a building contract;

(c) Where the contract is for personal service; and

(d) Where one of the parties is a minor.

(iv) Suit for Injunction

An injunction is an order of a Court restraining a person from doing a particular act. It is a mode

of securing the specific performance of a negative term of the contract, (i.e., where he is doing

something which he promises not to do), the Court may in its discretion issue an order to the

defendant restraining him from doing what he promised not to do. Injunction may be prohibitory

or mandatory. In prohibitory, the Court restrains the commission of a wrongful act whereas in

mandatory, it restrains continuance of a wrongful commission.

In Lumley v. Wagner (1852) 90 R.R. 125. W agreed to sing at L’s theatre and nowhere else. W, in

breach of contract with L entered into a contract to sing for Z. Held, although W could not be

compelled to sing at Ls theatre, yet she could be restrained by injunction from singing for Z.

(v) Suit upon Quantum Meruit

Quantum Meruit “As much as is earned” Or “According to the quantity of work done”

When the person has begun the work and before he could complete it, the other party terminates

the contract or does something which make it impossible for the other party to complete the

contract, he can claim for the work done under contract.

He may also recover the value of work done when further performance of contract become

impossible.

Suit for Quantum Meruit arise in three cases:–

A. Work done and accepted under void contract.

B. Act done or something delivered non-gratuitously, the person who enjoys the benefit must pay

for it.

C. Divisible Contract: - One part performed & refuses to perform other part. Party in default may

sue other party who has enjoyed the benefit of past performance.

The party in default may also sue on a “quantum meruit” for what he has done if the contract is

divisible and the other party has had the benefit of the part which has been performed. But if the

contract is not divisible, the party at fault cannot claim the value of what he has done.

46 CA NAVEEN BAID


Chapter 9

CONTINGENT & QUASI CONTRACT

CONTINGENT CONTRACT As per Section 31, a contingent contract is a contract to do or not to do something, if some event

collateral to such contract, does or does not happen. For example, A contracts to sell B 10 bales

of cotton for Rs. 20,000, if the ship by which they are coming returns safely. This is a contingent

contract.

Contract of insurance and contracts of indemnity and guarantee are popular instances of

contingent contracts.

Rules regarding contingent contracts The following rules are contained in Section 32-36:

(a) Contracts contingent upon the happening of a future uncertain event cannot be enforced by

law unless and until that event has happened. If the event becomes impossible, the contract

becomes void - Section 32.

(i) A makes a contract to buy B’s house if A survives C. This contract cannot be enforced by law

unless and until C dies in A’s lifetime.

(ii) A contracts to pay B a sum of money when B marries C, C dies without being married to B.

The contract becomes void.

(b) Contracts contingent upon the non-happening of an uncertain future event can be enforced

when the happening of that event becomes impossible and not before - Section 33.

A contracts to pay B a certain sum of money if a certain ship does not return. The ship is sunk.

The contract can be enforced when the ship sinks.

(c) If a contract is contingent upon how a person will act at an unspecified time, the event shall be

considered to become impossible when such person does anything which renders it impossible

that he should so act within any definite time or otherwise than under further contingencies -

Section 34.

A agrees to pay B Rs. 1,000 if B marries C. C marries D. The marriage of B to C must now be

considered impossible although it is possible that D may die and C may afterwards marry B.

(d) Contracts contingent on the happening of an event within a fixed time become void if, at the

expiration of the time, such event has not happened, or if, before the time fixed, such event

becomes impossible - Section 35.

A promises to pay B a sum of money if a certain ship returns with in a year. The contract may be

enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.

(e) Contracts contingent upon the non-happening of an event within a fixed time may be enforced

by law when the time fixed has expired and such event has not happened or before the time fixed

has expired, if it becomes certain that such event will not happen - Section 35

A promise to pay B a sum of money if a certain ship does not return within the year. The contract

may be enforced if the ship does not return within the year or is burnt within the year.

(f) Contingent agreements to do or not to do anything if an impossible event happens, are void,

whether the impossibility of the event is known or not known to the parties to the agreement at

the time when it is made - Section 36.



A agrees to pay Rs. 1,000 to B if two straight lines should enclose a space. The agreement is

void.

QUASI CONTRACTS

Quasi contracts are based on principle of equity, justice and good conscience.

In the case of Quasi contracts, the promisor voluntarily undertakes an obligation in favour of

the promisee, or

Obligation may be imposed by law upon a person for the benefit of another even in the

absence of contract.

SALIENT FEATURES OF QUASI CONTRACTS

It does not arise from any agreement of the parties concerned, but it is imposed by law,

and It is a right which is available not against the entire world, but against a particular

person/s only.

Quasi-Contracts or Implied Contracts under Indian Contract Act

The following types of quasi-contracts have been dealt within the Indian Contract Act—

(a) Necessaries supplied to person incapable of contracting or to anyone whom he is illegally

bound to support - Section 68.

(b) Suit for money had and received - Section 69 and 72.

(c) Quantum Meruit (Already Discussed)

(d) Obligations of a finder of goods - Section 71.

(e) Obligation of person enjoying benefit of a non-gratuitous act - Section 70

Claim for necessaries

Contracts by minors and persons of unsound mind are void. However, Section 68 of the Indian

Contract Act provides that their estates are liable to reimburse the trader, who supplies them with

necessaries of life.

Suit for money had and received

The right to file a suit for the recovery of money may arise (a) Where the plaintiff paid money to

the defendant (i) under a mistake, (ii) in pursuance of a contract the consideration for which has

failed, or (iii) under coercion, oppression, extortion or other such means.

A debtor may recover, from a creditor the amount of an over-payment made to him by mistake.

The mistake may be mistake of fact or a mistake of law.

(b) Payment to third-party of money which another is bound to pay. For example, where A’s

goods are wrongfully attached in order to realise arrears of Government revenue due by B, and A

pays the amount to save his goods from being sold, he is entitled to recover the amount from B.

(c) Money obtained by defendant from third-parties. For example, where an agent has obtained a

secret commission or a fraudulent payment from a third-party, the principle can recover the

amount from the agent.

Obligation of a person enjoying the benefit of non-gratuitous act

48 CA NAVEEN BAID


(a) Where a person lawfully does anything for another person or delivers anything to him.

(b) Not intending to do so gratuitously and

(c) Such other person enjoys the benefit thereof, the latter is bound to make compensation to the

former in respect of, or to restore, the things so done or delivered.

For example, when one of the two joint tenants pays the whole rent to the landlord, he is entitled

to compensation from his co-tenant, or if A, a tradesmen, leaves goods at B’s house by mistake

and B treats the goods as his own, he is bound to pay A for them.

RESPONSIBILITY OF FINDER OF GOODS

A person who finds goods belonging to another and takes them into his custody is subject to same responsibility as a bailee.

* To take proper care

* Not use it for personal purposes

* Restore it to true owner, if owner is traced

The finder is entitled to get the reward that may have been offered by the owner and also any

expenses he may have incurred in protecting and preserving the property.

Difference between:

Wagering Agreement Contingent Contract

1. It is a promise to give money or money’s

worth upon the determination or

ascertainment of an uncertain event.

It is a contract to do or not to do something if

some event collateral to such contract does or

does not happen.

2. In a wagering agreement the uncertain

event is the sole determining factor.

In a contingent contract, the event is only

collateral.

3. It is essentially of a contingent nature.

It may not be of wagering nature.

4. Void

Valid

5. Parties have no other interested in the

subject matter of the agreement except

the winning or losing of the amount of

wager. It is a game of chance.

It is not so in this case both parties have

interested in the subject matter of the contract.

Contract act

Law

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