Chapter – I

Introduction

Law: All the rules and principles which regulate our relations with other individuals and with in the state. (OR)

Rules of conduct, if recognized by the state and enforced by it on people to regulate order and security, are termed as law.

However, law is seen differently in different situations according to the role of a citizen he is in. There are many laws which are subcategorized, such as criminal law, mercantile law, industrial law, international law. Law is not static. As circumstances and conditions in a society change, laws are changed to fit the requirements of the society.

“Ignorantia Juris Not Excusat” is a familiar maxim which means “ignorance of law is no excuse”.

Mercantile law (or) commercial law (or) business law deals with economic and commercial activities and is important to the people engaged in it.

“The term mercantile law is also used to denote the aggregate body of those legal rules which are connected with trade, industry & commerce”.

Ex:1. The contract act (1872).2. The sale of goods act (1930).3. The partnership act (1932).4. The companies act (1956).

Contract:

Sec.2 (h) of the Indian contract act defines a contract as, “an agreement enforceable at law”.

According to Sir William Anson “A contract is an agreement enforceable at law made between to or more persons, by whom rights are acquired by one or more two acts or forbearances on the part of the other or others”.

According to Sir Frederick Pollock “Every agreement and promise enforceable at law is a contract”.

According to Salmond “An agreement creating and defining obligations between the parties” is said to be a contract”.

Essentials Requirements of a Contract:

If we analyze the definitions of contract we find that a contract essentially consists of three elements:

1. Two parties 2.Agreement 3.Enforceable by law

1. Two parties:

At least two parties are necessary to make a contract. The person who makes the promise is known as the “promisor” and the person to whom the promise is made is known as “promisee”.

Contract = Agreement + Enforceable by law (legal obligation)

2. Agreement:

Sec. 2(e) of the Indian contract act defines agreement as “every promise and every set of promises forming consideration for each other”.

Sec. 2(b) of the Indian contract defines “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a promise”.

To sum up: Agreement = offer + Acceptance

Consensus ad idem: “Meeting of the minds of the parties in full and final agreement”.

3. Enforceable by law or Legal obligation:

An agreement to become a contract, must give rise to a legal obligation or duty, meaning it must be enforceable in the court of law.

The term ‘obligation’ is defined as a legal tie which imposes upon a definite person or persons the necessity of doing or abstaining from doing a definite act or acts.

An agreement which gives rise to a social obligation is not a contract. It must give rise to a legal obligation to become a contract.

Scenario: A father promises to pay his son Rs. 100 every month as pocket allowance. Later he refuses to pay. The son cannot recover as it is a domestic agreement.

Hence all contracts are agreements but all agreements are not necessarily contracts.

Essential elements of a valid contract:

1. Offer and acceptance 2. Intention to create legal relationship 3. Lawful consideration 4. Capacities of parties – Competency5. Free and genuine consent 6. Lawful object7. Not expressly declared void 8. Certainty and possibility of performance9. Legal formalities

1. Offer and acceptance: There must be two parties and the terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the offeror.

2. Intention to create legal relationship: When the two parties enter in to an agreement, there intention must be to create a legal relationship between them. If there is no such intention on the part of the parties, there is no contract between them.

Legal Case (Balfour Vs Balfour): A husband promised to pay his wife a household allowance of £ 30 every month. Later the parties separated and the husband failed to pay the amount. The wife sued for the allowance. Agreements such as these were outside the realm of contract altogether.

3. Lawful consideration: An agreement to be enforceable by law must be supported by consideration. ‘Consideration’ is an advantage or benefit moving from one party to the other.

The agreement is legally enforceable only when both the parties give something and get something in return. ‘Consideration need not necessarily be in cash or kind’.

Scenario: ‘X’ promises to sell his house to ‘Y’ for 2, 00,000 rupees. House is the consideration to ‘Y’ for parting with 2 Lac rupees & 2 Lac rupees is ‘X’s consideration.

4. Capacity of parties – competency: The parties to the agreement must be capable of entering in to a valid contract. Every person is competent to contract if the a) is of the age of majority,b) is of sound mind,c) Not disqualified from contracting by any law to which he is subject.

Flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness etc and status. If a party suffers from any flaw in capacity, the agreement is not enforceable except in some special cases.

Scenario: ‘X’ a minor borrowed 8,000 rupees from ‘Y’ and executed mortgage of his property in favor of the lender. This was not a valid contract as ‘X’ is not competent to contract. Therefore the mortgage was not valid and the money advanced to minor could not be recovered.

5. Free and genuine consent: It is essential to the creation of every contract that there must be free and genuine consent of the parties to the agreement. The consent of the parties is said to be free or the parties are said to be the same of the same mind, when they agree about the subject matter of the contract in the same at the same time.

If the agreement is induced by coercion, undue influence, fraud or misrepresentation then there is said to be absence of free consent. Consent is also said to be free if it has been given by the parties independently without any fear or favor.

Scenario: ‘X’ threatens to kill ‘Y’ if he does not sell his house to ‘X’. ‘Y’ agrees to sell his house, incase ‘Y’s consent has been obtained by coercion and therefore it can’t be regarded as free.

6. Lawful object: The object of the agreement must be lawful. In other words it means that the object must not be a) Illegal b) immoral c) opposed to public policy

Taking in to account of the above three, the agreement should not violate the provisions of some law or it should not relate to matters which are forbidden by law.

Scenario: ‘X’, ‘Y’ & ‘Z’ enter in to an agreement for division among them of gains acquired or to be acquired by them by fraud. The agreement is void because its object is unlawful.

7. Not expressly declared void: The agreement must have not been expressly declared void by any law in force in the country.

Scenario: ‘X’ promised to marry none else except ‘Y’ and in default pay her 1, 00,000 rupees. ‘X’ married ‘Z’ and ‘Y’ sued ‘X’ for the recovery of 1, 00,000 rupees. It was held that ‘Y’ was not entitled to recover anything because this agreement was in restraint of marriage and as such void.

8. Certainty and possibility of performance: The agreement must be certain and not vague or indefinite. If it is vague and it is not possible to ascertain its meaning, it cannot be enforced.

Scenario: ‘O’ agreed to purchase a motor van from ‘S’ on “hire purchase terms”. The hire purchase price was to be paid over two years. Held, there was no contract as the terms were not certain about rate of interest and mode of payment.

In other words, agreement to do an act impossible in itself cannot be enforced.

Scenario: ‘A’ agrees with ‘B’ to put life in to B’s dead wife, the agreement is void as it is impossible of performance.

9. Legal formalities: A contract may be made by words, spoken or written. It is, however in the interest of the parties that the contract should be in writing.

In some cases, the document in which the contract is incorporated is to be stamped, where as in some cases it needs to be registered for a written contract.However some special cases are there where in the contracts can be carried out in the presence of eyewitness.

Lease agreements for a period of more than three years. Contracts of insurance, negotiable instruments and contracts relating to transfer of immovable properties must be in writing. And some of them need to be registered also.

Scenario: An oral agreement for sale of immovable property is unenforceable because the law requires that such agreement must be in writing and registered.

Classification of contracts:

Contracts may be classified in to different categories depending up on their

1. Validity or Enforceability2. Formation or Mode of creation3. Performance or Extent of execution

1. Classification according to validity or Enforceability: A contract is based on an agreement. An agreement becomes a contract when all the essential elements referred to above are present. In such a case, the contract is a valid contract.

If one or more of the elements are missing, the contract is voidable, void, illegal or unenforceable.

Voidable contract: According to Indian contract act of sec.2 (i), an agreement which is enforceable by law at the option of one or more of the parties there to, but not at the option of the other or others, is a voidable contract.

Classification of

contracts

Validity or

Enforceabil

ity

Formation or Mode of creation

Performance

or Extent of execution

Valid Void IllegalUnenforcea

bleExpress

ContractsImplied contracts

Executed Executory

When the consent of a party to a contract is not free, i.e. it is caused by coercion, undue influence, misrepresentation or fraud, the contract is voidable at his option (sec. 19 & 19(A)). A voidable contract continues to be valid till it is avoided by the party entitled to do so.Scenario: A promises to sell his car to B for Rs 2,000. His consent is obtained by use of force. The contract is voidable at the option of A.

When a person promises to do something for another person for a consideration, but the other person prevents him from performing his promise, the contract becomes voidable at his option.

Scenario: A and B contract that B shall execute certain work for A for Rs 1,000. B is ready and willing to execute the work accordingly; but A prevents him from doing so. The contract is voidable at the option of B and if he elects to rescind it, he is entitled to recover from A i.e.; compensation from any loss which he has incurred by its non-performance.

When a party to a contract promises to perform an obligation within a specified time, any failure to perform his obligation with in the fixed time makes the contract voidable at the option of the promise.

If the party rescinding the contract has received any benefit under the contract from another party to such contract he shall restore such benefit, so far as may be, to the person from whom it was received (sec.64). The party rightfully rescinding the contract is also entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract (sec.65).

Void agreement: An agreement not enforceable by law is said to be void (sec.2 (g)). A void agreement does not create any legal rights or obligations. It is a nullity and is ‘destitute of legal effects’ altogether. It is “void ab initio”, i.e; from the very beginning as, for example, an agreement with a minor or an agreement without consideration.

Void contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable (sec.2 (j)). A contract, when originally entered in to, may be valid and binding on the parties,

Ex: A contract to import goods from a foreign country. It may subsequently become void; if a war breaks out between the importing country and the exporting country.

It is illogical to talk of a void contract originally entered in to, for what is supposed to be a contract is no contract at all. We may talk of such a contract as a void agreement.

Illegal agreement: An illegal agreement is one which transgresses some rule of basic public policy or which is criminal in nature or which is immoral.

All illegal agreements are void but all void agreements or contracts are not necessarily illegal. An illegal agreement is not only void as between the immediate parties but has this further effect that even the collateral transactions to it become tainted with illegality.

A collateral transaction is one which is subsidiary, incidental or auxiliary to the principal or original contract.

Scenario: ‘B’’ borrows Rs 5,000 from ‘A’ and enters in to a contract with an alien to import prohibited goods. ‘A’ knows of the purpose of the loan. The transaction between ‘B’ and ‘A’ is collateral to the main agreement. It is illegal since the main agreement is illegal.

Where as, if the main agreement is void, the collateral transactions to it are not affected. In the above case, if ‘B’ has entered in to a void agreement with a minor, the contract between ‘B’ and ‘A’ would not have been affected.

Unenforceable agreement: An unenforceable contract is one which cannot be enforced in a court of law because of some technical defect, such as absence of writing or where

the remedy has been barred by lapse of time. The contract may be carried out by the parties concerned; but in the event of breach or repudiation of such a contract, the aggrieved party will not be entitled to the legal remedies.

2. Classification according to formation or Mode of creation:

A contract may be a) Made in writing (or) by word of mouth, orb) Inferred from the conduct of the parties or the circumstances of the case.

These are the modes of formation of a contract.Contracts may be classified according to the mode of their formation as follows:

Express contract:

If the terms of a contract are expressly agreed upon (whether by words spoken or written) at the time of formation of the contract, the contract is said to be an express contract. Where the offer or acceptance of any promise is made in words, the promise is said to be an express (sec.9). An express promise results in an express contract.

Implied contract:

An implied contract is one which is inferred from the acts or conduct of the parties or course of dealings between them. It is not the result of any express promise or promises by the parties but of their particular acts. It may also result from a continuing course of conduct of the parties. Where the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied (sec. 9). An implied promise results in an implied contract.

Ex: 1. There is an implied contract when ‘A’-A) Gets in to a public bus, orB) takes a cup of tea in a restaurant,C) Obtains a ticket from an automatic weighing machine, orD) Lifts B’s luggage to be carried out of the railway station.

2. A fire broke out in P’s farm. He called upon the fire brigade to put out the fire which the latter did. P’s farm did not come under the free service zone although he believed to be so. Held, he was liable to pay for the service rendered as the service was rendered on an implied promise to pay (upon rural district council vs. Powell).

Quasi contract:

It resembles a contract in that a legal obligation is imposed on a party who is required to perform it. It rests on the ground of equity that “a person shall not be allowed to enrich himself unjustly at the expense of another”.

Scenario: T, a tradesman leaves goods at C’s house by mistake. C treats the goods as his own. C is bound to pay for the goods. Quasi contract is not a contract at all as unlike other contracts ‘quasi contract’ is created by law.

E-commerce contract:

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

3. Classification according to performance or Extent of Execution:

To the extent to which the contracts have been performed, these are classified in to-

a) Executed contract: ‘Executed’ means that which is done. An executed contract is one in which both the parties have performed their respective obligations. Ex: A agrees to paint a picture for B for Rs.100. When A paints the picture and B pays the price i.e. when both the parties perform their obligations, the contract is said to be executed.

In some cases, even though a contract may appear to be completed at once, its effects may still continue. Thus when a person buys a bun containing a stone and subsequently breaks one of his teeth, he has a right to recover damages from the seller (Chaproniere vs. Mason, 1905).

b) Executory contract: ‘Executory’ means that which remains to be carried in to effect. An executory contract is one in which both the parties have yet to perform their obligations.

Scenario: A agrees to paint a picture for B for Rs. 100. If A has not yet painted the picture and B has not paid the price. Similarly, if A agrees to engage B as his servant from the next month, the contract is executory.

A contract may sometimes be partly executed and partly executory. Thus if B has paid the price to A and A has not yet painted the picture, the contract is executed as to B and executory as to A.

Contracts are also classified according to their performance as:

a) Unilateral or One-sided contract: A unilateral or one-sided contract is one in which only one party has to fulfill his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract comes in to existence. Such contracts are also known as contracts with executed consideration.

Scenario: ‘A’ permits a railway coolie to carry his luggage and place it in a carriage. A contract comes in to existence as soon as the luggage is placed in the carriage. But by that time the coolie has already performed his obligation. Now only ‘A’ has to fulfill his obligation, i.e.; pay the reasonable charges to the coolie.

b) Bilateral contract: A bilateral contract is one in which the obligations on the part of both the parties to the contract are outstanding at the time of the formation of the contract. In this sense, bilateral contracts are similar to executory contracts and are also known as contracts with executory consideration.

Offer or Proposal

The process of making an agreement commences with “proposal”. The word “proposal” is synonymous with in the word “Offer”.

Sec. 2(a) of Indian Contract Act defines a proposal as “when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other, to such act or abstinence, he is said to make a proposal”.

There were two parties involved in offer. The person making the proposal is called the “proposer” or “offeror” or “promisor”. The person to whom the proposal is made is called the “propose” or “offeree” or “promise”. A proposal becomes a promise when it is accepted.

Types of offer:

There are two kinds of offer:

A. Expressed offer.B. Implied offer.

Expressed offer: When an offer made by expressing words, spoken or written, this is known as “express offer”.

Implied offer: When an offer may be implied from the conduct of the parties or the circumstances of the case, this is known as “implied offer”.

Essentials of a valid offer:

1. Offer must be capable of creating legal relations: An offer should not be a casual statement. It should intend to create legal relations between the parties. If an offer is not intended to create legal relationship it is not an offer in the eyes of law.

Legal Case (Balfour Vs Balfour): Balfour and his wife were enjoying there leave in England. When Balfour was to return to Ceylon where he was employed, his wife was advised to stay in England due to her ill-health. Mr. Balfour has agreed to send a monthly some money as maintenance till she remained in England. But after sometime due to differences he stopped sending money. Wife sued him for the money. But the suit was dismissed because there is no legal relation between the parties except the economic relation.

2. The terms of offer must be certain or capable of being made certain:

An offer usually contains some terms and conditions. Such terms and conditions must be clear, definite and certain. If they are not so, the offer is not a valid offer and is unenforceable.Legal Case (Taylor Vs Portington): ‘A’ promised to take ‘B’s hose on rent if the house was “put into thorough repairs and decorated thoroughly according to present style”. It was held that the terms were vague and uncertain and the promise could not be enforced.

3. Offer must be communicated to the offeree:

An offer to be complete and effective must be communicated to the person to whom it is made. If there is no communication to an offer, there is no valid acceptance. “An acceptance of an offer in ignorance of an offer is not acceptance at all”.

Legal Case (Lalmam shukla Vs Gowri Dutt): ‘G’ sent his servant, ‘L’ to fine his missing nephew. ‘G’, in the mean time announced a reward for information relating boy. ‘L’, found the boy and informed to ‘G’ without knowing the announcement. ‘L’ later came to know the reward and claimed it. His suit was dismissed by saying he could not accept offer unless he had knowing the offer.

4. Offer may be specific or general:

When an offer is made to a specific person or some special class of persons it is called a “specific offer”. This offer can be accepted by those specific persons. When an offer made to all general public, it is called as “general offer”, it can be accepted by anyone.

Legal Case (Carlill Vs Carbolic smoke Ball Company): The Company offered an reward of money in an advertisement by saying that, any person who contracts influenza after using their smoke balls can get the reward. Mrs. Carlill used the smoke balls but she never got rid of influenza. She therefore sued the reward as it was a general offer.

5. An invitation to offer is not an offer:

An offer is different from an invitation to an offer. Just as a statement of intention is not an offer in the same way an invitation to offer is also not an offer. It does not pass legal requirements of an offer.

Legal Case (Harvey Vs Facie): In this case three telegrams were exchanged between the parties.a. H to F: “Will you sell us the estate of bumper hall pen telegraph the lowest price”.b. F to H: “Lowest price is 900”.c. H to F: “We agree to buy”

Facie did not sent any reply, hence Harvey sued. The suit was dismissed by saying “mere statement of price is not an offer”.

6. Offer may be conditional: An offer may be subject to conditions. In such cases, the conditions must be clearly brought to notice. If it is done there is no valid offer. If the offer accepted with out knowledge of conditions, the offeror can’t claim the fulfillment of the conditions.

Revocation or lapse of offer: An offer may come to an end by revocation or lapse, or rejection. Sec .6 deals with various modes of revocation of offer. According to it, an offer is revoked:

1. By communication of notice of revocation by the offeror at any time before its acceptance is complete as against him.Scenario: At an auction sale, ‘A’ makes the highest bid for ‘B’s goods. He withdraws the bid before the fall of the hammer. The offer has been revoked before its acceptance.

2. By the lapse of time if it is not accepted within the prescribed time. However, if no time is prescribed, it lapses by the expiry of a reasonable time.

3. By non-fulfillment by the offeree of a condition precedent to acceptance.

4. By death or insanity of the offeror provided the offeree come to know of it before acceptance. If he accepts an offer in ignorance of the death or insanity of the offeror, the acceptance is valid.

In addition to the above cases dealt with in Sec .6, an offer is also revoked:

5. If a counter offer is made to it i.e. where an offer is accepted with some modification in the terms of the offeror with some other condition not forming part of the offer, such qualified acceptance amounts to a counter-offer.

6. If an offer is not accepted according to the prescribed or usual mode, provided the offeror gives notice to the offeree within a reasonable time that the acceptance is not according to the prescribed or usual mode. If the offeror keeps quiet, he is deemed to have accepted the acceptance {Sec .7(2)}.

7. If the law is changed. An offer comes to an end if the law is changed so as to make the contract contemplated by the offer illegal incapable of performance.

Rejection of offer:

An offeree may reject the offer. Once he does that he cannot subsequently accept it. Rejection of the offer may be express or implied.

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

Implied rejection: Rejection of the offer is implied by law:

A. Where the offeree makes a counter-offer.B. Where the offeree gives a conditional acceptance.

Acceptance & its legal rules

Definition: According to section 2(b) of the Indian contract act 1872, defines an acceptance is “when the person to whom the proposal is made signifies is assent there to, the proposal is said to be accepted becomes a promise”. On the acceptance of the proposal, the proposer is called the promisor/offeror and the acceptor is called the promisee/offeree.

Legal Rules of Acceptance:

1) Acceptance must be obsolete and un-qualified:

An acceptance to be valid it must be obsolete and un-qualified and in accordance with exact terms of the offer.

An acceptance with a variation, slight is no acceptance and may amount to a mere counter-offer(i.e.., original may or may not accept)

2) Acceptance must be communicated to the offeror:

For a valid acceptance, acceptance must not only be made by the offeree but it must also be communicated by the offeree to the offeror

Communication of the acceptance must be expressed or implied.

A mere mental acceptance is no acceptance.

3) Acceptance must be according to the mode prescribed (or) usual and reasonable manner:

If the offeror prescribed a mode of acceptance, acceptance must be given accroding to the mode prescribed.

If the offeror prescribed no mode of acceptance, acceptance must given according to some usual and reasonable mode.

If an offeror is not accepted according to the prescribed (or) usual mode, the proposer may within a reasonable time give notice to the offeree that the acceptance is not according to the mode prescribed.

If the offeror keeps quit he is deemed to have accepted the acceptance.

4) Acceptance must be given within a reasonable time:

If any time limit is specified, the acceptance must be given within that time.

If no time limit is specified, the acceptance must be given within a reasonable time.

Legal Case (Ramsgate Victoria Hotel Company Vs Montelfore):

On June 8th “M” offered to take shares in “R” company. He received a letter of acceptance on November 23rd he refused to take shares.Judgment: “M” was entitled to refuse as his offer has lapsed as the reasonable period which it could be accepted and tested.

5) It cannot precede an offer:

If the acceptance precedes an offer, it is not a valid acceptance and does not result in a contract.

In other words “acceptance subject to contract” is no acceptance.

6) Acceptance must be given by the parties (or) party to whom it is made:

An offer can be accepted only by the person (or) persons to whom it is made.

It cannot be accepted by another person without the consent of the offeror.

Legal Case (Boulton Vs Jones):

Boulton bought a horse-pipe business from Brockle Hurst. Jones, to whom Brockle Hurst owed a debt, placed an order with Brockle Hurst for the supply of certain goods. Boulton supplied the goods to pay Boulton for the goods because, he by entering into a contract with Brockle Hurst, intended to set off his debt against Brockle Hurst.Judgment: The offer was made to the Brockle Hurst and it was not in the power of Boulton to step in and accept. Therefore there was no contract.

7) It cannot be implied from silence:

Silence does not amount to acceptance.

If the offeree does not respond to the offer (or) keeps quite, the offer will lapse after reasonable time.

The offeror cannot compel the offeree to respond offer (or) to suggest that silence will be equivalent to acceptance.

8) Acceptance must be expressed (or) implied:

An acceptance may be given either by words (or) by conduct.

An acceptance which is expressed by words (i.e., spoken or written) is called expressed acceptance.

An acceptance which is inferred by the conduct of the person (or) by circumstances of the case is called “implied acceptance”.

Legal Case (Carilill Vs Carbolic Ball Company):A company advertised in several newspapers is that a reward of 100 pounds would be given to any person contracted influenza after using the smoke ball according to the printed directions. Once, Mr.Carilill used the smoke balls according to the directions of the company, but contracted influenza.Judgment: She should recover the amount as by using the smoke balls as she accepted the offer.

9) Acceptance must be given by performing some condition (or) by accepting some consideration.

10) Acceptance must be made before the offer lapses (or) before the offer is withdrawn.

CONSIDERATION

Consideration is a technical term used in the sense of quid i.e. something in return. Sec 2(d) defines consideration as when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called as consideration.

Legal rules as to consideration: 1) It must move at the desire of the promisor:

An act constituting consideration must have been done at the desire or request of the promissor. If it is done at the instance of a third party or without the desire of the promissor, it will not be a good consideration.

Legal Case (Durgaprasad Vs Baldeo): B spent some money on the improvement of a market at the desire of the collector of the district. In consideration of this D who was using the market promised to pay some money to B held the agreement was void being without consideration as it had not moved at the desire of D.

2) It may move from the promisee or any other person:

Consideration may move from the promisee or any other person, i.e. even a stranger. This means that as long as there is consideration for furnished it. But the stranger to consideration will be able to sue only if he is party to the contract.

Legal Case (Chinnaya Vs Ramayya): An old lady, by a dead of gift. Made over certain property to her daughter D, under the direction that she should pay her amount, P (sister of old lady), a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount later, D refused to pay the amount on the plea that no consideration had moved from P to D. Held, p was entitled to maintain it as consideration had moved from the old lady, sister of P to the daughter, D.

3) It may be an act, abstinence or forbearance a return promise:

Following are good considerations for a contract.

a) Forbearance to sue: If a person who could sue another for the enforcement of a right agrees not to pursue his claim, this constitutes a good consideration for a promise by the other person who could sue.

Legal Case (Debi Radha Rani Vs Ram Dass): D is ready to sue her husband for maintenance allowance. On husband's agreeing to pay her a monthly allowance by way of maintenance, she forbears to sue, held, the wife’s forbearance to sue amounts to consideration for the husband's agreement for payment of maintenance allowance.

b) Compromise of a disputed claim: Compromise is a kind of forbearance. The claim should be reasonable and the person claiming should honestly believe that it is a valid claim. He should also act bonafied. If it turns out that the claim was frinolons and the claimant was not acting bonafied, the other party can claim compensation.

c) Composition with creditors: A debtor who is financially embarrassed may call a meeting of his creditors and request them to accept a lesser amount in satisfaction of their debt. If the creditors agree to it, the agreement is binding both upon the debtor and the creditors and this amount to a compromise of claims of the creditor.

4) It may be past, present or future:

A) Past consideration: When consideration by a party for a present promise was given in the past i.e. before the date of promise, it is said to be past consideration.

Scenario: ‘A’ renders some revenue to ‘B’ at latter’s desire. After a month ‘B’ promises to compensate ‘A’ for the revenues rendered to him. It is past consideration. ‘A’ can recover the promised amount.

B) Present or executed consideration: When consideration is given simultaneously with promise i.e. at the time of the promise, it is said to be present consideration. Scenario: ‘A’ receives Rs. 5000 in return for which he promise to deliver certain goods to ‘B’. The money ‘A’ receives is the present consideration for the promise he makes to deliver the goods.

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

Scenario: ‘D’ promises to deliver certain goods to ‘P’ after a week, ‘P’ promises to pay the price after a fortnight. The promise of ‘D’ is supported by the promise of ‘P’. 5) It need not be adequate:

Consideration means something in return. This something in return need not necessary be equal in value to something given. The law simply provides that a contract should be supported by consideration.

Legal Case (High Vs Brooks): ‘B’ promised to pay certain bills if ‘H’ would handover guarantee to him. ‘H’ handed over the guarantee but it turned out to be enforceable. Held, as ‘B’ received what he had asked for there was consideration for his promise, although guarantee was of smaller value than he has supposed. According to explanation 2 to sec 25, an agreement to which the consent of the pomissor is freely given is not void merely because the consideration is inadequate.

6) It must be real and not illusory:

Although consideration need not be adequate, it must be real competent and of some value in the eyes of law.

a) Physical impossibility:

Legal Case (Hall Vs Cazenone): A charter party contained a clause that a particular ship would mail on a specified day. This date had already expired when the contract was entered into the consideration in this case is physically impossible

b) Legal impossibility:

Legal Case (Harney Vs Gibbons): ‘A’ owes Rs.100 to ‘B’, he promises to pay Rs.510 to ‘C’, the servant of ‘B’, who in return promises to discharge ‘A’ from the debt .This is legally impossible because ‘C’ cannot give discharge for a debt due to ‘B’, his master.

c) Uncertain consideration:

Scenario: ‘A’ engages ‘B’ for doing certain work and promises to pay a reasonable sum. There is no recognized method of ascertaining the reasonable remuneration. The promise is unenforceable as consideration is uncertain.

d) Illusory consideration:

Legal Case (Stilk Vs Myrick): Two of the crew of a ship deserted it half way through a voyage. The captain there by promised to divide the salary of the deserters among the rest of the crew if they worked the vessel. Held, they could not recover the amount as the consideration was illusory.

7) It must be something which the promissor is not already bound to do:

A promise to do what one is already bound to do, either by general law or under as existing contract, is not a goof consideration for a new promise, since it adds nothing to pre existing legal or contractual obligation.

Legal Case (Collins Vs Godfroy, Ramachandra Vs Raju): ‘A’ promised to ‘B’ ,who had received summons to appear at a trial in a civil suit, a certain sum being a compensation for the loss of time during his attendance .held, the promise was without consideration , for ‘B’ was under a duty imposed by law to appear and give evidence.

8) It must be illegal, immoral or opposed to public policy (sec .23):

The consideration given for an agreement must not be immoral. Where it is unlawful, the courts do not allow an action on the agreement.

Capacity of a Contract

An agreement between two persons can be enforced in the court of law when both of them are competent of contract. According to section11 of Indian contract act, 1872, “Every person is competent to contract, who is of the age of majority, according to the law to which he is a subject and who is of sound mind and who is not disqualified from contracting by any law o which he is a subject. A person is said to be a major by age subject to the rules of Indian majority act, 1875. Soundness of mind of a person is decided by section 12 of Indian contract act, 1872. Some persons are disqualified from contracting by laws of insolvency and Indian penal code.

The following persons can be said to be competent to contract:

1. Major by age: According to section 5 of the Indian majority act 1875, a person who completes 18 years of his age is called a major by age. In case of persons whose parents are not alive and who are governed by a legally appointed guardian or a court of law (court of wards). 21 years of age should be completed to become majors by age. This rule applies to both male and female persons equally. A person who does not attain the age of majority is called a minor by age. Such persons are not eligible to enter to contracts. Any agreement made with a minor (or) by a minor (or) between two minors becomes invalid.

2. Persons of sound mind: A person is said to be sound mind for the purpose of entering into contracts, if he is capable of understanding the terms of the agreement at the time. When he is entering into it and is capable of forming a rational judgment about the effect of the agreement in his own interest (section 12). A person who is not having soundness

of mind is called a person of unsound mind (or) insane person. These persons are reclassified in to three categories as under:

a. Idiots: A person who is devoid of any faculty of thinking and where there is no hope of his recovery from the state of mind is called an idiot. Any agreement made with an idiot (or) between two idiots becomes void.

b. Lunatics: Persons who are usually mind and occasionally of unsound mind are called lunatics. The persons undergoing treatment for mental diseases come under this category. Such persons can enter into valid contracts during the intervals of sanity of mind. All other agreements made by such persons become voidable.

c. Drunkards: The persons who are usually of sound mind and occasionally of unsound mind an account of influence of a drink (or) drug are called drunkards. Agreements made by them during the period of intoxication are not enforceable at law and all other agreements made by them are valid.

3. Not disqualified from contracting: Some persons are disqualified (or) prohibited from entering into agreements during specified periods of time even after having the age of majority and soundness of mind. Insolvents are disqualified from contracting by laws of insolvency until they are released from insolvency. Convicts are prohibited from entering into agreements during the period of imprisonment under Indian penal code. Convicts include persons involved in criminal activities (or) felony against government.

4. Disqualification an account of profession, political status and official status: The doctors and advocates are restricted from entering into contracts with their parents (or) clients for the payment of their medical (or) legal fees. Such agreements cannot be enforced an account of their professional ethics. The presidents, ministers and top executives of countries and their diplomatic staff posted in other countries are also restricted from entering into contracts of personal nature in those countries. The contracts of personal nature include the agreements of marriage, purchase of immovable properties and opening of bank accounts.

Special rules regarding minors:

Agreements:

1. Agreements with minors are void-ab-initio: An agreement with a minor is not only void, but it is void from the very beginning i.e. void-ab-initio. Any agreement to enter into an agreement with a minor also becomes void. Any amount paid to the minor cannot be recovered as the consideration given to a minor is considered as no consideration in law.

Legal Case (Mohiri bibi Vs Dharmodas Ghose): In this case, a lady agreed to give a loan of 50,000 Rs to a minor by mortgaging his property. She paid 20,000 as advance. The mortgage was agreed to be executed after the payment of balance amount. But the minor

did not take the balance. So he filed a suit. The court of law held that the minor cannot be forced to mortgage his property. Moreover, the amount paid to him cannot be recovered.

2. Agreements made for the benefit of minors can be forced by them: When an agreement is made between a major person and a minor in whom the minor is the beneficiary it can be enforced by the minor but only by the major person. This ruling was given by the honorable high court of Kerala to protect the innocent minors from the experienced action of the majors.

Legal Case (Abdul Ghaffar Vs Piyarelal): In this case, a major person purchased goods on credit from a minor who was running provisions stores of his deceased father. When he claimed the amount, the court of law held that it should be paid as the promise is a minor.

3. Agreements for the supply of necessaries of life to minors can be enforced: According to the rule of quasi contracts, if a person suppliers necessaries of life to another person who is incompetent to contract, the value of goods (or) services can be recovered from his private property. This rule applies to minors also. Necessaries of life include not only the bare essentials of life like food, clothing and shelter but they also include a number of essential services and expenses such as education, medical service, professional training, marriage expenses, funeral expenses, any loans taken to meet any of those expenses. But they should be suitable to the standard of living of the minor.

Legal Case (Nash Vs Inman): In this case, a minor purchased eleven fancy waist coats from a ready-made garments shop on credit basis and the seller filed a suit to recover the price. The court of law held that although clothing is necessary of life, fancy waist coats are not necessaries of life. So the amount cannot be claimed from the minor.

4. Minors agreement cannot be ratified: If an agreement made by a minor during his minority is revised (or) confirmed (or) ratified by him after becoming major, such agreement will not become valid. Because the consideration given to a minor is void and it cannot become a valid consideration for the fresh (or) ratified agreement.

Legal Case (Indran Rama Swamy Vs Anthiappa Chettiar): In this case, a person gave a loan of 15,000 Rs to a minor and obtained a promissory note. Later he obtained another promissory note for the same amount from the minor after he becomes a major. The court of law held that the second note is also invalid. So the amount cannot be recovered.

5. Minor can plea at all times: If a minor enters into an agreement with a major person by wrongly representing his age as major, such agreement also becomes void, because a minor cannot be held liable for misrepresentation of his age.

Legal Case (Leslie Vs Sheill): In this case, a minor took a loan of 500 pounds from a major person by representing his age as full age on account of his physical personality. The court of law held that the amount cannot be recovered from the minor as far as he was a minor, although he had misrepresented his age.

6. A minor not liable for any civil torts: When a minor causes a loss to a major person by not following his instructions, or committing a civil tort then the minor cannot be held liable to compensate the loss (or) to pay the damages. Even his parents cannot be held liable.

Legal Case (Jennings Vs Rundoll): In this case, a minor took a pony (small horse) on hire at a hill station. He was instructed by the owner of the party not to take it to the top of the hill. But the minor took it, so it fell down and died. The court of law held that the damages cannot be claimed either from the minor (or) from his parents.

7. A minor can become a partner: According to the rules of Indian partnership act, 1932 a minor can be admitted as a partner in a firm. There should be at least two major partners in such firm. He will be eligible to share profits but not liable for any losses. His liability is limited to the extent of capital contributed by him. He may (or) may not continue as partner after becoming major. He should give a notice of his choice within six months of becoming major. Otherwise he is denied as continuing as a major partner from the date of becoming major.

8. A minor can become a share holder: A company should not allot shares to minors and other incompetent persons. But if shares are allotted to a minor by mistake, the agreement cannot be avoided by the company, because the minor becomes beneficiary. He can receive dividends, if the company goes on winding up the areas of calls on shares if any cannot be claimed from the minor (or) his parents.

Legal Case (Liquidator of Pasupathi Bank Ltd Vs Palaniappa Mudaliar): In this case, a banking company allotted shows in the name of minor daughter of Mr. P. Mudaliar. If went into liquidation without declaring any dividends. When the liquidator claimed arrears of calls from her father, the court of law declared that the amount cannot be claimed.

9. Minor can become an agent of a major person: A major principal can appoint a minor as his agent. Agreement made by minor agents with third parties on behalf of their major principals will become valid but the agent will not become personally liable.

10. Any money paid to a minor cannot be recovered: Any amount paid to a minor (or) any goods delivered to a minor cannot be recovered except in the case of necessaries of life because any consideration given to a minor becomes nullity as per law. This rule is explained in the case.

Legal Case (Jagannath Vs Lalta Pandit): In this case, a minor agreed to take a loan of 1, 00,000 rupees from a major person by mortgaging his property and took 50,000 rupees as advance by giving his documents. Later he claimed the documents through court of law as the agreement becomes void. But the court of law held that the minor should repay the money before taking back the documents, as the court of law felt that the minor made the agreement to deceive the innocent money lender knowing fully well that such agreements become void as per law.

Conclusion: All these benefits are given to minors as they are very innocent persons and they should be protected from the experienced actions of major persons. Some people criticized the Indian law towards minors is strong words as the court of law have become their guardians, judges have become their advisors and lawyers have become their servants. Therefore, the courts will not tolerate any misuse of the privileges granted to minors.

Free Consent

It is essential to the creation of a contract that the parties are ad idem i.e, they agree upon the same thing in the same sense at the same time and that their consent is free and real. ‘Sec 10’ also says that “all agreements are contracts if they are made by the free consent of parties”.

Consent: It means acquiescence or act of assenting to an offer. According to ‘sec 13’ – “Two or more persons are said to consent when they agree upon the same thing in the same sense”.

The validity of an agreement depends not only on the consent of the parties to it, but their free consent also. Consent is said to be free when it is not caused by1. Coercion2. Undue Influence3. Fraud4. Misrepresentation5. Mistake

When there is no consent, there is no contract. Salmond defines it as “error in consensus”. If there is no ‘consensus ad idem’, there is no contract.

Legal Case (Bala Debi Vs Majumdar): An illiterate woman executed a deed of gift in favor of her nephew under the impression that she was executing a deed authorizing her nephew to manage her lands. The evidence showed that the woman never intended to execute such a deed of gift, nor was the deed ever read or explained to her. Held, the deed was void and inoperative.

1. Coercion: Coercion is the threat or force used by one party against the other for making him enter in to an agreement.

“sec. 15” of the Indian contract act defines coercion “the committing or threatening to commit any act forbidden by the Indian penal code 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 in to an agreement.”

The threat amounting to coercion need not necessarily proceed from party to the contract. It may proceed even from a stranger to the contract. The intention of the person using coercion should, however, be to cause any person to enter into an agreement.

Scenario: ‘A’ threatens to kill ‘B’ if he does not lend Rs 10,000 to ‘C’. ‘B’ agrees to lend the amount to ‘c’. The agreement is entered into under coercion.

Consent is said to be caused by coercion when it is obtained by:

Committing or threatening to commit any act forbidden by the IPC (1860).

Legal Case (Ranganayakamma Vs Alwar Setty): A young girl of 13 years was forced to adopt a boy to her husband who had just died by the relatives of the husband who prevented the removal of his body for cremation until she consented. Held, the consent was not free but was induced by coercion.

Unlawful detaining or threatening to detain any property

Legal Case (Bansraj Vs The secretary of state): The government gave a threat of attachment against the property of ‘p’ for the recovery of the fine due from ‘t’, the son of ‘p’. ‘p’ paid the fine. Held, the contract was induced by coercion.

Effect of coercion: 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 (sec. 19).

According to sec 72, 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 also amounts to coercion.

Legal Case (Chikkam Raju Vs Seshamma): In this case, a person held out a threat of committing suicide to his wife and son if they did not execute a release in favor of his brother in respect of certain properties. The wife and son executed the release deed under the threat. Held, the threat of suicide amounted to coercion and therefore the release deed was voidable.

Duress: In the English law, the near equivalent of the term ‘coercion’ is ‘duress’. Duress involves actual or threatened violence over the person of another (or his wife, patient, or child) with a view to obtaining his consent to the agreement. If the threat is with regard to the goods or property of the other party, it is not duress.

2. Undue influence (sec. 16): Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. This happens when a special kind of relationship exists between the parties such that one party is in a position to exercise undue influence over the other.

According to sec.16(1) defines undue influence as “A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other”.

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, e.g. the relationship between master and servant, doctor and patient.b) Where he stands in a judiciary relation (relation of trust and confidence) to the other. It is supposed to exist for example, between father and son, solicitor and client, trustee and beneficiary and promoter and company.c) 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. Such a relation exists, for example, between a medical attendant and his patient.

Legal Case (Mannu singh Vs Umadat pandey): A spiritual guru induced his devotee to gift to him the whole of his property in return of a promise of salvation of the devotee. Held, the consent of the devotee was given under undue influence.

Undue influence is sometimes called moral coercion. Halsbury defined undue influence as “the unconscientious use by one person of power possessed by him over another in order to induce the other party to enter into a contract”.

Effects of undue influence: When consent to an agreement is obtained by undue influence, the agreement is a contract voidable at the option of the party whose consent was so obtained. Any such contract may be set aside either absolutely or if the party who is entitled to avoid it has received any benefit there under, upon such terms and conditions as to the court may seem just and equitable.

Scenario: ‘A’s son has forged ‘B’s name to a promissory note. ‘B’ under threat of prosecuting ‘A’s son obtains a bond from ‘A’ for the amount of the forged note. IF ‘B’ sues on this bond, the court may set the bond aside.

Relationships which raise presumption of undue influence: The following relationships usually raise a presumption of undue influence viz. parent and child, guardian and ward, trustee and beneficiary, religious adviser and disciple, doctor and patient, solicitor and client, finance and financee. The presumption of undue influence applies whenever the relationship between the parties is such that one of them is, by reason of confidence reposed in him by the other, able to take unfair advantage over the advantage.

Disproving the presumption: The presumption of undue influence can be disproves by showing that –a) Full disclosure of fact was made by the influencing party to the party alleged to have been influenced at the time of entering into the contract.

b) The price was adequate. Inadequacy of consideration is only an evidence of undue influence. It is however, conclusive.c) That the weaker party was in receipt of independent advice, before making the promise. The mere fact that independent advice was received will not necessarily save the transactions.

Pardanashin Klomen: A contract with a pardanashin woman is presumed to have been induced by undue influence. A pardanashin woman is one who observes complete seclusion because of the custom of the particular community to which she belongs.Any person who enters into a contract with a pardanashin woman has strictly to prove that no undue influence was used and that she had free and independent advice and understood the contents of the contract and exercised her free will.

3. Fraud (Sec. 17): Fraud exists when it is shown that –

a) A false representation has been made Knowingly, or Without belief in its truth, or Recklessly, not caring whether it is true or false and the maker intended the other

party to act upon it, orb) There is a concealment of a material fact.

According to sec. 17, ‘fraud’ means and includes any of the following acts committed by a party to a contract, or with the connivance or by his agent with intent to deceive a person to enter in to a contract.

1. The suggestion that a fact is true when it is not true and the person making the suggestion do not believe it to be true.2. The active concealment of a fact by a person having knowledge or belief of the fact.3. A promise made without any intention of permitting it.4. Any other act fitted to deceive.5. Any such act or omission as the law specially declares to be fraudulent.

Scenario: 1. ‘B’ is ‘A’s daughter and has just come of age. Here the relation between the parties would make it A’s duty to tell ‘B’ if the horse is unsound. 2. ‘A’ sells, by auction, to ‘B’ a horse which ‘A’ knows to be unsound. ‘A’ says nothing to ‘B’ about horse’s unsoundness. This is not fraud in ‘A’.

Essential Elements of Fraud:

1. There must be a representation or assertion and it must be false: without a representation, there can be no fraud except in cases where silence may itself amount to fraud or where there is an effective concealment of a fact.

Legal Case (Peek Vs Gurney): The prospectus of a company did not refer to the existence of a document disclosing liabilities. This gave the impression that the company was prospectus. If the existence of the document had been disclosed the impression would have been quite different. Held, non-disclosure amounted to fraud and anyone who purchased shares on the faith of this prospectus could avoid the contract.

2. The representation must relate to a material fact which exists now or existed in the past. A mere opinion, commendatory or puffing expression or hearsay or flourishing description, is not regarded as representation of fact.

Scenario: ‘A’ while negotiating with ‘B’ for the sale of certain goods, tells him that the goods cost him Rs 2,000. This is a statement of fact, but if he states that the goods are worth Rs 2,000 this is a statement of opinion.

3. The representation must have been made before the conclusion of the contract with the intention of inducing the other party to act upon it.

Not only must the representation be false and made with the knowledge of its falsity, but it must also be made with intent to deceive the other party.

4. The representation or statement must have been made with knowledge of its falsity or without belief in its truth or recklessly, not caring whether it is true or false:

Further, the representation amounting to fraud must have been made either by a party to the contract or with his connivance or by his agent.

5. The other party must have replied upon the representation and must have been deceived: A mere attempt at deceit by one party is not fraud unless the other party is actually deceived. If a representation does not come to the notice of a party, it cannot be said to have misled that party because it does not lead that party at all.

6. The other party must have been induced to act upon the representation or assertion:A mere falsehood is not enough to give a right of action. It must have

induced the other party to act upon it. The other party cannot shut his eyes to the obvious defect or news which he could have easily ascertained by reasonable investigation or inspection.

7. The other party, acting on the representation or assertion, must have subsequently suffered some loss. It is a common rule of law “that there is no fraud without damage”.

Consequences of Fraud:

A contract induced by fraud is voidable at the option of the party defrauded. Until it is avoided, it is valid.

1. He can rescind the contract. Where he does so, he must act within a reasonable time. If the interval, while he is deliberating an innocent third party has acquired an interest in the property for value, he cannot rescind the contract.

Scenario: ‘A’ purchases certain goods from ‘B’ by making a misrepresentation. ‘A’ sells the goods to ‘X’ before ‘B’ avoids the contract. ‘B’ loses the right to avoid the contract.

2. He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been if the representation made had been true.

3. He can sue for damages.

4. Misrepresentation (Sec. 18):

Misrepresentation is a false statement which the person making it honestly believes to be true or which he does not know to be false. It also includes non-disclosure of a material fact or facts without any intent to deceive the other party.

Legal Case (Derry Vs Peek): A company’s prospectus contained representation that it had statutory powers to run its tramways by steam provided the consent of a government authority was obtained. The directors issued a prospectus stating therein that the company had the right to use steam power. They honestly believed that the permission for the use of steam power would be granted. The permission was refused. The company was then wound up. Held, the directors were guilty of misrepresentation and not of fraud.

Requirements of Misrepresentation:

A misrepresentation is relevant if it satisfies the following requirements:

1. It must be a representation of a material fact. Mere expression of opinion does not amount to misrepresentation even if it turns out to be wrong.2. It must be made before the conclusion of the contract with a view to including the other party to enter into the contract.3. It must actually have been acted upon and must have induced the contract.4. It must be made with the intention that it should be acted upon by the person to whom it is addressed.5. It must be wrong but the person who made it honestly believed it to be true.6. It must be made without any intention to deceive the other party.7. It need not be made directly to the plantiff.

Consequences of Misrepresentation:

1. Avoid or rescind the contract.2. Accept the contract but insist that he shall be placed in the position in which he would have been if the representation made had been true.

Loss of Right of Recession:

The aggrieved party loses the right to rescind or avoid the contract for misrepresentation or fraud.

1. If he, after becoming aware of the misrepresentation or fraud, takes benefit under the contract or in some other way affirms it.2. If restitutio in integrum (i.e. restoration to the original position) of the parties is not possible or it can be stated in as where the subject matter of the contract has been consumed or destroyed.3. If a third party has acquired rights in the subject-matter of the contract in good faith and for value.5. Mistake (Sec. 20, 21, 22):

Mistake may be defined as an erroneous belief about something. It may be a mistake of law or a mistake of fact.

Mistake of Law: Mistake of law may be

1. Mistake of law of the country.2. Mistake of law of a foreign country.

Mistake of law of the country: “Ignorantia non Excusat” i.e. ignorance of law is no excuse, is a well-settled rule of law. A party cannot be allowed to get any relief on the ground that had done a particular act in ignorance of law.

Scenario: ‘A’ and ‘B’ enter in to a contract on the erroneous belief that a particular debt is barred by the Indian law of limitation.

Mistake of law of foreign country: Such a mistake is treated as mistake of fact and the agreement in such a case is void.

Mistake of Fact: Mistake of fact may be-

1. Bilateral mistake2. Unilateral mistake.

1. Bilateral mistake: Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake. In such a case, the agreement is void. The following two conditions have to be fulfilled for the application of sec. 20:

The mistake must be mutual :

Both the parties should misunderstand each other and should be at cross-purposed.

Scenario: ‘A’ agreed to purchase ‘B’s motor car which was lying in ‘B’s garage. Unknown to either of the parties, the car and garage were completely destroyed by fire a day earlier. The agreement is void.

The mistake must relate to a matter of fact essential to the agreement :

As to what facts are essential in an agreement will depend upon the nature of the promise in each case.

Legal Case (Galloway Vs Galloway): A man and a woman entered into a separation agreement under which the man agreed to pay a weekly allowance to the woman, mistakenly believing themselves lawfully married. Held, the agreement was void as there was mutual mistake on a point of fact which was material to the existence of agreement.

The various cases which fall under bilateral mistake are as follows:

Mistake as to the subject matter : Where both the parties to an agreement are working under a mistake relating to the subject-matter, the agreement is void. Mistake, as to the subject-matter covers the following cases:

a) Mistake as to the existence of the subject matter: If both the parties believe the subject matter of the contact to be in existence, which in fact at the time of contract is non-existent, the contract is void.

Legal Case (Couturier Vs Hastie): ‘A’ agreed to sell a cargo of corn supposed at the time of the contract to be in transit from salonica to the U.K. Unknown to the parties, the corn has become fermented and had already been sold by the master of the ship at Tunis. Held, the agreement was void and the buyer was not liable for the price.

b) Mistake as to the identity of the subject-matter: It usually arises where one party intends to deal in one thing and the other intends to deal in another.

Legal Case (Scriven bros Vs Handley Co.): In an auction sale, the auctioneer was selling tow. A bid for a lot, thinking it was hemp. The bid was extravagant for tow, but reasonable for hemp. Held, there was no contract.

c) Mistake as to the quality of the subject-matter: If the subject matter is something essentially different from what the parties thought it to be the agreement is void.

d) Mistake as to the quantity of the subject-matter: If both the parties are working under a mistake as to the quantity of the subject-matter, the agreement is void.

Legal Case (Cox Vs Prentice): A silver bar was sold under a mistake as to its weight. There was a difference in value between the weight of the bar as it was and as it was supposed to be. Held, the agreement is void.

e) Mistake as to the title of the subject-matter: If the seller is selling a thing which he is not entitled to sell and both the parties are acting under a mistake, the agreement is void.

f) Mistake as to the price of the subject matter: If there is a mutual mistake as to the price of the subject-matter, the agreement is void.

Mistake as to the possibility of performance of contract : Consent is nullified if both the parties believe that an agreement is capable of being performed when infact this is not the case. The agreement, in such a case, is void on the ground of impossibility.

Impossibility may be –

a) Physical impossibility:

Legal Case (Griffith Vs Brymer): A contract for the hire of a room for witnessing the coronation procession of Edward VII was held to be void because, unknown to the parties, the procession had already been cancelled.

b) Legal impossibility: A contract is void if it provides that something shall be done which cannot, as a matter of law, be done.

2. Unilateral mistake: When in a contract only one of the parties is mistaken regarding the subject-matter or in expressing the terms or the legal effect of the agreement, the mistake is a unilateral mistake. According to sec. 22, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.

Legal Case (Smith Vs Hughes): ‘H’ bought oats from ‘S’ a sample of which had been shown to ‘H’. ‘H’ erroneously thought that oats were old. The oats were, however new. Held, ‘H’ could not avoid the contract.

Exceptions: A unilateral mistake is generally not allowed as a defense in avoiding a contract. But in certain cases, the consent is given by a party under an error or mistake which is as fundamental as goes to the root of agreement. Thus the following cases, even though there is a unilateral mistake, the agreement is void.

Mistake as to the identity of the person contracted with :

It is a fundamental rule of law that if one of the parties represents himself to be some person other than him really is, there is a mistake as to the identity of the person contracted with.

Legal Case (Solwer Vs Potter): In May 1938, a lady by the name of Ann Robinson was convicted of permitting disorderly conduct in her café. In July of the same year, she

assumed another name, Ann potter, and took a lease of slower’s premises. Held, the lease was “void ab initio”.

Mistake as to the nature of contract :

If a person enters in a contract in the mistaken belief that he is signing a document of a different class and character altogether, there is a mistake not as to the nature of the contract and the contract is void.

Legal Case (Foster Vs Mackinnon): ‘M’, an old man of poor sight, indorsed a bill of exchange thinking that it was a guarantee. Held, there was no contract on the ground that the mind of the signer did not accompany the signature.

Legality of object

To sustain the legality of the object following are the points which should be taken care of:

1. A contract must not only be based upon the mutual agreement of competent parties but must also have lawful object.2. Sec .23 says that the “object” or the “consideration” of an agreement is not lawful in some cases.3. “Object” means purpose or design.4. In some cases, consideration for an agreement may be lawful but purpose entered into may be unlawful. In such cases agreement is void.5. Both the object and the consideration of an agreement must be lawful.

When consideration or object is unlawful (sec 23)

A. When it is forbidden by law:

An act is forbidden by law when it is punishable by the criminal law of the country.

Scenario: ‘A’ promises ‘B’ to obtain an employment in the public service and ‘B’ promises to pay 1,000 to ‘A’. The agreement is void, as the consideration for it is unlawful.

B. If it is of such a nature that, if permitted, it would defeat the provisions of any law:

Scenario: “A’ was licensed under an excise act to run a liquor shop. The act forbade the sale, transfer or sub-lease of the license or the creation of a partnership to run the shop. ‘A’ took ‘B’ in to partnership held, the agreement is void.

C. If it is fraudulent:

Scenario: “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, or the object is unlawful.

D. If it involves or implies injury to the person or property of another.

Scenario: ‘B’ borrowed 100 from ‘L’ and executed bond promising to work for ‘L’ without pay for a period of two years. In case of default, ‘B’ was to pay interest and principal sum at once. Held, the contract was void as it involved injury to the person of ‘B’.

E. If the court regards it as immoral.

An agreement between a husband and wife for future separation is unlawful.

Scenario: ‘A’ agrees to let her daughter to ‘B’ for state of living together without being married. The agreement is unlawful, being immoral.

An agreement is unlawful for immorality in the following cases:

a. Where the consideration is an act of sexual immorality.b. Where the object of the agreement is the furtherance of immorality.Scenario: Lending money to a prostitute to help her in trade.c. Where the court regards it as opposed to public policy.

Unlawful and illegal agreements:

Unlawful agreement is like a void agreement, is not enforceable by law. It affects only the immediate parties and has no further consequences.

Illegal agreements are criminal acts against public policy causing harm to public and safety. It affects immediate parties and has further consequences.

Important points:

1. Every illegal agreement is unlawful, but every unlawful agreement is not necessary illegal.2. A criminal act is one which is both forbidden by law and which is revolting to the morals of the society.3. Unlawful acts are those which are less rigorous in public morals and neither do they result in the commission of a crime.

Remedies for breach of contract

Breach: Breach of contract means failure of a party to perform his obligations. When one party commits a breach, the aggrieved party becomes entitled to rescind the contract. It therefore operates as a mode of discharging a contract.

Breach of contract is of two types:

1. Actual Breach: Where one party fails to perform his contractual obligations on the due date of the performance or during the performance he is said to have committed a breach of the contract.

2. Anticipatory breach: Reputation of an integral part of a contract by the promisor before the actual due date of the performance of the contract is called an anticipatory breach.

Scenario of actual breach: ‘A’ agrees to supply to ‘B’ 1000 bags of sugar on 1st Feb. 1998. On that day he fails to supply. This is actual breach of contract.

Scenario of anticipatory breach: ‘A’ agrees to marry ‘B’. But therefore the agreed date ‘A’ marries ‘C’. The contract has been repudiated by ‘A’ by his conduct before the due date of its performance.

Remedies for breach of contract: The following are the remedies for breach of contract.

1. Rescission: Rescission means cancellation of contract. It may be mutual agreement (or) one sided. When two parties to a contract mutually agree to go back from their contractual obligations (or) to discharge themselves from the contract is called discharge by mutual agreement. The aggrieved party can exercise the option of rescission when the other party to a contract commits breach of contract in such case he can claim for the compensation from the other party for any loss sustained.

Scenario: ‘A’ agreed to sell 1000 bags of wheat to ‘B’ on 1st nov 1998. But he failed to do so. So, ‘B’ can rescind the contract and can claim for the loss which he had occurred.

2. Suit for damages: Damages may be defined as monetary compensation in respect of loss suffered as a result of breach. The object of providing damages is to put the injured party in the same position, so far as money can do, in which he would have been, had the contract been performed.

Damages are of four types:A. Normal (or) ordinary damages.B. Special damages.C. Vindictive (or) exemplary damagesD. Nominal damages.A. Normal or ordinary damages: Damages which arise in the ordinary course of events from the breach of contract are called ordinary damages. These damages constitute the direct loss suffered by the aggrieved party. They are estimated on the basis of circumstances prevailing on the date of the breach of contract.

B. Special damages: The consequential damages caused by the breach of contract due to the existence of special circumstances are called as special damages. Such damages are awarded by the court only when at the time of making contract, these special circumstances were foreseeable by the party committing the breach.

The leading case on this point is:

Legal Case (Simpson Vs London & North Western Railway Co.):

In this case Mr. S a manufacturer delivered his samples to Railway Company to be exhibited at new castle. On the consignment he wrote “must reach at new castle on Monday certain”. Due to negligence of Railway Company, the samples reached after the exhibition was over. Mr. S claimed for the damages from Railway Company for his loss of profit from exhibition. The court held that the railway company was liable to pay the damages as it is a case of special circumstances and must have contemplated that a delay in delivery might result in such a loss.

C. Vindictive or exemplary damages: These are quite heavy in amount and are awarded by way of punishment only in the following cases:1) Breach of contract to marry.2) Dishonor of customer’s cheque by the bank without any proper reason.

These damages are awarded with the intention of punishing the defaulting party. In case of a breach of a contract to marry, damages will include compensation for the loss of feeling and reputation of injured party. In case of dishonor of cheque damages are awarded taking into consideration the loss to the prestige and goodwill of the customer.

D. Nominal damages: These damages are quite small in amount. They are never granted by way of compensation for the loss. In such cases, the actual loss is very negligible. They are awarded simply to recognize the right of the party to claim damages for the breach of contract.

3. Suit for Quantum Meruit: Literal meaning of “Quantum Meruit” is “as much as earned” or “payment in proportion to the work done”. This right is available to the person under the quasi contracted obligations but not under any contract. It is the general principle that when a person has done something under a contract act but could not

complete it due to any reason such as impossibility or breach of contracts, he is allowed to claim remuneration for the work already done. Therefore an aggrieved party can exercise the right of “Quantum Meruit” on the breach of contract from the other party who is in default.

Scenario: ‘X’ forgets certain goods at ‘Y’s house. He had no intention to leave them with him gratuitously. ‘Y’ uses those goods for his personal benefit. ‘X’ can compel ‘Y’ to pay for those goods.

4. Specific performance: The court may direct the party in breach to carry out the performance of the contract specifically according to the terms of the contract. This is termed as “specific performance” of the contract. This remedy is granted under the specific relief act, 1877. It gives the court discretionary power to order specific performance instead of (or) in addition to damages.

5. Injunction: The term injunction may be defined as an order of the courts restraining a person from doing something which he promised not to do. It is just like a stay order given by the court. This remedy is available only where the contract contains a negative stipulation.

The leading case on this point is

Legal Case (Warner Bros Pictures Vs Nelson):

In this case a film actress nelson agreed to act for Warner bros for a fixed period and not with the third party during this period or engage in any other occupation without the written consent of Warner. Nelson then contracted to act for a third party and Warner sought an injunction, which was granted by the court and ordered nelson not to contract with the third party.