Chapter 1A - Concept Notes

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FINPREP - Concept Notes

Chapter Name Indian Contract Act

Chapter No. 1A

FINPREP

A CPT preparatory program from

Concept Notes

Subject: Mercantile Law


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Chapter No. 1A

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Chapter No. 1A

THE INDIAN CONTRACT ACT, 1872

Unit 1- Nature of Contracts

Applicability:

This act extends to the whole of except the State of Jammu and Kashmir; and it shall come into force on

the first day of September, 1872.

A. What is Contract?An agreement which is legally enforceable is a contract.

Example: X enters into an agreement with Y to buy his land at a price agreed by both. This

agreement is legally enforceable and his called a Contract.

All contracts are agreements, but all agreements are not contracts.

Example: X agrees to take Y to a movie. Though there is an agreement, this is not a contract as the

agreement cannot be enforced.

This can be better understood by the following process chart.

Proposal

Promise

Consideration

Agreement

Legally enforceable

Contract

Voidable agreement

Legally not enforceable

Void agreement


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Chapter No. 1A

Proposal: When one person signifies to another his willingness to do or to abstain from doinganything, with a view to obtaining the assent of that other to such act or abstinence, he is said to

make a proposal. Example: X offers to sell his land to Y for Rs. 2 lacs. This is called a proposal. Promise Sec. 2(b): When a person to whom the proposal is made, signifies his assent thereto, the

proposal is said to be accepted and it becomes a promise. Example: If Y accepts the offer made by X,

the proposal when it is accepted, becomes a promise.

Sec. 2(c) - The person making the proposal is called the "promisor", and the person accepting the

proposal is called "promisee".

Consideration: When, at the desire of the promisor, the promisee or any other person has done orabstained 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 a consideration for the promise.

For example if Y agrees to pay X Rs. 2 lacs for the land, then Rs. 2 lacs is the consideration.

Let us take another example: If X offers to pay Rs. 5000 to Y for not attending a competition, then

the abstinence of Y is the consideration from his side and Rs. 5000 is the consideration from X.

AgreementSec. 2(e): Every promise and every set of promises, forming the consideration for eachother, is an agreement.

ContractSec. 2(h): An agreement enforceable by law is a contract. Voidable AgreementSec. 2(i): An agreement which is enforceable by law at the option of one or

more of the parties thereto, but not at the option of the other or others, is a voidable agreement.

Void AgreementSec. 2(g): An agreement not enforceable by law is said to be void.B. Essentials of Valid Contract:

S. 10 of Indian Contract Act, 1872 states that a ll agreements are contracts if they are made by the free

consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not

expressly declared to be void.

Hence the essentials of Valid Contract are:

Intention to create legal obligation through offer and acceptance should be presentThis should result in a moral duty on the person who promises or offers to do something. And this

should also give right to the promisee to claim its fulfillment. Such duties and right should be legal

and not merely moral.

In Balfour v. Balfour, a husband promised to pay maintenance allowance every month to his wife, so

long as they remain separate. When he failed to perform this promise, she brought an action toenforce it. As it is an agreement of domestic nature, it was held that it does not contemplate to

create any legal obligation.

Free consent of the parties is necessaryConsent would be considered as free consent if it is not vitiated by coercion, undue influence, fraud,

misrepresentation or mistake. Wherever the consent of any party is not free, the contract is voidable

at the option of that party.

Illustration: A threatened to shoot B if he (B) does not lend him Rs. 2000 and B agreed to it. Here the

agreement is entered into under coercion and hence voidable at the option of B.


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Chapter No. 1A

Competency or capacity to enter into contract must be ensuredSection 11 of the Indian Contract Act, 1872 provides that a person who-

(a) has not attained the age of majority,(b) is of unsound mind [excluding the Lucid intervals] and(c) is disqualified from entering into a contract by any law (like an alien enemy, insolvents,

convicts etc),

Shall be considered as not competent to enter into any contract.

Lawful consideration should be presentConsideration refers to compensation for doing or omitting to do an act or deed. It is also referredto as quid pro quomeaning thereby something in return for another thing.

Illustration: A agrees to sell his books to B for Rs. 100, Bs promise to pay Rs. 100 is the consideration

for As promise to sell his books and As promise to sell the books is the consideration for Bs promise

to pay Rs. 100.

Lawful object should be the subject matter of contractThe agreement entered must not be either illegal or void. An illegal agreement is an agreement

expressly or impliedly prohibited by law. A void agreement is one without any legal effects.

For Example: Threat to commit murder or making/publishing defamatory statements or entering into

agreements which are opposed to public policy is illegal in nature.


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Chapter No. 1A

C. Types of Contract:

a) Void contract: Sec. 2(j)A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. It

is a contract which cannot be enforced by a court of law.

Some of the examples of Void contracts are:

Where both the parties to an agreement are under a mistake of fact. When the consideration or object of an agreement is unlawful. An agreement without consideration. An agreement in restraint of marriage, trade, legal proceedings, and agreement by way of

wager.

b) Voidable contract: Sec. 2(i)An agreement which is enforceable by law at the option of one or more the parties but not at the

option of other or others is a voidable contract.

Example: A contract brought about a result of coercion, undue influence, fraud or misrepresentation

would be voidable at the option of the person whose consent was caused by any one of

these factors.


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Chapter No. 1A

Distinction between Void and Voidable contracts.

Perspective Void Contract Voidable Contract

i)Definition A contract which ceases to be enforceable bylaw.

An agreement which is enforceable by

law at the option of one or more the

parties thereon, but not at the option of

other or others

ii) Nature Void contract is valid when it is made butsubsequently becomes unenforceable on

certain grounds such as supervening

impossibility, subsequent illegality;

repudiation of voidable contract, a

contingent contract becomes impossible.

Voidable contract is voidable at the

option of the aggrieved party and remain

valid until rescinded by him. Contract

caused by coercion, undue influence,

fraud, misrepresentation are voidable.

iii)Rights Void contract does not provide any legalremedy for the parties to the contract. They

even cannot get it performed when they so

desire.

In voidable contract, the aggrieved party

gets a right to rescind the contract.

When the aggrieved party rescinds it, the

contract becomes void. In case it is not

rescinded within a reasonable time, then

the contract remains valid.

c) Illegal contract:Illegal contracts are those that are forbidden by law. All illegal agreements are void but all void

agreements / contracts are not necessarily illegal. The illegal contracts and the connected contracts

shall not be enforced by court of law.

Example: Contract to commit crime. Contract that is immoral or opposed to public are illegal in

nature.

Distinction between illegal and Void contracts.

Perspective Illegal Contract Void Contract

i) Scope An illegal contract is always void. A void agreement may not be illegal. Itmay be void due to some other factor.

(Example: An agreement the terms of

which are not uncertain is void but not

illegal.

ii) Effect oncollateral

transaction

Collateral transaction to an illegal

agreement also becomes illegal and

hence cannot be enforced.

The collateral transaction to the

agreement which is merely void and not

illegal may be enforced for execution.

Collateral transactions mean transactions which are to be compiled with before or after or

concurrently along with the main contract.

iii)Void-ab-initio Illegal contracts are void from thevery beginning.

Valid contracts can subsequently change

its character and can become void.

iv)Penalty orpunishments.

All illegal agreements punishable

under different laws.

There is no punishment to the parties to

a void agreement.


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Chapter No. 1A

d) Express contract:A contract which is made by words either spoken or written is said to be an express contract.

According to sec. 9, if the proposal or acceptance of any promise is made in words, the promise issaid to be express.

e) Implied contract:Implied contracts means contracts implied by law (i.e.) the law implies a contract though parties

never intended. According the sec. 9, if the proposal or acceptance is made otherwise than in words,

the promise is said to be implied.

Example: A delivers goods by mistake at Bs warehouse instead of Cs place. Here there is an

obligation in part of B to return the goods to A, though they never intended to enter into a contract.

f) Tacit contract:A contract is said to be tacit when it has to be inferred from the conduct of the parties.Example: Obtaining cash through automatic teller machine (ATM), sale by fall of hammer at an

auction sale.

g) Executed contract:If the consideration for the promise in a contract (i.e., any act or forbearance) is given or executed,

such type of contract is called contract with executed consideration.

h) Executory contract:In executory contracts the reciprocal promises or obligations, which serves as consideration, will be

performed in future.

i) Unilateral contract:Unilateral contract is a one-sided contract in which only one party has to perform his promise or

obligation.

j) Bilateral contract:Where the obligation or promise in a contract is outstanding on the part of both the parties, it is

known as bilateral contract.


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a) Contract of Record: Contracts of record derive their binding force from the authority of the court. A contract of record is either a judgment of a court or a recognisance.

Judgment is an obligation imposed by a court upon one or more persons in favour of another or

others. The Judgment of a court is technically not a contract as it is not based on the agreement

between two parties. However it shall be binding on all the persons who are litigants.

A recognizance is a written acknowledgement of a debt due to the state which is usually met

with the connection with criminal proceedings.

b) Contract under seal: A contract under seal is one which derives its binding force from its form alone. It is in writing, duly signed and sealed and delivered to parties. It is also referred to as a deed or a specialty contract.

Simple contracts are lacking of all the formalities referred above.

D. Proposal / Offer:According to sec. 2(a), a person is said to make proposal when he 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.

Example:

(a) Where A tells B that he desires to marry B by the end of 2006, there is no offer m ade unless, he

also asks will you marry me?, conveying his willingness and tries to obtainthe assent of B in the same

breadth.(b) Where A offers to sell his car to B it conveys his willingness to do an act. Through this offer not

only willingness is being conveyed but also an intention to obtain the assent can be seen.

Classification of Offer:

Classification ofoffer

General offer

Special offer

Cross offers

Counter offer

Standing, open orcontinuing offer


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Chapter No. 1A

General offer: It is an offer made to the public in general and hence anyone can accept and do the

desired act.

Sec. 8 stipulates that, anyone performing the conditions of the offer can be

considered to have accepted the offer.

The general offer can be accepted by anyone at any time, until the same is

retracted or withdrawn.

Special offer: When offer is made to a definite person, it is known as specified offer and such

offer can be accepted only by that specified person.

Cross offer: When two parties exchange identical offers in ignorance at the time of each others

offer, the offers are called Cross offers.

There is not binding contract in such a case, as ones offer cannot be construed as

acceptance by the other.

Example: If A makes a proposal to B so sell some goods at a specified price and B, without knowing

proposal of A, makes a proposal to purchase the same goods at a price specified in the proposal of A, it

is not an acceptance , as B was not aware of proposal made by A.

Counteroffer: When the offeree offers to qualified acceptance of the offer subject to

modifications and variations in terms of original offer, he is said to have made a

counter offer.

Counter offer amounts to rejection of the original offer.

Standing / open /continuing offer:

An offer made to a public at large, and allowed to remain open for acceptance overa period of time is known as a standing / open / continuing offer.

Tender for supply of goods is a kind of standing offer.

Rules as to Offer:

i) The offer must be capable of creating legal relation.ii) The offer must be certain, definite and not vague.iii) The offer may be expressed or implied.iv) The offer must be distinguished from an invitation to offerv) An offer may be specific or general.vi)

The offer must be communicated.

vii) The offer must be made with a view to obtaining the consent of the offeree.viii) An offer may be conditional.ix) The offer should not contain a term the non-compliance of which would amount to acceptance.


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Distinction between Invitation to offer and offer.

Invitation to offer Offer

An invitation to an offer is only a circulation of anoffer; it is an attempt to induce offers and precedes

a definite offer.

An offer is definite and capable of converting anintention into a contract

Acceptance of an invitation to an offer does not

result in contract.

Acceptance to an offer results in contract.

Example: When a person advertises that he has a

stock of books to sell.

Example: When a person advertises that he is

selling a stock of books at specified prices.

In order to ascertain whether a particular statement amounts to an offer or an invitation to offer, the

test would be intention with which such statement is made.

-- Offer Does the person who makes the statement intend to be bound by it as soon

as it is accepted by the other?

-- Invitation to offer Does the person who makes the statement intend to do some further act,

before he becomes bound by it?

E. Acceptance:Sec. 2(b) of the act:

A proposal or offer is said to have been accepted when the person to whom the proposal is made

signifies his assent to the proposal to do or not to do something.

Rules as to Acceptance:

i) Acceptance must be absolute and unqualifiedii) It must be communicated to offeroriii) Acceptance must be in the mode prescribediv) Acceptance must be given within reasonable time (before the offer lapses)v) Mere silence is not acceptancevi) Acceptance by conduct (either in writing or by word of mouth or by performance of some act)Relationship between Offer and Acceptance:

Acceptance is to offer what lighted match is to train of gun powder

-- Sir William Anson.

Here the offer is compared to gun powder and the acceptance is compared to the lighted match. The

following are the important observation from the above quotation:

Once the offer is accepted, it cannot be recalled or withdrawn. However there is a chance to withdraw the offer before it is accepted. Once the offer is accepted, it becomes promise and it cannot be withdrawn or revoked. An offer by itself cannot create any legal relationship but it is the acceptance by the offeree which

creates a legal relationship.


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Chapter No. 1A

F. Communication of offer and acceptance: Communication of offer:

(i) The communication of an offer is complete when it comes to the knowledge of the person towhom it is made (Sec. 4). It may be communicated either by words spoken or written or it may

be inferred from the conduct of the parties.

(ii) When the proposal is made by post its communication will be complete when the lettercontaining the proposal reaches the person to whom it is made.

Communication of Acceptance:Modes of communicating acceptance:

i) By any act: It includes any expression of words whether written or oral. Communication wouldalso include any conduct intended to communicate like positive acts or signs so that the otherperson understands what the person means to say or convey.

ii) By omission to do something: This may be conveyed by a conduct or by forbearance on the partof one person to convey his willingness or assent. However silence would not be treated as

communication by omission.

iii) By conduct: Some of the examples are delivery of goods at a price by a seller to a willing buyer,dropping a coin in a weighing machine or buying a ticket when entering a public bus.

Communication of acceptance is complete:

(i) As against the proposer, when it is put in course of transmission to him.(ii) As against the acceptor, when it comes to the knowledge of the proposer.When a proposal is accepted by a letter sent by the post, then the communication of acceptance will

be complete:

i) As against the proposer, when the letter of acceptance is posted.ii) As against the acceptor, when the letter reaches the proposer.If there is no delivery of the letter, the acceptance could be treated as having been completed from

the viewpoint of proposer but not from the viewpoint of acceptor.

Communication of special conditions:

The special conditions are conveyed tacitly and the acceptances of these conditions are also

conveyed by the offeree again tacitly or without him even realizing it.

The lucid examples for the above communication of special conditions are the conditions stipulate

on the backside of the travel tickets, conditions displayed as notice in public buses and public trains

etc.

These conditions are communicated through conduct and the offeree has been treated as having

accepted the conditions. This has been affirmed in Mukul Datta Vs. Indian Airlines (1962) case law.


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G. Communication of Performance:If an offer is made in the form of a promise in return for an act, the performance of that act, even

without any communication thereof, is to be treated as an acceptance of the offer.

H. Revocation of offer and acceptance:Under sec. 4, the communication of a revocation (to offer and to acceptance) is complete:

As against the person who makes it, when it is put into a course of transmission to the person towhom it is made so as to be out of the power of the person who makes it;

As against the person to whom it is made, when it comes to his knowledge.Example: If A revoke proposal made to B by a telegram, the revocation will be complete, as for as A is

concerned when A have dispatched the telegram. But as far as B is concerned, it will be complete only

when B receives the telegram.

As regards revocation of acceptance, A can revoke his acceptance to B by a telegram. This revocation

of acceptance for A will be complete when A dispatches the telegram and against B, it will be

complete when it reaches B

Under Sec.5, a proposal may be revoked at any time, before the communication of its acceptance is

complete as against the proposer. An acceptance may be revoked at any time before the

communication of acceptance is complete as against the acceptor.

Important points to be noted:

Where the acceptor fails to fulfill certain conditions precedent to acceptance, then the proposal getsrevoked.

Death or insanity of the proposer would result in automatic revocation of the proposal but only ifthe fact of death or insanity comes to the knowledge of the acceptor.

The time for acceptance lapses, if the acceptance is not given within the specified time and whereno time is specified, then within a reasonable time.


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Chapter No. 1A

Unit 2 Consideration

A.What is Consideration?Definition Sec. 2 (d)

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 a consideration for the promise.

From the above definition it is observed that:

Consideration is doing or not doing something, which the promisor desires to be done or not done Consideration must be at the desire of the promisor Consideration may move from one person to any other person Consideration may be past, present or future and Consideration should be real though not adequate.Consideration is identified as quid pro quo (something for something) from its promise of the promisor

B.Legal requirements regarding consideration:a) Consideration must move at the desire of the promisor, either from the promisee or some other

third party.

b) Consideration can flow either from the promise or any other person. There can be a stranger to aconsideration but not stranger to a contract.

c) Executed or Executory ConsiderationWhere consideration consists of performance, it is called executed consideration; where itconsists only of a promise, it is executory.

d) Past consideratione) Adequacy of considerationf) Performance of what one is legally bound to performg) Consideration must be real and competenth) Consideration must not be unlawful, immoral, or opposed to public policy.C.Suit by a third party on an agreement:It is general rule of contract that only parties to contract can sue & be sued on that contract .This rule is known as Doctrine of privity i.e relationship between the parties to contract .

Exceptions for the above rule:

(i) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a partyto the contract between the settler and the trustee.

(ii) In the case of family settlement, if the terms of the settlement are reduced into writing, themembers of family who originally has not been parties to the settlement may enforce the

agreement.


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Chapter No. 1A

(iii) In the case of certain marriage contracts, a female member can enforce a provision for marriageexpenses, made on the partition of the Hindu Undivided Family.

(iv) In the case of assignment of a contract, when the benefit under the contract has been assigned theassignee can enforce the contract.

(v) In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, andadmits to C the receipt of that amount, but subsequently refuses to pay C. Now C can sue and

enforce him claim.

(vi) Whenever the promisor is by his own conduct stopped from denying his liability to perform thepromise, the person who is not a party to the contract can sue upon it to make the promisor liable.

(vii) In cases where a person makes a promise to an individual for the benefit of third party and createsa charge on certain immovable property for the purpose, the third party can enforce the promise

"though, he is stranger to the contract.

D.Validity of an agreement without consideration:The general rule is that an agreement made without consideration is void (No consideration, No

contract). But Section 25 of the Indian Contract Act lays down certain exceptions which make a promise

without consideration valid and binding. Thus the following agreements without consideration are valid:

(i) If it is expressed in writing and registered and is made out of natural love and affection betweenparties standing in a near relation to each other; or

(ii) If it is made to compensate a person who has already done something voluntarilyfor the promisor,or done something which the promisor was legally liable to do; or

(iii) If it is a promise in writing and signed by the person to be charged therewith, or by his agent, topay a debt barred by the law of limitation.

(iv) According to Section 185 of the Indian Contract Act, consideration is not required to create anagency.

(v) No consideration is required to effect the bailment(vi) In the case ofgift actually made, no consideration is necessary. There need not be nearness of

relation and even if it is, there need not be any natural love and affection between them.

Important Notes:

Gratuitous promise (free of cost) will not result in an agreement in the absence of consideration. Forinstance, a promise to subscribe to a charitable cause cannot be enforced.


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Chapter No. 1A

Unit 3 Other Essential Elements of Contract

One of the essential of valid contract is Free Consent of the parties

A.Free Consent:Consent means acquiescence or act of assenting to an offer. Two or more persons are said to consent

when they agree upon the same thing in the same sense. (Sec. 13)

Sec. 14 stipulates that, Consent is said to be free when it is not caused by

(i) Coercion as defined in Sec. 15 or(ii) Undue influence as defined in Sec. 16, or(iii) Fraud as defined in Sed. 17, or(iv) Misrepresentation as defined in Sec. 18, or(v) Mistake.

When there is no consent, there is no contract.

Example: A is forced to sign a promissory note at the point of pistol. A knows what he is signing but his

consent is not free. The contract in this case is voidable at this option.

(i) Coercion: When a person is compelled to enter into a contract by the use of force by the other party or under a

threat, coercion is said to be employed.

According to Sec 15 coercion means Committing or threatening to commit any act forbidden by Indian Penal Code 1860, or Unlawful detaining or threatening to detain any property with the intention of causing any

person to enter into an agreement.

The threat amounting to coercion need not necessarily be from a party to contract, it may alsoproceed from a stranger to the contract.

It is immaterial whether the IPC is or is not in force where the coercion is employed. A threat to commit suicide also amounts to coercion.Example: A threatens to kill B if he does not lend Rs. 1000 to C. B agrees to lend the amount to C. The

agreement is entered into under coercion.

(ii) Undue Influence: Sometimes a party is compelled to enter into an agreement against his will as a result of unfair

persuasion by the other party.

Sec. 16: A contract is said to be induced by undue influence where the relations subsisting betweenthe 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.


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Chapter No. 1A

Essentials of undue influence: There are two persons The relations are satisfying between them One must dominate the other There must be unfair advantage It involves the moral pressure

The following relationships usually raise a presumption of undue influence viz. Principal and agent Doctor and patient Father and son Teacher and student Promoter and company Spiritual advisor and devotee Finance and fiance

Difference between coercion and undue influence:Perspective Coercion Undue Influence

Way of consent The consent is given under the threat

of an offence

The consent is given by a person who is so

situated in relation to another that the

other person is in a position to dominate

his will

Nature Coercion is a physical character. It

involves use of physical or violent

force.

Undue influence is of moral character. It

involves use of moral force or mental

pressure.

Involvement of

criminal action

It involves a criminal act No criminal act is involved

Relationship

between parties

In coercion there need not to be any

relationship between parties.

In undue influence, there must be some

kind of relationship between parties which

enables to exercise undue influence over

the other.

Enforceability Where there is coercion, the contract

is voidable.

Where there is undue influence the

contract is voidable or court may set aside

or enforce it in a modified form.

Position of benefits

received

In case of coercion where the contract

is rescinded by the aggrieved party, as

per sec. 64, any benefit received has

to be restored back to the other party.

The court has the discretion to direct the

aggrieved party to return the benefit in

whole or in part or not to give any such

directions


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Chapter No. 1A

(iii) Fraud: According to Sec 17, Fraud means and includes any of those acts committed by a party to contract

or with his connivance or by his agent with intent to deceive or induce a person to enter a contract:

The suggestion that a fact is true when it is not true and the person making it does not believe itto be true

The active concealment of a fact by a person having knowledge or belief of the fact A promise made without any intention of performing it Any other act fitted to deceive Any such act or omission as the law specially declares to be fraudulent

Any fraud committed by a party which does not lead the other party to enter into a contract is notcovered by this section.

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is nofraud. However in the following circumstances, silence amounts to fraud:

Where there is a duty to speak or Where his silence is equivalent to speech.

(iv) Misrepresentation: 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 otherparty.

According to sec. 18, there is misrepresentation When a person positively asserts that a fact is true when his information does not warrant it

to be so, though he believes is to be true.

When there is any breach of duty by a person which brings an advantage to the personcommitting it by misleading another to his prejudice.

When a party causes, however innocently, the other party to the agreement to make amistake as to the substance of the thing which is the subject of the agreement.

Distinction between Fraud and Misrepresentation.

Fraud Misrepresentation

In case of fraud the person making representation

knows that his statement is untrue / false.

In case of misrepresentation, the person believed

that it to be true, which is not true.

Fraud not only enables the party to avoid the

contract but is also entitled to bring action.

Misrepresentation merely provides a ground for

avoiding the contract and not for bringing an

action in court.


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Chapter No. 1A

General consequences of coercion, fraud, misrepresentation etc. (Sec. 19)

When consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation,then the contract is voidable at the option of the party those consent was so obtained.

However the aggrieved party may insist that the contract should be performed and that he shouldbe put in the same position in which he would have been, if the representation made had been true.

When the person has the means of discovering the truth with ordinary diligence cannot avoid acontract on the ground that his consent was caused by misrepresentation or silence amounting to

fraud.

Where the party to a contract commits fraud or misrepresentation, but the other party is not misledby such fraud or misrepresentation, then the contract cannot be avoided by the later.

(v) Mistake:Mistake of law may be: Mistake of law of the country:Ignorance of laws is no excuse is a well settled rule of law. A party

cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of

law. Therefore a mistake of law is no excuse, and the contract cannot be avoided.

Example: A and B enter into a contract on the erroneous belief that a particular debt is barred by the

Indian Law of Limitation. This contract may be voidable.

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

Mistake of fact may be:

Bilateral Mistake: Where both the parties to an agreement are under a mistake as to a matter offact essential to the agreement, there is a bilateral mistake. In such a case the agreement is void.

Unilateral Mistake: When in a contract only one of the parties is mistaken regarding the subject matter or, in expressing or understanding the terms or, the legal effect of the agreement,

Then the mistake is a unilateral mistake. 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. A unilateral mistake is not

allowed as a defense in avoiding a contract unless the mistake is brought about by the other partys

fraud or misrepresentation.

Essentials of Mistake:

(i) Mistake should be matter of fact.(ii) Mistake should not be a matter of law.(iii)Mistake should be a matter of essential fact.(iv)Mistake should not be unilateral but of both the parties and(v) Mistakes renders agreement void and neither party can enforce the contract against each

other.


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B.Capacity to contract:Section 11 explains that, every person who

(a) Has attained the age of majority,(b) Is of sound mind and(c) Is not otherwise disqualified from contracting

Is competent to contract.

(a)Age of majority:According to Indian majority act, every person domiciled in India attains majority on the completion of

18 years of age. However he attains majority on completion of 21 years, when his property is managed

by a court of wards or a guardian.

Position of minors agreement:

(i) A contract by a minor is altogether void. (Mohiri Bibi vs. Dharmodas Ghose). A minor is incapableof giving a promise imposing a legal obligation.

(ii) A minor can be a promisee or a beneficiary. He can hold other parties liable for the performanceof their promise.

(iii) A minor cannot be a partner in a firm. However, be may be admitted to the benefits ofpartnership with the consent of all the partners.

(iv) There are no estoppels against the minor. He can always plead minority in a suit attempting tohold him liable, no matter he might have earlier misrepresented himself to be major in age.

(v) A minor cannot ratify contracts which he might have made during minority, after becoming major.(vi) A minor's agreement being void cannot be specifically enforced. However, the estate of a minor

can be held liable for the necessities supplied to him or to his dependents suited to his status in

life.

(vii) Though the agreement of a minor is void, his guardian can, under certain circumstances and forthe benefit of minor, enter into contracts.

(viii) A minor can be an agent, but not a principal.(ix) A minor can hold property, fully paid up shares and can seek contracts of employment or

apprenticeship.

(x) The principle of restitution does not apply against a minor.(xi) A person giving guarantee for a minor debtor can be held liable as surety on the default of the

minor

(xii) A minor can never be adjudicated insolvent.


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(b)Sound mind: Section 12 lays down that, a person is said to be of sound mind for the purpose of making a

contract, if at the time when he makes it, he is capable of understanding it and of forming arational judgment as to its effect upon his interests.

A person, who is usually of unsound mind, but occasionally of sound mind, may make a contractwhen he is of sound mind.

A person, who is usually of sound mind, but occasionally of unsound mind, may not make acontract when he is of unsound mind.

The burden of proof of unsound mind is on the person who challenges the validity of thecontract.

A lunatic who estate is managed by a committee or a manager is not capable of entering acontract even during the periods of lucidity.

The following persons are considered as unsound mind: Lunatic, Idiot, Drunken or intoxicated persons.

(c)Disqualified persons:

The following persons are disqualified from contracting, partially or wholly, hence the contracts by such

person are void:

Foreign Sovereigns and Ambassadors: They may enter into contracts. But they cannot be suedexcept with the permission of the Central Government and certified by the Secretary. Alien Enemy: During the war, the alien enemy cannot enter into a contract with an Indian

subject. If a contract is already entered into before the declaration of war, its performance will

be suspended during the period of war and in case the war continues, the contract becomes

void on the ground of impossibility of particular contract.

Convict: He is no competent to contract during the period of sentence. Bankrupt: He cannot enter into contract and bind his property as his property shall be vested in

the official receiver when he is adjudged an insolvent.

Artificial Person - Corporation: It is a person in the eye of law. It is a legal entity. It can purchaseproperties enter into contracts, sue and be sued on such contracts. Its contractual capacity islimited. For example, it cannot enter into contract to marry or which is ultra vires its powers.

C.Lawful object and consideration:Every agreement of which the object or consideration is unlawful is void. As per sec. 23 of this act, the

consideration or object of an agreement is lawful, unless

It is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or any rule for a

time being in force


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is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or Is an agreement opposed to public policy?

(i) Forbidden by law:Acts forbidden by law are those which are punishable under any statute or rules or regulations

made under any statute.

Example: A promise to obtain for B an employment in the public service and B promises to pay

Rs. 1,00,000/- to A. The agreement is void, as the consideration is unlawful.

(ii) Defeat of the provision of law:Where an agreement is entered into with the object of defeating any provision of law then it is

prohibited. Law includes any legislative enactment or rule for the time being in force in India.

Example: N agreed to enter a companys service in consideration of a weekly wage of Rs. 75 and a

weekly expense allowance of Rs. 25. Both the parties knew that the expense allowance was a

device to evade tax. Held the agreement was unlawful.

(iii) Fraudulent:An agreement which is made for a fraudulent purpose is void.

Example: A & B are partners in a firm. They agree to defraud a Government department by

submitting a tender in the individual name and not in the firm name. This agreement is void as it is

a fraud on the Government department.

(iv) Injury to the person or property of another:Example: B borrowed Rs. 100 from L and executed a bond promising to work for L without pay for

a period of two years. In case of default B was to pay interest at a very exorbitant rate and the

principal sum of once. The contract was void as it involved injury to the person of B.

(v) Immoral:Example: A agrees to let her daughter to B for concubinage (state of living together as man and

wife without being married). The agreement is unlawful, being immoral.

(vi) Agreement opposed to public policy:An agreement is said to be opposed to public policy when it is harmful to the public welfare. Someof the agreements which are opposed to public policy and are unlawful are as follows.

1) Agreements of trading with enemy: An agreement made with an alien enemy in time of war isillegal on the ground of public policy.

2) Agreement to commit a crime: Where the consideration in an agreement is to commit a crime,the agreement is opposed to public policy. The Court will not enforce such an agreement.

3) Agreements which interfere with administration of police: An agreement, the object of whichis to interfere with the administration of justice is unlawful, being opposed to public policy. It

may take any of the following forms.


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Interference with the course of justice: An agreement which obstructs the ordinaryprocess of justice is unlawful.

Stifling prosecution: It is in public interest that if a person has committed a crime, hemust be prosecuted and punished.

Maintenance and champerty: Maintenance is an agreement to give assistance,financial or otherwise, to another to enable him to bring or defend legal proceedings

when the person giving assistance has got no legal interest of his own in the subject-

matter.

4) Agreements in restraint of legal proceeding: Sec. 28 which deals with these agreements.Agreements restricting enforcement of rights: An agreement which wholly or partially

prohibits any party from enforcing his rights under or in respect of any contract is void

to that extent.

Agreements curtailing period of limitation: Agreements which curtail the period oflimitation prescribed by the Law of Limitation are void because their object is to

defeat the provisions of law.

5) Trafficking in public offices and rules: Agreements for the sale or transfer of public offices andtitles or for the procurement of a public recognition like Padma Vibhushan or Param Veer

Chakra for monetary consideration are unlawful being opposed to public policy.

Example: R paid a sum of Rs, 2,50,000 to A who agreed to obtain a seat for Rs son in a

Medical College. On As failure to get the seat, R filed a suit for the refund of Rs. 2,00,000.

Held, the agreement is void on the ground of public property.

6) Agreements tending to create interest opposed to duty: If a person enters into an agreementwhereby he is bound to do something which is against his public or professional duty theagreement is void on the ground of public property.

7) Agreements in restraint of paternal rights: A father, and in his absence the mother, is the legalguardian of his/her minor child. These rights of guardianship cannot be bartered away by any

agreement.

8) Agreements restricting personal liberty: Agreements which unduly restrict the personalfreedom of the parties to it are void as being against public policy.

9) Agreements in restraint of marriage: Every agreement in restraint of the marriage of anyperson, other than a minor, is void (Sec. 26). This is because the law regards marriage and

married status as the right of every individual.

10)Marriage brokerage or brokerage agreements: An agreement by which a person for amonetary consideration promises in return to procure the marriage of another is void being

opposed to public policy.

11)Agreements interfering with marital duties: Any agreement which interferes with theperformance of marital duties is void being opposed to public policy. Such agreements have

been held to include the following.

A promise by a married person to marry during the lifetime or after the death of spouse. An agreement in contemplation of divorce e.g. an agreement to lend money to a woman

in consideration of her getting a divorce and marrying the lender.


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An agreement that the husband and wife will always stay at the wifes parents house andthat the wife will never leave her parental house.

12)Agreements to defraud creditors or revenues authorities: An agreement the object of which isto defraud the creditors or the revenue authorities is not enforceable being opposed to public

policy.

13)Agreements in restraint of trade: An agreement which interferes with the liberty of a personto engage him in any lawful trade profession or vocation is called an agreement in restraint of

trade.

D.Agreements expressly declared void:A void agreement is one which is not enforceable by law. Such an agreement does not give rise to

any legal consequences and void-ab-initio.

The following agreements have been expressly declared to be void by the Contract Act.

1) Agreements by incompetent parties Sec. 11Every 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.

2) Agreements made under a mutual mistake of fact Sec. 20Where both the parties to an agreement are under a mistake as to a matter of fact essential to

the agreement, the agreement is void.

3) Agreements the consideration or object of which is unlawful Sec. 23The consideration or object of an agreement is lawful, unless

It is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or any rule for

a time being in force

is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or Is an agreement opposed to public policy.

4) Agreements the consideration or object of which is unlawful in part Sec. 24If 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.

5) Agreements made without consideration Sec. 25

Agreement without consideration is void, unless it is in writing and registered, or is a promise

to compensate for something done, or is a promise to pay a debt barred by limitation law.

6) Agreements in restraint of marriage Sec. 26

Every agreement in restraint of the marriage of any person, other than a minor, is void.


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7) Agreements in restraint of trade Sec. 27

Every agreement by which any one is restrained from exercising a lawful profession, trade or

business of any kind, is to that extent void.

8) Agreements in restraint of legal proceedings Sec. 28

Every agreement, by which any party thereto is restricted absolutely from enforcing his rights

under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or

which limits the time within which he may thus enforce his rights, is void to the extent.

9) Agreements the meaning of which is uncertain Sec. 29

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

10) Agreements by way of wager Sec. 30

A wager is an agreement between two parties by which one promises to pay money or moneys

worth on the happening of some uncertain event in consideration of the other partys promise topay if the event does not happen.

Thus if A and B enter into an agreement that A shall pay B Rs. 100 if it rains on Monday, and that B

shall pay A the same amount if it does not rain, it is a wagering agreement.

Essentials of Wagering Agreement:

Promise to pay money or moneys worth: The wagering agreement must contain apromise to pay money or moneys worth.

Uncertain event: The promise must be conditional on an event happening or nothappening.

Each party must stand to win or lose: Upon the determination of the contemplated event,each party should stand to win or lose.

No control over the event: Neither party should have control over the happening of theevent one way or the other

No other interest on the event: Neither party should have any interest in the happening ornon-happening of the event other gdfgjdg sum or stake he will with or lose

11) Agreements contingent on impossible events Sec. 36

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 to the parties to the agreement at the

time when it is made.

12) Agreements to do impossible acts Sec. 56

An agreement to do an act impossible in itself is void.

A contract to do an act which, after the contract is made, becomes impossible or, by reason of

some event which the promisor could not prevent, unlawful, becomes void when the act

becomes impossible or unlawful.


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Other Important Notes:

Speculative

Transactions

In speculative transaction, there is

(a) Mutual intention of parties to acquire or deliver goods or commodities and(b) Undertaking of risk arising from movement prices.

Insurance policy An insurance policy is a valid contract. But if an insurance policy is taken by a

person who has no insurable interest, then it is void.

Example: A person, who has no insurable interest in a ship, takes a policy

against it being sunk, and then the contract is void.

Wager and collateral

transactions

The validity of a collateral transaction cannot be challenged because the main

contract is a wager and void. If the main transaction is illegal, the collateral

transaction cannot be valid.

Documents

Chapter 1A - Concept Notes