THE INDIAN CONTRACT ACT, 1872

By: Vanshika Jain

Introduction
The law relating to contract is governed by the Indian Contract Act 1872. The Act extends to the whole of India except the State of Jammu & Kashmir. The Bill pertaining to the Act was passed on 25th April 1872 and the Act came into force on 1st September 1872.

Contract
The term contract has been defined by various authors in the following manner: A contract is an agreement creating and defining obligations between the parties - Salmond A contract is an agreement enforceable at law, made between two or more persons, by which rights are acquired by one or more to act or forbearances on the part of the other or others. - Anson Every agreement and promise enforceable at law is a contract. - Sir Fredrick Pollock The Indian Contract Act has defined contract in Section 2(h) as an agreement enforceable by law. These definitions resolve themselves into two distinct parts. First, these must be an agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, an agreement must be coupled with an obligation. A contract therefore, is a combination of the two elements: 1. An Agreement, and 2. An Obligation. An agreement occurs when two minds meet upon a common purpose, i.e. they mean the same thing in the same sense at the same time. The meeting of the minds is called consensus-ad-idem, i.e., consent to the matter. An obligation is the legal duty to do or abstain from doing what one has promised to do or abstain from doing.

In broad sense, therefore, a contract is an exchange of promises by two or more persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is recognized and enforced by law. Example1. A agrees with B to sell his car for Rs. 10,000/- to him. A is under an obligation to deliver the car to B. B is under an obligation to pay Rs. 10000/- to A. Example 2. A promises to pay Rs. 1000/- to B if B kidnaps X. This agreement is not enforceable by law although there is a promise as well as consideration because the agreement being unlawful is not enforceable by law.

Essential Elements of a Contract

Section 10 of the Indian Contract Act, 1872 provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

Agreement
Section 2(e) of the Indian Contract Act provides that every promise and every set of promises forming the consideration for each other is an agreement. Offer Communication of Offer Acceptance Agreement = Offer + Acceptance

Characteristics of an agreement:
(a) Plurality of persons There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself. (b) Consensus-ad-idem Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.
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Offer/Proposal
Section 2(a) of the Indian Contract Act defines an Offer asWhen one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of the other to such act or abstinence he is said to make a proposal. Example: A offers Rs. 5 to B if he would mow his lawn. The promise to pay Rs. 5 is binding as soon as B promises to mow the lawn. Until then A is free to withdraw his offer. Essentials of a Valid Offer 1. An offer must be one to give rise to legal consequences. To constitute an offer, offerer must intend to create a legal obligation. Where such intention is lacking, agreement is not contract. Where an agreement clearly provides that it shall not be subject to legal jurisdiction, there is no contract between the parties. Social invitations are examples of offers made without the intention of creating legal obligations. For eg. If A invites B to dinner and then forgets all about it and goes out of town on the meeting date, then B cannot claim compensation for expense and inconvenience as there was no intention to create a legal obligation. In Balfour V. Balfour (1919), a husband working in Ceylone, had agreed in writing to pay a housekeeping allowance of 30 every month to his wife living in England. On receiving information that she was unfaithful to him, he stopped the allowance. On his failure to pay, the wife sued him for the recovery of the amount. Held, that she could not recover the amount as it was just a mere domestic arrangement with no intention to create legally binding relations. Therefore there is no contract. Offers made in jest or excitement cannot be construed as offers as they lack contractual intention, and are made without any thought or intention of creating a binding obligation. In Weeks v. Tybold (1604), the defendant in the course of a casual conversation said that he would give 100 to anyone marrying his daughter with his consent. He was sued for the amount. It was held that such general words spoken to excite suitors cannot be taken as seriously intended. 2. The terms of the offer must be definite or capable of being made definite.

An offer must be clear, certain, complete, definite and final. It must not be uncertain, vague or loose. For eg. A promise to pay an increased price for a horse if it proves lucky to promiser, is too vague and not binding. For eg. X promised Y that he will take his house on rent at Rs. 10000/- p.m. if the house is put into thorough repair and the drawing rooms decorated according to present style. The terms of the offer are too uncertain and hence the promised could not be enforced. 3. An offer must be distinguished from an invitation to offer. An offer is to be distinguished from an invitation to offer exemplified by Advertisements. Marked price of goods displayed in shop windows. Catalogues mentioning prices of goods. In all such cases the trader or advertiser is simply inviting an offer i.e. indicating that he is willing to consider an offer to pay the goods on the terms set out in the advertisement or catalogue. He is not making an offer. 4. Every offer must be communicated to the offeree. Every offer must be made known to the offeree; otherwise he will not be in a position to accept the offer without having the knowledge of the offer. The mere desire to enter into an agreement will not constitute an offer. The communication of the offer may be made by express words oral or written. For eg. A offers his car to B for Rs. 10000. A written communication setting out a definite proposition will have no effect till it is duly posted and reaches the offeree. 5. The communication of the offer may be general or specific. An offer need not always be made to an ascertained person but it is necessary than an ascertained person should accept it. Where an offer is made to a specific person it is called specific offer and it can be accepted only by that person. When an offer is addressed to an uncertain body of individuals i.e. the world at large, it is called general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer. For eg. If a person offers a reward to anyone who finds his lost diamond ring, the finder can successfully claim the reward.

For eg. A advertise in the newspapers that he will pay Rs. 1000/- to anyone who restores to him his lost son. B without knowing of this reward finds As lost son and restores him to A. In this case, since B did not know of the reward, he cannot claim it from A. Case Law: Carlill v. Carbolic Smoke Ball Co. (1893)

Acceptance
Section 2(b) of the Act defines Acceptance asWhen a 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. Section 7 of the Contract Act provides thatIn order to convert a proposal into a promise the acceptance must: (1) be absolute and unqualified; (2) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes the manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner and not otherwise, but if he fails to do so, he accepts the acceptance. Section 8 of the Act further provides that Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. Thus, an offer once accepted explodes into a contract. The offeree when he signifies acceptance is called the Acceptor. Rules governing Acceptance 1. Acceptance may be express i.e. by words spoken or written or implied from the conduct of the parties. 2. If a particular method of acceptance is prescribed, the offer must be accepted in the prescribed manner. 3. Acceptance must be unqualified and absolute and must correspond with all the terms of the offer. 4. A counter offer or conditional acceptance operates as a rejection of the offer and causes it to lapse, e.g., where a horse is offered for Rs. 1,000 and the offeree counter-offers Rs. 990, the offer lapses by rejection. 5. Acceptance must be communicated to the offeror, for acceptance is complete the moment it is communicated. 6. Mere silence on the part of the offeree does not amount to acceptance.

7. If the offer is one which is to be accepted by being acted upon, no communication of acceptance to the offeror is necessary, unless communication is stipulated for in the offer itself. Thus, if a reward is offered for finding a lost dog, the offer is accepted by finding the dog after reading about the offer. 8. Acceptance must be given within a reasonable time and before the offer lapses or is revoked. An offer becomes irrevocable by acceptance. 9. An acceptance never precedes an offer. There can be no acceptance of an offer which is not communicated. Similarly, performance of conditions of an offer without the knowledge of the specific offer, is no acceptance. Revocation of Proposals Section 5 of the Indian Contract Act saysA proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Section 4 of the Act states that The communication of a proposal is complete, when it comes to the knowledge of the person to whom it is made. And the communication of an acceptance is complete, as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the, knowledge, of the proposer. The communication of a revocation is complete, as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as "to be out of the power of the person who makes it; and as against the person to whom it is made, when it comes to his knowledge. Illustrations: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

Further Section 6 of the Act provides Revocation how made A proposal is revoked (1) By the communication of notice of revocation by the proposer to the other party; (2) By the lapse of the time prescribed in such proposal for its acceptance, or if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance; (3) By the failure of the acceptor to fulfil a condition precedent to acceptance, or (4) By the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.

Types of Agreements
All agreements are classified into1. 2. 3. 4. 5. Valid Agreement Void Agreement Voidable Agreement Enforceable Agreement Illegal Agreement

1. Valid Agreements These are agreements that are enforceable at law.

Such an agreement is fully operative in accordance with the intention of the parties and the law. Such an agreement satisfies all the conditions of a valid contract under the act. 2. Void Agreements A void agreement is one which has no legal effect at all, and is therefore not enforceable at law. Thus, agreements of which the object or consideration is unlawful, or which are in restraint of trade or of marriage or of legal proceedings or which are by way of a wager, are all void. No legal-rights flow from such an agreement, and consequently, no action could be taken under such an agreement in a Court of Law. In the eyes of law, there is no such agreement. Such agreements are void ab initio, i.e. void from the very beginning. 3. Voidable Agreements A void agreement is one which is valid as long as it is not avoided by the party entitled to do so. Thus it is an agreement which is enforceable at law at the option of one of the parties to such agreement, but not at the option of the other. Thus, agreements induced by coercion, undue influence, fraud or misrepresentation are voidable. It is for the party upon whom fraud etc., has been practiced to set up such fraud, etc., and have the agreement set aside by the court; if he does not, the agreement stays as a legal binding contract.

4. Unenforceable Agreements An otherwise valid contract may be unenforceable at law, if some rule of law renders it incapable of proof because of some technical defect, e.g., a promissory note which is unstamped or not sufficiently stamped. Such a contract is otherwise valid, but cannot be proved and enforced in a Court of law. 5. Illegal Agreements These are agreements which are void because they are against the law. Thus, an agreement to buy smuggled opium would be void as it is illegal.

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Free Consent
Section 13 enacts that- Two or more persons are said to consent when they agree upon the same thing in the same sense. Section 14 defines free consent thus Consent is said to be free when it is not caused by(1) Coercion, as defined in Section 15, or (2) Undue influence, as defined in Section 16, or (3) Fraud, as defined in Section 17, or (4) Misrepresentation, as defined in Section 18, or (5) Mistake, subject to the provisions of Section 20, 21 and 22. Consent is said to be caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.

Coercion
In Indian law, the term, coercion, means actually committing or threatening to commit any act that is forbidden by law. Thus, when a persons consent to an agreement is obtained by exercising pressure on that person either by committing or threatening to commit an act that is forbidden by the law, the consent so obtained, is vitiated by coercion. Sec 15 of the Act defines coercion as coercion is 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 into an agreement. It is to be noted that it is immaterial whether the Indian Penal Code is or is not in force in the place where coercion is employed. In simple words, the doing of any act forbidden by the Indian Penal Code is coercion even though such an act is done in a place where the IPC is not in force. For eg. If A at the point of a pistol asks B to execute a promissory note in his favour and B to save his life does so he can avoid this agreement as his consent was not free. Even a threat to third party, e.g. where A compels B to sign a document threatening to harm C, in case B does not sign would also amount to coercion.

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In Ranganayakamma v. Alwar Chetty, 1889 the refusal by the relatives of a deceased person to permit the cremation of his body, until his (the deceased) wife gave consent for adopting a boy, was held to amount to coercion. In Muthiah Chettiar v. Karuppan Chetti, 1927, an agent refused to handover the account books, bonds etc., of the business to his successor agent unless the principal gave him a release of all liabilities during the term of his agency. The principal did so, but later succeeded in the suit to declare the release deed as vitiated by coercion. A mere threat by one person to another to prosecute him does not amount to coercion. There must be a contract made under the threat and that contract should be one sought to be avoided because of coercion. (Ramachandra v. Bank of Kohlapur, 1952).

Undue Influence
Section 16 defines Undue Influence as (1) A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain the unfair advantage over the other. (2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of the another(a) Where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or (b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reasons of age, illness, or mental or bodily distress. 3) Where the person who is in the position to dominate the will of another, enters into a contract with him, and the transaction appears on the face of it, or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other. It is clear from the definition of undue influence in Section 16, that contract flawed by the element of undue influence fall into two categories: (a) Where no special relationship exists between the parties to a contract. In the case of contracts falling under this category, the party influenced must prove that (1) the other party was in a position to dominate his will, and (2) that the contract was extremely unfair and gave the other party unfair advantage.

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(b) Where a special relationship exists between parties to a contract. In the case of contracts falling under this category, undue influence will exist between the parties. Let us understand these situations in detail: 1. Real or apparent authority or fiduciary relationship Real or Apparent Authority The first part of sub-clause (a) deals with real or apparent authority; when a person has real or apparent authority over another, the law assumes that such person will be in a position to dominate the will of the person over whom s/he holds such authority. A person has real authority when s/he definitely holds some power over the other, but a person will have apparent authority when inspite of having no actual authority, the person can approach others as if s/he actually has some authority. These relationships of domination may include the relationship between a person and her/his spiritual adviser, between a police officer and a person in her/his lock up, between a younger person and an elder figure exercising influence over him, and even between an income tax officer and a tax payer. Fiduciary Relationship The second strand of this sub clause, i.e., sub-section (2)(a) states that when two persons are in a fiduciary relationship with each other, it is assumed that one person is in a position to dominate the will of the other. A fiduciary relationship is one where a person places confidence in, or trusts another, whatever the basis or origin of this feeling. Fiduciary relationships may include a variety of relationships ranging from the relationship between a doctor and patient, a solicitor/lawyer/advocate and a client, a person and his managing agent, relationship between a person from whom advice is expressly sought and the person seeking the advice, relationship between a spiritual adviser and devotee, relationship between a parent and a child or between a guardian and child. Thus the difference between the first and the second strands of this sub clause is that while a person who is in a fiduciary relationship with another, necessarily has some real authority over that person, a person having real authority over another, need not necessarily be in a fiduciary relationship with that person. 2. Contracting with a person whose mental capacity is temporarily or permanently affected due to mental or bodily distress, age or illness This deals with those cases where a contract is made with a person, taking advantage of her/his mental incapacity, caused for whatever reason. The consent to enter into such a contract will also be deemed to have been obtained by exercising undue influence.

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In a case before the Madras High Court, a poor widow, being desperately in need of money to establish her right to maintenance, was persuaded by a moneylender to pay an exorbitant interest of 100%. The Court, deeming this to have been clear case of undue influence where her consent had been obtained by taking advantage of her mental distress, reduced the interest rate to 24%. It would be pertinent to point out here that certain circumstances have been judged to fall outside the fold of mental distress, i.e. they have been classified as not being undue influence. These include Merely an urgent need of money to defend oneself in a criminal prosecution; Statutory compulsion, i.e., where a party is forced to accept a contract or the terms of at contract, by virtue of a statutory compulsion.

Illustrations: (a) A having advanced money to his son, B, during his minority, upon B's coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. (b) A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. (c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. (d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence. (e) A parent stands in a fiduciary relation towards his child and any transaction between them by which any benefit is procured by the parent to himself or to a third party, at the expense of the child will be viewed with jealously by Courts of Equity and the burden will be on the parent or third party claiming the benefit of showing that the child in entering into the transaction had independent advice, that he thoroughly understood the nature of transaction and that he was removed from all undue influence when the gift was made. (Marim Bibi v. Cassim Ebrahim, 1939).

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Unconscionable Transactions An unconscionable transaction is one which makes an exorbitant profit of the others distress by a person who is in a dominant position. In such cases the test is that between two parties on an unequal footing, one has sought to exploit and make an exorbitant profit out of the others distress. Merely the fact that the rate of interest is very high in a money lending transaction shall not make it unconscionable. But if the rate of interest is very exorbitant and the court regards the transaction unconscionable, the burden of proving that no undue influence was exercised lies on the creditor. For eg. A being in debt to B, the money lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract is not induced by undue influence. Transaction with Parda-nishin Women Since parda-nishin ladies lead a secluded life being in pardah and are therefore generally ignorant about the affairs of the world, they are given some special protection. The general view about the parda-nishin woman is that she is a woman who by the custom of the country or the usage of the particular community to which she belongs, is obliged to observe complete seclusion. Thus, a woman who goes to a Court and gives evidence, who fixes rent with tenants, and collects rents, who communicates when necessary, in matters of business, with men other than members of her own family, could not be regarded as a parda-nishin woman (Ismail Musafee v. Hafiz Boo, 1906). A person who contracts with parda-nishin woman has to prove that no undue influence was used and that she had free and independent advice fully understood the contents of the contract and exercised her free will. Burden of proving Undue Influence Sub-section (3) of Section 16 provides that where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such a contract was not induced by undue influence, shall lie upon the person who is in a position to dominate the will of the other.

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Difference between Coercion and Undue Influence Coercion 1. Consent is obtained by threat of an offence and the person is forced to give his consent. 2. Coercion is mainly a physical character. 3. Coercion is of an avowedly violent character. 4. It is not necessary that coercion is used against the party itself; it may be used against the agent, relation or friend of the party. Undue Influence 1. Consent is obtained by dominating the will of the giver. 2. Undue influence is a moral character. 3. Undue influence is more subtle and intangible. 4. Undue influence is exercised upon the concerned party itself.

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Fraud
When a party to a contract makes a misrepresentation knowing that it is false, with an intent to deceive, or not caring for its truth or falsehood, the misrepresentation is said to be fraudulent. Section 17 lays down thatFraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (1) The suggestion, as a fact, of that which is not true by one who does not believe it to be true; (2) The active concealment of a fact by one having knowledge or belief of the fact; (3) A promise made without any intention of performing it; (4) Any other act fitted to deceive; (5) Any such act or omission as the law specially declared to be fraudulent. In other words, fraud is an untrue statement made knowingly or without belief in its truth or recklessly, carelessly, whether it be true or false with the intent to deceive. Mere silence as to facts likely to affect the willingness of a party to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. Illustrations: 1. A sells by auction to B, a horse which A knows to be unsound. A says nothing to B about the horses unsoundness. This is no fraud in A. 2. In case B is As daughter and has just come of age. Here the relation between the parties would make it As duty to tell B if the horse is unsound. 3. B says to A--"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech. 4. A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B.

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Essential elements of fraud: An assertion or representation or active concealment by a person or his agent: (a) Such assertion or representation or active concealment must relate to a fact. (b) Such assertion or representation or concealment should have been made with knowledge of its untruth, or recklessly or carelessly whether it be true or false, and with intent to deceive. (c) It should have been made with a view to inducing the other party to enter into a contract. (d) The other party must be thereby damnified, for there is no fraud without damages. False representation A intending to deceive B, falsely represents that 500 mounds of indigo are made annually at As factory and thereby induces B to buy the factory. The contract is voidable at the option of B. Active Concealment If a person intending to sell certain wooden furniture takes the trouble of covering the several holes, and also giving a thick coat of paint with a view to prevent their detection by the prospective buyers, the seller will be guilty of mind. In the case of a contract vitiated by fraud it is essential that the party aggrieved must have acted upon the representation, and thereby been deceived and damnified. It is a common saying that there is no fraud without damage. Unless the party aggrieved has suffered damage or injury no action will lie; the damage may be actual or temporary injury, i.e., loss of money, or moneys worth or some tangible detriment capable of being ascertained and assessed.

Misrepresentation
A representation is a statement of fact, made by one party to the other on the basis of which the other party enters into a contract. A misrepresentation, therefore, is a statement of fact that is not correct or false. It is to be noted that the representation always relates to a statement of fact and not of law. The term misrepresentation is ordinarily used to connote both innocent misrepresentation and dishonest misrepresentation. Misrepresentation may therefore, be either (i) Innocent misrepresentation, or (ii) Wilful misrepresentation with intent to deceive and is called fraud.

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Section 18 of the Act defines misrepresentation as "Misrepresentation" means and includes(1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach, of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. Essential elements of misrepresentation 1. Making of unwarranted statements, which are not true although the person making it believes it to be true. 2. Any breach of duty giving advantage to the person committing it and thereby misleading another to his prejudice; 3. Causing a party to an agreement to make a mistake as to the substance of the thing which is the subject matter of the agreement. Difference between Misrepresentation and Fraud Misrepresentation Fraud

1. Misrepresentation may be quite 1. Fraud is more or less intentional innocent i.e. the intent to deceive wrong i.e. it implies an intent to is lacking in case of deceive. misrepresentation. 2. In case of misrepresentation and 2. In case of fraud, the argument fraudulent silence, the defendant that that the plaintiff had the can take a good plea that the means of discovering the truth plaintiff had the means of with ordinary diligence is not discovering the truth with available with the defendant ordinary diligence. except in case of fraud by silence. 3. Misrepresentation may lead to 3. In fraud, the plaintiff can claim avoidance of contract. damages as well.

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Mistake
The law believes that contracts are made to be performed. The whole structure of the business depends on this fact as the businessmen depend on the validity of the contracts. Accordingly, the law says that it will not aid any one to evade consequences on the plea that he was mistaken. On the other hand, the law also realizes that mistakes do occur, and that these mistakes are so fundamental that there may be no contract at all. If the law recognizes mistake in contract, the mistake will render the contract void. Effect of Mistake A mistake in the nature of miscalculation or error of judgment by one or both the parties has no effect on the validity of the contract. For example, if A pays an excessive price for goods under a mistake as to their true value, the contract is binding on him. Therefore, mistake must be a vital operative mistake, i.e. it must be a mistake of fact which is fundamental to contract. To be operative so as to render the contract void, the mistake must be: (a) Of fact, and not of law or opinion; (b) The fact must be essential to agreement, i.e., so fundamental as to negative the agreement; and (c) Must be on the part of both the parties; Thus, where both the parties to an agreement are under a mistake as to a matter of fact essential to agreement, the agreement is void (Section 20). Such a mistake prevents the formation of any contract at all and the Court will declare it void. For eg, A agrees to buy B a certain horse. It turns out that the horse was dead at the time of bargain though neither party was aware of the fact. The agreement is hence void. Mistake of Law and Mistake of Fact Mistakes are of two kinds: (i) mistake of law, and (ii) mistake of fact. If there is a mistake of law of the land, the contract is binding because everyone is deemed to have knowledge of law of the land and ignorance of law is no excuse (ignorantia juris non-excusat). But mistake of foreign law and mistake of private rights are treated as mistakes of fact and are execusable. The law of foreign country is to be proved in Indian courts as ordinary facts. So mistake of foreign law make the contract void. Similarly, if a contract is made in ignorance of private right of a party, it would be void, e.g., where A buys property which already belongs to him.

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Mutual or Unilateral Mistake Mistake must be mutual or bilateral, i.e., it must be on the part of both the parties. A unilateral mistake, i.e., mistake on the part of only one party, is generally of no effect unless (i) it concerns some fundamental fact and (ii) the other party is aware of the mistake. Mutual or common mistake as to Subject matter A contract is void when both the parties to it assumes that a certain state of things exist which does not actually exist or in their ignorance the contract means one thing to one and another thing to the other, and they contract subject to that assumption or under that ignorance. There is a mistake on the part of both the parties. Such a mistake may relate to the subject matter, its identity, quantity and quality. (a) Mistake as to existence of the subject matter: Where both the parties believe the subject matter of the contract to be in existence but in fact, it is not in existence at the time of making the contract, there is a mistake and the contract is void. For eg. There was a contract between A and B to buy cargo described as shipped from Port X to Y and believed to be at sea which in fact got lost earlier unknown to the parties and hence not in existence at the time of the contract. Here the contract is void due to the parties mistake. (b) Mistake as to the identity of the subject matter: Where the parties are not in agreement to the identity of the subject matter, i.e. one means one thing and the other means another thing, the contract is void; there is no consensus ad idem. For eg, A has a horse by the name of Fury. A also a racing car by the same name. A is interested in selling his horse. Now Z, a racer, is interested in buying the car. So he negotiates with A and enters into a contract to purchase Fury. Now, A has agreed to sell the horse Fury. But Z has agreed to buy the racing car Fury. Apparently, there is an absence of agreement between A and Z on the same thing in the same sense. Thus, it would be unjust to ask either of the parties to suffer the consequences of a contract that they did not intend, but entered into because of a genuine mistake. (c) Mistake as to quantity of the subject matter: There may be a mistake as to quantity or extend of the subject matter which will render the contract void even if the mistake was caused by the negligence of a third party. For eg, P wrote to H inquiring the price of rifles and suggested that he might buy as many as fifty. On receipt of a reply he wired send three
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rifles. Due to the mistake of the telegraph clerk the message transmitted to H was send the rifles. He dispatched 50 rifles. Hence, there was no contract between the parties. (d) Mistake as to quality of the subject matter or promise: Mistake as to quality raises difficult questions. If the mistake is on the part of both the parties the contract is void. But if the mistake is on the part of one party difficulty arises. The general rule is that a party to a contract does not owe any duty to the other party to disclose all the facts in his possession during negotiations. Even if he knows that the other party is ignorant of or under some misapprehension as to an important fact, he is under no obligation to enlighten him. Each party must protect his own interests unaided. In contract of sale of goods, this rule is summed up in the maxim caveat emptor (let the buyer beware). The seller is under no duty to reveal the defects of his goods to the buyer, subject to certain conditions. Unilateral Mistake as to nature of the contract The general rule is that a person who signs an instrument is bound by its terms even if he has not read it. But a person who signs a document under a fundamental mistake as to its nature (not merely as to its contents) may have it avoided provided the mistake was due to either(a) (b) The blindness, illiteracy or senility of the person signing, or A trick or fraudulent misrepresentation as to the nature of the document.

For eg., M, a senile man of feeble sight, endorsed a bill of exchange for Rs. 3000 thinking it was a guarantee. In such a case there was no contract and no liability was incurred by the signature. But if M knew that the document whereon he put his signature was a bill of exchange, he cannot avoid it on the ground that he believed that the bill was for Rs. 30 only. In the former case, he was mistaken as to the nature or character of the document. In the latter case he was mistaken as to the contents of the document. Unilateral Mistake as to the identity of the person contracted with It is the rule of the law that if a person intends to contract with A, B cannot give himself any right under it. Hence, when a contract is made in which personalities of the contracting parties are or may be of importance, no other person can interpose and adopt the contract. For example, where M intends to contract only with A but enters into contract with B believing him to be A, the contract is vitiated by mistake as there is no consensus ad idem.

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Mistake as to the identity of the person with whom the contract is made will operate to nullify the contract only if: (i) (ii) The identity is for material importance to the contracts; and The mistake is known to the other person, i.e., he knows that it is not intended that he should become a party to the contract.

In Cundy v. Lindsay, one Blenkarn posing as a reputed trader Blankiron placed an order for some goods with M/s Lindsay and Co. The company thought that it is dealing with Blankiron and supplied the goods. Blenkarn sold the goods to Cundy and did not pay to Lindsay. The latter sued Cundy. The Court held that there was no contract between Lindsay and Blenkarn and therefore Cundy has no title to the goods. In Jaggan Nath v. Secretary of State for India (1886) where one person by the name of S, Jaggan Naths brother, represented himself to be Jaggan Nath thereby inducing a government agent to enter into a contract with him (S). the Court held that the government agent intended to enter into a contract only with Jaggan Nath and the reason that he ended up contracting with S was because he thought S was Jaggan Nath. Therefore, the agreement was held to be invalid since there was no real consent between the parties. Illustrations: (a) Z wants to contract with X for the supply of bricks. A represents himself as X and enters into a contract with Z. (b) Z enters into a contract for the supply of water with Y, thinking him to be V, a fictitious person whose identity Y has assumed for the purpose of the agreement. In the first situation, the contract between X and Z shall be void because Z intended to contract with X, of whose existence he was aware, and whose existence was material to Z at the time he was entering into the contract. On the other hand, in the second situation, Y has assumed the mantle of another person V, of whose existence Z is unaware and moreover, Zs intention was to contract with the person who was representing himself to be V, and NOT V specifically. Thus, in the second situation, the contract will not be void, since the mistake is one of the attributes and not one of the identity of the person. Points to be noted: If a person to whom the offer is made, accepts it in the belief that the offer was actually made to him/her, and does not think that the offer was intended for another, the contract will be valid because, again, the person must be aware that the other is making the mistake.(otherwise it still remains the mistake of one party).

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If a person (A) enters into a contract with another (B) making a mistake as to that persons attributes, e.g., financial insolvency, this would not render the contract void for lack of consensus, since whatever may be Bs actual financial situation, A intended to contract with B, even if it was under the impression that Bs financial position was better than it actually was.

To conclude, the following test is helpful for resolving the issues relating to mistake as to identity: If the identity of the person with whom you are entering into the contract is an element of the contract, then the contract will be void in cases where there is mistake as to the identity of the person. A corollary to this would be that if you would have been equally willing to contract with anyone so long as the others had the same attributes that you thought the person in question had, the contract will be valid.

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Competence of the parties to contract

In law persons are either natural or artificial. Natural persons are human beings and artificial persons are corporations. The general rule is that all natural persons have full capacity to make binding contracts. But, the Indian Contract Act admits an exception in the case of: (i) (ii) (iii) Minors, Lunatics, and Persons disqualified from contracting by any law to which they are subject.

These persons are not competent to contract. Section 11 provides that every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. Minors Contract According to the Indian Majority Act, 1875, a minor is a person, male or female, who has not completed the age of 18 years. In case a guardian has been appointed to the minor or where the minor is under the guardianship, the person continues to be a minor until he completes his age of 21 years. The following points must be kept in mind with respect to the minors contract: (a) A minors contract is altogether void in law, and a minor cannot bind himself by a contract. If the minor has obtained any benefit, such as money on a mortgage, he cannot be asked to repay, nor can his mortgaged property be made liable to pay. (b) Since the contract is void ab initio, it cannot be ratified by the minor on attaining the age of majority. (c) Estoppel is an important principle of the law of evidence. To explain, suppose X makes a statement to Y and intends that the latter should believe and act upon it. Later on, X cannot resile from this statement and make a new one. In other words, X will be estopped from denying his previous statement. But a minor can always plead minority and is not estopped from doing so even where he had produced a loan or entered into some other contract by falsely representing that he was of full age, when in reality he was a minor. However, where the loan was so obtained by fraudulent representation by the minor or some property was sold by him and the transactions are set aside as being void, the Court may direct the minor to restore the property to the other party.

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For example, a minor fraudulently overstates his age and takes delivery of a motor car after executing a promissory note in favour of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the court on equitable grounds may order the minor to return the car to the trader, if it is still with the minor. (d) A minors estate is liable to pay a reasonable price for necessaries supplied to him or to anyone whom the minor is bound to support. (Section 68 of the Act). (e) An agreement by a minor being void, the Court will never direct specific performance of the contract. (f) A minor can be an agent, but he cannot be a principal nor can he be a partner. He can, however, be admitted to the benefits of a partnership. Lunatics Agreement A person of unsound mind is a lunatic. That is to say for the purposes of making contract, if a person is of unsound mind at the time when he makes the contract, he is incapable of understanding it and of forming rational judgment as to its effect upon his interests. A person of unsound mind cannot enter into a contract. A lunatics agreement is thus void. But if he makes a contract when he was of the sound mind, then he will be bound by it. Persons disqualified from entering into Contract Some statues disqualify certain persons governed by them, to enter into a contract. The following are few of them: Alien Enemies A person who is not an Indian citizen is an alien. An alien may be either an alien friend or a foreigner whose sovereign or state is at peace with India, has actually contractual capacity of an Indian citizen. On the declaration of war between his country and India he becomes an alien enemy. A contract with an alien enemy becomes unenforceable on the outbreak of war. Foreign sovereigns and Ambassadors Foreign sovereigns and accredited representatives of foreign states, i.e., Ambassadors, High commissioners, enjoy a special privilege in that they cannot be sued in Indian Courts. Foreign sovereign governments can enter into contracts through agents residing in India. In such cases the agent becomes personally responsible for the performance of the contracts.

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Consideration
Consideration is one of the essential elements of a valid contract. The requirement of consideration stems from the policy of extending the arm of the law to the enforcement of mutual promises of parties. A mere promise is not enforceable at law. For eg. If A promises to make a gift of Rs. 500 to B, and subsequently changes his mind, B cannot succeed against A for breach of promise, as B has not given anything in return. It is only when a promise is made for something in return from the promise, that such promise can be enforced by law against the promisor. This something in return is the consideration for the promise. Section 2(d) of the Indian Contract Act, 1872 defines Consideration thus 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 abstain from doing, something, such act, abstinence or promise is called a consideration for the promise. In simple words consideration means something, which is of some value in the eye of the law. Thus consideration may take the form of delivery of anything which has a money, or payment of money itself, or rendering some services, or doing something which under law a person is not bound to do or a promise to do any or all of those things. Illustrations: (a) A promises to pay B Rs. 1000 at the end of six months if C, who owes to grant time to C accordingly. Here the promise of each party is the consideration for the promise of the other. (b) A promises, for a certain sum paid to him by B, to make good the value of his ship if it is wrecked on a certain voyage. Here As promise is the consideration for Bs payment and Bs payment is the consideration for As promise. Rules governing consideration 1. Consideration is essential to every contract A contract not supported by consideration is void and can only be called a gratuitous promise. In Abdul Aziz v. Masum Ali (1914), a person had verbally promised to the Secretary of the Mosque Committee to subscribe a sum of money for rebuilding the mosque. On a suit by the Secretary to enforce this simple promise, it was held that the promise was not enforceable as there was no consideration in the sense of benefit to the promisor. A promise made without consideration is a gift; one made for a consideration is a bargain.

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2. Consideration must move at the desire of the promisor and from the promisee or any other person The promisor must desire the act or forbearance on the part of the promise. Under Section 2(d) there must be a link between the desire of the promisor and the act or forbearance on the part of the promise. In other words, the act or forbearance on the part of the promise should not be at the instance of the third party. 3. Consideration need not be adequate Although consideration must have some value, it need not be adequate i.e., a full return for the promise. Section 25 (Explanation II) clearly provides that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate. It is upon the parties to fix their own prices. For eg., where A voluntarily agreed to sell his motor car for Rs. 500 to B, it became a valid contract despite the inadequacy of the consideration. 4. Consideration must be real and competent, and not vague, indefinite or illusionary Consideration must be real and competent enough to be performed. It shouldnt be vague or illusionary. For eg., if a man promises to convert an ordinary paper into currency notes or to make parallel lines meet, it is illusionary consideration. For eg., a sons promise to stop being a nuisance to his father, being vague, is no consideration. 5. Pre-existing legal obligation If a person is already bound by statutory or official duty to do a particular act, the performance of the act cannot be considered for a promise. 6. Consideration must be legal or lawful Section 23 of the Indian Contract Act states The consideration or object of an agreement is lawful, unless It is forbidden by law; or Is of such a nature that, if permitted, it would defeat the provisions of any law; or Is fraudulent; or Involves or implies injury to the person or property of another; or The court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or the object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. 7. It may be past, present or future (Executed, Executory and Past consideration) Executed consideration or present consideration refers to consideration which take place simultaneously with the promise. Thus if C buys a watch from a watch shop and pays the price and the watch seller delivers the watch then and there, the consideration is executed since it is performed simultaneously by both parties.
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Executory consideration, on the other hand, refers to consideration for a promise, which is to be furnished in the future. Past consideration means an act constituting consideration which took place and is complete (wholly executed) before the promise is made. When consideration is not necessary The general rule is that an agreement made without consideration is void. But Section 25 of the Indian Contract Act lays down certain exceptions which make a promise without consideration, valid and binding. It says An agreement made without consideration is void unless (1) It is expressed in writing and registered under the law for the time being in force for the registration of the documents, and is made on account of natural love and affection between parties standing in a near relation to each other; or unless (2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless (3) it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract. Explanation 1.-Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made. Explanation 2.-An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given. Illustrations (a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement. (b) A, for natural love and affection, promises to give his son, B, Rs. 1,000. A puts his promise to B into writing and registers it. This is a contract. (c) A finds B's purse and gives it to him. B promises to give A Rs. 50. This is a contract. (d) A supports B's infant son. B promises to pay A's expenses in so doing. This is a contract. (e) A owes B Rs. 1,000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 500 on account of the debt. This is a contract.

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(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. (g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely given. The inadequacy of the consideration is a fact which the Court should take into account in considering whether or not A's consent was freely given.

Void Agreements
The following types of agreements are void under Indian Contract Act: 1. 2. 3. 4. Agreement by or with minor or a person of unsound mind or a person disqualified to enter into a contract Section 11; Agreement made under a mistake of fact, material to the agreement on the part of both the parties Section 20; An agreement of which the consideration or object is unlawful Section 23; If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void Section 24; An agreement made without consideration subject to three exceptions provided to Section 25; An agreement in restraint of marriage Section 26; Section 26 states that Every agreement in restraint of the marriage of any person, other than a minor, is void. In other words, an agreement not to marry at all or not to marry any particular person or class of persons is void as it is in restraint of marriage. An agreement in restraint of trade Section 27; Section 27 states that Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent, void. The words restrained from exercising a lawful profession, trade or business, do not mean an absolute restriction, and are intended to apply to a partial restriction limited to some particular place. Certain agreements are not enforced by courts as they impose restraint on the right to carry on a trade. The reasons for such agreements being declared void is that they militate against the livelihood of individuals and they deny the public the benefit of the skill and expertise of capable persons thereby discouraging industry and enterprise.

5.

6.

7.

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A restraint on a servant is not valid. However, where by an agreement of service a person agrees that during the term of agreement he will not take up employment outside directly or indirectly take part in or promote or aid any business in competition with that of his employer, the restraint is lawful. However, where a servant is wrongfully dismissed by the employer, he may treat the contract as annulled and is free from the restraint clause of the agreement. Other types of restraint are personal covenants between an employer and his employee whereby the latter agrees not to compete with the former or serve with any of his competitors after employment. This issue came before the Supreme Court, where N entered into a bond with the company to serve for a period of five years. In case N leaves his job earlier and joins elsewhere with companys competitor within five years, he was liable for damages. N was imparted the necessary training but he left the job and joined another company. The former employer instituted a suit against N. The Supreme Court held that the restraint was necessary for the protection of the companys interest and not as such, the court would refuse to enforce. The words to the extent in Section 27 make it clear that if in an agreement there are some covenants which are prohibited whereas the others are not and if the two parts can be separated then only those covenants which operate as restraint of trade would be void and not whole of the agreement itself. Exception to Section 27 of the Indian Contract Act (a) Sale of goodwill: where the seller of the goodwill of a business undertakes not to compete with the purchaser of the goodwill, the contract is enforceable provided the restraint appears to be reasonable as to territorial limits and the length of time. (b) Partners Agreement under Indian Partnership Act, 1932: Section 11(2) of the Act permits contracts between partners to provide that a partner shall not carry on any business other than that of the firm while he is partner. Section 36(2) provides for contracts between partners stipulating that a partner, on ceasing to be a partner, will not carry on any business similar to that of the firm within a specified period or within specified local limits, and the agreement shall be valid if the restrictions are reasonable. (c) Trade Combinations: an agreement the object of which is to regulate business and not to restrain it, is valid. Thus an agreement in the nature of a business combination between traders or manufacturers e.g. not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion does not amount to a restrained of trade and is perfectly valid.
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8.

An agreement in restraint of legal proceedings- Section 28;

Section 28 states that Every agreement(a) 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; or (b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent. Exception 1.- This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. Exception 2.- Nor shall this section render, illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration. 9. Agreements, the meaning of which is not certain, or capable of being made certain Section 29; Illustrations: (a) A agrees to sell to B a hundred tons of oil ". There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. (b) A agrees to sell to B one hundred tons of oil of a specified' description, known as an article of commerce. There is no uncertainty here to make the agreement void. 10. Agreement by way of wager Section 30; Section 30 of the Indian Contract Act provides that Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager or entrusted to any person to abide the result of any game of other uncertain event on which any wager is made. Section 30 only says that agreements by way of wager are void. This section does not define wager. The literal meaning of the word wager is bet. Wagering agreements are nothing but ordinary betting agreements. For example, A and B enter into an agreement that if Englands Cricket Team wins the test match, A will pay B Rs. 1000 and if it loses then B will pay Rs. 1000 to A. This is a wagering agreement and nothing can be recovered by winning party under the agreement.
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In the views of Sir William Anson A promise to give money or moneys worth upon the determination or ascertainment of an uncertain event is a wagering contract. In other words, the essence of wagering is that one party is to win and the other to lose upon a future event which at the time of the contract is of an uncertain nature that is to say, if the event turns one way, a party to the agreement will lose; but if it turns out the other way, he will win. Essentials of wagering contract: (a) Promise to pay money or moneys worth. (b) Uncertain event. (c) One to lose and other to win. (d) No control over the event - Neither party should have control over the happening of the event one way or the other. (e) Past, present or future events A wager is generally made on a future event but can equally well be made on a past event e.g. which horse won the Derby last year or on the question whether the earth is flat. (f) No other interest in the event A contract is not a wager if the party to whom money is promised on the occurrence of an event has an interest in its non-occurrence. If he has no such interest the contract may be wager. (g) Unlawful event It is not necessary that the event on which bet is placed should be unlawful. The agreement can as well be a wager even if the event is a lawful one. 11. An agreement to enter into an agreement in the future; 12. An agreement to do an act impossible in itself Section 56 Section 56 of the Indian Contract Act states that - An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful.- 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. Compensation for loss through non-performance of act known to be impossible or unlawful.- Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and
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which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise. Illustrations: (a) A agrees with B to discover treasure by magic. The agreement is void, (b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.

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When contract becomes void 1) An agreement not enforceable by law is void-ab-initio Section 2(g). 2) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable Section 2(j). 3) A contract becomes void when, by reason of some event which the promisor could not prevent, the performance of the contract becomes impossible, e.g., by destruction of the subject-matter of the contract after the formation of the contract. 4) A contract becomes void by reason of subsequent illegality. A in India agrees to supply goods to B in Pakistan. After the formation of the contract war breaks out between India & Pakistan and the supply of goods to Pakistan is prohibited by legislation. The contract becomes void. 5) Where a contract is voidable at the option of the aggrieved party the contract becomes void when the option is exercised by him. 6) A contingent contract to do or not to do anything if an uncertain future event happens becomes void if the event becomes impossible. As per Section 31, a contingent contract is a contract to do or not to do something, if some event collateral to such contract, does or does not happen. For example, A contracts to sell B, 10 bales of cotton for Rs. 20,000, if the ship by which they are coming returns safely. This is a contingent contract. Rules regarding contingent contracts The following rules are contained in Section 32-36: 1. Contracts contingent upon the happening of a future uncertain event cannot be enforced by law unless and until that event has happened. If the event becomes impossible, the contract becomes void Section 32. (a) A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void. 2. Contracts contingent upon the non-happening of an uncertain future event can be enforced when the happening of that event becomes impossible and not before. Section 33. (a) A contracts to pay B a certain sum of money if a certain ship does no return. The ship is sunk. The contract can be enforced when the ship sinks. 3. If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act
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within any definite time or otherwise than under further contingencies Section 34. (a) A agrees to pay B Rs. 1000 if B marries C. C marries D. the marriage of B to C must now be considered impossible although it is possible that D may die and C may afterwards marry B. 4. Contracts contingent on the happening of an event within a fixed time become void if, at the expiration of the time, such event has not happened, or if, before the time fixed, such event becomes impossible Section 35. (a) A promise to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year. 5. Contingent agreements to do or not to do anything if an impossible event happens, are void, whether the impossibility of the event is known or not known to the parties to the agreement at the time when it is made Section 36. (a) A agrees to pay Rs. 1000 to B if two straight lines should enclose a space. The agreement is void.

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Quasi-Contract
Nature of Quasi-Contracts A valid contract must contain certain essential elements, such as offer and acceptance, capacity to contract, consideration and free consent. But sometimes the law implies a promise imposing obligations on one party and conferring right in favour of the other even when there is no offer, no acceptance, no consensus-ad-idem, and in fact, there is neither agreement nor promise. Such cases are not contracts in the strict sense, but the court recognizes them as relations resembling those of contracts and enforces them as if they were contracts, hence the term quasi-contracts i.e. resembling a contract. Quasi-contracts rests upon the principle that no person shall be allowed to enrich himself unjustly at the expense of another. Quasi-contracts or Implied contracts under the Indian Contract Act The following types of quasi-contracts have been dealt within the Indian Contract Act 1. 2. 3. 4. 5. Supply of necessaries Payment by an interested person Liability to pay for non-gratuitous acts Finder of lost goods Mistake or coercion Section Section Section Section Section 68. 69. 70. 71. 72.

1. Supply of necessaries: Section 68 lays down that If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. For example: A supplies, B a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from Bs property. Two conditions can be said to constitute necessaries: a. The contract must be for goods which are absolutely necessary to support him in his life, and b. These goods which are termed as necessaries should not be possessed by him before, or he should not have sufficient supply of them.

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2. Payment by an Interested Person: Section 69 states that A person who is interested in the payment of money which another by law is bound to pay it, and who therefore pays it, is entitled to be reimbursed by the other. For example: Where A, a tenant, pays the property tax on behalf of the owner B, who is bound to pay it, A is entitled to be reimbursed by B. In order to attract the provisions of Section 69 the following conditions must be satisfied: a. The person making the payment must be interested in the payment of the money. b. The payment must be involuntary. It should be under an obligation to pay. c. The payment must be made to some other person. d. The payment must be one which the other party was legally bound to pay. 3. Liability to pay for Non-Gratuitous Acts: Section 70 lays down that Where a person lawfully does anything for another person or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. For example: A, a tradesman, leaves goods at Bs house by mistake. B treats the goods as his own. He is bound to pay A for them. For example: A, a joint tenant, alongwith B, pays the whole rent to the landlord C. A is entitled to compensation from b, his co-tenant. In order to invoke Section 70, the following conditions must be satisfied: a. The act must be lawfully done; b. The act must be done by a person not intending it to be gratuitous; and c. The other person to whom the act is done must enjoy the benefit of it. d. Such person is bound to compensate. 4. Finder of Lost Goods: Section 71 provides that A person who finds goods belonging to another, and takes them into custody, is subject to the same responsibility as a bailee. A finder of the goods is liable: a. To try and find out the true owner; and
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b. To take due and proper care of the goods. The finder may of course sell the goods in two cases: a. When the things are in danger of perishing or of losing a greater part of its value. b. When the lawful charges of the finder in respect of the thing found amounts to two0thirds of its value. 5. Mistake or Coercion Section 72 deals with payments made or things delivered under mistake or coercion. It says that- A person to whom money has been paid or anything delivered, by mistake or under coercion, must repay or return it. For example: A railway company refuses to deliver up certain goods to the consignee except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive. Section 72 in terms does not make any distinction between mistake of fact or mistake of law. The term mistake has been used without any limitation.

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Discharge or Termination of Contracts

A contract is said to be discharged or terminated when the rights and obligations arising out of a contract are extinguished. Contracts may be discharged or terminated by any of the following modes: (a) Performance, i.e., by fulfillment of the duties undertaken by the parties. (b) Mutual consent or agreement. (c) Lapse of time. (d) Operation of law. (e) Impossibility of performance, and (f) Breach of contract.

Breach of Contract
Where the promisor neither performs his contract nor does he tender performance, or where the performance is defective, there is a breach of contract. The breach of contract may be (1) actual or, (2) anticipatory. The actual breach may take place either at the time the performance is due, or when actually performing the contract. The anticipatory breach, i.e., a breach before the time for the performance has arrived. This may also take place in two ways, by the promisor doing an act which makes the performance of his promise impossible or by the promisor in some other way showing his intention not to perform it. Remedies for Breach of Contract Where a contract is broken, the injured party has several causes of action open to him. The appropriate remedy in any case will depend upon the subject matter of the contract and nature of the breach. In case of breach of contract, the aggrieved party is entitled to the undernoted remedies: (a) Rescission (b) Suit for specific performance (c) Suit for an injunction (d) Suit for damages. I. Rescission When a party to a contract has broken the contract, the other party may treat the contract as rescinded and he is absolved from all his obligations under the contract. Under Section 65, when a party treats the contract as rescinded, he makes himself liable to restore any benefits he has received under the contract to the party from whom such benefits were received.

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Under Section 75, if a person rightfully rescinds a contract he is entitled to a compensation for any damage which he has sustained through the non-fulfillment of the contract by the other party. Section 64 deals with consequences of rescission of voidable contracts, i.e., where there is a flaw in the consent of one party to the contract. Under this section when a person at whose option a contract is voidable rescinds, the other party thereto need not perform any promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder, from another party to such contract, restore such benefit so far as may be, to the person from whom it was received. For example: A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her Rs. 100 for each nights performance. On the sixth night, A willfully absents herself from the theatre and B, in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he sustained through the non-fulfilment of the contract. II. Specific Performance The Court may in certain cases decree specific performance of a contract in addition to or instead of damages to the aggrieved party. Specific Performance as the term itself indicates, means the actual implementation of the agreement by both the parties. This remedy is entirely discretionary and will not be applicable in the cases listed below a. Where the remedy in monetary terms is adequate. b. Where it would not be possible or practicable for the court to supervise the implementation of the contract. c. Where the contract involves personal services. d. Where one of the parties to a contract is a minor. Specific performance is usually ordered in the case of purchase of land, or house, purchase of debentures in a company etc. Where the contract involves sale of goods, specific performance would be decreed if the goods are by their nature, rare goods, not easily purchasable in the market. The party seeking specific performance must, however, in his turn perform all the terms of the contract which he is obliged to perform at the time of seeking redress from the Court. III. Injunction An injunction, is an order of a Court restraining a person from doing a particular act. It is a mode of securing the specific performance of a negative term of the contract, (i.e. where he is doing something which he promises not to do), the Court may in its discretion issue an order to the defendant restraining him from doing what he promised not to do.
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For example: W agreed to sing at Ls theatre and nowhere else. W in breach of contract with L entered into a contract to sing for Z. It was held that though W could not be compelled to sing at Ls theatre, he could be restrained by injunction from singing for Z. IV. Damages Section 73 lays down the law in this regard. It states that, when a contract has been broken, a party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage, caused to him thereby, which naturally arose in the usual course of things from such breach or which the parties knew, when they made the contract to be likely to result from the breach of it. If Section 73 is considered then it becomes clear that the following elements must be present for deciding about damages 1. 2. 3. 4. There is a breach of contract. The party who suffers is entitled to receive compensation. The party who made breach is liable to pay compensation. The compensation is for the loss or damage caused to the aggrieved party. 5. The loss or damage should be such a. Which naturally arose in the usual course of things from such breach; or b. Which parties knew, when they made the contract, to be likely to result from the breach of it. 6. Such compensation is not to be given for any remote and indirect loss or damage caused because of such breach. 7. If the circumstances existed to reduce loss remedying the damages then they must be kept in view in estimating damages and the damages must be reduced to that extent. Such compensation is not given for any remote and indirect loss or damage sustained by the breach. For example: A hires Bs ship to go to Bombay, and there takes on board, on the first of January, a cargo, which A is to provide, and to bring it to Calcutta, the freight to be paid when earned. Bs ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense. Assessment of Damages 1. Personal Inconvenience damages may be claimed for personal inconvenience suffered by a party by reason of breach of contract.

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2. Mental distress or shock no damages can be claimed for mental disappointment or mental shock or distress. But there is one exception. A breach of promise to marry is the exception, though no material loss is suffered, the aggrieved party can claim for mental shock and humiliation. 3. Mitigation of damages a party who suffers as a result of breach of contract is under a legal duty to try his best to minimize his loss. Classification of damages Damages may be classified as (a) Liquidated Damages Where the contracting parties agree in advance the amount payable in the event of breach, the sum payable is called liquidated damages. (b) Unliquidated Damages Where the amount of compensation claimed for a breach of contract is left to be assessed by the Court, damages claimed are called unliquidated damages. Unliquidated damages are of the following types: General or Ordinary Damages: These are restricted to pecuniary compensation to put the injured party in the position he would have been had the contract been performed. It is the estimated amount of loss actually incurred. For eg., in a contract for the sale of goods, the damages payable would be the difference between the contract price and the price at which the goods are available on the date of the breach. Special Damages: Special damages are those resulting from a breach of contract under some peculiar circumstances. If at the time of entering into the contract the party has notice of special circumstances which makes special loss the likely result of the breach in the ordinary course of things, then upon his-breaking the contract and the special loss following this breach, he will be required to make good the special loss. For eg., A delivered goods to the Railway Administration to be carried to a place where an exhibition was being held and told the goods clerk that if the goods did not reach the destination on the stipulated date, he would suffer a special loss. The goods reached late. He was entitled to claim special damages. Exemplary Damages: These damages are awarded to punish the defendant and are not, as a rule, granted in case of breach of contract. In two cases, however, the Court may award such damages, viz., a. Breach of promise to marry; and b. Wrongful dishonor of a customers cheque by the banker. In a breach of promise to marry, the amount of the damages will depend upon the extent of injury to the partys feelings. In the bankers
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case, the smaller the amount of the cheque dishonoured, larger will be damages as the credit of the customer would be injured in a far greater measure, if a cheque for a small amount is wrongfully dishonoured. Nominal Damages: Nominal damages consist of a small token award, e.g., a rupee of even 25 paise, where there has been an infringement of contractual rights, but no actual loss has been suffered. These damages are awarded to establish the right to decree for breach of contract.

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Performance of contract

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Contract of indemnity and guarantee

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Practical Questions:

Syllabus MBA GBTU SEM II Business Law 1. Contract Act, 1872 Definition of a Contract and its essentials Formation of a valid Contract Offer and Acceptance Consideration Capacity to Contract Free consent Legality of object Discharge of a Contract by performance, Impossibility and Frustration Breach, Damages for breach of a contract Quasi Contracts Contract of Indemnity and Guarantee Contract of Bailment and Pledge Contract of Agency.

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