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Business Law II

Indian Contract Act, 1872.

Section. 1. Short title.--This Act may be called the Indian Contract Act, 1872.

Extent, Commencement.--It extends to the whole of India 2[except the State of Jammu
and Kashmir]; and it shall come into force on the first day of September, 1872.

Section 1--Notes

The Preamble.--It discloses the main object and purposes of the Act. It is not only an
amending but also a consolidating Act, Ramdas v. S. Ameerchand AIR 1916 PC 7 : 43
IA 164. The Act deals with a particular subject and it is exhaustive upon the same.
When a rule of English Law receives statutory recognition by the Indian Legislature, it is
the language of the Act which determines the scope, uninfluenced by the manner in
which the analogous provision comes to be construed. Superintendence Company of
India (P.) Ltd. v. Krishan Murgai, AIR 1980 SC 1717.

Fundamental Rights.--Any provisions of this Act inconsistent with the fundamental


rights guaranteed in Part III of the Constitution by operation of Article 13 of the
Constitution will be void. Delhi Transport Corporation v. D.T.C. Majdur Congress, AIR
1991 SC 101.

Provisions of the Act not superseded.--The Parties to the contract may agree to a
particular form or condition or mode in which contract is to be executed. In case where
the government enters into a contract with a person and a particular form has been
provided for the contract has to be in that form. This does not indicate that the
provisions of this Act stand superseded by the provisions contained in the constitution
or by those of other Acts which provide for a particular mode or a form in which contract
has to be executed. Union of India v. The Steel Stock Holders Syndicate, Poona, AIR
1976 SC 879.

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SECTION. 2. INTERPRETATION CLAUSE

Section. 2. Interpretation clause.--In this Act the following words and expression are
used in the following senses, unless a contrary intention appears from the context:

( a) When one person signifies to another his willingness to do or to abstain from


doing anything, with a view to obtaining the assent of that other to such act
or abstinence, he is said to make a proposal;

( b) When the person to whom the proposal is made signifies his assent thereto,
the proposal is said to be accepted. A proposal, when accepted, becomes a
promise;

( c) The person making the proposal is called the "promisor", and the person
accepting the proposal is called the "promisee";

( 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;

( e) Every promise and every set of promises, forming the consideration for each
other, is an agreement;

( f) Promises which form the consideration or part of the consideration for each
other, are called reciprocal promises;

( g) An agreement not enforceable by law is said to be void;

( h) An agreement enforceable by law is a contract;

( 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
contract;

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


ceases to be enforceable.
Clarification Notes:

Offer: A person who makes an offer is known as offeror. A person to whom an offer is
made is known as an offeree. An offer is made when the offeror proposes a set of
terms to an offeree, with the intention that if the proposed terms are accepted, they will
create a binding contract between the two parties. By accepting the terms proposed, the

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offeree would also agree to become legally bound by them. This acceptance would
therefore form a contract.

As a contract is a legally binding agreement, neither an offer nor an acceptance should


be made without a willingness to accept the legal consequences.

Offer and Invitation to Treat: One must understand the difference between an offer
and an invitation to offer. An invitation to offer is different from offer.

An invitation to offer is an invitation to negotiate. The key element here is that of


“negotiation” and “non-finality”. The contract is not concluded because the process or
processes of negotiation are not complete to the satisfaction of the parties to a contract,
principally arriving at the issue of contract in the same sense, that is consensus ad
idem.

The important question to be asked is---whether the statement made in advertisements


or display of goods (including symbolic representations) made is an offer capable of
acceptance or merely an invitation to make offers, and do business. An invitation of this
nature, if it is not intended to be binding, is known as an “invitation to treat”

Cases to be looked at page 4-6 of Reference Book:


Partridge v. Crittenden (1968) 2 ALL ER 421.
Mcpherson v. Appana AIR 1951 SC 184.
Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd.(1960) 3 ALL E R
731

Section 2—Notes.

Offer and Acceptance.--Until the offer was accepted there was no concluded contract
between the parties and withdrawal of such an offer is perfectly valid. There is nothing
inequitable or improper in withdrawing the offer as the offeror was in no way bound to
keep the offer open indefinitely. Nutakka Sesharatanam v. Sub-Collector, Land
Acquisition, Vijayawada, AIR 1992 SC 131.

Consideration. "Consideration" means the reasonable equivalent or other valuable


benefit passed on by the promisor to the promisee or by the transferor to the transferee.
Similarly when the work "consideration" is qualified by the word "adequate", it makes
consideration stronger so as to make it sufficient and valuable having regard to the

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facts, circumstances and necessities of the case. Sonia Bhatia v. State of U.P., AIR
1991 SC 1274.

Executed and Executory.--If the performance of the contract has been fully and
completely made by both sides there will be no question of any further rights and
liabilities under the contract. But when the contract is one in which the consideration is
executed on one side to be executed by the other side there will be a right on one side
and consequent liability on the other. In case of executory consideration rights and
liabilities are outstanding on both sides. Union of India v. Chaman Lal & Co., AIR 1957
SC 652.

Document of Contract.--Where all the specific terms have been reduced into writing
after agreement, the mere fact that it is stated that a formal contract will be executed
does not denude the writing of its value. Mere heading or title of a document cannot
divest the document of its real character because it is the substance which has to be
looked into, not the form. C.T.T. Punjab v. Panipat W&G Mills, AIR 1976 SC 640.

No time fixed.--The time at which the entire amount becomes payable is not specific. It
is vague and ambiguous and incapable of true interpretation. Though such type of
agreement is not itself void or unenforceable yet in such cases the courts can always
look to the custom, usage and practice. And indeed the court relied upon such custom,
usage and practice in the trade to decree the claim. Premjit Theatres, Secunderabad v.
Rashi Mehta & Co., AIR 1990 AP 272.

Arbitration clause in an illegal contract.--If contract is illegal and void, an arbitration


clause which forms a part of the contract must also be held to be invalid. The arbitration
clause being an integral part of it cannot be sustained if the contract itself was found to
be illegal Khardah Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., AIR 1962 SC 1810 and
Waverly Jute Mills Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., AIR 1963 SC 90.

Waiver.--Where a condition in the contract is for the exclusive benefit of one of the
contracting parties and does not create liabilities against him, he can waive it unilaterally
and the entire contract cannot fall through. Dr. Jiwan Lal v. Brij Mohan Mehra, AIR
1973 SC 559.

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Tender. — A tender is an offer. It is something which invites and is communicated to
notify acceptance. Broadly stated, it must be unconditional; must be in proper form, the
person by whom the tender is made must be able to and wiling to perform his
obligations. The terms of the invitation to tender cannot be open to judicial scrutiny
because the invitation to tender is in the realm of contract.

However, a limited judicial review may be available in cases where it is established that
the terms of the invitation to tender were so tailor-made as to suit the convenience of
any particular person with a view to eliminating all others from participating in the
bidding process.

In the case of public property being disposed by the state or its instrumentality (See
Art.12 for definition of state and its instrumentality) the process must be fair and
transparent as it partakes the character of public trust. However the authority has the
right not to accept the highest or the lowest bid. In doing so the Authority’s action in
accepting or refusing the bid must be free from arbitrariness or favoritism.
CASE at page 7 of Reference Book:
Meerut Development Authority v. Association of Management Studies, AIR 2009
SC 2894.

In a tender process, therefore, the offer comes from the person who submits the tender
and there is no contract until the person asking for tenders accepts one of them.

The question whether a statement is an offer or an invitation to treat depends primarily


on the intention with which it is made.

Tender -- Legality of Conditions.--Order of Single Judge directing to issue tender


forms to all those who intend to bid without insisting on the condition that tender
schedule would be only issued to those, who have minimum of one year experience in
the same nature of work, worth Rs. 25 Lakhs for a single work for the last three years
preceding the date of tender cannot be said to be an unreasonable conditions in the
absence of any mala fides or details thereof and it could not be contended that the
department is favoring one applicant. State of Kerala v. Anoop Kumar, (2005) 4 BC 302
(Ker--DB).

CASES.

Notice inviting tender (for mail motor contract) specifically mentioned that the vehicle
should be one not having already run more than one Lakh kilometers and crossing the
age of five. On date of participation, the vehicle sought to be placed was more than five
years old. Subsequent acquisition of new vehicle would not make him eligible to
participate in tender. Gayatri Banerjee v. State of West Bengal, AIR 2007 Cal 233.
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Petitioner having participated in the tender cannot turn around and challenge it just
because they were unsuccessful bidders. Commissioner having placed the tenders of
successful bidders before committee for final decision cannot be said to have acted
ultra vires his powers. Mega Enterprises v. State of Maharashtra, AIR 2007 Bom 156.

Terms of tender notice explicitly stating that financial bid of ineligible bidder would not
be opened. Petitioner not meeting eligibility criteria cannot seek direction to open
financial bid. Mega Enterprises v. State of Maharashtra, AIR 2007 Bom 156.

Cancellation of tender on ground that the petitioner was not a local resident and without
issuing notice was wholly arbitrary, illegal and on extraneous consideration. Shailesh
Kumar Ganesh v. State of Jharkand, (2005) 4 BC 252 (Jhar).

The Supreme Court in Tata Cellular v. Union of India AIR 1996 SC 11 has
prescribed the following requisites of a valid tender:-
1. It must be unconditional.
2. Must be made at a proper place.
3. Must conform to terms of obligation.
4. Must be made at proper time.
5. Must be made in the proper form.
6. The person by whom the tender is made must be able and willing to
perform his obligations.
7. There must be reasonable opportunity for inspection.
8. Tender must be made to proper person.
9. It must be of full amount.

Tender Notice.--State is required to follow proper procedure to give 15 days’ notice


before inviting tenders and proposed termination of lease on ground of poor
performance and lease could only be terminated after hearing the petitioner and
discretion for extension to lease can be used. It is only thereafter fresh notice should be
issued inviting tenders for grant of fresh mining lease. B.S. Construction, Garhwa v.
Jharkhand State Mineral Development Corporation Ltd. Ranchi, (2005) 4 BC 263 (Jhar).

Tender-Privity of Contracts.--Appellant gave his offer for supply of steel furniture


which was accepted by Divisional Level Purchase Committee. Letter sent by the
defendant was subject to fulfilment of condition whereby the plaintiff was required to
execute an agreement deed with the convener within a period of ten days along with a
security of 5 per cent of anticipated supply not exceeding Rs 20,000 as required under
NIT (Notice Inviting Tender) clauses. Plaintiff did not produced any documentary
evidence showing that he had executed the agreement deed with the convener and also
deposited Rs. 20,000 as security. Where there is no privity of contract between parties,

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then there is no question of any loss suffered by the plaintiff. Surinder Mohan Aggarwal
v. State of J&K, (2006) 2 BC 105 (J&K).

Tender, withdrawal before expiry of validity period.--Once a tender is tendered no


changes can be made and no tender can be withdrawn. Withdrawal of tender before
expiry of its period, earnest money is to be forfeited. Person withdrawing tender cannot
take stand that since final sale result was not declared, there was no bar on withdrawal.
State of Maharashtra v. A.P. Paper Mills Ltd., (2006) 2 BC 245 : (2006) 4 SCC 209 :
AIR 2006 SC 1788.

Modification of contract.--Court has no right under Article 226 of the Constitution to


grant one time settlement or for rescheduling of loans or fixing installments. Grant of
one time settlement or rescheduling of loan amount would amount to modification of
contract. Tamil Nadu Industrial Investment Corporation Ltd. v. Millennium Business
Solutions (P.) Ltd., (2005) 2 BC 79 (Mad--DB).

THE COMMUNICATION, ACCEPTANCE AND REVOCATION OF PROPOSALS

Section. 3. Communication, acceptance and revocation of proposals.--The


communication of proposals, the acceptance of proposals and the revocation of
proposals and acceptances respectively are deemed to be made by any act or omission
of the party proposing, accepting or revoking, by which he intends to communicate such
proposal, acceptance or revocation, or which has the effect of communicating it.

Section. 4. Communication when complete.--The communication of a proposal is


complete when it comes to the knowledge of the person to whom it is made.

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 to be out of the power of the person who makes it;

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as against the person to whom it is made, when it comes to his knowledge.

Illustrations

( a) A proposes, by letter, to sell a house to B at a certain price.


The communication of the proposal is complete when B received the letter.

( b) B accepts A's proposal by a letter sent by post.


The communication of the acceptance is complete.

as against A when the letter is posted;

as against B, when the letter is received by A.

( c) A revokes his proposal by telegram.


The revocation is complete as against A when the telegram is dispatched. It is complete
as against B when B receives it.

B revokes his acceptance by telegram. B's revocation is complete as against B when


the telegram is dispatched and as against A when it reaches him.

Section 4—Notes.

Acceptance of offer.--Where no time is given for acceptance of an offer the


acceptance has to be communicated within a reasonable time. An offer could not be
kept open indefinitely nor could the parties claim that they had right to act upon that
offer as and when it suits them. Shree Jaya Mahal Co-operative v. Zenith Chemicals
Works Ltd., AIR 1991 Bom 211.

Conduct.--Where the communication tantamount to a counter offer silence of the


original offeror will be treated to be an acceptance. Where there is a mistake as to terms
of a document, amendment to the draft was suggested and a Counter-offer was made,
the signatory to the original contract is not estopped by his signature from denying his
intention to make an offer in the terms set out in the document. Where the contract is
comprised in a number of parts it is essential to the validity of the contract that the
contracting party should either have assented to or taken to have assented to the same
thing in the same sense. It follows that a party may be taken to have assented if he has
so conducted himself as to be estoppted from denying that he has so assented. Ramji
Dayawala & Sons. v. Invest Import, AIR 1981 SC 2085.
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Section. 5. Revocation of proposals and acceptances.--A 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 as complete as against the acceptor, but not afterwards.

Illustration

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

B accepts the proposal by a letter sent by post.

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.

Section 5--Notes

Forefeiture of Security Amount.--Tenderor's money was forfeited. Order of forfeiture


of security amount challenged by writ is maintainable. [Food Corporation of India v. Sujit
Roy, AIR 2000 Gau 61].

Section. 6. 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.

Section. 7. Acceptance must by absolute.--In order to convert a proposal into a


promise the acceptance must--

(1) be absolute and unqualified.


(2) be expressed in some usual and reasonable manner, unless the proposal
prescribed the manner in which it is to be accepted. If the proposal

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prescribes a manner in which it is to be accepted and the acceptance is not
made is 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.

OF CONTRACTS, VOIDABLE CONTRACTS AND VOID AGREEMENTS

Section. 10. What agreements are contracts.—

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.

Nothing herein contained shall affect any law in force in [India], and not
hereby expressly repealed, by which any contract is required to be made in
writing or in the presence of witnesses, or any law relating to the registration
of documents.

Section 10--Notes

Interpretation of Agreement.--A Company agreed to purchase certain salt works with


exclusive rights to manufacture salt. The agreement enabled the company to
manufacture a minimum quantity of salt every year in addition to the quantity required
by the company for consumption in the alkali factory and for the payment of minimum
royalty, equivalent to an amount chargeable on the minimum quantity to be
manufactured by the company. Owing to the shortfall of the production of the salt,
differences arose with respect to the royalty payable under the agreement. Upon
construing different clauses of the agreement, it was held that the clauses (3) and (5)
had been deliberately inserted with the object and purpose of ensuring that even in
respect of lean years the government was to be paid the minimum guaranteed royalty,
equivalent to the amount stipulated as minimum quantity to be manufactured under
clause 3 of the agreement. State of Gujarat v. Chemical Works Ltd., AIR 1985 SC 609.

Nomenclature.--The nomenclature and description given to a contract is not


determinative of the real nature of the document or of the transaction thereunder.
These, however, have to be determined from all the terms and clauses of the document
and the rights and results flowing therefrom. Just as a document cannot be interpreted
by picking out only a few clauses ignoring the other relevant ones, in the same way the
nature and meaning of a document cannot be determined by its end result or one of the
results or consequences which stem from it. The Bamboo Contract is not a contract of
sale of goods but is a grant of a profits a prendre that is a benefit to arise out of land
and that it is not possible to bifurcate the bamboo contract into the two : one for sale of
bamboos existing at the date of contract and other for the sale of further goods, that is
of bamboos to come into existence in the further. The Bamboo contract granted was a

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benefit to arise out of the land which is an interest in the immovable property. State of
Orissa v. Titlagarh Paper Mills, AIR 1985 SC 1293.
Agreement-Contract.--When one document refers to another, the two may be read
together as to constitute a complete memorandum and because of non-payment of
stipulated amount neither the partnership came into existence nor the property became
the partnership property, therefore, order of appointment of Receiver in unjustified. [ The
Associated Bombay Cinemas Pvt. Ltd. v. Urmi Developers Pvt. Ltd., (1998) 1 BC 256
(Bom).]

Free consent to contract.--If the respondents are not agreeable to the terms of
petitioner, it is open to them to refuse to sign the agreement and search for another
party which would after better terms even if the Board of Directors of respondent
company accepted the terms and passed are solution. [ Hi-Tech. Gears Ltd. v. Yogi
Pharmach Ltd., (1998) 1 BC 192 (All.).]

Auction Sale (Contract Act, S. 10)--Auction Sale.--Petitioner having participated in


auction on basis of terms and conditions is estopped from challenging the terms and
conditions, on the basis of which the auction was held. JayKrishna Industries Ltd. v.
Economic Development Corporation, (2006) 1 BC 85 (Bom) (DB).

Concluded contract.--In negotiations between parties for replacement of generator,


plaintiff put toward its own terms of proposal regarding mode of payment and during the
service there was a suggestion in the nature of invitation which cannot be said to be a
firm offer, letter sent by defendant bank in response thereto was a mere proposal and
not a letter of acceptance, cannot be said to be a concluded contract. United Bank of
India v. Shyam Sundar Banerjee, AIR 2007 Cal 87.

Summary suit.--Contract in writing contemplated under Order XXXVII CPC, need not
always be signed by both the parties and need not be evidenced in a single document
written by parties. However, the writing must be such as to arrive at a conclusion that an
agreement was certainly brought into existence and the claim made thereunder ought to
be indisputable. Jyotsna K. Valia v. T.S. Parekh & Co., AIR 2007 (NOC) 2237 : (2007)
4 AIR Bom R 738 (Bom--FB).

Section. 11.
Who are competent to contract.—
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.
Section 11—Notes
As per Sec.11 the following persons are incompetent to contract---
1. A minor.

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2. A person of unsound mind, and
3. A person disqualified by law to which he is subject.
CASE
Refer Page 36 of Reference book.

In Mohiri Bibi v. Dharamodas Ghose (1930) 30 1A 114, a minor entered into an


contract for borrowing a sum of Rs.20,000, out of which the lender paid the minor a
sum of Rs.8000. The minor executed mortgage of property in favour of the lender.
Subsequently, the minor sued for setting aside the mortgage. The Privy Council had
to ascertain the validity of the mortgage. The mortgagee prayed for refund of Rs.8000.

Though under Section 7 of the Transfer of Property Act, every person competent to
contract is competent to mortgage, in this case, one must see whether the parties
involved are competent to contract. The Privy Council decided that Secs.10 and 11 of
the Indian Contract Act make the minor’s contract void. The Privy Council further held
that a minor’s contract is not only void but void ab initio (from the very beginning).
Therefore any money advanced to a minor cannot be recovered.

CASE
Refer Page 36 of Reference book.

In Chacko v. Mahadevan AIR 2007 SC 2967, the Supreme Court decided,


determining the validity of a contract entered upon by parties, one of whom being a
person of unsound mind. In the present case, Chacko was not having sound mind and
he was treated from 11 August, 1983 to 14 August, 1983 in Mental Hospital, Trichur
for Alcoholic Psychosis. Moreover, it is established by the facts that one cent of the
land was sold for 18,000 on 4th September, 1982 vide Ext. A2, while 10 months
thereafter three cents of land was sold for only Rs. 1000. This corroborates the finding
that Chacko was not of sound mind at least at the time when he executed the sale
deed dated 11 July 1983. If one cent of land costs 18000 than three cents of land
should cost 54000 at least, reasonably. No one in his senses would sell his property
worth 54000 for a paltry sum of 1000.
According to well-known, latin maxim, ‘res ipsa loquitur’ i.,e the facts speak for
themselves, it was held that Chacko sold the land by sale deed dated 11 July 1983
when he was not of sound mind and some fraud was played on him at that time.

CASE

Hindu Undivided Family.--Indian Contract Act does not impose any disability upon
members of a Hindu Undivided Family in the matter of entering into a contract inter se
or with a stranger. A member of a Hindu Undivided Family has the same freedom of
contract as any other individual and may enter into partnership agreement. Commr. of
Income-tax v. Sir Hukumchand Mannalal and Co., (1970) 79 ITR 18 : AIR 1971 SC 383;

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Ratanchand Darbarilal v. Commr. of Income-tax, (1985) 155 ITR 720 : AIR 1985 SC
1572.

Essentials of a Valid Contract

All agreements are contracts if they are made with the free consent of parties.

 Both the contracting parties must be competent to contract. (Sec.11)


Status of Minor, person of unsound mind (Sec.12) and a person
disqualified by law to which he is subject.
[Go to Page 36 Para 2 of Book]

 Both the parties must give their free consent. (Sec.13)-when two or
more person agree on the same thing in the same manner.

 There must be lawful consideration and therefore must comply Sec.


25 of Contract Act—Agreement without consideration, 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.

 The object for which the contract is made must be lawful one.
(Sec.10). That is, must not be opposed to the law of the land. It
should not be therefore opposed to “public policy” i,.e should not be
against “public interest” . For example: A contract for setting up a
gambling house.

Section. 12.
What is a sound mind for the purposes of contracting.—

A person is said to be of sound mind for the purpose of making a contract if,
at the time when he makes it, he is capable of understanding it and of
forming a rational judgment as to its effect upon his interests.
A person who is usually of unsound mind, but occasionally of sound mind,
may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind,
may not make a contract when he is of unsound mind.
Illustrations

( a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract


during those intervals.
( b) A sane man, who is delirious from fever, or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its
effect on his interests, cannot contract whilst such delirium or drunkenness
lasts.

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CASE.

Nilima Ghosh v. Harjeet Kaur AIR 2011 Delhi 104.

Appellant was declared unfit by doctors as she was suffering from


schizophrenia. The doctors issued two medical certificates confirming the
above mentioned medical condition on dates 26 th October 1989 and 10th
January 1990 respectively.

The appellant had signed in two “agreements to sell” documents dated 21


February 1985 and 7 September 1987.

The appellant took the plea that the two agreements to sell may be declared
invalid as she was suffering from schizophrenia.

Court: - Held the document valid stating that she suffered from schizophrenia
only after signing the documents.

Section. 13. "Consent" defined.--Two or more persons are said to consent


when they agree upon the same thing in the same sense.

CASE.

Oral Contract.--In a suit for specific performance tenant pleading oral


agreement to sale of property in his favour by the landlord and made
payment of consideration at the rate of Rs. 1,000 per month for about four
years, but did not take any steps on his own accord, seeking performance of
alleged oral contract. He swung into action only after receipt of notice
demanding vacate possession. Since existence of consensus ad idem not
proved, oral agreement cannot be enforced. P. Prabhakara Rao v. P.
Krishna, AIR 2007 AP 163.

Section. 14. "Free consent" defined.


--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 Sections 20, 21 and 22.

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Consent is said to be so caused when it would not have been given but for
the existence of such coercion, undue influence, fraud, misrepresentation or
mistake.

Relinquishment of contract of marriage.--One of the essential features of


muslim marriage is the payment of "Mehar". Although it is an obligation upon
the husband, but the wife is well within her rights to relinquish the dower.
Such a relinquishment can be made conditionally since the concept of cost
out is the basis of marriage, the principle of valid contract would be
applicable to relinquishment. In the instant case wife was accompanied by
her family members and the agreement bearing her thumb impression
cannot be said to have been obtained by inducement by coercion, fraud,
undue influence, misrepresentation or mistake, particularly when the wife
was major and had the capacity to enter into the agreement. Once she had
relinquished her right to receive "Mehar" under a valid agreement, she was
prevented from claiming after divorce under Act of 1896. Hasina Bano v.
Alam Noor, AIR 2007 Raj 49.

Section. 15. "Coercion" defined.—

"Coercion" is the committing, or threatening to commit, any act forbidden by


the Indian Penal Code (45 of 1860), or the unlawful detaining, or threatening
to detain, any property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement.

Explanation.--It is immaterial whether the Indian Penal Code (45 of 1860) is


or is not in force in the place where the coercion is employed.

Illustrations
A, on board an English ship on the high seas, causes B to enter into an
agreement by an act amounting to criminal intimidation under the Indian
Penal Code (45 of 1860).

A afterwards sues B for breach of contract at Calcutta.

A has employed coercion, although his act is not an offence by the law of
England, and although Section 506 of the Indian Penal Code (45 of 1860)
was not in force at the time when or place where the act was done.

Apart from infirmities leading to void or voidable consequences on contracts


entered upon by the parties under the Indian Contract Act 1872, one may
also become liable under offences mentioned in the Indian Penal Code
(IPC).
Therefore we must be careful not to commit offences under IPC that might
get attracted due to some of our action as far as the concept of “coercion” is
concerned. It would not only invalidate a contract and push it into the domain

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of void or voidable categories but would also invite penal action under
criminal law jurisprudence that forms part of IPC.

One must therefore be careful about the following offences under IPC:-

 Wrongful gain and wrongful loss. (Sec. 23 IPC)

 Dishonestly. (Sec.24 IPC)

 Fraudulently. (Sec.25 IPC)

 Common Intention (Sec.34 IPC)

 Abetment. (Sec.107 IPC)

 Criminal Conspiracy (Sec.120 A and B)

 Wrongful restraint/ Wrongful confinement. (Secs.399-348 IPC)

 Of criminal force and assault. (Secs. 349-358 IPC)

 Of kidnapping, Abduction, Slavery, Forced Labour (Secs.359-374IPC)

 Extortion. (Sec.383-389 IPC)

 Cheating. (Sec.420 IPC)

 Fraudulent Deeds and removal of property. (Secs.421-424 IPC)

 Offences relating to documents. (Secs.463-477 IPC)

 Offences relating to property and other marks. (Secs.478-489 IPC)

 Of criminal breach of contracts of service. (Secs.490-492 IPC)

 Of criminal intimidation. (Secs.503-510 IPC)

 Of Attempts to commit Offences. (Sec.511IPC)

Duress: Simply understood, duress is unlawful pressure used to gain


advantage for oneself and cause disadvantage to the other. Under the
English law, duress is said to consist in actual or threatened violence or
imprisonment of the contracting party or his wife, parent or child, by another
party or anyone acting with his knowledge and for his advantage. But in the

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Indian legal context, coercion as defined in Sec 15 of the Contract Act, is
much wider and includes unlawful detention of the property also.
Further Coercion can be committed by any person, not necessarily a party to
the contract. Again it need not be directed against the contracting party, his
parents, wife or child. It may be directed against any person, even if he is a
stranger.

While in English law, duress must be such as will cause immediate violence
and also unnerve a person of ordinary firmness of mind, these requisites are
not necessary in Indian Law, as decided in,

Karuppayee Ammal v. Karuppiaah Pillai, (1987) 1 Mad LJ 138.

IMPORTANT CASES at Page 40-41 of Reference Book.

North Ocean Shipping v. Hyundai Construction [1979] QB 705

Universe Tankships v. ITWF [1982] 2 ALL ER 67

Dimskal Shipping Co. v. ITWF [1991] 4 ALL ER 871

Chikam Amiraju v. Chikam Seshamma (1917) 41 Mad 33

Section. 16. "Undue influence" defined.--

(1) A contract is said to be induced by "undue influence" where the relations


subsisting between the parties are such that one of the parties is in a
position to dominate the will of the other and uses that position to obtain an
unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle,
a person is deemed to be in a position to dominate the will of another--
( a) where he holds a real or apparent authority over the other, or where he
stands in a fiduciary relation to the other; or
( b) where he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness, or
mental or bodily distress.

(3) Where a person who is in a position to dominate the will of another, enters
into a contract with him, and the transaction appears, on the face of it or on
the evidence adduced, to be unconscionable, the burden of proving that
such contract was not induced by undue influence shall lie upon the person
in a position to dominate the will of the other.
Nothing in this sub-section shall affect the provisions of Section 111 of the
Indian Evidence Act, 1872 (1 of 1872).

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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.]

Section 16--Notes

Undue influence.--The court trying a case of undue influence must consider


two things namely,

(1) the relationships between the parties are such that the one party is in a
position to dominate the will of the other and

(2) the party has used that position to obtain an unfair advantage over the
other. Subhas Chandra v. Ganga Prasad, AIR 1967 SC 878.

It is not sufficient for the person seeking the relief to show that the relations
of the parties have been such that one naturally relied upon the other for
advice, and the other was in a position to dominate the will of the first in
giving it. More than mere influence must be proved so as to render influence
in the language of the law "undue", Sathurai v. Kappanna Chaettiar, AIR
1920 PC 65; Afsar Shaikh v. Soleman Bibi, AIR 1976 SC 163.

Burden of proof or Onus probandi.--If the transaction appears to be


unconscionable, then the burden of proving that it was not induced by undue
influence would lie upon the person who was in a position to dominate the
will of the other. Afsar Shaikh v. Soleman Bibi, AIR 1976 SC 163.

Unconscionable: Not right or reasonable, unethical, immoral and wrong.

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Remedies: Remedies for undue influence is rescission. Damages are not
available. Under 19 A of Contract Act, once ‘Rescission’ ordered, the whole
transaction is set aside.

Escrow agreement.--An escrow agreement is normally arrived at in order to


safeguard the interest of the parties for the purpose of a contract and the
escrow agents are normally persons who are trusted by the parties to act
fairly and without bias not withstanding their relationship with the respective
parties. Siddhi Vinayak Realities (P.) Ltd. v. Tulip Hospitality Services Ltd.,
(2007) 4 SCC 612 : AIR 2007 SC 1457.

Section. 17. "Fraud" defined.--"Fraud" means and includes any of the


following acts committed by a party to a contract, or with his connivance, or
by him agent, with intent to deceive another party thereto or his agent, or to
induce him to enter into the contract:

(1) the suggestion, as a fact, of that which is not true, by one who does not
believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the
fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.

Explanation.--Mere silence as to facts likely to affect the willingness of a


person to enter into a contract is not fraud, unless the circumstances of the
case are such that, regard being had to them, it is the duty of the person
keeping silence to speak, or unless his silence is, in itself, equivalent to
speech.
Illustrations

( a) A sells, by auction, to B, a horse which A knows to be unsound. A says


nothing to B about the horse's unsoundness, This is not fraud in A.
( b) B is A's daughter and has just come of age. Here, the relation between the
parties would make it A's duty to tell B if the horse is unsound.
( c) 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.
( d) 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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Section 17--Notes

Fraud.--Fraud or deceit has to be considered perpetrated by defendants by


their conduct not strictly arising out of any written contract and as such
Fraud is only on the facts of dishonesty. [ Ae Mustaveer Establishment for
Trade v. Varuna Overseas Pvt. Ltd., (1998) 2 BC 259 (Del).]

Cancellation of sale Deed.--If the plaintiff has challenged the validity of sale
deed, he is not obliged to produce attesting witnesses to rebut its
correctness. Markande v. Sudama Chaubey, AIR 2007 All 70.

Section. 18. "Misrepresentation" defined.--"Misrepresentation" means


and includes:

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

Section 18--Notes

Fraudulent misrepresentation.--A distinction is usually drawn between


fraudulent misrepresentation as to the character of the document and
fraudulent misrepresentation as the contents thereof. In respect of the
former the transaction has usually been held to be void, while in the case of
the latter, it is merely voidable.

Where the mind of the signer did not accompany the signature, he never
intended to sign and, therefore, in contemplation of law, he never did sign
the contract to which his name was appended.

He was thus deceived not merely as to legal effect but as to the actual
contents of the document. This is a case where the person executing the
document was totally ignorant of the mischiefs played upon him. This was
fraudulent misrepresentation as to the character of the document and not
merely as to its content or as to its legal effect. He never intended to sign or
never intended to enter into the contract to which he unknowingly become a
party and thus it was a totally void transaction. Ningawwa v. Byrappa, AIR
1968 SC 956; Gorakh Nath Dube v. Hari Narain Singh, AIR 1973 SC 2451.

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