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C AT R HPE

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LAW OF CONTRACTS

Busines s Law Includin g Compan y Law

1. 1 NATUR E OF CONTR ACT


[Section s 12]

INTRODUCTION
We ente r into contract s day afte r day. Takin g a seat in a bus amount s to enterin g into a contract . When you put a coin in the slot of a weighin g machine , you have entere d into a contract . You go to a restauran t and take snacks , you have entere d into a contract . In such cases, we do not even realis e tha t we are makin g a contract . In the case of people engaged in trade , commerc e and industr y, they carry on busines s by enterin g into contracts . The law relating to contract s is to be found in the India n Contrac t Act, 1872. The law of contract s differs from othe r branche s of law in a very importan t respect . It does not lay down so many precis e right s and dutie s which the law will protec t and enforce; it contain s rathe r a numbe r of limitin g principles , subjec t to which the partie s may create rights and dutie s for themselves , and the law will uphol d those right s and duties . Thus , we can say tha t the partie s to a contract , in a sense make the law for themselves . So long as they do not transgres s some legal prohibition , they can fram e any rule s they like in regard to the subjec t matte r of thei r contrac t and the law will give effect to thei r contract.

WHAT IS A CONTRACT?
Sectio n 2(h) of the India n Contrac t Act, 1872 define s a contrac t as an agreemen t enforceable by law. Sectio n 2(e) define s agreemen t as every promis e and every set of promise s forming consideration for each other. Sectio n 2(b) define s promis e in thes e words: When the person to whom the proposa l is made signifie s his assen t thereto , the proposa l is said to be accepted. A proposa l when accepted , become s a promise. From the above definitio n of promise , it is obvious tha t an agreemen t is an accepted proposal. The two element s of an agreemen t are: (i) offer or a proposal ; and (ii) an acceptanc e of tha t offer or proposal. What agreement s are contracts ? All agreement s are not studie d unde r the India n Contract Act, as some of them are not contracts . Only those agreement s which are enforceabl e at law are contracts . The Contrac t Act is the law of those agreement s which creat e obligations , and in case of a breac h of a promis e by one part y to the agreement , the othe r has a legal remed y. Thus , a contrac t consist s of two elements: (i) an agreement ; and (ii) legal obligation , i.e., it shoul d be enforceabl e at law. Howeve r, ther e are some agreement s which are not enforceabl e in a law court . Such agreements do not give rise to contractua l obligation s and are not contracts. Examples (1) A invite s B for dinne r in a restaurant . B accept s the invitation . On the appointed day, B goes to the restaurant . To his utte r surpris e A is not there . Or A is there

Law of Contract s

but refuse s to entertai n B. B has no remed y agains t A. In case A is presen t in the restauran t but B fails to turn-up , then A has no remed y agains t B. (2) A gives a promis e to his son to give him a pocket allowanc e of Rupee s one hundred every month . In case A fails or refuse s to give his son the promise d amount , his son has no remed y agains t A. In the above example s promise s are not enforceabl e at law as ther e was no intentio n to create legal obligations . Such agreement s are social agreement s which do not give rise to legal consequences . This shows tha t an agreemen t is a broade r term tha n a contract . And, therefore, a contrac t is an agreemen t but an agreemen t is not necessaril y a contract. What obligation s are contractua l in nature? We have seen above tha t the law of contracts is not the whole law of agreements . Similarl y, all legal obligation s are not contractua l in nature. A legal obligatio n havin g its source in an agreemen t only will give rise to a contract. Example A agree s to sell his motor bicycle to B for Rs. 5,000. The agreemen t gives rise to a legal obligation on the par t of A to delive r the motor bicycle to B and on the par t of B to pay Rs. 5,000 to A. The agreemen t is a contract . If A does not delive r the motor bicycle, then B can go to a court of law and file a suit agains t A for non-performanc e of the promise on the par t of A. On the othe r hand , if A has alread y given the deliver y of the motor bicycle and B refuse s to make the paymen t of price, A can go to the court of law and file a suit against B for non-performanc e of promise. Similarl y, agreement s to do an unlawful , immora l or illega l act, for example , smuggling or murderin g a person , canno t be enforceabl e at law. Besides , certai n agreement s have been specifically declare d void or unenforceabl e unde r the India n Contrac t Act. For instance , an agreemen t to bet (Wagerin g agreement ) (S. 30), an agreemen t in restrain t of trad e (S. 27), an agreemen t to do an impossibl e act (S. 56). An obligatio n which does not have its origin in an agreemen t does not give rise to a contract . Some of such obligation s are 1. Torts or civil wrongs; 2. Quasi-contract; 3. Judgement s of courts , i.e., Contract s of Records; 4. Relationshi p betwee n husban d and wife, truste e and beneficiar y, i.e., status obligations. These obligation s are not contractua l in nature , but are enforceabl e in a court of law. Thus , Salmon d has rightl y observed : The law of Contract s is not the whole law of agreements nor is it the whole law of obligations . It is the law of those agreement s which creat e obligations, an d those obligation s which have , thei r source in agreements. Law of Contract s create s right s in persona m as distinguishe d from right s in rem. Rights in rem are generall y in regar d to some propert y as for instanc e to recove r land in an action of ejectment . Such right s are availabl e agains t the whole world. Right s in persona m are against or in respec t of a specific perso n and not agains t the world at large. Examples (1) A owns a plot of land . He has a righ t to have quie t possessio n and enjoymen t of the same . In othe r words every membe r of the public is unde r obligatio n not to

LAW OF CONTRACTS

Busines s Law Includin g Compan y Law

distur b his quie t possessio n and enjoyment . This righ t of A agains t the whole world is known as righ t in rem. (2) A is indebte d to B for Rs. 100. It is the righ t of B to recove r the amoun t from A. This righ t of B agains t A is known as righ t in personam . It may be noted tha t no one else (except B) has a righ t to recove r the amoun t from A. The law of contract s is concerne d with right s in persona m only and not with rights in rem.

ESSENTIAL CONTRACT

ELEMENTS

OF

VALID

We have seen above tha t the two element s of a contrac t are: (1) an agreement ; (2) legal obligation. Sectio n 10 of the Act provide s for some more element s which are essentia l in order to constitut e a valid contract . It read s as follows: All agreement s are contract s if they are made by free consen t of parties , competen t to contract, for a lawful consideratio n and with a lawful object and are not hereb y expressly declared to be void. Thus , the essentia l element s of a valid contrac t can be summe d up as follows 1. Agreement. 2. Intentio n to creat e legal relationship. 3. Free and genuin e consent. 4. Partie s competen t to contract. 5. Lawfu l consideration. 6. Lawfu l object. 7. Agreement s not declare d void or illegal. 8. Certaint y of meaning. 9. Possibilit y of performance. 10. Necessar y Legal Formalities. These essentia l element s are explaine d briefl y. 1. Agreement As alread y mentioned , to constitut e a contrac t ther e mus t be an agreement . An agreement is compose d of two elementsoffe r and acceptance . The part y makin g the offer is known as the offeror, the part y to whom the offer is made is known as the offeree. Thus , ther e are essentially to be two partie s to an agreement . They both mus t be thinkin g of the same thing in the same sense . In othe r words, ther e mus t be consensus-ad-idem. Thus , wher e A who owns 2 cars x and y wishe s to sell car x for Rs. 30,000 . B, an acquaintanc e of A does not know tha t A owns car x also. He think s tha t A owns only car y and is offering to sell the same for the state d price. He gives his acceptanc e to buy the same. There is no contrac t becaus e the contractin g partie s have not agree d on the same thing at the same time , A offering to sell his car x and B agreein g to buy car y. Ther e is no consensus-ad-idem. 2. Intention to create legal relationship As alread y mentione d ther e shoul d be an intentio n on the par t of the partie s to the

Law of Contract s

agreemen t to creat e a legal relationship . An agreemen t of a purel y social or domesti c nature is not a contract. Example A husban d agree d to pay 30 to his wife every mont h while he was abroad . As he failed to pay the promise d amount , his wife sued him for the recover y of the amount. Held: She could not recove r as it was a social agreemen t and the partie s did not intend to creat e any legal relation s [Balfou r v. Balfou r (1919)2 K.B.571]. Howeve r, even in the case of agreement s of purel y social or domesti c nature , ther e may be intentio n of the partie s to creat e legal obligations . In tha t case, the social agreemen t is intended to have legal consequence s and, therefore , become s a contract . Whethe r or not such an agreemen t is intende d to have legal consequence s will be determine d with referenc e to the facts of the case. In commercia l and busines s agreement s the law will presum e tha t the parties enterin g into agreemen t inten d those agreement s to have legal consequences . Howeve r, this presumptio n may be negative d by expres s term s to the contrar y. Similarl y, in the case of agreement s of purel y domesti c and social nature , the presumptio n is tha t they do not give ris e to legal consequences . Howeve r, this presumptio n is rebuttabl e by giving evidenc e to the contrar y, i.e., by showin g tha t the intentio n of the partie s was to creat e legal obligations. Examples (1) Ther e was an agreemen t betwee n Rose Compan y and Crompto n Compan y, where of the forme r were appointe d sellin g agent s in Nort h Americ a for the latte r. One of the clause s include d in the agreemen t was: This arrangemen t is not... a formal or legal agreemen t and shal l not be subjec t to legal jurisdictio n in the law court s. Held that: This agreemen t was not a legally bindin g contrac t as the partie s intended not to have legal consequence s [Rose and Fran k Co. v. J.R. Crompto n and Bros. Ltd. (1925) A.C. 445]. (2) An agreemen t containe d a claus e tha t it shall not give rise to any legal relationships, or be legally enforceable , but bindin g in honour only. Held: The agreemen t did not give rise to legal relation s and, therefore , was not a contract . [Jones v. Vernon s Pools Ltd. (1938) 2 All E.R. 626]. (3) An aged couple (C and his wife) held out a promis e by correspondenc e to their niece and her husban d (Mrs. and Mr. P.) tha t C would leave them a portio n of his estate in his will, if Mrs. and Mr. P would sell thei r cottag e and come to live with the aged couple and to shar e the househol d and othe r expenses . The young couple sold thei r cottag e and starte d living with the aged couple. But the two couples subsequently quaralle d and the aged couple repudiate d the agreemen t by requiring the young couple to stay somewher e else. The young couple filed a suit agains t the aged couple for the breac h of promise. Held: Tha t ther e was intentio n to creat e legal relation s and the young couple could recover damage s [Parker v. Clark (1960) 1 W.L.R. 286]. 3. Free and genuine consent The consen t of the partie s to the agreemen t mus t be free and genuine . The consen t of the partie s shoul d not be obtaine d by misrepresentation , fraud , undu e influence , coercion or mistake. If the consen t is obtaine d by any of thes e flaws, then the contrac t is not valid.

LAW OF CONTRACTS

Busines s Law Includin g Compan y Law

4. Parties competent to contract The partie s to a contrac t shoul d be competen t to ente r into a contract . According to Section 11, every perso n is competen t to contrac t if he (i) is of the age of majorit y, (ii) is of sound mind , and (iii) is not disqualifie d from contractin g by any law to which he is subject. Thus, ther e may be a flaw in capacit y of partie s to the contract . The flaw in capacit y may be due to minorit y, lunac y, idiocy, drunkennes s or status . If a part y to a contrac t suffer s from any of thes e flaws, the contrac t is unenforceabl e except in certai n exceptiona l circumstances. 5. Lawful consideration The agreemen t mus t be supporte d by consideratio n on both sides. Each part y to the agreement mus t give or promis e somethin g and receive somethin g or a promis e in return. Consideration is the price for which the promis e of the othe r is sought . Howeve r, this price need not be in term s of mone y. In case the promis e is not supporte d by consideration , the promise will be nudu m pactu m (a bare promise ) and is not enforceabl e at law. Moreove r, the consideratio n mus t be real and lawful. 6. Lawful object The object of the agreemen t mus t be lawful and not one which the law disapproves. 7. Agreements not declared illegal or void Ther e are certai n agreement s which have been expressl y declare d illega l or void by the law. In such cases, even if the agreemen t possesse s all the element s of a valid agreement, the agreemen t will not be enforceabl e at law. 8. Certainty of meaning The meanin g of the agreemen t mus t be certai n or capabl e of being made certai n otherwise the agreemen t will not be enforceabl e at law. For instance , A agree s to sell 10 metre s of cloth. There is nothin g whateve r to show wha t type of cloth was intended . The agreemen t is not enforceable for wan t of certaint y of meaning . If, on the othe r hand , the specia l description of the cloth is expressl y stated , say Terryco t (80 : 20), the agreemen t would be enforceable as ther e is no uncertainl y as to its meaning. Howeve r, an agreemen t to agree is not a conclude d contrac t [Punit Beriwal a v. Suva Sanya l AIR 1998 Cal. 44]. 9. Possibility of performance The term s of the agreemen t shoul d be capabl e of performance . An agreemen t to do an act impossibl e in itself canno t be enforced . For instance , A agree s with B to discove r treasure by magic. The agreemen t canno t be enforced. 10. Necessary legal formalities A contrac t may be oral or in writing . If, howeve r, a particula r type of contrac t is required by law to be in writing , it mus t comply with the necessar y formalitie s as to writing , registration and attestation , if necessar y. If thes e legal formalitie s are not carrie d out, then the contract is not enforceabl e at law.

Law of Contract s

LAW OF CONTRACTS

1. 2 CLASSIFIC ATION OF CONTR ACTS


Contract s may be classifie d in term s of thei r (1) validit y or enforceabilit y, (2) mode of formation, or (3) performance. 1. Classification according to validity or enforceability Contract s may be classifie d accordin g to thei r validit y as (i) valid, (ii) voidable , (iii) void contracts or agreements , (iv) illegal , or (v) unenforceable. A contrac t to constitut e a valid contrac t mus t have all the essentia l element s discussed earlie r. If one or more of thes e element s is/ar e missing , the contrac t is voidable , void, illegal or unenforceable. As per Sectio n 2 (i) a voidabl e contrac t is one which may be repudiate d at the will of one of the parties , but unti l it is so repudiate d it remain s valid and binding . It is affecte d by a flaw (e.g., simpl e misrepresentation , fraud , coercion , undu e influence) , and the presenc e of anyon e of thes e defect s enable s the part y aggrieve d to take step s to repudiat e the contract. It shows tha t the consen t of the part y who has the discretio n to repudiat e it was not free. Example A, a man enfeeble d by diseas e or age, is induce d by Bs influenc e over him as his medical attendan t to agree to pay B an unreasonabl e sum for his professiona l services . B employs undue influence . As consen t is not free; he can take step s to set the contrac t aside. An agreemen t which is not enforceabl e by eithe r of the partie s to it is void [Sectio n 2(i)]. Such an agreemen t is withou t any legal effect ab initio (from the very beginning) . Unde r the law, an agreemen t with a mino r is void (Sectio n 11).* A contrac t which cease s to be enforceabl e by law become s void when it cease s to be enforceable [Sectio n 2(i)]. Examples (1) A and B contrac t to marr y each othe r. Before the lime fixed for the marriage , A goes mad. The contrac t become s void. (2) A contract s to take indigo for B to a foreign port. As governmen t afterwards declare s war agains t the countr y in which the port is situated . The contrac t becomes void when war is declared.
* (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Othe r instance s of void agreement s are: Agreement s entere d into throug h a mutua l mistak e of fact betwee n the partie s (Sectio n 20). Agreements , the object or consideratio n of which is unlawfu l (Sectio n 23). Agreements , par t of the consideratio n or object of which is unlawfu l (Sectio n 21). Agreement s made withou t consideratio n (Sectio n 25). Agreement s in restrain t of marriag e (Sectio n 26). Agreement s in restrain t or trad e (Sectio n 27). Agreement s in restrain t of legal proceeding s (Sectio n 28). Uncertai n agreement s (Sectio n 29). Wagerin g agreement s (Sectio n 30). Impossibl e agreement s (Sectio n 56). An agreemen t to ente r into an agreemen t in the future.

Busines s Law Includin g Compan y Law

In the above two examples , the contract s were valid at the time of formation . They became void afterwards . In exampl e (1) the contrac t becam e void by subsequen t impossibilit y. In exampl e (2) the contrac t becam e void by subsequen t illegalit y.* It is misnome r to use a void contract as originall y entere d into. In fact, in tha t case there is no contrac t at all. It may be called a void agreement . Howeve r, a contrac t originally valid may become void late r. An illegal agreemen t is one the consideratio n or object of which (1) is forbidde n by law; or (2) defeat s the provision s of any law; or (3) is fraudulent ; or (4) involve s or implie s injury to the perso n or propert y of another ; or (5) the court regard s it as immoral , or opposed to public policy. Examples (1) A, B and C ente r into an agreemen t for the divisio n among them of gains acquired or to be acquired , by them by fraud . The agreemen t is illegal. (2) A promise s to obtai n for B an employmen t in the public service , and B promises to pay Rs. 1,000 to A. The agreemen t is illegal. Every agreemen t of which the object or consideratio n is unlawfu l is not only void as betwee n immediat e partie s but also taint s the collatera l transaction s with illegalit y. In Bomba y, the wagerin g agreement s have been declare d unlawfu l by statute. Example A bets with B in Bomba y and loses; make s a reques t to C for a loan, who pays B in settlemen t of As losses . C canno t recove r from A becaus e this is money paid under or in respec t of a wagerin g transactio n which is illega l in Bomba y. An unenforceabl e contrac t is neithe r void nor voidable , but it canno t be enforce d in the court becaus e it lacks some item of evidenc e such as writing , registratio n or stamping . For instance , an agreemen t which is require d to be stampe d will be unenforceabl e if the same is not stampe d at all or is under-stamped . In such a case, if the stam p is require d merel y for revenue purposes , as in the case of a receip t for paymen t of cash, the require d stam p may be affixed on paymen t of penalt y and the defect is then cured and the contrac t becomes enforceable . If, howeve r, the technica l defect canno t be cured the contrac t remains unenforceable , e.g., in the case of an unstampe d bill of exchang e or promissor y note. Contract s whic h mus t be in writing . The following mus t be in writing , a requiremen t laid down by statut e in each case: (a) A negotiabl e instrument , such as a bill of exchange , cheque , promissor y note (The Negotiabl e Instrument s Act, 1881). (b) A Memorandu m and Article s of Associatio n of a compan y, an applicatio n for shares in a company ; an applicatio n for transfe r of share s in a compan y (The Companies Act, 1956). (c) A promis e to pay a time-barre d debt (Sectio n 25 of the India n Contrac t Act, 1872).
* (a) (b) Othe r example s of contract s becomin g void are: A contingen t contrac t to do or not to do anythin g if an uncertai n futur e even t happen s become s void if the even t become s impossibl e (Sectio n 32). A contrac t voidabl e at the option of the promisee , become s void when the promise e exercise s his option by avoidin g the contract . (Section s 19; 19A).

Law of Contract s

(d) A lease , gift, sale or mortgag e of immovabl e propert y (The Transfe r of Property Act, 1882). Some of the contracts and documents evidencing contracts are, in addition to be in writing , require d to be registere d also. These are: 1. Document s coming withi n the purvie w of Sectio n 17 of the Registratio n Act, 1908. 2. Transfe r of immovabl e propert y unde r the Transfe r of Propert y Act, 1882. 3. Contract s withou t consideratio n but made on accoun t of natura l love and affection between partie s standin g in a nea r relatio n to each othe r (Sectio n 25, The Indian Contract Act, 1872). 4. Memorandu m of Association , and Article s of Associatio n of a Compan y, Mortgages and Charge s (The Companie s Act, 1956). 2. Classification according to mode of formation Ther e are differen t modes of formatio n of a contract . The term s of a contrac t may be stated in words (writte n or spoken) . This is an express contract . Also the term s of a contract may be inferre d from the conduc t of the partie s or from the circumstance s of the case. This is an implie d contrac t (Sectio n 9). Example If A enter s into a bus for going to his destinatio n and take s a seat , the law will imply a contrac t from the very natur e of the circumstances , and the commute r will be obliged to pay for the journe y. We have seen tha t the essenc e of a valid contrac t is tha t it is based on agreemen t of the parties. Sometimes , howeve r, obligation s are create d by law (regardles s of agreement ) whereby an obligatio n is impose d on a part y and an action is allowed to be brough t by anothe r part y. These obligation s are known as quasi-contracts . The India n Contrac t Act, 1872 (Chapte r V Section s 6872) describe s them as certai n relation s resemblin g those create d by contrac t. Examples (1) A supplie s B, a mino r, with necessarie s suitabl e to his conditio n in life. A is entitled to be reimburse d from Bs propert y. (2) A supplie s the wife and childre n of B, a mino r, with necessarie s suitabl e to their condition in life. A is entitle d to be reimburse d from Bs propert y. (3) A, a tradesman , leave s goods at Bs house by mistake . B treat s the goods as his own. B is bound to pay A for them. In all the above cases, the law implie s a contrac t and a perso n who has got benefi t is under an obligatio n to reimburs e the othe r. 3. Classification according to performance Anothe r metho d of classifyin g contract s is in term s of the exten t to which they have been performed. Accordingl y, contract s are: (1) executed , and (2) executor y or (1) unilateral , and (2) bilateral. An executed contrac t is one wholly performed . Nothin g remain s to be done in term s of the contract. Example A contract s to buy a bicycle from B for cash. A pays cash. B deliver s the bicycle.

LAW OF CONTRACTS

10

Busines s Law Includin g Compan y Law

An executor y contrac t is one which is wholly unperformed , or in which ther e remains something furthe r to be done. Example On Jun e 1, A agree s to buy a bicycle from B. The contrac t is to be performe d on Jun e 15. The executor y contrac t become s an execute d one when completel y performed . For instance, in the above example , if both A and B perfor m thei r obligation s on Jun e 15, the contract become s executed . Howeve r, if in term s of the contrac t performanc e of promis e by one party is to preced e performanc e by anothe r part y then the contrac t is still executor y, thoug h it has been performe d by one part y. Example On Jun e 1, A agree s to buy a bicycle from B. B has to delive r the bicycle on Jun e 15 and A has to pay price on July 1. B deliver s the bicycle on Jun e 15. The contrac t is executory as somethin g remain s to be done in term s of the contract. A Unilatera l Contrac t is one wherei n at the time the contrac t is conclude d ther e is an obligation to perfor m on the par t of one part y onl y. Example A make s paymen t for bus fare for his journe y from Bomba y to Pune . He has performed his promise . It is now for the transpor t compan y to perfor m the promise. A Bilatera l Contrac t is one wherei n ther e is an obligatio n on the par t of both to do or to refrai n from doing a particula r thing . In this sense , Bilatera l contract s are simila r to executory contracts. An important corollary can be deduced from the distinction between Executed and Executor y Contract s and betwee n Unilatera l and Bilatera l contracts . It is tha t a contrac t is a contrac t from the time it is made and not from the time its performanc e is due. The performance of the contrac t can be made at the time when the contrac t is made or it can be postponed also. See example s above unde r Executor y Contract. Classification/Types of Contracts
1. From the poin t of vie w of enforceability (a) Valid contracts (b) Voidable contracts (c) Void contract s or agreements (d) Illega l agreements (e) Unenforceabl e Agreement s (Certai n contract s mus t be in writing) 2. Accordin g to Mod e of Formation (a) Expres s contract (b) Implie d contract (c) Quasi-contracts 3. Accordin g to Performance (a) Executed (b) Executory (c) Uni-lateral (d) Bi-lateral

Law of Contract s

11

Classificatio n of Contract s in the Englis h Law In Englis h Law, contract s are classifie d into (a) Forma l Contract s and (b) Simpl e Contracts. Formal contracts are those whose validity or legal force is based upon form alone. Forma l Contract s can be eithe r (a) contract s of record or (b) contract s unde r seal or by (deed or specialit y contracts . No consideratio n is necessar y in the case of Forma l Contracts . Such contracts do not find any place unde r India n Law as consideratio n is necessar y unde r Section 25 (of course ther e are some exception s to the principl e tha t a contrac t withou t consideration is void). Contract s of Record are not contract s in the real sense as the consensus-ad-ide m is lacking . They are only obligation s impose d by the court upon a part y to do or refrai n from doing something. A Contrac t of Record is eithe r (i) a judgemen t of a court or (ii) recognizance . An obligation imposed by the judgemen t of a court and entere d upon its record s is often called a Contract of Record. Example A is indebte d to B for Rs. 500 unde r a contract , A fails to pay. B sues A and gets a judgemen t in his favou r. The previou s righ t of B to obtai n Rs. 500 from A is replaced by the judgemen t in his favou r and executio n may be levied upon A to enforce payment, if need be. A Recognizanc e is a writte n acknowledgemen t to the crown by a crimina l tha t on default by him to appea r in the court or to keep peace or to be of good conduct , he is bound to pay to the crown a certai n sum of mone y. This is also an obligatio n impose d upon him by the court. A contrac t with the following characteristic s is known as a contrac t unde r seal or by deed or a contrac t of speciality ; (i) It is in writing , (ii) It is signed , (iii) It is sealed, and (iv) It is delivered by the partie s to the contract. These contract s are used in Englis h Law for variou s transaction s such as conveyances of land, a lease of property for more than three years, contracts made by corporations, contract s made withou t consideration . Unde r the India n Contrac t Act also, a specialit y contract is recognise d if the following condition s are satisfied : (1) the contrac t mus t be in writing (2) it mus t be registere d accordin g to the law of registratio n of documents , (3) it mus t be between partie s standin g in nea r relatio n to each othe r, and (4) it shoul d proceed out of natura l love and affectio n betwee n the partie s (Sectio n 25 of the India n Contrac t Act, 1872). All contract s othe r tha n the forma l contract s are called simpl e or parol contracts . They may be made : (i) orally, (ii) in writing , or (iii) implie d by conduct.

LAW OF CONTRACTS

1. 3 OFFE R AND ACCEP TANCE


[Section s 39 of the India n Contrac t Act, 1872]

OFFER/PROPOSAL
A proposa l is define d as when one perso n signifie s to anothe r his willingnes s to do or to abstain from doing anything , with a view to obtainin g the assen t of tha t othe r to such act or

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Busines s Law Includin g Compan y Law

abstinence , he is said to make a proposal. [Sectio n 2 (a)]. An offer is synonymou s with proposal. The offeror or propose r expresse s his willingnes s to do or not to do (i.e., abstai n from doing) something with a view to obtai n acceptanc e of the othe r part y to such act or abstinence . Thus, there may be positive or negative acts which the propose r is willing to do. Examples (1) A offers to sell his book to B. A is makin g an offer to do something , i.e., to sell his book. It is a positiv e act on the par t of the propose r. (2) A offers not to file a suit agains t B, if the latte r pays A the amoun t of Rs. 200 outstanding. Here the act of A is a negativ e one, i.e., he is offering to abstai n from filing a suit.

HOW AN OFFER IS MADE?


An offer can be made by (a) any act or (b) omissio n of the part y proposin g by which he intends to communicat e such proposa l or which has the effect of communicatin g it to the other (Sectio n 3). An offer can be made by an act in the following ways: (a) by words (whethe r writte n or oral). The writte n offer can be made by letters, telegrams, telex messages , advertisements , etc. The oral offer can be made either in perso n or over telephone. (b) by conduct . The offer may be made by positiv e acts or signs so tha t the person acting or makin g signs mean s to say or convey. Howeve r silenc e of a part y can in no case amoun t to offer by conduct. An offer can also be made by a part y by omissio n (to do something) . This include s such conduct or forbearanc e on ones par t tha t the othe r perso n take s it as his willingnes s or assent. An offer implie d from the conduc t of the partie s or from the circumstance s of the case is known as implie d offe r. Examples (1) A proposes , by lette r, to sell a house to B at a certai n price. This is an offer by an act by writte n words (i.e., letter) . This is also an expres s offer. (2) A proposes , over telephone , to sell a house to B at a certai n price. This is an offer by act (by oral words) . This is an expres s offer. (3) A owns a motor boat for takin g people from Bomba y to Goa. The boat is in the waters at the Gatewa y of India . This is an offer by conduc t to take passenger s from Bombay to Goa. He need not spea k or call the passengers . The very fact tha t his motor boat is in the water s nea r Gatewa y of Indi a signifie s his willingnes s to do an act with a view to obtainin g the assen t of the othe r. This is an exampl e of an implied offer. (4) A offers not to file a suit agains t B, if the latte r pays A the amoun t of Rs. 200 outstanding. This is an offer by abstinenc e or omissio n to do something. Specific and General Offer An offer can be made either: 1. to a definit e perso n or a group of persons , or 2. to the public at large.

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The first mode of makin g offer is known as specific offer and the second is known as a genera l offer. In case of the specific offer, it may be accepte d by tha t perso n or group of persons to whom the same has been made . The genera l offer may be accepte d by any one by complyin g with the term s of the offer. The celebrate d case of Carlil l v. Carbolic Smok e Ball Co., (1813) 1 Q.B. 256 is an excellent example of a genera l offer and is explaine d belo w. Examples (1) A offers to sell his house to B at a certai n price. The offer has been made to a definit e person , i.e., B. It is only B who can accep t it [Boulto n v. Jones (1857) 2H. and N. 564].* (2) In Carbolic Smok e Ball Co.s case (supra) , the patent-medicin e compan y advertised tha t it would give a rewar d of 100 to anyon e who contracte d influenz a afte r using the smoke balls of the company for a certain period according to the printed directions . Mrs. Carlil l purchase d the advertise d smoke ball and contracte d influenza in spite of using the smoke ball accordin g to the printe d instructions . She claimed the rewar d of 100. The claim was resiste d by the compan y on the groun d that offer was not made to her and tha t in any case she had not communicate d her acceptance of the offer. She filed a suit for the recover y of the reward. Held: She could recove r the rewar d as she had accepte d the offer by complying with the term s of the offe r. The genera l offer create s for the offeror liabilit y in favou r of any perso n who happens to fulfil the condition s of the offer. It is not at all necessar y for the offeree to be known to the offeror at the time when the offer is made . He may be a strange r, but by complyin g with the condition s of the offer, he is deeme d to have accepte d the offer. Essential requirements of a valid offer An offer mus t have certai n essential s in order to constitut e it a valid offer. These are: 1. The offer mus t be made with a view to obtai n acceptanc e [Sectio n 2(a)]. 2. The offer mus t be made with the intentio n of creatin g legal relations . [Balfou r v. Balfou r (1919) 2 K.B. 571.]** 3. The term s of offer mus t be definite , unambiguou s and certai n or capabl e of being made certai n (Sectio n 29). The term s of the offer mus t not be loose, vague or ambiguous. Examples (1) A offers to sell to B a hundre d quintal s of oil. Ther e is nothin g whateve r to show what kind of oil was intended . The offer is not capabl e of being accepte d for want of certaint y. (2) A who is a deale r in coconut oil only, offers to sell to B one hundre d quintal s of oil. The natur e of As trad e afford s an indicatio n of the meanin g of the words, and there is a valid offer.

LAW OF CONTRACTS

* **

For facts or this case, pleas e refer to page 21. See page 5.

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Busines s Law Includin g Compan y Law

4. An offer mus t be distinguishe d from (a) a mere declaratio n of intentio n or (b) an invitation to offer or to treat. Offer vis-a-vis declaration of intention to offer A perso n may make a statemen t withou t any intentio n of creatin g a bindin g obligation. It may amoun t to a mere declaratio n of intentio n and not to a proposal. Examples (1) An auctionee r, N advertise d tha t a sale of office furnitur e would take place at a particula r place. H travelle d down abou t 100 Km to atten d the sale but found the furniture was withdraw n from the sale. H sued the auctionee r for his loss of time and expenses. Held: N was not liable [Harri s v. Lickerson . (1875) L.R.S. Q.B. 286.]. (2) A fathe r wrote to his would-b e son-in-la w tha t his daughte r would have a shar e of what he would leave at the time of his death . At the time of death , the son-in-law staked his claim in the propert y left by the deceased. Held: The son-in-law s claim mus t fail as ther e was no offer from his father-in-law creating a bindin g obligation . It was just a declaratio n of intentio n and nothing more [Re Ficus (1900) 1. Ch. 331.]. Offer vis-a-vis invitation to offer An offer mus t be distinguishe d from invitatio n to offer. A prospectu s issue d by a college for admissio n to variou s course s is not an offer. It is only an invitatio n to offer. A prospective student by filling up an applicatio n form attache d to the prospectu s is makin g the offer. An auctionee r, at the time of auction , invite s offers from the would-be-bidders . He is not making a proposal. A displa y of goods with a price on them in a shop window is construe d an invitatio n to offer and not an offer to sell. Example In a departmenta l store , ther e is a self-service . The customer s pickin g up article s and take them to the cashie rs desk to pay. The customer s action in pickin g up particular goods is an offer to buy. As soon as the cashie r accept s the paymen t a contrac t is entered into [Pharmaceutica l Society of Great Britai n v. Boots Cash Chemist s (Southern) Ltd. (1953) 1 Q.B. 401]. Likewise , prospectu s issue d by a compan y for subscriptio n of its share s by the members of the public, the price lists , catalogue s and quotation s are mere invitation s to offe r. On the basis of the above, we may say tha t an offer is the final expressio n of willingness by the offeror to be bound by his offer shoul d the othe r part y choose to accep t it. Wher e a part y, withou t expressin g his final willingness , propose s certai n term s on which he is willing to negotiate , he does not make an offer, he only invite s the othe r part y to make an offer on those terms . This is perhap s the basic distinctio n betwee n an offer and an invitatio n to offer. In Harvey v. Facie, the plaintiff s (Harvey ) telegraphe d to the defendant s (Facie) , writing: Will you sell us Bumpe r Hall Pen?* Telegrap h lowest cash price. The defendant s replie d also

Bumpe r Hall Pen was the nam e of the real estate.

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by a telegram , Lowest price for Bumpe r Hall Pen 900. The plaintiff s immediatel y sent their last telegra m stating : We agree to buy Bumpe r Hall Pen for 900 aske d by you. The defendants refuse d to sell the plot of land (Bumpe r Hall Pen) at tha t price. The plaintiffs contention tha t by quotin g thei r minimu m price in respons e to the inquir y, the defendants had made an offer to sell at tha t price, was turne d down by the Judicia l Committee . Their Lordship pointe d out tha t in thei r first telegram , the plaintiff s had aske d two questions , first as to the willingnes s to sell and second, as to the lowest price. They reserve d thei r answer as to the willingnes s to sell. Thus , they had made no offer. The last telegra m of the plaintiffs was an offer to buy, but tha t was neve r accepte d by the defendants. 5. The offe r mus t be communicate d to the offeree. An offer mus t be communicated to the offeree before it can be accepted . This is true of specific as well as genera l offer. Example G sent S, his servant , to trace his missin g nephe w. Subsequentl y, G announce d a rewar d for informatio n relatin g to the boy. S, trace d the boy in ignoranc e of the announcemen t regardin g rewar d and informe d G. Late r, when S came to know of the reward, he claime d it. Held, he was not entitle d to the rewar d on the groun d tha t he could not accep t the offer unles s he had knowledg e of it [Lalma n Shukl a v. Gauri Dutt, II, A.L.J. 489]. 6. The offer mus t not contai n a term the non-complianc e of which may be assumed to amoun t to acceptance . Thus , the offeror canno t say tha t if the offeree does not accept the offer withi n two days, the offer would be deeme d to have been accepted.

LAW OF CONTRACTS

Example A tells B I offer to sell my dog to you for Rs. 45. If you do not send in your reply, I shal l assum e tha t you have accepte d my offer. The offer is not a valid one. 7. A tende r is an offer as it is in respons e to an invitatio n to offer. Tender s commonly arise where , for example , a hospita l invite s offers to suppl y eatable s or medicines . The persons filling up the tender s are giving offers. Howeve r, a tende r may be either: (a) specific or definite ; wher e the offer is to suppl y a definit e quantit y of goods, or (b) standing ; wher e the offer is to suppl y goods periodicall y or in accordanc e with the requirement s of the offeree. In the case of a definit e tende r, the supplier s submi t thei r offers for the suppl y of specified goods and services . The offeree may accep t any tende r (generall y the lowest one). This will resul t in a contract. Example A invite s tender s for the suppl y of 10 quintal s of suga r. B, C, and D submi t their tenders. Bs tender is accepted. The contract is formed immediately the tender is accepted. In the case of standin g offers, the offeror gives an open offer whereb y he offers to supply goods or service s as require d by the offeree. A separat e acceptanc e is made each time an order is placed . Thus , ther e are as many contract s as are the acts of acceptance. Example The G.N. Railwa y Co. invite d tender s for the suppl y of stores . W made a tende r and the term s of the tende r were as follows: To suppl y the compan y for 12 month s with such quantitie s of specifie d article s as the compan y may order from time to time . The

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Busines s Law Includin g Compan y Law

compan y accepte d the tende r and placed the orders . W execute d the order s as placed from time to time but late r refuse d to execut e a particula r orde r. Held: W was bound to suppl y goods withi n the term s of the tende r [Grea t Northern Railwa y v. Witha m (1873) L.R. 9 C.P. 16]. The Suprem e Cour t of Indi a in this regar d has observed : As soon as an order was placed a contrac t arose and unti l then ther e was no contract . Also each separat e order and acceptance constituted a differen t and distinc t contrac t [Chatturbhu j Vithalda s v. Moreshove r Parashram AIR 1954 SC 326]. It is to be noted tha t if the offeree gives no order or fails to order the full quantit y of goods set out in a tende r ther e is no breac h of contract. Revocatio n or Withdrawa l of a tende r. A tendere r can withdra w his tende r before its final acceptance by a work or suppl y orde r. This righ t of withdrawa l shal l not be affecte d even if there is a claus e in the tende r restrictin g his righ t to withdra w. A tende r will, howeve r, be irrevocable wher e the tendere r has, on some consideration , promise d not to withdra w it or where ther e is a statutor y prohibitio n agains t withdrawa l [The Secretar y of State for India v. Bhaska r Krishnaj i Saman i AIR 1925 Bom 485]. Specia l term s in a contract . The special terms , formin g par t of the offer, mus t be duly brought to the notice of the offeree at the time the offer is made . If it is not done, then there is no valid offer and if offer is accepted , and the contrac t is formed , the offeree is not bound by the specia l term s which were not brough t to his notice. The term s may be brough t to his notice either: (a) by drawin g his attentio n to them specificall y, or (b) by inferrin g tha t a man of ordinar y prudenc e could find them by exercisin g ordinary intelligence. (a) the example s of the first case are wher e certai n condition s are writte n on the back of a ticke t for a journe y or deposi t of luggag e in a cloak room and the words. For conditions see back are printe d on the face of it. In such a case, the perso n buying the ticke t is bound by whateve r condition s are writte n on the back of the ticket whethe r he has read them or not. Examples (1) P, a passenge r deposite d a bag in the cloakroo m at a Railwa y Station . The acknowledgement receip t given to him bore, on the face of it, the words See back . On e of the condition s printe d on the back limite d the liabilit y of the Railway s for any packag e to 10. The bag was lost, and P claime d 24. 10s, its value , pleading tha t he had not read the condition s on the back of the receipt. Held : P was bound by the condition s printe d on the back as the compan y gave reasonable notice on the face of the receip t as to the condition s at the back of the document [Parker v. Sout h Easter n Rly. Co. (1877) 2 C.P.D. 416]. (2) A lady, L, the owner of a cafe, agree d to purchas e a machin e and signed the agreement withou t readin g its terms . Ther e was an exemptio n claus e excluding liability of the selle r unde r certai n circumstances . The machin e proved fault y and she purporte d to terminat e the contract. Held : Tha t she could not do so, as the exemptio n claus e protecte d the selle r from the liabilit y [LEstrang e v. Grancob Ltd. (1934) 2 R.B. 394].

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(3) T purchase d a railwa y ticket , on the face of which the words: For condition s see back were written . One of the condition s exclude d liabilit y for injur y, however caused. T was illiterat e and could not read . She was injure d and sued for damages. Held : Tha t the railwa y compan y had properl y communicate d the condition s to her who had constructiv e notice of the condition s whethe r she read them or not. The company was not bound to pay any damage s [Thompso n v. LM. and L. Rly. (1930) 1 KB. 417]. (b) The same rule holds good even wher e the condition s formin g par t of the offer are printed in a languag e not understoo d by the accepto r provide d his attentio n has been draw n to them in a reasonabl e manne r. In such a situation , it is his duty to ask for the translation , of the condition s and if he does not do so, he will be presume d to have a constructiv e notice of the terms of the condition s [Mackillingan v. Campagin e de Massangere s Maritime s (1897) 6 Cal. 227 J]. If condition s limitin g or definin g the right s of the accepto r are not brough t to his notice, then they will not become par t of the offer and he is not bound by them. Example A passenge r was travellin g with luggag e from Dubli n to Whitehave n on a ticket , on the back of which ther e was a term which exempte d the shippin g compan y from liabilit y for the loss of luggage . He neve r looked at the back of the ticke t and ther e was nothing on the face of it to draw his attentio n to the term s on its back. He lost his luggag e and sued for damages. Held : He was entitle d to damage s as he was not bound by somethin g which was not communicate d to him [Henderso n v. Stevenso n (1875) 2 H.L.S.C . 470]. Also, if the condition s are containe d in a documen t whic h is delivere d after the contract is complete , then the offeree is not bound by them . Such a documen t is considere d a noncontractua l documen t as it is not suppose d to contai n the condition s of the contract . For instance , if a touris t drivin g into Mussoorie , receive s a ticke t upon payin g toll-tax , he might reasonably assum e tha t the object of the ticke t was tha t by producin g it he migh t be free from paying toll at some othe r toll-ta x barrie r, and migh t put in his pocket withou t readin g the same. The ticke t is just a receip t or a vouche r. Example C hired a chair from the Municipa l Counci l in order to sit on the beach . He paid the rent and receive d a ticke t from an attendant . On the back of the ticket , ther e was a claus e exemptin g the Counci l for any acciden t or damag e arisin g from hire of chairs . C sustaine d persona l injurie s as the chair broke down while he was sittin g therein . He sue d for damages. Held : Tha t the Counci l was liable [Chapleto n v. Barry U.D.C. (1940) 1 K.B. 532]. From the illustration s given it may be conclude d that whethe r the offeree will be bound by the special condition s or not will depen d on whethe r or not he had or could have had notice by exercisin g ordinar y diligence. Detaile d observation s with respec t to printe d condition s on a receip t were made by the Bomba y High Cour t in R.S. Deboo v. M. V. Hindleka r, AIR 1995 Bom. 68. These observation s are: 1. Term s and condition s printe d on the revers e of a receip t issue d by the owner of the laundr y or any othe r bailee do not necessaril y form par t of the contrac t of

LAW OF CONTRACTS

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Busines s Law Includin g Compan y Law

bailmen t in the absenc e of the signatur e of the bailor (customer ) on the document relied upon. The onus is on the bailee to prove tha t the attentio n of the bailor was drawn to the specia l condition s before contrac t was conclude d and the bailor had consented to them as contractua l terms. 2. It canno t be just assume d tha t the printe d condition s appearin g on the revers e of the receipt automatically become contractual terms or part of the contract of bailment. 3. In certai n situations , the receip t canno t be considere d as a contractua l document as such, it is a mere acknowledgemen t of entrustmen t of certai n articles. Cross Offers Wher e two partie s make identica l offers to each othe r, in ignoranc e of each othe rs offer, the offers are known as cross-offer s and neithe r of the two can be called an acceptanc e of the other and, therefore , ther e is no contract. Example H wrote to T offering to sell him 800 tons of iron at 69s. per ton. On the same day T wrote to H offering to buy 800 tons at 69s. Thei r letter s crosse d in the post. T contended tha t ther e was a good contract. Held: tha t ther e was no contract . [Tinn v. Hoffma n & Co. (1873) 29 L.T. Exa. 271.]. Termination or Lapse of an Offer An offer is made with a view to obtai n assen t thereto . As soon as the offer is accepted it become s a contract . But before it is accepted , it may lapse , or may be revoked . Also, the offeree may rejec t the offer. In thes e cases, the offer will come to an end. Essential Requirements of a Valid Offer 1. Mus t be made with a view to obtai n acceptance. 2. Mus t be made with the intentio n of creatin g legal relations. 3. Term s of offer mus t be definite , unambigou s and certai n or capabl e of being made certain. 4. It mus t be distinguishe d from mere declaratio n of intentio n or an invitatio n to offer. 5. It mus t be communicate d to the offeree. 6. The offer mus t not contai n a term the non-complianc e of which may be assumed to amoun t to acceptance. 7. A tende r is an offer as it is in respons e to an invitatio n to offer. 8. The Specia l term s, formin g par t of the offer, mus t be duly brough t to the notice of the offeree at the time the offer is made. 9. Two identica l cross-offer s do not make a contract. (1) The offe r lapse s afte r stipulate d or reasonabl e time . [Sectio n 6(2)] The offer must be accepte d by the offeree withi n the time mentione d in the offer and if no time is mentioned , then withi n a reasonabl e time . The offer lapse s afte r the time

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stipulate d in the offer expire s if by tha t time offer has not been accepted . If no time is specified , then the offer lapse s withi n a reasonabl e time . Wha t is a reasonable tim e is a questio n of fact and would depen d upon the circumstance s of each case. Example M offered to purchas e share s in a compan y by writin g a lette r on Jun e 8. The company allotted the share s on 23rd Novembe r. M refuse d the shares. Held : Tha t the offer lapse d as it was not accepte d withi n a reasonabl e time [Ramsgate Victori a Hotel Co. v. Montefior e (1860) L.R.I. Ex. 109]. 2. An offe r lapse s by the deat h or insanit y of the offere r or the offere e before acceptance . Sectio n 6(4) provide s tha t a proposa l is revoke d by the deat h or insanity of the propose r, if the fact of his deat h or insanit y comes to the knowledge of the accepto r before acceptance . Therefore , if the acceptanc e is made in ignorance of the death , or insanit y of offere r, ther e would be a valid contract . Similarl y, in the case of the deat h of offeree before acceptance , the offer is terminated. 3. An offer terminate s when rejecte d by the offeree. 4. An offer terminate s when revoke d by the offerer before acceptance. 5. An offer terminate s by not being accepte d in the mode prescribed , or if no mode is prescribed , in some usua l and reasonabl e manne r. 6. A conditiona l offer terminate s when the conditio n is not accepte d by the offeree. Example A propose s to B I can sell my house to you for Rs. 12,000 provide d you lease out your land to me. If B refuse s to lease out the land , the offer would be terminated. 7. Counte r offe r. An offer terminate s by counte r-offe r by the offeree. When in place of acceptin g the term s of an offer as they are, the offeree accept s the same subject to certai n conditio n or qualification , he is said to make a counte r-offe r. The following have been held to be counter-offers: (i) Wher e an offer to purchas e a house with a conditio n tha t possessio n shal l be given on a particula r day was accepte d varyin g the date for possessio n [Routledg e v. Gran t (1828) 130 E.R. 920]. (ii) An offer to buy a propert y was accepte d upon a conditio n tha t the buye r signed an agreement which containe d specia l term s as to paymen t of deposit , makin g out title completio n date , the agreemen t havin g been returne d unsigne d by the buyer [Jones v. Danie l (1894) 2 Ch. 332]. (iii) An offer to sell rice was accepte d with an endorsemen t on the sold and bough t note tha t yellow and wet grain will not be accepte d [All Shai n v. Moothi a Chett y, 2 Bom L.R. 556]. (iv) Wher e an acceptanc e of a proposa l for insuranc e was accepte d in all its terms subject to the conditio n tha t ther e shal l be no assuranc e till the first premiu m was paid [Sir Mohame d Yusu f v. S. of S. for Indi a 22 Bom. L.R. 872].

LAW OF CONTRACTS

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Busines s Law Includin g Compan y Law

Termination of an Offer 1. An offer lapse s afte r stipulate d or reasonabl e time. 2. An offer lapse s by the deat h or insanit y of the offerer or the offeree before acceptance. 3. 4. 5. 6. An offer lapse s on rejection. An offer terminate s when revoked. It terminate s by counte r-offe r. It terminate s by not being accepte d in the mode prescribe d or in usua l and reasonabl e manne r. 7. A conditiona l offer terminate s when conditio n is not accepted.

ACCEPTANCE
The India n Contrac t Act, 1872 define s an acceptanc e as follows: Whe n the perso n to whom the proposa l is made signifie s his assen t thereto , the proposal is said to be accepted [Sectio n 2 (b)]. Thus , acceptanc e is the act of giving consen t to the proposal . A proposa l when accepted becomes a contract. Acceptance How Made? As mentione d above, the offeree is deeme d to have given his acceptanc e when he gives his assen t to the proposal . The assen t may be expres s or implied . It is expres s when the acceptance has been signifie d eithe r in writing , or by word of mouth , or by performanc e of some require d act. The first two kind s of acceptanc e are self-explanator y. Acceptanc e by performing the require d act is exemplifie d in the case of Carlil l v. Carbolic Smok e Ball Co.* Examples (1) A trade r receive s an order from a custome r and execute s the order by sendin g the goods. The custome rs order for goods constitute s the offer which was accepte d by the trade r by sendin g the goods. It is a case of acceptanc e by conduct . Here the trader is acceptin g the offer by the performanc e of the act. (2) A loses his dog and announce s a rewar d of Rs. 50 to anyon e who bring s his dog to him. B need not convey his acceptanc e of the genera l offer. If he finds the dog and gives it to A, he is entitle d to the rewar d as he accepte d the offer by doing the required act. Acceptanc e is implie d when it is to be gathere d from the surroundin g circumstance s or the conduc t of the parties. Examples (1) A enter s into a bus for going to his destinatio n and take s a seat . From the very nature of the circumstance , the law will imply acceptanc e on the par t of A. (2) Parker v. Clark (1960) 1 W.L.R. 286.**
* ** Explaine d earlie r on page 13. Explaine d earlie r on page 5.

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(3) As scoote r goes out of order and he was strande d on a lonely road. B, who was standin g nearb y, start s correctin g the fault . A allows B to do the same . From the nature of the circumstances , A has given his acceptanc e to the offer by B. Who can Accept? In the case of a specific offer, it can be accepte d only by tha t perso n to whom it is made. The rule of law is tha t if A want s to ente r into a contrac t with B, then C canno t substitute himself for B withou t As consent. Example Boulto n v. Jones . The facts of this case were as follows: B, who was a manage r with X, purchase d his business . J, to whom, X owed a debt, placed an order with X for the supply of certai n goods. B supplie d the goods even thoug h the order was not addressed to him. J refuse d to pay B for the goods becaus e he, by enterin g into contrac t with X, intende d to set-off his debt agains t X. Held : The offer was made to X and it was not in the power of B to have accepte d the same. In the case of a genera l offer, it can be accepte d by anyon e by complyin g with the terms of the offe r. Example Carlil l v. Carbolic Smok e Ball Co.*

LAW OF CONTRACTS

ESSENTIALS OF A VALID ACCEPTANCE


Ther e are some legal rule s which make the acceptanc e effectiv e so as to give rise to a valid contract . These are: (1) Acceptance must be absolute and unqualified (Section 7) An acceptanc e to be valid mus t be absolut e and unqualifie d and accordin g to the exact terms of the offer. An acceptanc e with a variation , howeve r slight , is no acceptance , and may amount to a mere counte r offer which the origina l offeror may or may not accept. Examples (1) A offers to sell his house to B for Rs. 1,000. B replies , I can pay Rs. 800 for it. The offer of A is rejecte d by B as the acceptanc e is not unqualified . Howeve r, B subsequentl y change s his mind and is prepare d to pay Rs. 1,000. This will also be treated as a counte r offer and it is up to A whethe r to accep t the same or not [Union of Indi a v. Babulal , A.I.R. 1968 Bomba y 294]. (2) M offered to sell land to N for 280. N replie d purportin g to accep t and enclosed 80, promisin g to pay the balanc e of 200 by monthl y instalment s of 50 each. Held : Tha t N could not enforce acceptanc e becaus e his acceptanc e was not an unqualified one [Neale v. Merret t (1930) W.N. 189]. (3) A offers to sell his house to B for Rs. 10,000 . B replies , I am prepare d to buy your house for Rs. 10,000 provide d you purchas e my 1980 model Ambassado r Car for Rs. 60,000. Ther e is no acceptanc e on the par t of B.

See page 13.

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Howeve r, a mere variatio n in the languag e which does not involve any differenc e in substance would not make the acceptanc e ineffectiv e [Heywort h v. Knigh t (1864) 144 E.R. 120, 142 R.R. 855]. Also, if some condition s are implie d as a par t of the contract , and the offeree accept s the offer subjec t to those conditions , the acceptanc e will be treate d as valid. Example A offers to sell his house to B, and B agree s to purchas e it subjec t to the title being approved by Bs solicito r. The acceptanc e by B is absolut e and unqualifie d as it is presume d tha t A has a title to the propert y and it was not necessar y for A to mention anything abou t the title. Furthe r, an offeree may accep t an offer subjec t to contract or subjec t to forma l contract or subjec t to contrac t to be approve d by solicitors. The significanc e of thes e words is that the partie s do not inten d to be bound , and are not bound , unti l a forma l contrac t is prepared and signed by them . The accepto r may agree to all the term s of a proposa l and yet decline to be bound unti l a forma l agreemen t is draw n up. Examples (1) C accepte d Es offer to sell nurser y for 4,000 , subjec t to a prope r contrac t to be prepared by the vendo rs solicitors . A contrac t was prepare d by Cs solicitor s and approved by Es solicitors , but E refuse d to sign it. Held : Tha t ther e was no contrac t as the agreemen t was only conditional. [Chillingwort h v. Esche (1924) 1 Ch. 97]. (2) E bough t a house from B subjec t to a contract. The term s of the forma l contract were agreed , and each part y signed his part . E posted his par t but B did not post his par t as he change d his mind in the meantime. Held : Tha t ther e was no bindin g contrac t betwee n the partie s [Eccles v. Bryant (1948) Ch. 93]. In the first example , one of the partie s did not sign the contract . In the second example, separate part s duly signed by the partie s were not exchanged . In both the cases, ther e was no bindin g contract. (2) Acceptance must be communicated to the offeror The communicatio n of acceptanc e may be expres s or implied . A mere menta l acceptance is no acceptance . A mere menta l acceptanc e mean s tha t the offeree is assentin g to an offer in his mind only and has not communicate d it to the offero r. Example B, a supplie r, sent a draf t agreemen t relatin g to the suppl y of Coal and Coke to the manage r of a railwa y compan y for his acceptance . The manage r wrote the word approved on the same and put the draf t in the drawe r of his table intendin g to send it to the company s solicitor s for a forma l contrac t to be draw n up. By an oversight , the draft agreement remaine d in the drawe r. Held : Tha t ther e was no contrac t as the manage r had not communicate d his acceptance to the propose r. The acceptanc e of an offer canno t be implie d from the silenc e of the offeree or his failure to answe r.

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Example F offered by lette r to buy his nephew s horse for 30, saying : If I hea r no more about it, I shal l conside r the horse is mine at 30. The nephe w did not reply at all, but he told an auctionee r who was sellin g his horse s not to sell tha t particula r horse as he had sold it to his uncle . By mistake , the auctionee r sold the horse . F sued the auctioneer for conversion . Held, F could not succeed as his nephe w had not communicate d acceptance and ther e was no contrac t [Felthous e v. Bindle y (1862) 11 C.B. (N.S.) 869]. Howeve r if the offeree has by his previou s conduc t indicate d tha t his silenc e mean s that he accepts , then the acceptanc e of the offer can be implie d from the silenc e of the offeree. Furthe r, in the case of a genera l offer, it is not necessar y to communicat e the acceptance if it is made by actin g upon the term s or the offer [Carlil l v. Carbolic Smok e Ball Co.*]. (3) Acceptance must be according to the mode prescribed. (Section 7) Wher e the offerer prescribe s a particula r mode of acceptance , then the accepto r should follow tha t mode. In case no mode of acceptanc e is prescribe d by the propose r, then the acceptance mus t be accordin g to some usua l and reasonabl e mode. If the propose r prescribed a manne r in which it is to be accepted , and the acceptanc e is not made in such manne r, the proposer may, withi n a reasonabl e time afte r the acceptanc e is communicate d to him, insist tha t his proposa l shal l be accepte d in the prescribe d manne r, and not otherwise ; but if he fails to do so, he accept s the acceptance. Examples (1) A sends an offer to B through post in the usual course. B should make the acceptanc e in the usua l and reasonabl e manner as no mode of acceptanc e is prescribed. He may accept the offer by sending a lette r, through post, in the ordinar y course , withi n a reasonabl e time. (2) A send s an offer to B throug h post in the usua l course and asks for an acceptance by wire. B shoul d accep t the order by wire. Howeve r, if B accept s the offer by a lette r, then A may insis t tha t the acceptanc e shoul d be in the prescribe d mode. But if the propose r does not insis t withi n a reasonabl e time then the propose r is bound by the acceptance , thoug h not made in the prescribe d mode. (3) The acceptanc e mus t be given withi n the time specified , if any, otherwis e it must be given withi n a reasonabl e time . Wha t is a reasonabl e time is a questio n of fact and would depen d upon the circumstance s of each case. Example Ramsgat e Victori a Hotel Co., v. Montefior e (1866) L.R.I. Ex. 109**. (4) The acceptanc e mus t be in respons e to offer. Ther e can be no acceptanc e without offer. Acceptanc e canno t preced e offer. For instance , no allotmen t of share s in a compan y can be made unles s the allotte e has applie d for them beforehan d (Section 41 of the Companie s Act, 1956). (5) The acceptanc e mus t be made before the offer lapse s or is terminated , revoke d or withdrawn. If the offer lapses , then ther e is nothin g to accept. (6) Acceptanc e can be given by the perso n to whom the offer is made . Howeve r, in the case of a genera l offer, acceptanc e can be given by any membe r of the public.
* ** See page 13. See page 19.

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Agreement to Agree in Future Law does not allow makin g of an agreemen t to agree in the future . The partie s must agree on term s of the agreement . The term s of the agreemen t mus t be eithe r definit e or capable of being made definit e withou t furthe r agreemen t of the parties. Examples (1) A, an actres s was engage d for a provincia l tour. The agreemen t provide d tha t if the party went to London , A would be engage d at a salar y to be mutuall y arranged between us . Held : Tha t ther e was no contrac t as the term s were not definit e and were incapabl e of being made definit e withou t furthe r agreemen t of the parties . [Lofus v. Roberts , (1902) 18 T.L.R. 532]. (2) F sold par t of his land to a motor compan y subjec t to a conditio n tha t the company should buy all thei r petro l from F at a price to be agree d by the partie s in writing and from time to time. The agreemen t also provide d tha t dispute , if any, was to be submitte d to arbitration . The price was neve r agree d and the compan y refused to buy the petrol. Held : Tha t ther e was a bindin g contract . The agreemen t provide d the metho d by which the price could be ascertained . The term s of the agreemen t were definite and the partie s did not agree to settl e the term s in futur e by thei r mutua l consent [Foley v. Classiqu e Coaches Ltd. (1934) 2 K.B.I]. Essentials of a Valid Acceptance 1. 2. 3. 4. 5. 6. 7. Acceptanc e mus t be absolut e and unqualified. It mus t be communicated. It mus t be accordin g to the mode prescribed. It mus t be given withi n the time specifie d or withi n reasonabl e time. It mus t be in respons e to offer. It mus t be made before the offer lapses. It mus t be given by the perso n to whom the offer is made.

COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION


As mentione d earlie r tha t in order to be a valid offer and acceptance. (i) the offer mus t be communicate d to the offeree, and (ii) the acceptanc e mus t be communicate d to the offero r. Similarl y, revocatio n of offer by the offeror to the offeree and revocatio n of the acceptance by the offeree to the offeror mus t be communicated. According to Sectio n 4, the communicatio n of a proposa l is complet e when it comes to the knowledg e of the perso n to whom it is made. Example A propose s by lette r, to sell a house to B at a certai n price. The communicatio n of the proposal is complet e when B receive s the lette r.

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The completio n of communicatio n of acceptanc e has two aspects , viz: (i) as agains t the propose r, and (ii) as agains t the accepto r. The communicatio n of acceptanc e is complete: (i) as agains t the proposer, when it is put into a course of transmissio n to him, so as to be out of the power of the acceptor; (ii) as agains t the acceptor, when it comes to the knowledg e of the propose r. Example A proposes , by lette r, to sell a house to B at a certai n price. B accept s As proposa l by a lette r sent by post. The communicatio n of acceptanc e is complete: (i) as agains t A, when the lette r is posted by B; (ii) as agains t B, when the lette r is receive d by A. The communicatio n of a revocatio n (of an offer or an acceptance ) is complete: (1) as agains t the perso n who make s it, when it is put into a course of transmission to the perso n to whom it is made , so as to be out of the power of the perso n who make s it. (2) as agains t the perso n to whom it is made when it comes to his knowledge. Example A propose s by lette r, to sell a house to B at a certai n price. B accept s the proposa l by a lette r sent by post. A revoke s his proposa l by telegram . The revocatio n is complet e as agains t A, when the telegram is despatched . It is complet e as agains t B, when B receive s it. B revoke s his acceptanc e by telegram . Bs revocatio n is complet e as agains t B, when the telegra m is despatched , and as agains t A, when it reache s him. Revocation of Proposal and Acceptance Sectio n 5 provide s tha t a proposa l may be revoke d at any time before the communication of its acceptanc e is complet e as agains t the propose r, but not afterwards. Also an acceptanc e may be revoke d at any time before the communicatio n of the acceptance is complet e as agains t the accepto r, but not afterwards. Example A proposes , by a lette r sent by post, to sell his house to B. B accept s the proposa l by a lette r sent by post. A may revoke his proposa l at any time before or at the momen t when B posts his letter of acceptance , but not afterwards. B may revoke his acceptanc e at any time before or at the momen t when the letter communicatin g it reache s A, but not afterwards. The Englis h Law on communicatio n of proposal , acceptanc e and revocatio n throug h post office differs in some respect s from the India n Law. In England , post office is the agen t of the party makin g the proposa l to take the proposa l to the offeror and to bring back the acceptance from the offeree. But in Indi a post office is the agen t of both offeror and offeree. Therefore, acceptance canno t be revoke d in the Englis h Law. In this contex t Sir William Anson observes

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26

Busines s Law Includin g Compan y Law

tha t Acceptanc e to an offer is wha t a lighte d matc h is to a train of gun-powde r. It produces somethin g whic h canno t be recalled or undone .

CONTRACTS OVER TELEPHONE OR TELEX


Person s may ente r into contract s either : (1) when they are face to face, or (2) over telephone or telex, or (3) throug h post office. When person s are face to face, one person making the offer and the othe r acceptin g it, the contrac t comes into existenc e immediatel y. Similarl y, in the case of conversatio n over telephone , the contrac t is formed as soon as the offer is accepte d but the offeree mus t make it sure tha t his acceptanc e is receive d by the offeror, otherwis e ther e will be no contract , as communicatio n of acceptanc e is not complete.

1. 4 CAPACIT Y OF CONTR ACT


[Section s 10 12] We have mentione d earlie r tha t one of the essential s of a valid agreemen t is tha t the parties to the contrac t mus t be competen t to contrac t (Sectio n 10).

WHO ARE COMPETENT TO CONTRACT?


Sectio n 11 provide s tha t Every perso n is competen t to contrac t who is of the age of majority accordin g to the law to which he is subject , and who is of sound mind , and is not disqualified from contractin g by any law to which he is subject . Thus , incapacit y to contract may arise from: (i) minorit y, (ii) menta l incompetence , and (iii) status.

MINORITY
According to Sectio n 3 of the India n Majorit y Act, 1875, a mino r is a perso n who has not completed 18 year s of age. Howeve r, in the following two cases, a mino r attain s majorit y after 21 year s of age: 1. Wher e a guardia n of mino rs perso n or propert y has been appointe d unde r the Guardian s and Wards Act, 1890, or 2. Wher e the superintendenc e of mino r s propert y is assume d by a Cour t of Wards.

MINORS CONTRACTS
The positio n of minors contract s is summe d up as follows: 1. A contrac t with or by a mino r is void and a mino r, therefore , cannot , bind himself by a contract . A mino r is not competen t to contract . In Englis h Law, a mino rs contract , subjec t to certai n exceptions , is only voidabl e at the option of the mino r. In 1903 the Privy Counci l in the leadin g case of Mohir i Bibi v. Dharmoda s Ghose (190, 30 Ca. 539). Held : Tha t in Indi a mino rs contract s are absolutel y void and not merel y voidable. The facts of the case were: Example Dharmoda s Ghose, a mino r, entere d into a contrac t for borrowin g a sum of Rs. 20,000 out of which the lende r paid the mino r a sum of Rs. 8,000. The mino r executed

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27

mortgag e of propert y in favou r of the lende r. Subsequentl y, the mino r sued for setting aside the mortgage . The Privy Counci l had to ascertai n the validit y of the mortgage. Under Sectio n 7 of the Transfe r of Propert y Act, every perso n competen t to contrac t is competent to mortgage . The Privy Counci l decide d tha t Section s 10 and 11 of the Indian Contract Act make the minor s contract void. The mortgagee prayed for refund of Rs. 8,000 by the mino r. The Privy Counci l furthe r held tha t as a mino rs contrac t is void, any money advance d to a mino r canno t be recovered. 2. A mino r can be a promise e or a beneficiar y. Durin g his minorit y, a mino r cannot bind himsel f by a contract , but ther e is nothin g in the Contrac t Act which prevents him from makin g the othe r part y to the contrac t to be bound to the mino r. Thus, a mino r is incapabl e of makin g a mortgage , or a promissor y note, but he is not incapable of becomin g a mortgagee , a payee or endorsee . He can derive benefit unde r the contract. 3. A mino r s agreemen t canno t be ratifie d by the mino r on his attainin g majorit y. A mino r canno t ratif y the agreemen t on attainin g the age of majorit y as the original agreement is void ab-initi o and, therefore , validit y canno t be given to it late r on. Example A, a mino r make s a promissor y note in favou r of B. On attainin g majorit y, he make s out a fresh promissor y note in lieu of the old one. Neithe r the original , nor the fresh promissory not e is valid. [Indra n Ramaswam y v. Anthiapp a Chettia r (1906) 16 M.L.J . 422.]. 4. If a mino r has received any benefi t unde r a void contract , he canno t be asked to refun d the same. We have mentione d the facts of Mohir i Bibi s case. Unde r that case, the lende r could not recove r the money paid to the mino r. Also the property mortgaged by the mino r in favou r of the lende r could not be sold by the latte r for the realizatio n of his loan. 5. A mino r is alway s allowe d to plead minorit y, and is not estoppe d to do so even where he had procured a loan or entered into some other contract by falsely representing , tha t he was of full age. Thus , a mino r who has deceive d the other party to the agreemen t by representin g himsel f as of full age is not prevented, from late r assertin g tha t he was a mino r at the time he entere d into agreement. Example S, a mino r, borrowe d 400 from L, a moneylende r, by fraudulentl y misrepresentin g that he was of full age. On defaul t by S, L sued for retur n of 400, and damage s for the tort of deceit. Held : L could not recove r 400, and his claim for damage s also failed. The court did not gran t the relief; otherwise , it would have been an indirec t way of enforcin g a void contract. Even on equitabl e grounds , the mino r could not be aske d to refun d 400, as the money was not traceabl e and the mino r had alread y spen t the same [Leslie v. Shiell (1914) 3 K.B. 607]. It is to be noted tha t if money could be trace d then the court would have , on equitable grounds, aske d the mino r for restitution , as mino r does not have a libert y to cheat . In the case of a fraudulen t misrepresentatio n of his age by the mino r, inducin g the othe r part y to enter into a contrac t the court may awar d compensatio n to tha t othe r part y unde r sections 30 and 33 of the Specific Relief Act 1963.

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Busines s Law Includin g Compan y Law

Example A mino r fraudulentl y mortgage d and sold certai n properties . On the cancellatio n of the agreemen t at the instanc e of the mino r, the lende r and purchase r were awarded compensation . The lende r and purchase r did not know abou t the fact tha t the selle r was a mino r. In fact, the mino r fraudulentl y represente d tha t he was of full age. 6. A mino r canno t be a partne r in a partnershi p firm. Howeve r, a mino r may, with the consen t of all the partner s for the time being, be admitte d to the benefit s of partnership (Sectio n 30, the India n Partnershi p Act, 1932). 7. A mino rs estate is liable to a person who supplie s necessarie s of life to a mino r, or to one whom the mino r is legally bound to suppor t accordin g to his statio n in life. This obligatio n is cast on the mino r not on the basis of any contrac t but on the basis of an obligatio n resemblin g a contrac t (Sectio n 68). Howeve r, ther e is no personal liabilit y on a mino r for the necessarie s of life supplied. The term necessaries is not define d in the India n Contrac t Act, 1872. The Englis h Sale of Goods Act define s necessarie s as goods suitabl e to the conditio n in life of the mino r and to his actua l requirement s at the time of sale and deliver y (Sectio n 2). From the above definition, it is obvious tha t in order to entitl e the supplie r to be reimburse d from the mino rs estate , the following mus t be satisfied: (i) the goods are necessaries , for tha t particula r mino r havin g regar d to his station in life (or statu s or standar d of living) and thu s purchas e or hire of a car may be a necessit y for a particula r mino r, and (ii) the mino r need s the goods both at the time of sale and deliver y. Wha t is necessary to see is the mino rs actua l requirements at the time of sale and at the time of deliver y, wher e thes e time s are different. Example I, a mino r, was studyin g in B.Com., in a college. He ordere d 11 fancy coats for about 45 with N, the tailo r. The tailo r sued I for the price. Is fathe r proved tha t his son had already a numbe r of coats and had clothe s suitabl e to his conditio n in life when the clothes made by the tailo r were delivered. Held : The coats supplie d by the tailo r were not necessarie s and, therefore , the action failed [Nash v. Inma n (1908)]. The mino rs estat e is liable not only for the necessar y goods but also for the necessary services rendere d to him. The lendin g of money to a mino r for the purpos e of defendin g a suit on behal f of a mino r in which his propert y is in jeopard y, or for defendin g him in prosecution, or for savin g his propert y from sale in executio n of a decree is deeme d to be a servic e rendere d to the mino r. Othe r example s of necessar y service s rendere d to a mino r are: provision of education , medica l and legal advice , provisio n of a house on ren t to a mino r for the purpos e of living and continuin g his studies. Example G, a mino r and a professiona l billiard s playe r, agree d with R, a leadin g professional playe r, to go on a world tour, competin g agains t each othe r in matches . G was to pay a certai n sum of money to R for this purpos e and also for the purpos e of learnin g the game. R made all arrangement s for the matche s and spen t mone y, but G refuse d to go. R sued G and claime d damage s for breac h of his contract. Held : G was liable to pay as the agreemen t was for the mino rs benefi t in that he would in effect be receivin g instructio n [Robert s v. Gray (1913) 1 K.B. 520].

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8. Minor s parents/guardian s are not liable to a mino rs credito r for the breach of contract by the mino r, whethe r the contrac t is for necessarie s or not. Howeve r, the parents are liable wher e the mino r is actin g as an agen t of the parent s or the guardian. 9. A mino r can act as an agent and bind his principa l by his acts withou t incurring any persona l liabilit y. Minors Position Under English Law In England , one who has not attaine d full age is treate d as an infan t or a mino r. Infanc y, unde r the Englis h law, mean s the period of life which precede s the completio n of the twentyfirst year, and person s unde r tha t age are regarde d as infants . Contract s entere d into by an infant are classifie d into the following categories: (i) Void contracts. (ii) Voidable contracts. (iii) Valid contracts. (iv) Contract s enforceabl e at the option of the infan t but not at the option of the other part y. (i) Void Contracts . Sectio n 1 of the Infant s Relief Act, 1874 provide s tha t the following three types of contract s (whethe r specialit y or simple ) are void: (a) Any agreemen t for the repaymen t of money lent or to be lent, (b) Any contrac t for goods supplie d or to be supplied , othe r tha n necessaries , (c) All account s stated. Example Leslie v. Shiel l discusse d on page 27. (ii) Voidabl e Contracts . In this categor y of contracts , the positio n is tha t they upon a mino r unles s he repudiate s them before he reache s the age of majorit y reasonabl e time thereafte r. Howeve r, the contrac t canno t be enforce d agains t infanc y. Some such types of contract s are: (a) Contract s of a continuin g nature. (b) Contract s unde r which a mino r acquire s an interes t in propert y of a kind, e.g., (i) lease s of propert y, (ii) partnershi p agre ement* , and (iii) to take share s (which are not fully paid up).

LAW OF CONTRACTS

are binding or within a him during

permanent agreements

(iii) Valid Contracts . An infan t is bound by such contracts . These are of two types: (a) Contract s for necessaries and (b) Contract s for the mino rs benefi t such as for his education, training , etc. Example (1) Nash v. Inma n (see page 28). Robert s v. Gray (see page 28). (iv) Contract s enforceabl e at the option of the infan t but not at the option of the other part y. All contract s othe r tha n (i), (ii) and (iii) discusse d above are enforceabl e at the option of the infant but not as agains t him, eithe r durin g or afte r infanc y.
* See Chapte r III.

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Position of Minors Contracts 1. A contrac t with a mino r is void ab-initio. 2. A mino rs agreemen t canno t be ratifie d by the mino r on attainin g majorit y. 3. A mino r canno t be aske d to refun d any benefi t receive d unde r a void agreement. 4. A mino r is not estoppe d to plead minorit y even wher e he falsely represents himself to be of full age. 5. A mino r canno t be a partne r in a partnershi p firm. He may, howeve r, be admitte d to the benefit s of an alread y existin g partnership. 6. A mino r can, howeve r, be a promise e or beneficiar y. 7. A mino rs estat e is liable to a perso n who supplie s necessarie s of life to a mino r. 8. Minor s parents/guardian s are not liable to a mino r s credito r for the breac h of contract by a mino r. 9. A mino r can act as agent.

MENTAL INCOMPETENCE
We have seen earlie r tha t one of the essentia l element s of a valid contrac t is tha t the parties to the contrac t mus t be competen t to contract , and a perso n mus t be of sound mind so as to be competen t to contrac t (Sectio n 1011). Sectio n 12 lays down a test of soundness of mind . It read s as follows: A perso n is said to be of unsoun d mind for the purpos e of makin g a contract , if at the time when he makes it, he is incapable of understanding it, and of forming a rational judgemen t as to its effect upon his interests. A perso n who is usuall y of unsoun d mind , but occasionall y of sound mind , may make a contrac t when he is of sound mind. A perso n who is usuall y of sound mind , but occasionall y of unsoun d mind , may not make a contrac t when he is of unsoun d mind . Examples (1) A patient , in a lunati c asylum , who is at intervals , of sound mind , may contract during those intervals. (2) A sane man, who is delirious from fever or who is so drunk that he cannot understan d the term s of a contrac t or form a rationa l judgemen t as to its effect on his interest , canno t contrac t whils t such deliriu m or drunkennes s lasts. From the above examples given, it is obvious that Soundness of mind of a person depend s on two facts: (i) his capacit y to understan d the term s of the contract , and (ii) his abilit y to form a rationa l judgemen t as to its effect upon his interests. If a perso n is incapabl e of both, he suffer s from unsoundnes s of mind . Idiots , lunatic s and drunken person s are example s of those havin g an unsoun d mind . But whethe r a part y to a contract , at the time of enterin g into the contract , is of sound mind or not is a questio n of fact to be decide d by the court . Ther e is presumptio n tha t a perso n is sane but this presumption

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is rebuttable . The perso n intereste d in provin g the unsoundnes s of a perso n has to satisf y the court. The liabilit y for necessarie s of life supplie d to persons of unsoun d min d is the same as for minor s (Sectio n 68). The positio n of contract s by persons of unsoun d min d is given below. Lunatics A lunati c is a perso n who is mentall y derange d due to some, menta l strai n or other personal experience . Howeve r, he has some interval s of sound mind . He is not liable for contracts entere d into while he is of unsoun d mind . Howeve r, as regard s contract s entered into durin g lucid intervals , he is bound . His positio n in this regar d is identica l with mino r, i.e., in genera l the contrac t is void but the same exception s as discusse d above (unde r mino r s contracts ) are relevant. Idiots An idiot is a perso n who is permanentl y of unsoun d mind . He does not have lucid intervals. He is incapabl e of enterin g into a contrac t and, therefore , a contrac t with an idiot is void. Howeve r, like a mino r, his properties , if any, shal l be liable for recoverie s on account of necessarie s of life supplied . Also he can be a beneficiar y. Drunken or Intoxicated Persons A perso n who is drunk , intoxicate d or deliriou s from fever so as to be incapabl e of understanding the natur e and effect of an agreemen t or to form a rationa l judgmen t as to its effect on his interests cannot enter into valid contracts whilst such drunkenness or deliriu m lasts. Unde r the Englis h Law, contract s made by person s of unsoun d mind are voidabl e and not void.

LAW OF CONTRACTS

INCOMPETENCE THROUGH STATUS


Beside s minor s and person s of unsoun d mind , ther e are some othe r person s who are incompetent to contract , partiall y or wholly, so tha t the contract s of such person s are void. Incompetency to contrac t may arise from politica l status , corporat e status , legal status , etc. Alien Enem y (Politica l Status) . An alien is a perso n who is the citize n of a foreign countr y. Thus , in the India n context , an alien is a person , who is not a subjec t of India . An alien may be (i) an alien friend , or (ii) an alien enem y. An alien frien d (i.e., a foreigner ) whose countr y is at peace with the Republi c of India, has usuall y the full contractua l capacit y of a natura l born India n subject . But he cannot acquire propert y in India n ship, and also canno t be employe d as Maste r or any othe r Chief Officer of such a ship. In the case of contract s with an alien enem y (i.e. an alien whose countr y is at war with India) the positio n is studie d unde r two heads : (i) contract s durin g the war; and (ii) contracts made before the war. Durin g the subsistenc e of the war, an alien can neithe r contrac t with an India n subjec t nor can he sue in an India n court except by licence from the Central Government. As regard s contract s entere d into before the war break s out, they are eithe r dissolved or merel y suspended . Those contracts , which are agains t the public policy or are such which

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would benefi t the enem y, stan d dissolved . Othe r contract s (i.e., not agains t the public policy) are merel y suspende d for the duratio n of the war and revive d afte r the war is over, provided they have not alread y become time-barre d unde r the law of limitation. It may be observed that an Indian, who resides voluntaril y, or who is carrying on business , in a hostil e territor y would be treate d as an alien enem y. Foreign Sovereigns and Ambassadors (Political status) Foreig n sovereign s and accredite d representative s of a foreign Stat e or Ambassadors enjoy some specia l privileges . They canno t be sued in our court s unles s they choose to submit themselves to the jurisdictio n of our courts . They can ente r into contract s and enforce those contracts in our courts . Howeve r, they canno t be proceede d agains t in India n court s without the sanctio n of the Centra l Government. Company under the Companies Act or Statutory Corporation by passing Special Act of Parliament (Corporate status) A compan y canno t ente r into a contrac t which is ultra vires its Memorandu m of Association. A statutor y corporatio n canno t go beyond the objects mentione d in the Act, passe d by the Parliament. Similarl y, Municipa l Corporation s (Local bodies) are disqualifie d from entering into contract s which are not withi n thei r statutor y powers. Married Women (Marital status) A marrie d woma n has full contractua l capacit y and can sue and be sued in her own name. She is not incompeten t to contract. Insolvent Persons (Legal status) Insolven t person s are incompeten t to contrac t unti l they obtai n a certificat e of discharge.

1. 5

FRE E CONSENT
[Section s 10; 13 22]

Consent Defined (Section 13)


It is essentia l to the creatio n of a contrac t tha t both partie s agree to the same thing in the same sense . When two or more person s agree upon the same thing in the same sense, they are said to consent. Examples (1) A agree s to sell his Fia t Car 1983 model for Rs. 80,000 . B agree s to buy the same. Ther e is a valid contrac t since A and B have consente d to the same subjec t matte r. (2) A, who owns thre e Fia t Cars , offers to sell one, say, car x to B for Rs. 80,000 . B agree s to buy the car for the price thinkin g tha t A is sellin g car y. Ther e is no consen t and hence no contract . A and B have agree d not to the same thing but to different things. (3) In Foster v. Mackinno n (1869) L.R. 4 C.P. 704, the defendan t had purporte d to endorse a bill of exchang e which he was told was a guarantee . The Cour t held that his signature , not being intende d as an endorsemen t of a bill of exchange , there

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was no consen t and consequentl y no agreemen t entere d into by him, and therefore he was not liable on the Bill. Free Consent Defined (Section 14) Consen t is said to be free when it is not cause d by (a) Coercion. (b) Undu e influence. (c) Fraud. (d) Misrepresentation. (e) Mistake. For a contrac t to be valid it is not only necessar y tha t partie s consen t but also tha t they consent freely. Wher e ther e is a consent , but no free consent , ther e is generall y a contract voidable at the option of the part y whose consen t was not free.

LAW OF CONTRACTS

COERCION (Sections 15, 19 and 72)


Coercio n is (i) the committing , or threatenin g to commi t any act forbidde n by the Indian Penal Code or (ii) the unlawfu l detaining , or threatenin g to detain , any propert y, to the prejudice of any perso n whateve r, with the intentio n of causin g any perso n to ente r into an agreement. Examples (1) A Hind u widow is forced to adop t X unde r threa t tha t her husban ds corpse (dead body) would not be allowed to be remove d unles s she adopt s X. The adoptio n is voidable as havin g been induce d by coercion [Ranganayakamm a v. Alwa r Setti, 13 Mad. 24.]. (2) A threaten s to kill B if he doesn t transfe r his house in As favou r for a very low price. The agreemen t is voidabl e for being the resul t of coercion. (3) An agen t refuse d to han d over the books of account s of the principa l unles s he (principal ) release d him from all liabilitie s concernin g pas t transactions. Held : The releas e so given was not binding , being the outcom e of coercion [Muthia v. Karuppa n 50 Mad. 780]. Note that , it is not necessar y tha t coercion mus t have been exercise d agains t the promisor only, it may be directe d at any person. Examples (1) A threaten s to kill B (Cs son) if C does not let out his house to A. The agreement is cause d by coercion. (2) X threaten s to kill A if he does not sell his house to B at a very low price. The agreement is cause d by coercion thoug h X is strange r to the transaction. Furthe r, note that , it is immateria l whethe r the India n Pena l Code is or is not in force in the place wher e the coercion is employe d (Explanatio n to Sectio n 15). Example A, on board an Englis h ship on the high seas, cause s B to ente r into an agreemen t by an act amountin g to crimina l intimidatio n unde r the India n Pena l Code. A afterwards

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sues B for breac h of contrac t at Calcutta . A has employe d coercion , althoug h his act is not an offence by the law of England , and althoug h the India n Pena l Code was not in force at the time or place wher e the act was done. Threat to Commit SuicideIs it Coercion? The doubt arise s becaus e suicid e thoug h forbidde n by the India n Pena l Code is for obvious reason s not punishable . A dead perso n canno t be punished . But, since Sectio n 15 declares tha t committin g or threatenin g to commi t any act forbidde n by the India n Penal Code is coercion , a threa t to commi t suicid e shoul d obviousl y be so regarde d (suicid e being forbidden). The same view was held in Ammiraj u v. Seshamm a (1917) 41 Mad. 33. In this case, A obtaine d a releas e deed from his wife and son unde r a threa t of committin g suicide . The transaction was set aside on the groun d of coercion.

DURESS
The Englis h equa l of coercion is Duress . Dures s has been define d as causing , or threatening to cause , bodily violence or imprisonment , with a view to obtai n the consen t of the other party to the contract . Dures s differs from coercion on the following points: 1. Coercion can be employe d agains t any person , wherea s duress can be employed only agains t the othe r part y to the contrac t or the member s of his famil y. 2. Coercion may be employe d by any person , and not necessaril y by the promisee. Duress can be employe d only by the part y to the contrac t or his agent. 3. Coercion is wider in its scope and include s unlawfu l detentio n of goods also. Duress on the othe r han d does not includ e unlawfu l detentio n of goods. Only bodily violence or imprisonmen t is duress.

CONSEQUENCES OF COERCION (Section 19)


When consent to an agreement is caused by coercion, the agreement is a contract voidabl e at the option of the part y whose consen t was so obtained . In othe r words, the aggrieved part y can have the contrac t set aside or if he so desire s to insis t on its performance by the othe r part y. Liability of Person to Whom Money is Paid or Thing Delivered Under Coercion (Section 12) A perso n to whom money has been paid, or anythin g delivere d unde r coercion must repay or retur n it. Example A railwa y compan y refuse s to delive r certai n goods to the consignee , except upon the payment of an illega l charg e for carriage . The consigne e pays the sum charge d in order to obtai n the goods. He is entitle d to recove r so much of the charg e as was illegally excessive.

UNDUE INFLUENCE (Sections 16 and 19-A)


Undu e influenc e consist s in the imprope r exercis e of a power over the mind of one of the contractin g partie s by the othe r. According to Sec. 16, a contrac t is said to be induce d by undue influenc e wher e the relation s subsistin g betwee n the partie s are such tha t one of the

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partie s is in a positio n to dominat e the will of the othe r and uses tha t positio n to obtai n an unfair advantag e over the othe r. Examples (1) A havin g advance d money to his son B durin g his minorit y, upon B coming of age, obtains, by misus e of parenta l influence , a bond from B for greate r amoun t than the sum due in respec t of the advance . A employ s undu e influence. (2) A, a man enfeeble d by diseas e or age is induce d by Bs influenc e over him as his medical attendan t to agree to pay B an unreasonabl e sum for his professional service. B employ s undu e influence. (3) A, a spendthrif t and a weak-minde d just come of age, conveys a shar e of his family estate to his father-in-la w for nomina l consideration . Undu e influenc e is presumed to have been exercise d [Ram Krisha n v. Parmeshwar a (1931) M.W.N. 215]. Undue Influence When Presumed After recitin g the genera l principl e as above, Sectio n 16 lays down rule s of presumptions as regard s person s in particula r relations . It reads: A perso n is deeme d to be in a positio n to dominat e the will of another: (a) wher e he holds a real or apparen t authorit y over the othe r, or wher e he stands in a fiduciar y relatio n to the other ; or (b) wher e he make s a contrac t with a perso n whose menta l capacit y is temporaril y or permanently affecte d by reaso n of age, illnes s or menta l or bodily distress. Thus , the following relationship s are said to raise a presumptio n of undu e influence: (i) Paren t and child; (ii) guardia n and ward; (iii) doctor and patient ; (iv) spiritua l guru and disciple ; (v) lawye r and client ; (vi) truste e and beneficiar y and othe r simila r relationships. Example A Hindu , well advance d in age, with the object of securin g benefit s to his soul next world, gave away his whole propert y to his guru , or spiritua l advise r. influenc e was presumed. The presumptio n of undu e influenc e can be rebutte d by showin g tha t the part y have been influenc e had independen t legal advice of one who had full knowledg e relevant facts [Inche Noria v. Shai k Allie Bin Omar (1929) A.C. 127]. in the Undue said to of the

LAW OF CONTRACTS

Consequences of Undue Influence (Section 19-A) An agreemen t cause d by undu e influenc e is a contrac t voidabl e at the option of the party whose consen t was obtaine d by undu e influence . Howeve r, any such contrac t may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunde r upon such term s and condition s as the court deem s fit. Example A, a money-lende r, advance s Rs. 100 to B, an agriculturist , and by undu e influence, induce s B to execut e a bond for Rs. 200 with interes t at 6 percen t per month . The Court may set the bond aside , orderin g B to repay Rs. 100 with such interes t as may seem just.

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Burden of Proof [Section 16 (3)] If a part y is proved to be in a positio n to dominat e the will of anothe r and the transaction appears, on the face of it or on the evidenc e adduced , to be unconscionable , the burde n of proving tha t the contrac t was not induce d by undu e influence , lies on the part y who was in a positio n to dominat e the will of the othe r. The power to dominat e the will of anothe r is presume d in circumstance s mentione d in Sectio n 16 (2) and discusse d above. The presumptio n of undu e influenc e has not been accepted in the following relationships: Husband and wife [Howes v. Bisho p (1909) 2 KB 390]; maste r and servan t [Daula t v. Gulabra o (1925) Nag. 369); credito r and debtor ; landlor d and tenant ; Lakshm i Chan d v. Pt. Niade r Mal, AIR (1961) All 295]. In thes e relationship s undu e influenc e canno t be presume d and the part y allegin g undue influence mus t prove tha t it existed.

CONTRACTS WITH A PARDANASHIN WOMAN


Pardanashi n woma n is one who accordin g to the custom of her communit y observes complete seclusion . The Court s in Indi a regar d such women as being especiall y open to undue influence. When , therefore , an illiterat e pardanashi n woma n is allege d to have deal t with her properties and to have execute d a deed, the burde n of provin g tha t ther e was no undue influence lies on the part y settin g up the deed. The law demand s tha t the perso n who deals with a pardanashi n lady mus t show affirmativel y and conclusivel y tha t the deed was not only executed by, but was explaine d to, and was reall y understoo d by the lady. Notice that , a lady who claim s to be pardanashi n mus t prove complet e seclusion ; some degre e of seclusio n is not sufficient to entitl e her to get specia l protection.

UNDUE INFLUENCE IN MONEY LENDING TRANSACTIONS


The mere fact of the rat e of interes t being high is not evidenc e of undu e influence . A who is in urgen t need of money borrow s from a lende r who charge s him very high rat e of interest. The transaction , on the face of it, is not one induce d by undu e influence. Example A applie s to a banke r for a loan at a time when ther e is stringenc y in the money market. The banke r decline s to make the loan except at an unusuall y high rat e of interest. A accept s the loan on thes e terms . This is a transactio n in the ordinar y course of business , and the contrac t is not induce d by undu e influenc e [Illustratio n (a) to sectio n 16]. Thus , a transactio n will not be set aside merel y becaus e the rat e of interes t is high. The observation of Judicia l Committe e in Aziz Khan v. Duli Chan d may be noted here with advantage. The transaction , it observed , may undoubtedl y be improvident , but in the absence of any evidenc e to show tha t the money-lende r had actuall y take n advantag e of his position, it is difficul t for a Cour t of justic e to give relief on the ground s of simpl e hardship. So, to claim relief unde r Sectio n 16 it mus t be proved tha t the lende r was in a position to dominat e the will of the othe r but the urgen t need of money on the par t of the borrower doe s not by itself place the lende r in a positio n to dominat e his will. Howeve r, if the rat e of interes t is so high tha t the Cour t consider s it unconscionable , the

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burde n of provin g tha t ther e was no undu e influenc e lies on the credito r. In other words, undu e influenc e is presume d in such cases. Illustratio n (c) to Sectio n 16 establishe s the point as follows: Example A, being in debt to B, the money-lende r of his village , contracts , for a fresh loan on terms which appea r to be unconscionable . It lies on B to prove tha t the contrac t was not induce d by undu e influence. Similarl y, wher e a debto r was an old and illiterat e perso n and was much involve d in litigation and had agree d to pay to the credito r compoun d interes t at 25 per cent, the Court held the transactio n as unconscionabl e and allowed only 12 per cent simpl e interes t [Ruknisa v. Mohib Ali Khan (1931), I.A. 938]. Still in anothe r case, a poor Hind u widow wante d to bring a suit for maintenanc e and had to borrow Rs. 1,500. The rat e of interes t payabl e was 100 per cent per annum. The Court allowed interest at 24 per cent per annum [Annapuran i v. Swaminathan , 1910, 34 Mad. 7].

LAW OF CONTRACTS

FRAUD (Sections 17 and 18)


Fraud mean s and include s any of the following acts committe d by a part y to a contract (or with his connivanc e or by his agent ) with inten t to deceive anothe r part y theret o or his agent; or to induc e him to ente r into the contract: 1. the suggestion , as a fact, of tha t which is not true by one who does not believe it to be true; 2. the active concealmen t of a fact by one havin g knowledg e or belief of the fact; 3. a promis e made withou t any intentio n of performin g it; 4. any othe r act fitted to deceive; 5. any such act or omissio n as the law speciall y declare s to be fraudulent . From the analysis of the above, it follows tha t for frau d to exist ther e mus t be: (A) A representatio n or assertion , and it mus t be false . To constitut e frau d there must be an assertio n of somethin g false withi n the knowledg e of the part y assertin g it. Mere silence as to facts likely to affect the willingnes s of a person to enter into a contrac t is not fraud. Examples (1) H sold to W certai n pigs. The pigs were sufferin g from some fever and H knew it. The pigs were sold with all faults. H did not disclos e the fever to W. Held : There was no frau d [Ward v. Hobbs (1878) A.C. 13]. (2) A sells by auctio n to B, a horse which A knows to be unsound . A says nothin g to B abou t the horse s unsoundness . This is not frau d by A. Howeve r, (i) Silence is fraudulent , if the circumstance s of the case are such that , regard being had to them , it is the duty of the perso n keepin g silenc e to speak. * The duty to speak exists wher e the partie s stan d in a fiduciar y relationship , e.g., fathe r and son, guardia n and ward, etc.; or wher e the contrac t is a contrac t uberima e fidei (requirin g utmos t good faith), e.g., contract s of insurance . The duty to disclos e may also be an obligatio n impose d by statute.
* Explanatio n to Sectio n 17.

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Example A sells by auctio n to B, a horse which A knows to be unsound . B is As daughte r and has just come of age. Here the relatio n betwee n the partie s would make it As duty to tell B if the horse is unsound. (ii) Silenc e is fraudulen t wher e the circumstance s are such that , silence is in itself equivalent to speech [Explanatio n to Sectio n 17]. Example B says to A If you do not deny it, I shal l assum e tha t the horse is sound. A says nothing . Here As silenc e is equivalen t to speech. Thus , we may say tha t to constitut e fraud , ordinaril y, ther e mus t be active misstatement of fact or such a partia l and fragmentar y statemen t of fact as tha t the witholdin g of tha t which is not state d make s tha t which is state d absolutel y false. In Peek v. Gurne y (1873) 6 H.L. 377, the prospectu s issue d by a compan y did not refer to the existenc e of a documen t disclosing liabilities. The impressio n thereb y create d was tha t the compan y was a prosperou s one, which actually was not the case. Held : The suppressio n of trut h amounte d to fraud. (B) The representatio n or assertio n mus t be of a fact . The representatio n or assertion alleged to be false mus t be of a fact. A mere expressio n of opinion , puffer y or flourishing description does not constitut e fraud. Example A, a selle r of a horse , says tha t the horse is a Beauty and is worth Rs. 5,000. It is merely As opinion . But if in fact A paid only Rs. 2,000 for it, then he has misstate d a fact. (C) The representatio n or statem en t mus t hav e bee n mad e wit h a knowledg e of its falsity or withou t belie f in its trut h or recklessl y. Example A compan y issue d a prospectu s giving false informatio n abou t the unbounde d wealt h of Nevada. A shar e broke r who took share s on the faith of such an informatio n wanted to avoid the contract. Held : He could do so since the false representatio n in the prospectu s amounte d to fraud [Reese River Silve r Minin g Co. v. Smit h (1869) L.R. 4 H.L. 64]. With regar d to cases of above kind, ther e seem s to be no difficult y since frau d is proved when it is shown tha t a false representatio n has been made knowingl y or withou t belief in its truth. Howeve r, with regard to reckless misstatement it may appear difficult to say whethe r it amount s to frau d becaus e the perso n makin g such misstatemen t does not himself definitely know tha t the statemen t is false. But, if we carefull y look into it, we find tha t it does amoun t to frau d becaus e thoug h the perso n makin g it is not sure of the trut h of the statement, yet he represent s to the othe r part y as if he is absolutel y certai n abou t its truth. A perso n shal l be liable in frau d wher e the false statemen t he has made was (i) made knowingl y, (ii) withou t belief in its truth , or (iii) recklessl y, carelessl y whethe r it be true or false. [Derry v. Peek (1889) 14 A.C. 337]. The facts of Derry v. Peek were as follows: The director s of a Tramwa y Co. issue d a prospectu s statin g tha t they had the righ t to run tramcar s with stea m power instea d of with horse s as before. In fact, the Act incorporating the compan y provide d tha t such power migh t be used with the sanctio n of the Board of Trade. But, the Board of Trad e refuse d to give permissio n and the compan y had to be wound up. P, a shareholde r sued the director s for damage s for fraud . The House of Lords held tha t the

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director s were not liable in frau d becaus e they honestl y believe d wha t they said in the prospectus to be true. (D) The representatio n mus t hav e bee n mad e wit h the intentio n of inducin g the other part y to act upo n it. For frau d to exist , the intentio n of misstatin g the facts mus t be to cause the othe r party to ente r into an agreement. (E) The representatio n mus t in fact deceive . It has been said tha t deceit which does not deceive is not fraud . A frau d or misrepresentatio n which did not cause the consen t to a contrac t of the part y on whom such frau d was practise d or to whom such misrepresentation was made does not rende r a contrac t voidable.* Examples (1) A bough t a canno n of B. B knew the canno n had a defect, which rendere d it worthless, and so put a meta l plug to conceal the defect. A accepte d the cannon withou t examinin g it. The canno n burst , when used. Held : Ther e was no frau d becaus e A would have bough t it even if no deceptiv e plug had been put. He was not in fact deceive d by it [Horsefal l v. Thomas , (1862) 158 E.R. 813]. (F) The Part y subjecte d to frau d mus t hav e suffere d som e loss . It is a common rule of law tha t there is no frau d withou t damages . As such, frau d withou t damag e does not give ris e to an action of deceit. Requisites of Fraud 1. A representatio n or assertion , and it mus t be false. 2. The representatio n or assertio n mus t be of a fact. 3. The representatio n or assertio n mus t have been made with a knowledg e of its falsity or withou t belief in its trut h or recklessl y. 4. The representatio n mus t have been made with the intentio n of inducin g the other part y to act upon it. 5. The representatio n mus t in fact deceive. 6. The part y subjecte d to frau d mus t have suffere d some loss. Consequences of Fraud (Section 19) The part y defraude d has the following remedies: 1. He can avoid the performanc e of the contract. 2. He can insis t tha t the contrac t shal l be performe d and tha t he shal l be put in the position in which he would have been if the representatio n made had been true. Example A fraudulentl y inform s B tha t As estat e is free from encumbrance . B, therefore , buys the estate . The estat e is subjec t to mortgage . B may eithe r avoid the contract , or may insist on its being carrie d out and the mortgag e deed redeemed.
* Explanatio n to Sectio n 19.

LAW OF CONTRACTS

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3. He can sue for damages. Exceptions , i.e., where the contrac t is not voidable . In the followin g cases, the contract is not voidable: (1) When the part y whose consen t was cause d by misrepresentatio n or frau d had the means of discoverin g the trut h with ordinar y diligenc e (Exceptio n to Sectio n 19). (2) Wher e a part y, afte r becomin g awar e of the misrepresentatio n or fraud , take s a benefi t unde r the contrac t or in some othe r way affirm s it.

MISREPRESENTATION (Sections 18 and 19)


Like fraud , misrepresentatio n is incorrec t or false statemen t but the falsit y or inaccuracy is not due to any desir e to deceive or defrau d the othe r part y. It is innocent . The party making it believe s it to be true. Sectio n 18 of the Contrac t Act classifie s cases of misrepresentatio n into thre e group s as follows: (1) The positiv e assertion , in a manne r not warrante d by the informatio n of the person making it, of tha t which is not true , thoug h he believe s it to be true. Example X learn s from A tha t Y would be directo r of a compan y to be formed . X tells this to B in order to induc e him to purchas e share s of tha t compan y and B does so. This is misrepresentation by X, thoug h he believe d in the truthnes s of the statemen t and there was no inten t to deceive , as the informatio n was derive d not from Y but from A and was mere hearsa y. (2) Any breac h of duty which, withou t an inten t to deceive , gives an advantag e to the person committin g it (or anyon e claimin g unde r him), by misleadin g anothe r to his prejudice or to the prejudic e of anyon e claimin g unde r him. (3) Causing , howeve r innocentl y, a part y to an agreemen t to make a mistak e as to the substance of thing which is the subjec t of the agreement. Examples (1) X entere d into contrac t with C for the sale of hops. X told Y tha t no sulphu r had been used in thei r growth . Y agree d to buy only if no sulphu r had been used for their growth. As a matte r of fact, sulphu r had been used in 5 out of 300 acres which fact was evidentl y forgotte n by X when he represente d tha t no sulphu r was used. Held : Tha t the representatio n tha t no sulphu r had been used was in the natur e of a primar y stipulatio n and in a sense a condition , withou t which the contrac t would not have been proceede d with and, therefore , the contrac t could be avoided , though the representatio n was not fraudulen t [Bonnerma n v. White (1861) 142 E.R. 658.] (2) A chartere d a ship from B which was describe d in the charte r party and was represented to him as being not more tha n 2,800 registere d tonnage . It turne d out tha t the registere d tonnag e was 3,045 tons. A refuse d to accep t the ship in fulfilment of the charte r part y, and it was held tha t he was entitle d to avoid the charte r party by reaso n of the erroneou s statemen t as to tonnag e [Oceanic Stea m Navigatio n Co. v. Soonderda s Dhurumse y (1890) 14 Bom. 241]. Consequences of Misrepresentation (Section 19) In cases of misrepresentatio n the part y aggrieve d or wronge d can:

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(1) avoid the agreement , or (2) insis t tha t the contrac t be performe d and tha t he be put in the positio n in which he would have been if the representatio n made had been true. Example A inform s B tha t his estat e is free from encumbrance . B thereupo n buys the estate . In fact, the estat e is subjec t to mortgage , thoug h unknow n to A also. B may eithe r avoid the contrac t or may insis t on its being carrie d out and the mortgag e debt redeemed. Notice that , unlik e fraud , misrepresentatio n by a part y does not entitl e the othe r to claim damages. This, howeve r, is subject to certain exceptions, that is, in certain cases (mentione d below), the righ t to claim damage s arise s even in case of misrepresentation. These are: (a) Breac h of warrant y of authorit y of an agent . Wher e an agen t believe s that he has the authority to represent his principal while in fact he has no such authorit y, the agen t is liable in damages , even thoug h he is only guilty of innocent misrepresentation. [Collen v. Wrigh t (1857) E. and B. 647]. (b) Negligent representation made by one person to another between whom a confidentia l relationshi p exists , e.g., solicito r and client. Howeve r, if the part y whose consen t was cause d by misrepresentatio n had the mean s of discovering the trut h with ordinar y diligence , he has no remed y.

LAW OF CONTRACTS

MISREPRESENTATION AND FRAUD DISTINGUISHED


The following are the point s of differenc e betwee n the two: 1. In case of fraud , the part y makin g a false or untru e representatio n make s it with the intentio n to deceive the othe r part y to ente r into a contract . Misrepresentation on the othe r hand , is innocent , i.e., withou t any intentio n to deceive or to gain an advantage. 2. Both misrepresentatio n and frau d make a contrac t voidabl e at the option of the party wronged . But in case of fraud , the part y defrauded , gets the additional remedy of suing for damage s cause d by such fraud . In case of misrepresentation, except in certai n cases* , the only remedie s are rescissio n and restitution. 3. Althoug h in both the cases, the contrac t can be avoided ; in case of misrepresentation the contrac t canno t be avoide d if the part y whose consen t was so cause d had the means of discoveringth e trut h with ordinar y diligence.

MISTAKE
Mistak e may be define d as an erroneou s belief concernin g something . Mistak e is of two kinds: (1) Mistak e of fact, and (2) Mistak e of law.

These exceptional (see page 40).

cases are discussed

above under the heading

consequences

of misrepresentation

42

Busines s Law Includin g Compan y Law

MISTAKE OF FACT
A mistak e of fact may eithe r be: (a) bilatera l or (b) unilateral. Bilateral Mistake When both the partie s to the agreemen t are unde r a mistak e of fact essentia l to the agreement, the mistak e is called a bilatera l mistak e of fact and the agreemen t is void. Examples (1) A agree s to buy from B a certai n horse . It turn s out tha t the horse was dead at the time of the bargain , thoug h neithe r part y was awar e of the fact. The agreement is void. (2) A agree s to sell to B a specific cargo of goods suppose d to be on its way from England to Bomba y. It turn s out tha t before the day of the bargain , the ship conveying the cargo had been cast away and the goods lost. Neithe r part y was aware of the facts. The agreemen t is void. Mistake , so as to rende r the agreemen t void, mus t relat e to some essentia l matte r. Some typical cases of mistak e invalidatin g the agreemen t are given belo w. (A) Mistake as to the existence of subject-matter Examples (1) A being entitle d to an estat e for the life of B, agree s to sell it to C. B was dead at the time of the agreemen t but both partie s were ignoran t of the fact. The agreement is void. (2) A agree d to assig n to B a policy of assuranc e upon the life of X. X had died before the contract was made. Held : Ther e was no contrac t [Scott v. Coulso n (1903) 2 Ch. 249]. (3) A agree s to buy from B a certai n horse . It turn s out tha t the horse was dead at the time of the bargain , thoug h neithe r part y was awar e of the fact. The agreement is void. (4) A and B entere d into a contrac t for the sale and purchas e of India n corn suppose d to be on board a particula r ship bound for England . Unknow n to both partie s the corn was damage d and discharge d at an intermediat e port, some days prior to the contract. Held : The contrac t was void on the groun d of mistak e [Courturie r v. Hasti c (1856) 10 E.R. 1065]. (B) Mistake as to identity of the subject-matter Wher e the partie s agree upon differen t things , i.e., one meanin g one thing and the other meaning anothe r, the contrac t is void. Examples 1. A contrac t was entere d into for the purchas e of certai n bales of cotton to arrive by a ship called Peerless from Bomba y. Two ships of the same nam e (Peerless) were to sail from Bomba y. The buye r intende d to buy the cargo of one ship but the seller was sellin g the cargo of the othe r. The contrac t was held to be void. 2. A, who owns four Fia t cars, offers to sell his car x for Rs. 80,000 . B accept s the offer thinkin g A is sellin g his car y. Ther e is a mistak e as to the identit y of the subject-matter and hence no contract.

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(C) Mistake as to title to the subject-matter Wher e the partie s believe tha t the selle r is the owner of the thing which he purports to sell, but in fact, he has no title to it, the contrac t is void on the groun d of mistake. Example A agree d to take a lease of a fisher y from B thoug h contrar y to the belief of both parties at the time A was tenan t of the fisher y and B neve r had any title to it. The contract wa s void [Cooper v. Phibb s (1867) 159 E.R. 375]. (D) Mistake as to quantity of subject-matter Example P wrote to H inquirin g the price of rifles and suggeste d tha t he migh t buy as many as 50. On receip t of the information , he telegraphe d Send thre e rifles. But becaus e of the mistake of the telegrap h authorities , the messag e transmitte d was Send the rifles. H despatche d 50 rifles. Held : Ther e was no contrac t betwee n the parties . Howeve r, P could be held liable to pay for thre e rifles on the basis of an implie d contrac t [Henke l v. Pape (1870) 6 Ex. 7]. (E) Mistake as to price of the subject-matter Wher e a contrac t of lease of a house was agree d to at a lease of 230 but in the written agreement, the figure 130 was inserte d by mistake , the contrac t was held to be void. Howeve r, an erroneou s opinio n as to the value of the thing which forms the subjectmatter of the agreemen t is not to be deeme d a mistak e as to a matte r of fact [Explanation to Sectio n 20]. Example A buys an articl e thinkin g it is worth Rs. 10,000 while it is actuall y worth Rs. 5,000 onl y. The agreemen t canno t be avoide d on the groun d of mistake. Unilateral Mistake In the case of unilatera l mistake , i.e., wher e only one part y to a contrac t is unde r a mistake , the contract , generall y speakin g is not invalid . Sectio n 22 reads , A contac t is not voidable merel y becaus e it was cause d by one of the partie s to it being unde r a mistak e as to a matte r of fact. Exceptions . To the above rule, howeve r, ther e are the following exceptions: (A) Where the unilateral mistake is as to the nature of the contract A contrac t is void when one of the partie s to it does not inten d to ente r into it, but through the faul t of anothe r and withou t any faul t of his own, make s a mistak e as to the natur e of the contract . Thus , in Foster v. Mackinno n (1869) L.R. 4 C.P. 704, an old illiterat e man was made to sign a bill of exchange , by mean s of a false representatio n tha t it was a guarantee. Held : The contrac t was void. It shoul d be noted tha t the plea of mistak e will be availabl e only when it relate s to the nature of the contract , and not to the term s of the contrac t [Bay v. Polla and Morris (1930) 1 K.B. 628]. (B) Mistake as to quality of the promise In Scrive n v. Hindle y (1913) 3 K.B. 564, A held an auctio n for the sale of some lots of hemp and some lots of tow. B thinkin g tha t hemp was being sold, bid for a lot of tow for

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44

Busines s Law Includin g Compan y Law

an amoun t which was out of proportio n to it, and was only a fair price for hemp. Held : The contrac t could be avoided. (C) Mistake as to the identity of the person contracted with Wher e A intend s to contrac t with B but by mistak e enter s into a contrac t with C believin g him to be B, the contrac t is void on the groun d of mistake . The following cases are importan t illustration s of the point: 1. In Cund y v. Lindsa y & Co., (1878) 3 App. Cas. 459., one Blenkarn , knowin g that Blenkiron & Co., were the repute d customer s of Lindsa y & Co., ordere d some goods from Lindsa y & Co., by imitatin g the signatur e of Blenkiron . These goods were then sold to Cund y, an innocen t purchase r. In a suit by Lindsa y against Cundy for recover y of goods, it was held tha t as Lindsa y neve r intende d to contract with Blenkarn , ther e was no contrac t betwee n them and as such even an innocent purchaser of the goods from Blenkar n did not get a good title , and mus t return them or pay thei r price. 2. Similarl y, in Lake v. Simmon s (1927) A.C. 487, a lady X induce d Y to deliver possession of two pear l necklace s falsely representin g tha t she was the wife of baron Z and tha t she wante d them for showin g them to her husban d for his approval. Hel d : Y intende d to contrac t only with the wife of the baron , and not with X herself . Hence , the contrac t was void and X could not convey any title even to bonafid e buyers. 3. Philip s v. Brooks (1919) 2 K.B. 243. The facts of this case should , howeve r, be contrasted with Lake v. Simmons . In this case a man , N, called in perso n at a jewelle rs shop and chose some jewels, which the jewelle r was prepare d to sell him as a casua l custome r. He tendere d in paymen t a chequ e which he signed in the nam e G, a perso n with credit . Thereupo n N was allowed to take away the jewels which N pledge d with B who took them in good faith. Held : The pledgee , B, had a good title since the contrac t betwee n N and the jewelle r could not be declare d void on the groun d of mistak e but was only voidable on the groun d of fraud . Horridge , J. held tha t althoug h the jewelle r believe d the person to whom he was handin g the jewels was G, he in fact contracte d to sell and deliver to the perso n who came into his shop. The contract , therefore , was not void on the groun d of mistak e but only voidabl e on the groun d of fraud . The Learned Judge cited with approva l an America n case of Edmund s v. Merchan t Despatc h Co., 135 Mass. 283 in which Moorton , C.J. said, The mind s of the partie s met and agreed upon all the term s of the sale, the thing sold, the price and term s of payment, the perso n sellin g and the perso n buying.... . The plaintif f could not have supposed tha t he was sellin g to anothe r person : his intentio n was to sell to the person presen t and identifie d by sigh t and hearing , it does not affect the sale because the buye r assume d a false nam e and practise d any othe r deceit to induce the vendo r to sell.

MISTAKE OF LAW (Section 21)


Mistak e of law may be (a) Mistak e of Law of the Land , and (b) Mistak e of Foreig n Law. Mistake of Law of the Land In this regard , the rule is Ignoranti a juris non excusat, i.e., ignoranc e of law is no excuse. Followin g this principle , Sectio n 21 declare s tha t A contrac t is not voidabl e because it was cause d by a mistak e as to any law in force in India .

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Thus , where , A and B make a contrac t grounde d on the erroneou s belief tha t a particula r debt is barre d by the India n Law of Limitation ; the contrac t is not voidable. Mistake of Foreign Law The above maxim tha t ignoranc e of law is no excuse applie s only to the law of the country and not to foreign law. The mistak e of foreign law is to be treate d as a mistak e of fact. Sectio n 21 reads , A mistak e as to a law not in force in Indi a has the same effect as a mistak e of fact. Consequences of Mistake Mistak e render s a contrac t void and as such in case of a contrac t which is yet to be performed the part y complainin g of the mistak e may repudiat e it, i.e., need not perfor m it. If the contrac t is executed , the part y who receive d any advantag e mus t restor e it or make compensation for it, as soon as the contrac t is discovere d to be void.

LAW OF CONTRACTS

1. 6 CONSIDER ATION
[Section s 2(d), 10, 2325, 148, 185]

DEFINITION
In simples t terms , consideratio n is wha t a promiso r demand s as the price for his promise. Sir Frederic k Pollock define s consideratio n as an act or forbearanc e of one part y or the promise thereo f is the price for which the promis e of the othe r is bough t and the promise thus given for value is enforceable. In Currie v. Misa (1875) L.R. 10 Ex. 162, consideratio n was terme d as A valuable consideration in the sense of the law may consis t eithe r in some right , interest , profit or benefit accruin g to one part y, or some forbearance , detriment , loss or responsibilit y given, suffered or undertake n by the othe r. From the foregoin g definition s it is clearl y brough t out tha t the term consideration is used in the sense of quid-pro-quo which mean s somethin g in return . This something may be some benefit , right , interes t or profit or it may also be some forbearance , detriment , loss or responsibilit y upon the othe r part y. In India , the definitio n of consideratio n is containe d in Sectio n 2 (d) of the India n Contract Act, 1872. It reads : When at the desir e of the promiso r, the promise e or any othe r person has done or abstaine d from doing, or does or abstain s from doing, or promise s to do or promises to abstai n from doing something , such act or abstinenc e or promis e is called a consideratio n for the promise. Examples (1) A agree s to sell his house to B for Rs. 10,000 . Here Bs promis e to pay the sum of Rs. 10,000 is consideratio n for As promis e to sell the house ; and As promis e to sell the house is the consideratio n for Bs promis e to pay Rs. 10,000. (2) A promise s to pay B Rs. 1,000 at the end of 6 months , if C, who owes tha t sum to B, fails to pay it. B promise s to gran t time to C, accordingl y. Here the promise of each part y is the consideratio n for the promis e of the othe r part y.

46

Busines s Law Includin g Compan y Law

(3) A promises , for a certai n sum paid to him by B to make good to B the value of his ship if it is wrecke d on a certai n voyage. Here As promis e is the consideration for Bs paymen t and Bs paymen t is the consideratio n for As promise. (4) A promise s to maintai n Bs child and B promise s to pay A Rs. 1,000 yearly for the purpose. Here the promis e of each part y is the consideratio n for the promis e of the othe r part y. Importance of Consideration A promis e withou t consideratio n is purel y gratuitou s and, howeve r sacre d and binding in honou r it may be, canno t creat e a legal obligation . An analysi s of any contrac t will show tha t it consist s of two clearl y separabl e parts : (i) the promis e and (ii) the consideratio n for the promise. A perso n who make s a promis e to do or abstai n from doing somethin g usuall y does so as a retur n or equivalen t of some loss, damage , or inconvenienc e tha t may have been occasioned to the othe r part y in respec t of the promise . The benefi t so receive d and the loss, damage or inconvenienc e so cause d is regarde d in law as the consideratio n for the promise. Thus , generall y speaking , a contrac t canno t be though t of withou t consideration. * No consideration , no contract is the rule of the law. The following two cases prove this point: 1. Abdu l Aziz v. Mazu m Ali (1914) 36 All. 268. In this case a perso n verball y promise d the secretar y of the Mosque Committe e to subscribe Rs. 500 for rebuildin g of a mosque . Late r, he decline d to pay the said amount. Held : Ther e was no consideratio n and hence the agreemen t was void. 2. Kedarnat h v. Gori Mohame d (1886) 14 Cal. 64. In this case the defendan t had agree d to subscrib e Rs. 100 toward s the constructio n of a Town Hall at Howrah . The Secretar y, on the faith of the promise , called for plan s and entrusted the work to contractor s and undertoo k liabilit y to pay them. Held : The agreemen t was enforceabl e being one supporte d by consideratio n in the form of a detrimen t to the secretar y who had undertake n a liabilit y to the contractor s on the fait h of the promis e made by the defendant. Moreove r, since agreement , by very definitio n as per sectio n 2 (e), is a promise/(s ) in exchange for a promise/(s) , each promis e formin g consideratio n for the othe r. It will therefore be an inconsistenc y in itself to thin k of an agreemen t and consequentl y contrac t without consideration. Thus , in one sentenc e we may sum up the importanc e of consideration: Excep t in certai n cases, a contrac t withou t consideratio n canno t be though t of and if made, it is devoid of any legal obligation. Rules as to Consideration Followin g are the rule s as to consideration: (1) Consideration must move at the desire of the promisor Accordingl y, an act done at the desir e of a thir d part y is not a consideration. Example D constructe d a marke t at the instanc e of the Collecto r of a District . The occupant s of the shops in the said marke t promise d to pay D a commissio n on article s sold throug h thei r shops.
* Exceptions , i.e., cases wher e an agreemen t even withou t consideratio n is valid are discusse d on page 50.

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47

Held : Ther e was no consideratio n becaus e the money was not spen t by the plaintif f at the reques t of the defendants , but voluntaril y for a thir d perso n and thu s the contract was void [Durga Prasa d v. Baldeo (1881) 3 All. 211]. Notice tha t althoug h the promise e mus t give consideratio n at the desir e of the promiso r, it is not necessar y tha t the promiso r himsel f shoul d benefi t by the consideration . The promise would be valid even if the benefi t accrue d to a thir d part y. Example A owed Rs. 20,000 to B. He (A) persuade d C to sign a promissor y note in favou r of B. C promise d B tha t he would pay the amount . On the faith of promis e by C, B credited the amoun t to As account. Held : The discharg e of As accoun t was consideratio n for Cs promis e [Nationa l Bank of Upper Indi a v. Bansidha r (1930) 5 Luck I]. (2) Consideration may move from the promisee or any other person Althoug h it is necessar y tha t consideratio n mus t move at the desir e of the promiso r, it may be supplie d eithe r by the promise e or any othe r person . The case of Chinnayy a v. Ramayya , 4 Mad. 137 is a good illustratio n on the point. In tha t case, A, a lady, by a deed of gift transferre d certai n propert y to her daughte r, with a directio n tha t the daughte r shoul d pay an annuit y to As brothe r, as had been done by A. On the same day the daughte r execute d a writin g in favou r of the brothe r, agreein g to pay the annuit y. Afterwards , she decline d to fulfil her promis e sayin g tha t no consideratio n had moved from her uncle (As brother) . The Court , howeve r, held tha t the words the promisee or any othe r person in Sectio n 2(d) clearl y show tha t the consideratio n need not necessarily move from the promisee , it may move from any othe r person . Hence , As brothe r was entitled to maintai n the suit. Thus , in India , strange r to the consideratio n may maintai n a suit . In England , howeve r, the positio n is different . A strange r to the consideration , in England , canno t maintai n a suit. Thus , if A pays 100 to B and in consideratio n of tha t paymen t B promise s to deliver a necklac e to C the promis e of B to C, canno t be enforced. Strange r to the Contrac t v. Strange r to Consideration . A strange r to the consideration must, howeve r, be distinguishe d from a strange r to a contract . A strange r to a contrac t cannot sue in Englan d as well as in India. Examples (1) A who is indebte d to B sells his propert y to C and C promise s to pay off the debt to B. In case C fails to pay, B has no righ t to sue; C being strange r to the contract. (2) Upon As marriag e his fathe r and fathe r-in-la w entere d into a contrac t to contribute a certai n sum of money to be given to A after his marriage. As father paid his contributio n but his fathe r-in-la w failed to pay. Held : A could not sue his fathe r-in-la w since he (A) was a strange r to the contract [Tweddl e v. Atkinso n (1861) 1 B. & S. 393]. Exceptions To the above rule tha t a strange r to a contrac t canno t sue, ther e are the following exceptions: 1. In the case of trusts , the beneficiar y may enforce the contract.

LAW OF CONTRACTS

48

Busines s Law Includin g Compan y Law

Thus , wher e a contrac t betwee n X and Y is intende d to secur e benefi t to Z as cestue que trust. Z may sue in his own righ t to enforce the trust . In Khwaj a Muhamma d v. Hussaini Begum (1910) 32 All 410, H sued her fathe r-in-la w K to recove r Rs. 15,000 being the arrears of allowanc e called Kharchi-i-Pa n danBete l box expense , i.e., Pinmoney payabl e to her by K unde r an agreemen t made betwee n K and Hs fathe r in consideratio n of Hs marriag e to Ks son D. Both H and D were minor s at the date of marriage . The Privy Counci l held the promise to be enforceabl e by H. Thei r Lordshi p observe d tha t in Indi a wher e marriage s are contracted for minor s by parent s and guardians , it migh t occasion seriou s injustic e if the Common Law doctrin e of privit y of contrac t was applied. 2. On the same principle , the provisio n of marriag e expense s of female member s of a joint Hindu family on a partition between male members entitles the female membe r to sue for such expense s [Rakhmanba i v. Govin d (1904), 6B.L.R.421]. 3. In the case of an acknowledgemen t of liabilit y or by pas t performanc e thereof ; e.g. where X receive s money from Y for payin g it to Z and X admit s to Z the receipt of tha t amoun t then X become s the agen t of Z and will be liable to pay the amount to him. 4. In the case of a famil y settlemen t the terms of the settlemen t are reduce d into writing, the member s of the famil y who originall y had not been partie s to the settlement, may enforce the agreemen t [Shupp u v. Subramania m 33 Mad. 238]. 5. In the case of assignmen t of a contrac t when the benefi t unde r a contrac t has been assigned, the assigne e can enforce the contrac t [Kisha n Lal Sadh u v. Prantil a Bala Dasi (1928,) Cal. 1315]. (3) Consideration need not be adequate Adequac y of consideratio n is alway s the lookou t of the promiso r. Court s do not see whether every perso n makin g the promis e has recovere d full retur n for the promise . Thus, if A promise s to sell a house worth Rs. 80,000 for Rs. 20,000 only, the inadequac y of the price in itself shal l not rende r the transactio n void. But wher e a part y plead s coercion , undue influence or fraud , inadequac y of consideratio n will also be a piece of evidenc e to be looked into. Example A agree s to sell a horse worth Rs. 1,000 for Rs. 100. A denie s tha t his consen t to the agreement was freely given. The inadequac y of consideratio n is a fact which the Court should take into accoun t in considerin g whethe r or not As consen t was freely given. Sectio n 25 (Explanatio n 2) contain s the above provisions . It reads, An agreemen t to which the consen t of the part y is freely given is not void merely because the consideratio n is inadequate ; but the inadequac y of the consideratio n may be take n into accoun t by the Cour t determinin g the questio n whethe r the consen t of the promiso r was freely given . (4) Consideration must be real and competent Consideratio n mus t be real. If it is illusor y, e.g., if a man promise s to discove r treasure by magic, the transactio n is void. The consideratio n mus t also be competent , tha t is, it mus t be somethin g to which law attaches some value . Thus , an agreemen t to do somethin g which the promiso r is already under a duty to do, is void being withou t competen t consideration.

Law of Contract s

49

Examples (1) A promise s to pay an existin g debt punctuall y if, B, the credito r, gives him a discount. The agreement is without consideration and the discount cannot be enforced. (2) In Collin s v. Godfrey (1831) 100 E.R. 1040, it was held tha t when a witnes s who has receive d summon s to appea r at a trial , a promis e to pay him anythin g beyond his expense s is void for wan t of consideration , becaus e the witnes s was bound to appear and give evidence. But, a promis e made to a strange r to perfor m an existin g contract , is enforceabl e because the promiso r undertake s a new obligatio n upon himsel f which can be enforce d by the strange r. (5) Consideration must be legal Illega l consideratio n render s a contrac t void. For detail s see Par t 1.7 Legalit y of the object on page 64. Rules Regarding Consideration 1. Consideratio n mus t move at the desir e of the promiso r. 2. Consideratio n may move from the promise e or any othe r person , i.e., a stranger to consideratio n may maintai n a suit. 3. A strange r to the contrac t canno t maintai n a suit. 4. Consideratio n need not be adequate. 5. Consideratio n mus t he real and competent. 6. Consideratio n mus t be legal. Kinds of Consideration A consideratio n may be: 1. Execute d or Present . Consideratio n which moves simultaneousl y with the promise is called presen t consideration . Cas h Sales provid e an excellen t exampl e of the present consideration. 2. Executor y or Future . When the consideratio n is to move at a futur e date , it is called futur e or executor y consideration . It take s the form of a promis e to be performed in the future. Example A promise s B to delive r him 100 bags of whea t at the futur e date . B promise s to pay for it on deliver y. 3. Past . A pas t consideratio n is somethin g wholly done, forborne , or suffere d before the makin g of the agreement. Example A saves Bs life. B promise s to pay A Rs. 1,000 out of gratitude . The consideratio n for Bs promis e is a pas t consideration , somethin g done before makin g of the promise. In India , pas t consideratio n is a good consideration.

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50

Busines s Law Includin g Compan y Law

The words has done or abstaine d from doing in Sectio n 2 (d) are a recognitio n of the doctrine of pas t consideration. Example A, a mino r was given the benefi t of certai n service s by the plaintiff , who rendered those services , not voluntaril y but at the desir e of A and thes e service s were continued even afte r majorit y at the reques t of A who subsequentl y promise d to pay an annuity to the plaintiff , it was held that the pas t consideratio n was a good consideratio n [Sindha v. Abraha m (1895) 20 Bom. 755]. But unde r Englis h Law past consideratio n is no consideration . Thus , if the above promise was made in England , it could not have been enforceable. Exceptions to the Rule No Consideration No Contract The genera l rule of law is tha t an agreemen t withou t consideratio n is void. A bargain without consideratio n is a contradictio n in term s and canno t exist.* But ther e are a few exceptional cases wher e a contract , even thoug h withou t consideration , is enforceable . They are as follows: 1. An agreemen t made withou t consideratio n is valid if (a) it is expresse d in writing , and (b) it is registere d (unde r the law for the time being in force for registratio n of documents) , and (c) it is made on accoun t of natura l love and affection , and (d) made betwee n partie s standin g in a nea r relatio n to each othe r. Examples (1) An elder brothe r, on accoun t of natura l love and affection , promise d to pay the debts of his younge r brothe r. The agreemen t was put to writin g and was registered. Held : The agreemen t was valid [Venkatswam y v. Rangaswam y (1903) 13 M.L.J . 428]. (2) A Mohammeda n husband , by a registere d agreemen t promise d to pay his earnings to his wife. Held : The agreement , thoug h withou t consideration , was valid [Poonoo Bibi v. Fyaz Buks h (1874) Bom. L.R. 57]. Notice that for an agreemen t to be valid unde r this clause , the agreemen t mus t be the result of natura l love and affectio n and nearnes s of relatio n by itself does not necessarily import natura l love and affection. Example A Hind u husban d by a registere d document , afte r referrin g to quarrel s and disagreements betwee n himsel f and his wife, promise d to pay his wife a sum of money for her maintenanc e and separat e residence , it was held tha t the promis e was unenforceable [Raihikh y Dohee v. Bhootnat h (1900) 4. C.W.N. 488]. 2. A promis e made withou t consideratio n is valid if, it is a promis e to compensat e wholly or in part , a perso n who has alread y voluntaril y done somethin g for the promiso r, or somethin g which the promiso r was legally compellabl e to do [Sectio n 25 (2)].
* Lord Loughbotough.

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51

Examples (1) A finds Bs purs e and gives it to him. B promise s to give A Rs. 50. This is a valid contract. (2) A support s Bs infan t son. B promise s to pay As expense s in so doing. This is a valid contract. (3) A promis e to pay, wholly or in par t a debt which is barre d by the law of limitation can be enforced if (a) it is in writing , and (b) is signed by the debto r or his authorised agen t [Sectio n 25 (3)]. A debt barre d by limitation * canno t be recovered . Therefore , a promis e to pay such a debt is, strictl y speaking , withou t any consideration . But as noted above, if a writte n promise is made to repa y, it is enforceable. Example A owes B Rs. 1,000 but the debt is barre d by the Limitatio n Act. A signs a written promise to pay B Rs. 500 on accoun t of the debt. This is a valid contract. Notice that the above sectio n [Sectio n 25(3)] applie s only when the promiso r was liable himself for the time-barre d debt; the sub-sectio n does not apply to the case of a promis e to pay a time-barre d debt owing by a thir d part y. [Pestonj i v. Meherbai , 30 Bom. L.R. 1407]. Furthe r, Sub-sectio n (3) of Sectio n 25 would not apply unles s the promis e is to pay an ascertained sum. A promis e to pay wha t is due afte r takin g account s is not a promis e within the meanin g of Sectio n 25(3) [Chowks i v. Chowksi , 8 Bom. 194]. 4. Consideratio n is not necessar y to effect bailmen t (Sectio n 148). 5. No consideratio n is require d to creat e an agency (Sectio n 185). Notice, howeve r, tha t if no consideratio n has passe d to the agent , he is only a gratuitou s agen t and is not bound to do the work entruste d to him, althoug h if he begin s the work, he mus t do it to the satisfactio n of his principal. 6. The rule no consideratio n no contract does not apply to complete d gifts [Explanation 1 to Sectio n 25].

LAW OF CONTRACTS

1. 7 LEGALIT Y OF OBJECT
[Section s 23, 24] An agreement will not be enforceable if its object or the consideration is unlawful. According to Sectio n 23 of the Act, the consideratio n and the object of an agreemen t are unlawful in the following cases: 1. If it is forbidden by law If the object or the consideratio n of an agreemen t is the doing of an act forbidde n by law, the agreemen t is void. An act or an undertakin g is forbidde n by law when it is punishable by the crimina l law of the countr y or when it is prohibite d by specia l legislatio n derive d from the legislature.**

* **

Limitatio n Act. Pollock and Mulla : India n Contrac t Act, p. 138.

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Examples (1) A loan grante d to the guardia n of a mino r to enabl e him to celebrat e the mino rs marriage in contraventio n of the Child Marriag e Restrain t Act is illega l and cannot be recovere d [Sriniva s v. Raja Ram Moha n (1951) 2 M.L.J . 264]. (2) A partnershi p entere d into for the purpos e of doing busines s in arrac k on a licence granted only to one of the partners , is void ab-initi o whethe r the partnershi p was entere d into before the licence was grante d or afterward s as it involve d a transfer of licence, which is forbidden and penalised by the Akbari Act and the rules thereunde r [Velu Payaych i v. Siva Sooriam , A.I.R. (1950) Mad. 987]. (3) A promise s to drop a prosecutio n which he has institute d agains t B for robber y, and B promise s to restor e the value of the thing s taken . The agreemen t is void, as its object is unlawfu l [Illustratio n (h) to Sectio n 23]. 2. If it is of such a nature that if permitted, it would defeat the provisions of any law If the object or the consideratio n of an agreemen t is of such a natur e that , thoug h not directly forbidde n by law, it would defea t the provision s of the law, the agreemen t is void. Examples (1) As estat e is sold for arrear s of revenu e unde r the provision s of an Act of the Legislature, by which the defaulte r is prohibite d from purchasin g the estate . B, upon an understandin g with A, become s the purchase r and agree s to convey the estate to A upon receivin g from him the price which B has paid. The agreement is void, as it render s the transaction , in effect, a purchas e by the defaulte r, and would so defea t the object of the law [Illustratio n (i) to Sectio n 23]. (2) A let a flat to B at a ren t of 1200 a year. With a view to reduc e the municipal tax A made two agreement s with B. One, by which the ren t was state d to be 450 only and the othe r, by which B agree d to pay 750 for service s in connectio n with the flat. Held : A could not recove r 750 since the agreemen t was made to defrau d the municipal authorit y and thu s void [Alexande r v. Rayso n (1936) 1 K.B. 169]. 3. If it is fraudulent An agreemen t with a view to defrau d othe r is void. Examples (1) A, B and C ente r into an agreemen t for the divisio n among them of gains acquired or to be acquired , by them by fraud . The agreemen t is void as its object is unlawful. (2) A, being an agen t for a lande d proprieto r, agrees , for money, withou t the knowledge of his principal , to obtai n for B a lease of land belongin g to his principal . The agreemen t betwee n A and B is void as it implie s a frau d by concealmen t by A, on his principa l [Illustratio n (g) to Sectio n 23]. 4. If it involves or implies injury to the person or property of another If the object of an agreemen t is to injur e the perso n or propert y of anothe r it is void. Examples (1) A borrowe d Rs. 100 from B. He (A) execute d a bond promisin g to work for B

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53

withou t pay for 2 year s and in case of defaul t agree d to pay interes t at a very exhorbitant rat e and the principa l amoun t at once. Held : The contrac t was void [Ram Saroop v. Bans i 42 Cal. 742]. (2) An agreemen t betwee n some person s to purchas e share s in a compan y with a view to induc e othe r person s to believe , contrar y to the fact, tha t ther e is a bona fide market for the share s is void [Gherula l Parek h v. Mahadeo . A.I.R. (1956) S.E. 781]. 5. If the Court Regards it as Immoral or Opposed to Public Policy An agreemen t whose object or consideratio n is immora l or is opposed to the public policy, is void. Examples (1) A let a cab on hire to B, a prostitute , knowin g tha t it would be used for immoral purposes. The agreemen t is void [Pearce v. Brooks (1886) L.R. 1 Ex. 213]. (2) A, who is Bs mukhta r, promise s to exercis e his influence , as such, with B in favour of C and C promise s to pay 1,000 rupee s to A. The agreemen t is void, because it is immoral. (3) A agree s to let her daughte r to B for concubinage . The agreemen t is void, because it is immoral , thoug h the lettin g may not be punishabl e unde r the India n Pena l Code.

LAW OF CONTRACTS

1. 8 AGREEMENT S DECLARE D VOID


[Section s 26 30] The India n Contrac t Act, 1872 declare s certai n agreement s to be void. These are explained belo w.

AGREEMENTS AGAINST PUBLIC POLICY


The term publi c policy is not capabl e of being define d with any degre e of precision because publi c policy , in its nature , is highly uncertai n and fluctuating . It keeps on varying with the habit s and fashion s of the day, with the growt h of commerc e and usag e of trade*. In simpl e words, it may be said tha t an agreemen t which conflict s with moral s of the time an d contravene s any establishe d interes t of societ y, it is void as being agains t public policy. Thus , an agreemen t which tend s to be injuriou s to the public or agains t the public good is void as being opposed to public. According to F. Pollock, Agreement s may offend agains t the publi c policy, or tend to the prejudic e of the stat e in time of war (tradin g with the enemies, etc.), by tendin g to the perversio n or abus e of municipa l justice , (stiflin g prosecution , champert y, maintenance) or in private life by attempting to impose inconvenient and unreasonable restrictions on the free choice of individual s in marriag e or thei r libert y to exercis e any lawful trading or calling.
* In England , Lord Halsbur y in Janso n v. Drieftei n Consolidate d Mines Ltd. (1902) A.C. 484 observe d that categories of public policy are closed, and tha t no court can inven t a new head of public policy. Section 23 of the India n Contrac t Act, howeve r, leave s it open to court to hold any contrac t as unlawfu l on the ground of being opposed to public polic y.

54

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Some of the commonl y accepte d ground s of public policy includin g those containe d in Section s 26 to 28 are deal t with in the following paragraphs. 1. Trading with enemy All contract s made with an alien (foreigner ) enem y are illega l unles s made with the permission of the Government . An alien enem y is a perso n who owes allegianc e to a Government at war with India . Such agreement s are illega l on the groun d of public policy becaus e eithe r the further performanc e of the contrac t would involve intercours e with the enem y or its continued existence would confer upon the enem y an immediat e or futur e benefit. 2. Agreements prosecution for stifling

Contrac t for compoundin g or suppressio n of crimina l charges , for offences of a public nature are illega l and void. The law is you canno t make a trad e of your felony (crime). You canno t conver t crime into a source of profit. The underlyin g principl e is if the accuse d is innocent, the law is abuse d for the purpos e of extortion ; if guilt y, the law is elude d by a corrup t compromis e screenin g the crimina l for a bribe. Example A, knowin g tha t B has committe d a murde r, obtain s a promis e from B to pay him (A) Rs. 10,000 , in consideratio n of not exposin g B, ther e is a case of stiflin g prosecutio n and the agreemen t is illega l and void. 3. Contracts in the nature champerty and maintenance Maintenance mean s the promotio n of litigatio n in which a perso n has no interes t of his own. In othe r words, wher e a perso n agree s to maintai n a suit , in which* he has no interest, the proceedin g is known as Maintenance. Thus , maintenance tend s to encourag e speculative litigation . Champerty is a bargai n whereb y one part y is to assis t anothe r in recovering property and, in turn , is to shar e in the proceed s of the action . Unde r Englis h Law, both of these agreement s are declare d illega l and void being opposed to public policy. India n Law is different. In Raja Venkat a Subhadrayamm a Guru v. Sree Pusapath i Vekatapath i Raju , 48 Mad. 230 (P.C.), the Privy Counci l held tha t champert y and maintenanc e are not illega l in India, and tha t Court s will refus e to enforce such agreement s only when they are found to be extortionate and unconscionabl e and not made with the bonafid e object of assistin g the claims of the perso n unabl e to carry on litigatio n himself . In othe r words, only those agreements which appea r to be made for purpose s of gamblin g in litigation , and for injurin g or oppressing others, by encouragin g unhol y litigation , tha t will not be enforced , but not all agreement s of champerty or maintenance . Thus , an agreemen t to rende r service s for the conduc t of litigation in consideratio n of paymen t of 50 per cent of the amoun t recovere d throug h Cour t would be legally enforceable . But, wher e it was found tha t the value of the par t of the estat e promised to be conveyed amounte d to Rs. 64,000 in retur n for Rs. 12,000 which was to be spen t by the financier on the prosecutio n of an appea l in the Privy Council , it was held tha t althoug h the agreemen t was bond fide, it could not be enforced , the rewar d being extortionat e and unconscionable. 4. Agreements for the sale of public offices and titles Traffic by way of sale in public offices and appointment s obviousl y tend s to the prejudice
* See Bhagwu t Dayal Sing h v. Debi Dayal Sah u (1908) 35 l.A. 48: 35 Col. 4.

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55

of the public servic e by interferin g with the selectio n of the best qualifie d persons . Such sales, are, therefore , unlawfu l and void. Examples (1) A promise s to pay B Rs. 5,000 if B secure s him an employmen t in the public service. The agreemen t is void. (2) Similarl y, wher e A promise s to pay a sum to B in order to induc e him to retire so as to provid e room for As appointmen t to the public office held by B, the agreement is void [Saminatha n v. Muthusami , 30 Mad. 530]. (3) The secretar y of a college promise d Col. Parkinso n tha t if he made a large donation to the college, he would secur e a knighthoo d for him. Held : The agreemen t was agains t public policy and thu s void [Parkinso n v. College of Ambulanc e Ltd. (1925) 2 K.B.1]. 5. Agreements in restraint of parental rights According to law the fathe r is the guardia n of his mino r child; afte r the fathe r, the right of guardianshi p vests in the mothe r. This righ t canno t be bartere d away by any agreement. [Re Caroll (1931) 1 K.B. 307.]. Thus , the authorit y of a fathe r canno t be alienate d irrevocably an d any agreemen t purportin g to do so is void. Example A fathe r havin g two mino r sons agree d to transfe r thei r guardianshi p in favou r of Mrs. Annie Besan t and also agree d not to revoke the transfe r. Subsequentl y, he filed a suit for recover y of the boys and a declaratio n tha t he was the rightfu l guardian , the Court held tha t he had the righ t to revoke his authorit y and get back the children [Gidd u Narayanis h v. Mrs. Anni e Besan t. (1915) 38 Mad. P.C]. 6. Agreement in restraint of marriage According to Sectio n 26 of the Contrac t Act, Every agreemen t in restrain t of the marriage of any person , othe r tha n a mino r, is void. Example A promise d to marr y none else except Miss B, and in defaul t pay her a sum of Rs. 1,000. A marrie d some one else and B sued A for recover y of the sum. Held : The contrac t was in restrain t of marriage , and as such void. Notice tha t in Indi a any restrain t of marriag e whethe r tota l (absolute ) or partia l is opposed to public policy and hence void. In Englis h Law, howeve r, only an absolut e restraint is void, e.g., an agreemen t to marr y no one but the promisee. 7. Marriage brokerage or brocage contracts A marriag e brokerag e contrac t is one in which, in consideratio n of marriage , one or the other of the partie s to it, or thei r parent s or thir d partie s receive a certai n sum of mone y. Accordingl y, dowry is a marriag e brokerag e and hence unlawfu l and void. Examples (1) In Venkatakrishn a v. Venkatachala m 32, Mad. 185, a sum of money was agree d to be paid to the fathe r in consideratio n of his giving his daughte r in marriage. Held : Such a promis e amounte d to a marriag e brokerag e contrac t and was void.

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56

Busines s Law Includin g Compan y Law

(2) Wher e a purohi t was promise d a certai n sum of money in consideratio n of procuring a second wife for the defendant , it was held tha t the promis e was opposed to public policy and thu s void [Vaidyanatha n v. Gangaraz u (1290) 17 Mad. 9]. In the above cases, if marriag e had been performe d and the money remain s unpaid , it cannot be recovere d in a Cour t of Law. But, if the money had been paid and marriag e also performed, the money canno t be got back. 8. Agreements in restraint of legal proceedings Sectio n 28, as amende d by the India n Contrac t (Amendment ) Act, 1996 w.e.f. 8.1.1997, provides tha t every agreement (a) by which any part y theret o is restricte d absolutel y from enforcin g his right s under or in respec t of any contract , by the usua l legal proceeding s in the ordinar y tribunals, or which limit s the time withi n which he may thu s enforce his rights ; or (b) which extinguishe s the right s of any part y thereto , or discharge s any part y thereto from any liabilit y, unde r or in respec t of any contrac t on the expiry of a specified period so as to restric t any part y from enforcin g his rights , is void to tha t extent. Howeve r, an agreemen t to refer dispute s to arbitratio n is valid. Similarl y, the Suprem e Cour t in M/s. Angile Insulation s v. M/s. Davy Ash-mor e Indi a Ltd. AIR 1995 SC 1766 has held tha t an expres s agreemen t betwee n partie s to vest jurisdiction to refer any disput e to a specifie d court does not amoun t to contractin g agains t the statute. Thus, the claus e in the agreement , viz., This work order is issue d subjec t to the jurisdiction of the High Cour t situate d in Bangalore , in the Stat e of Karnatak a was held to be valid. Supreme Cour t said Mercantil e Law and Practic e permi t such agreements. 9. Contracts interfering with course of Justice Any agreemen t for the purpos e or to the effect of using imprope r influenc e of any kind with judge s or officers of justic e is void. 10. Contracts tending to create monopolies Such agreement s are void being opposed to public interest. Example In Distric t Board of Jhelu m v. Harichan d 1934 Lah. 474, a local body grante d a monopoly to A to sell vegetable s in a particula r localit y. Held : The agreemen t was void. 11. Agreements in restraint of trade Court s do not allow any tendenc y to impose restriction s upon the libert y of an individual to carry on any business , professio n or trade . In England , originall y, all agreement s in restrain t of trad e were void. But now, the rule is tha t thoug h tota l restrain t will be bad, reasonable restrain t will be enforceable . In Nordenfel t v. Maxi m Nordenfelt , etc., Co. (1893) A.C. 535, the House of Lords held tha t the real test for determinin g the validit y of agreements in restrain t of trad e was, whethe r the restrain t impose d was reasonable , for good consideration, not prejudicia l to the interest s of the public, and not more onerou s tha n necessar y for the protection of the part y imposin g the restrain t. In India , the law on the subjec t is containe d in Sectio n 27 which reads : every agreement by which any one is restraine d from exercisin g a lawful profession , trad e or busines s of any

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57

kind, is to tha t exten t void. Thus , in India , all agreement s in restrain t of trade , whether general or partial , qualifie d or unqualified , are void. It is, therefore , not open to the Courts in Indi a to ente r into any questio n of reasonablenes s or otherwis e of the restrain t [Khemchand v. Dayaldas , (1942) Sind, 114]. Examples (1) 29 out of 30 manufacturer s of combs in the city of Patn a agree d with R to supply him with combs and not to any one else. Unde r the agreemen t R was free to reject the goods if he found ther e was no marke t for them. Held : The agreemen t amounte d to restrain t of trad e and was thu s void [Shaikh Kalu v. Ramsara n Bhaga t (1909) 13 C.W.N. 388]. (2) J, an employe e of a compan y, agree d not to employ himsel f in a simila r concern within a distanc e of 800 miles from Madra s afte r leavin g the compan ys service. Held : The agreemen t was void [Oakes & Co. v. Jackso n (1876) 1 Mad. 134]. (3) A and B carrie d on busines s of brazier s in a certai n locality in Calcutta . A promised to stop busines s in tha t locality if B paid him Rs. 900 which he had paid to his workme n as advances . A stoppe d his busines s but B did not pay him the promised mone y. Held : The agreemen t was void and, therefore , nothin g could be recovere d on it [Madha v v. Raj Coomar (1874) 14 B.L.R. 76]. Exceptions [or Cases in which restraint of trade is valid in India] The following are the exception s to the above rule tha t a restrain t of trad e is void: 1. Sale of goodwill Exceptio n 1 to Sectio n 27 provide s tha t the selle r of the goodwill of a busines s may agree with the buye r to refrai n from carryin g on a simila r business , withi n specifie d local limits, so long as the buye r or any one derivin g title to the goodwill from him carrie s on a like business, provide d tha t such limit s are reasonable. Example S, a selle r of imitatio n jeweller y, sells his busines s to B and promise s not to carry on business in imitatio n jeweller y and real jeweller y. Held : The restrain t with regar d to imitatio n jeweller y was valid but not regardin g real jeweller y [Goldsol l v. Goldman d (1915)1 Ch.D. 292]. 2. Partners agreement Partner s may agree that: (a) a partne r shal l not carry on any busines s othe r tha n tha t of the firm while he is a partne r. [Sectio n 11(2) of the India n Partnershi p Act, 1932]; (b) a partne r on ceasin g to be a partne r will not carry on any busines s simila r to that of the firm withi n a specifie d period or withi n specifie d local limits . The agreement shal l be valid if the restriction s are reasonabl e [Sectio n 32(2) of the India n Partnership Act, 1932] (c) partner s may, upon or in anticipatio n of the dissolutio n of the firm, make an agreement tha t some or all of them will not carry on a busines s simila r to that

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of the firm withi n a specifie d period or withi n specifie d local limit s and such agreement shal l be valid if the restriction s impose d are reasonabl e [Sectio n 54 of the India n Partnershi p Act, 1932]. (d) a partne r may, upon the sale of the goodwill of a firm, make an agreemen t tha t such partne r will not carry on any busines s simila r to tha t of the firm withi n a specified period or withi n specifie d local limits ; and such agreemen t shal l be valid if the restrictions impose d are reasonabl e [Sectio n 55 of the India n Partnership , 1932]. 3. Service agreements An agreemen t of servic e by which a perso n binds himsel f durin g the term of the agreement not to take servic e with anyon e else or directl y or indirectl y take par t in or promot e or aid any busines s in direc t competitio n with tha t of his employe r is valid [Charle s v. Macdonald (1899) 23 Bom. 103]. Example A agree d to become assistan t for 3 year s to B who was a doctor practisin g at Zanziba r. It was agree d tha t durin g the term of the agreemen t A was not to practis e on his own account in Zanziba r. After one year, A starte d his own practice. Held : The agreemen t was valid and A could be restraine d by an injunctio n from doing so. These days it is a common practic e to appoin t managemen t trainees . A lot of time, money and energ y is spen t in trainin g the selecte d candidate s in the managemen t techniques. So, it will be a waste on the part of such organisations if these persons left for other organisation s immediatel y afte r training . Therefore , a servic e bond is normall y got signed whereby the traine e agree s to serve the organisatio n for a stipulate d period . Such agreements, if reasonable , do not amount , to restrain t of trad e and hence are enforceable. Thus , wher e an employe e undertoo k to serve his employe r for a period of 3 year s but leaves the servic e afte r one year, he may be aske d to abide by the agreemen t [Deshpand e v. Arvin d Mills , AIR 1946 Bom. 423]. But, if a restrain t impose d on the employe e is to operat e afte r the expiry of the period of his servic e it shal l prim a facie be void [Krishn a Murga i v. Superintendenc e Co. of India , AIR, 1979 Delhi 232].* Thus , wher e A bank appoint s an officer subjec t to the conditio n tha t after ceasing to be in servic e he would not join the servic e of any othe r bank in Indi a for a period of 5 years , the bank shal l not be in a positio n to enforce such condition.

WAGERING AGREEMENTS
A wagerin g agreement , says Sir William Anson, is a promis e to give money or money s worth upon the determinatio n or ascertainmen t of an uncertai n event. Cockbur n C.J. defined it as A contrac t by A to pay money to B on the happenin g of a given even t in consideration of Bs promis e to pay money to A on the even t not happening. Thus , a wagerin g agreement is an agreemen t unde r which money or money s worth is payable , by one perso n to another on the happenin g or non-happenin g of a future , uncertai n event.

Also see Brahamputr a Tea Co. v. Scurt h (1855) I.L.R. 11 Col. 545 and Oakes & co. v. Jackso n (1876) I.L.R. 1 Mad 134.

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The essenc e of gamin g and, wagerin g is tha t one part y is to win and the othe r to lose upon a futur e event , which at the time of the contrac t is of an uncertai n nature-tha t is to say, if the even t turn s out one way A will lose but if it turn s out the othe r way, he will win. Examples (1) A and B bet as to whethe r it would rain on a particula r day or not A promising to pay Rs. 100 to B if it rained , and B promisin g an equa l amoun t to A, if it did not . This agreemen t is wage r. (2) A and B agree to deal with the difference s in prices of a particula r commodit y. Such an agreemen t is a wage r. Effects of Wagering Agreements An agreemen t by way of wage r is void. Sectio n 30 provide s Agreement s by way of wager are void; and no suit shal l be brough t for recoverin g anythin g allege d to be won on any wager or entruste d to any perso n to abide by the resul t of any game or othe r uncertai n even t on whic h any wage r is made . Thus , in Indi a all agreement s by way of wage r are void. Wagering Agreemen t Void and not Illegal . In India , unles s the wage r amount s to a lotter y, which is a crime accordin g to Sectio n 294-A of the India n Pena l Code, it is not illega l but simply void. Thus , except in case of lotteries , the collatera l transaction s remai n enforceable. Example A borrow s Rs. 500 from B to pay to C, to whom B has lost a bet. Contrac t betwee n A and B is valid. Lotteries Lottery is an arrangemen t for the distributio n by chanc e among person s purchasing tickets. The dominan t motive of the participant s need not be gambling . Wher e a wagering transaction amount s to a lotter y, it is illega l as per Sec. 294-A of the India n Pena l Code. In Sir Dorabji Tata v. Edwar d F Lance (1918) I.L.R. 42 Bom. 676, wher e the Governmen t of India had sanctione d a lotter y, the Cour t held tha t the permissio n grante d by the Governmen t will not have the effect of overridin g Sec. 30 of the India n Contrac t Act and makin g such a lottery legal. Its only effect was tha t the person s responsibl e for runnin g the lotter y would not be punishabl e unde r the India n Pena l Code. Howeve r, in H. Anra j v. Govt. of Tami l Nad u AIR 1986 SC 63, the Suprem e Cour t upheld lotteries with the prior permissio n of the Governmen t as legal, thereb y conferrin g upon the winner of a lotter y, a righ t to receive the prize and the sale of lotterie s subjec t to payment of sales-tax . Suprem e Cour t held tha t a sale of lotter y ticke t confer s on the purchase r thereof two right s (a) a righ t to participat e in the draw and (b) a righ t to claim a prize contingent upo n his being successfu l in the dra w. Exceptions (Transactions Held Not Wagers) The following transaction s have been held not to be wagers: 1. Transaction s for the sale and purchas e of stocks and shares , or for the sale and delivery of goods, with a clear intentio n to give and take deliver y of share s or goods, as the case may be. Notice that , wher e the intentio n is only to settl e in price difference , the transactio n is a wage r and hence void. 2. Prize competition s which are game s of skill, e.g., pictur e puzzles , athletic competitions . Thus , an agreemen t to ente r into a wrestlin g contes t in which the

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winne r was to be rewarde d by the entir e sale proceed s of tickets . Was held not to be wagerin g contrac t [Babalalte b v. Rajara m (1931) 33 Bom. L.R. 260]. A crossword competition is not a wage r since it involve s skill. But, in Coleys v. Odham s Press* (1936) 1 K. 416 it was held tha t a crosswor d puzzle in which prize s depen d upon correspondence of the competito rs solutio n with a previousl y prepare d solution kept with the edito r of a newspape r is a lotter y and therefore , a wagerin g transaction. According to Prize Competitio n Act, 1955 prize competition s in game s of skill are not wager s provide d the prize money does not exceed Rs. 1000. 3. An agreemen t to contribut e a plate or prize of the value of above Rs. 500 to be awarded to the winne r of a horse race. (Sectio n 30). 4. Contracts of insurance Contract s of insuranc e are not wagerin g agreement s even thoug h the paymen t of money by the insure r may depen d upon a futur e uncertai n event . Contract s of insuranc e differ from the wagerin g agreement s in the following respects: (a) It is only perso n possessin g an insurabl e interes t tha t is permitte d to insur e life or propert y, and not any person , as in the case of a wage r. (b) In the case of fire and marin e insurance , only the actua l loss suffere d by the party is paid by the compan y, and not the full amoun t for which the propert y is insured. Eve n in the case of life insurance , the amoun t payabl e is fixed only becaus e of the difficulty in estimatin g the loss cause d by the deat h of the assure d in term s of mone y, but the underlyin g idea is only indemnification. (c) Contract s of insuranc e are regarde d as beneficia l to the public and are, therefore, encouraged. Wagerin g agreements , on the othe r hand , are considere d to be against public polic y.

1. 9 CONTINGEN T CONTRACTS
[Section s 31 36] Contingent Contract Defined (Section 31) A contingen t contract , is a contrac t to do or not to do something , if some event , collateral to such contrac t does or does not happen. Example A contract s to pay B Rs. 10,000 if Bs house is burnt . This is a contingen t contract. Essentials of a Contingent Contract 1. The performanc e of a contingen t contrac t is made dependen t upon the happening or non-happenin g of some event. 2. The even t on which the performanc e is made to depend , is an even t collatera l to the contract , i.e., it does not form par t of the reciproca l promise s which constitute the contract.
* Also see J.N . Gupta v. State of West Bengal , (1959) Cal. 141.

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Examples (1) A agree s to delive r 100 bags of whea t and B agree s to pay the price only afterwards, the contrac t is a conditiona l contrac t and not contingent , becaus e the even t on which Bs obligatio n is made to depen d is a par t of the promis e itself and not a collatera l event. (2) A promise s to pay B Rs. 10,000 if he marrie s C, it is not a contingen t contract. 3. The contingen t even t shoul d not be the mere will of the promiso r. Example A promise s to pay B Rs. 1,000, if he so chooses , it is not a contingen t contract.* Howeve r, wher e the even t is withi n the promiso r s will but not merel y his will, it may be a contingen t contract. Example A promise s to pay B Rs. 1,000, if A left Delhi for Bomba y, it is a contingen t contract, because going to Bomba y is an even t no doubt withi n As will, but is not merel y his will. Rules Regarding Enforcement of Contingent Contracts (Sections 32 to 36) The rule s regardin g contingen t contract s are summarise d hereunder: 1. Contract s contingen t upon the happenin g of a futur e uncertai n event , canno t be enforced by law unless and until that event has happened. And if, the event become s impossibl e such contrac t become void (Sectio n 32). Examples (1) A make s a contrac t with B to buy Bs horse if A survive s C. This contrac t cannot be enforce d by law unles s and unti l C dies in As life-time. (2) A make s a contrac t with B to sell a horse to B at a specifie d price if C, to whom the horse has been offered, refuse s to buy him. The contrac t canno t he enforced by law unles s and unti l C refuse s to buy the horse. (3) A contract s to pay B a sum of money when B marrie s C. C dies withou t being married to B. The contrac t become s void. 2. Contract s contingen t upon the non-happenin g of an uncertai n futur e even t can be enforced when the happenin g of tha t even t become s impossible , and not before. (Section 33). Example A agree s to pay B a sum of money if a certai n ship does not return . The ship is sunk. The contrac t can be enforce d when the ship sinks. 3. If a contrac t is contingen t upon as to how a perso n will act at an unspecifie d time, the even t shal l be considere d to become impossibl e when such perso n does anything, which render s it impossibl e tha t he shoul d so act withi n any definit e time , or otherwise tha n unde r furthe r contingencies . (Sectio n 34).

LAW OF CONTRACTS

In fact, it is not a contrac t at all.

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Example A agree s to pay B a sum of money if B marrie s C. C marrie s D. The marriag e of B to C mus t now be considere d impossible , althoug h it is possibl e tha t D may die and C may afterward s marr y B. 4. Contract s contingen t upon the happenin g of a specifie d uncertai n even t withi n a fixed time become void if, at the expiratio n of the time fixed, such even t has not happened or if, before the time fixed, such even t become s impossibl e (Sectio n 35 para 1). Example A promise s to pay B a sum of money if a certai n ship return s withi n a year. The contract may be enforce d if the ship return s withi n the year, and become s void if the ship is burn t withi n the yea r. 5. Contract s contingen t upon the non-happenin g of a specifie d even t withi n a fixed time may be enforce d by law when the time fixed has expire d and such even t has not happened , or, before the time fixed expired , if it become s certai n tha t such event will not happe n (Sectio n 35 para II). Example A promise s to pay B a sum of money if a certai n ship does not retur n withi n a yea r. The contrac t may be enforce d if the ship does not retur n withi n the year, or is burnt withi n the yea r. 6. Contingen t agreement s to do or not to do anything , if an impossibl e even t happens, are void, whethe r the impossibilit y of the even t is known or not to the partie s to the agreemen t at the time when it is made. Examples (1) A agree s to pay B Rs. 1,000 if two paralle l straigh t lines shoul d enclose a space. The agreemen t is void. (2) A agree s to pay B Rs. 1,000 if B will marr y As daughte r C. C was dead at the time of the agreement . The agreemen t is void.

1.1 0 QUASI CONTR ACTS (Certai n Rel ation s resem blin g th s e create d by co t ra t s) o n c
[Section s 68 72] Quas i Contracts are so called becaus e the obligation s associate d with such transactions could neithe r be referre d as tortiou s nor contractual , but are still recognise d as enforceable, like contracts , in Courts . According to Dr. Jenks , Quasi-contrac t is a situatio n in which law imposes upon one person , on ground s of natura l justice , an obligatio n simila r to tha t which arises from a true contract , althoug h no contract , expres s or implied , has in fact been entered into by them . Example X Supplie s goods to his custome r Y who receive s and consume s them . Y is bound to pay the price. Ys acceptanc e of the goods constitute s an implie d promis e to pay. This kind

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of contrac t is called a taci t contract . In this very illustration , if the goods are delivered by a servan t of X to Z, mistakin g Z for Y, then Z will be bound to pay compensation to X for thei r value . This is Quasi-Contract. The principl e underlyin g a quasi-contrac t is tha t no one shal l be allowed unjustl y to enrich himsel f at the expens e of anothe r, and the claim based on a quasi-contrac t is generally for mone y. Section s 68 to 72 of the Contrac t Act describ e the cases which are to be deeme d Quasicontracts. (1) Claim for necessaries supplied to a person incapable of contracting or on his account If a person , incapabl e of enterin g into a contract , or any one whom he is legally bound to suppor t is supplie d by anothe r perso n with necessarie s suite d to his conditio n in life, the person who furnishe d such supplie s is entitle d to be reimburse d from the propert y of such incapable perso n (Sec. 68). Examples (1) A supplie s B, a lunatic , with necessarie s suitabl e to his conditio n in life. A is entitled to be reimburse d from Bs propert y. (2) A, who supplie s the wife and childre n of B, a lunatic , with necessarie s suitabl e to their condition s in life, is entitle d to be reimburse d from Bs propert y. The above section covers the case of necessaries supplied to a person incapable of contractin g (say, a mino r, lunatic , etc.) and to person s whom the incapabl e perso n is bound to suppor t (e.g., his wife and mino r children) . Howeve r, following point s shoul d be carefully noted: (a) the goods supplie d mus t be necessaries . Wha t will constitut e necessarie s shal l vary from perso n to perso n dependin g upon the social statu s he enjoys.* (b) it is only the propert y of the incapabl e perso n tha t shal l be liable . He canno t be held liable personall y. Thus , wher e he doesn t own any propert y, nothin g shal l be payable. (2) Reimbursement of person paying money due by another in payment of which he is interested A perso n who is intereste d in the paymen t of money which anothe r is bound by law to pay, and who, therefore , pays it, is entitle d to be reimburse d by the othe r. (Sectio n 69). Example B holds land in Bengal , on a lease grante d by A, the Zaminda r. The revenu e payable by A to the Governmen t being in arrea r, his land is advertise d for sale by the Government. Unde r the Revenu e Law, the consequenc e of such sale will be the annulmen t of Bs lease . B, to preven t the sale and the consequen t annulmen t of his own lease , pays the Government , the sum due from A. A is bound to make good to B the amoun t so paid. In order tha t the Sectio n may apply, it is necessar y to prove that: (a) the perso n makin g the paymen t is intereste d in the paymen t of money, i.e., the paymen t was made bonafide , for the protectio n of his own interest.
* For detail s see discussio n on Minors unde r Capacit y to Contract [Page 26].

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(b) the paymen t shoul d not be a voluntar y payment . It shoul d be such tha t ther e is some legal or othe r coercive proces s compellin g the payment. (c) the paymen t mus t be to anothe r person. (d) the paymen t mus t be one which the othe r part y was bound by law to pay. (3) Obligation of a person enjoying benefits of non-gratuitous act Wher e a perso n lawfull y does anythin g for anothe r person , or deliver s anythin g to him, not intendin g to do so gratuitousl y, and such othe r perso n enjoys the benefi t thereof , the latte r is bound to make compensatio n to the forme r in respec t of, or to restor e the thing so done or delivere d [Sectio n 70]. Examples (1) A, a tradesman , leave s goods at Bs house by mistake . B treat s the goods his own. He is bound to pay for them. (2) A saves Bs propert y from fire. A is not entitle d to compensatio n from B, if the circumstances show tha t he intende d to act gratuitousl y. In order tha t Sectio n 70 may appl y, the following condition s mus t be satisfied: (a) the thing mus t be done lawfully; (b) the intentio n mus t be to do it non-gratuitously ; and (c) the perso n for whom the act is done mus t enjoy the benefi t of it. (4) Responsibility of finder of goods Ordinaril y speaking , a perso n is not bound to take care of goods belongin g to anothe r, left on a road or othe r public place by acciden t or inadvertence , but if he take s them into his custod y, an agreemen t is implie d by law. Although , ther e is in fact no agreemen t betwee n the owner and the finde r of the goods, the finde r is for certai n purposes , deeme d in law to be a bailee and mus t take as much care of the goods as a man of ordinar y prudenc e would take of simila r goods of his own. This obligatio n is impose d on the basis of a quasi-contract . Section 71, which deals with this subject , says: A perso n who finds goods belongin g to anothe r and take s them into his custod y, is subject to the same responsibilit y as a bailee .* (5) Liability of person to whom money is paid, or thing delivered by mistake or under coercion (Section 72) A perso n to whom money has been paid, or anythin g delivere d by mistak e or under coercion, mus t repay or retur n it. Examples (1) A and B jointly owe Rs. 1,000 to C. A alone pays the amoun t to C and B not knowin g this fact, pays Rs. 1,000 over agai n to C. C is bound to repay the amount to B. (2) A railwa y compan y refuse s to delive r certai n goods to the consigne e except upon the paymen t of an illega l charg e for carriage . The consigne e pays the sum charged

Detail s on p. 107.

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in order to obtai n the goods. He is entitle d to recove r so much of the charg e as was illegall y excessive. Notice that the term mistak e as used in Sectio n 72 include s not only a mistak e of fact but also a mistak e of law. Ther e is no conflict betwee n the provision s of Sectio n 72 on the one hand , and Section s 21 and 22 on the othe r, and the true principl e is tha t if one party under mistake , whethe r of fact or law, pays to anothe r part y money which is not due by contract or otherwise , tha t money mus t be repai d [Sales Tax Officer, Benare s v. Kanhaiyalal Makanlal Saraf , (1959), S.C.J . 53]. Quantum Meruit The phras e quantu m merui t mean s as much as merite d or as much as earne d. The general rule of law is tha t unles s a perso n has performe d his obligation s in full, he cannot claim performanc e from the othe r.* But in certai n cases, when a perso n has done some work under a contract , and the othe r part y repudiate d the contract , or some even t happen s which makes the furthe r performanc e of the contrac t impossible , then the part y who has performed the work can claim remuneratio n for the work he has alread y done. The righ t to claim quantum merui t does not arise out of the contrac t as the righ t to damage s does; it is a claim on the quasi-contractua l obligatio n which the law implie s in the circumstance s [Patel Engg. Co. Ltd. v India n Oil Corporatio n Ltd. , AIR (1975) Pat. 212]. The claim on quantu m merui t arise s in the following cases: 1. When a contract is discovered to be unenforceable (Section 65) When an agreemen t is discovere d to be void or become s void, any perso n who has received any advantag e unde r such agreemen t or contrac t is bound to restor e it, or to make compensation for it to the perso n from whom he receive d it. Examples (1) A pays B Rs. 1,000 in consideratio n of Bs promisin g to marr y C, As daughte r. C is dead at the time of the promise . The agreemen t is void, but B mus t repay A the 1,000 rupees. (2) A contract s with B to delive r to him 250 kilos of rice before the first of May. A deliver s 130 kilos only before tha t day and none afte r. B retain s the 130 kilos after the first of May. He is bound to pay A for them. (3) A, a singe r, contract s with B, the manage r of a theatre , to sing at his theatr e for two night s every week durin g the next two months , and B engage s to pay her Rs. 100 for each night s performance . On the sixth night , A wilfully absent s herself from the theatre , and B, in consequence , rescind s the contract . B mus t pay A for the five night s on which she had sung. 2. When one party abandons or refuses to perform the contract Wher e ther e is a breac h of contract , the aggrieve d part y is entitle d to claim reasonable compensation for wha t he has done unde r the contract.

LAW OF CONTRACTS

* Cutte r v. Pawell , (1795) T.T. 320.

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Example C, an owner of a magazine , engage d P to write a book to be publishe d by instalments in his magazine . After a few instalment s were published , the magazin e was abandoned. Held : P could claim payment on quantum meruit for the part already published [Planch e v. Colbur n (1831) 8 Bing. 14]. 3. When a Contract is divisible When a Contrac t is divisible , and the part y not in default , has enjoyed the benefi t of the par t performance , the part y in defaul t may sue on quantu m meruit. 4. When an indivisible contract is completely performed but badly When an indivisibl e contrac t for a lump sum is completel y performed , but badl y, the person who has performe d can claim the lump sum less deductio n for bad work. Example A agree d to decorat e Bs flat for a lump sum of 750. A did the work but B complained for fault y workmanship . It cost B 204 to remed y the defect. Held : A could recove r from B 750 less 204 [Hoenin g v. Isaacs (1952) AIR 11 E.R. 176].

1.1 1 PERFORMANC E OF CONTRACTS


[Section s 37 67] A contrac t create s obligations . Performanc e of a Contract mean s the carryin g out of these obligations . Sectio n 37 require s tha t the partie s to a contrac t mus t eithe r perfor m or offer to perfor m thei r respectiv e promises , unles s such performanc e is dispense d with or excused unde r the provision s of the Contrac t Act, or of any othe r law.

OFFER TO PERFORM OR TENDER OF PERFORMANCE


It may happe n tha t the promiso r offers performanc e of his obligatio n unde r the contract at the prope r time and place but the promise e refuse s to accep t the performance . This is called as Tende r or attempte d performance . According to Sectio n 38, if a valid tende r is made and is not accepte d by the promisee , the promiso r shal l not be responsibl e for nonperformance nor shal l he lose his right s unde r the contract . A tende r or offer of performance to be valid mus t satisf y the following conditions: 1. It must be unconditional A conditiona l offer of performanc e is not valid and the promiso r shal l not be relieved thereb y. A tende r is conditiona l wher e it is not in accordanc e with the term s of the contract. Examples (1) X offers to Y the principa l amoun t of the loan. This is not a valid tende r since the whole amoun t of principa l and interes t is not offered. (2) X a debto r, offers to pay Y the debt due by instalment s and tender s the first instalment. This is not a valid tende r [Behar i Lal v. Ram Ghulam , 24 All. 461].

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2. It mus t be made at prope r time and place, and unde r such circumstance s tha t the person to whom it is made may have a reasonabl e opportunit y of ascertainin g tha t the person offering to perfor m is able and willing ther e and then to do the whole of wha t he is bound by his promis e to do. Examples (1) X offers by post to pay Y the amoun t he owes. This is not a valid tende r, as X is not able ther e and then to pay. (2) X offers the goods contracte d to Y at 1 A.M. This is not a valid tende r unles s it was so agreed. As to wha t is prope r time and place, depend s upon the intentio n of the partie s and the provisions of Sectio n 46 to 50 which are discusse d on p. 86. 3. Since the tende r is an offer to delive r anythin g to the promisee , the promise e must have a reasonabl e opportunit y to see tha t the thing offered is the thing contracte d for. Example A contract s to delive r B at his warehouse , on 1st March 1989, 100 bales of cotton of a particula r qualit y. A mus t bring the cotton to Bs warehous e on the appointe d day, unde r such circumstances tha t B may have a reasonabl e opportunit y of satisfyin g himsel f tha t the thing offered is cotton of the qualit y contracte d for, and tha t ther e are 100 bales. Notice tha t an offer to one of severa l joint promisee s has the same Legal effect as an offer to all of them.

LAW OF CONTRACTS

WHO MUST PERFORM?


The promis e may be performe d by promiso r himself , or his agen t or by his legal representative. 1. Promisor himself (Section 40) If it appear s tha t it was the intentio n of the partie s tha t the promis e shoul d be performed by the promiso r himself , such promis e mus t be performe d by the promiso r. Example A promise s to pain t a pictur e for B. A mus t perfor m this promis e personalit y. 2. Agent In cases othe r tha n the one specifie d in (1) above, the promiso r may employ a competent person to perfor m it. Example A promise s to pay to B a sum of money. A may perfor m this promis e eithe r personally paying the money to B or causin g it to be paid to B by anothe r. 3. Legal representative In case of deat h of the promiso r, the Legal representativ e mus t perfor m the promise unless a contrar y intentio n appear s from the contract.

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Example A promise s to delive r goods to B on a certai n day on paymen t of Rs. 1,000. A dies before tha t day. As legal representative s are bound to delive r the goods to B and B is bound to pay Rs. 1,000 to As representatives. 4. Where , howeve r, a contrac t involve s persona l skill or is founde d on normal considerations , it comes to an end with the deat h of the promiso r. Example A promise s to pain t a pictur e for B by a certai n day. A dies before tha t day. The contract cannot be enforce d eithe r by As representative s or by B.

CONTRACTS WHICH NEED NOT BE PERFORMED


A contrac t need not be performed: 1. If the partie s mutuall y agree to substitut e the origina l contrac t by a new one or to rescin d or alte r it (Sectio n 62). Example A owes money to B unde r a contract . It is agree d betwee n A, B and C tha t B shall henceforth accep t C as his debto r, instea d of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted. 2. If the promise e dispense s with or remits , wholly or in par t the performanc e of the promise made to him or extend s the time for such performanc e or accept s any satisfaction for it (Sectio n 63). Examples (1) A promise s to pain t a pictur e for B. B afterward s forbids him to do so. A is no longer bound to perfor m the promise. (2) A owes B Rs. 5,000. C pays to B Rs. 1,000 and B accept s them , in satisfactio n of his claim on A. This paymen t is a discharg e of the whole claim. 3. If the person , at whose option the contrac t is voidable , rescind s it (Sectio n 64). 4. If the promise e neglect s or refuse s to afford the promiso r reasonabl e facilitie s for the performanc e of his promis e (Sectio n 67). Example A contract s with B to repai r Bs house . B neglect s or refuse s to point out to A the places in which his house require s repai r. A need not perform.

PERFORMANC E OF JOIN T PROMISES DEVOLUTION OF JOINT LIABILITIES


When two or more person s make a joint promise , the promise e may, in the absenc e of an expres s agreemen t to the contrar y, compel any (one or more) of such joint promisor s to perform whole of the promis e (Sectio n 43).

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Example A, B and C jointly promis e to pay D Rs. 3,000. D may, compel eithe r A or B or C or any two of them to pay him Rs. 3,000. Thus , in Indi a the liabilit y of joint promisor s is joint as well as several . In England, howeve r, the liabilit y of the joint promisor s is only joint and not severa l and accordingl y all the joint promisor s mus t be sued jointl y. In England , therefore , releas e or discharg e of any of the joint promiso r shal l discharge all the joint promisors. Right of Contribution Where a joint promisor has been compelled to perform the whole promise, he may compel every othe r joint promiso r to contribut e equall y with himsel f to the performanc e of the promis e (unles s a contrar y intentio n appear s from the contract) . If any one of the joint promisors make s defaul t in such contribution , the remainin g joint promisor s mus t bear the loss arisin g from such defaul t in equa l shares. Examples (1) A, B and C are unde r a joint promis e to pay D Rs. 3,000. A is compelle d to pay the whole. A can recove r Rs. 1,000 each from B and C. (2) A, B and C jointly promis e to pay D the sum of Rs. 3,000. C is compelle d to pay the whole. A is insolvent , but his asset s are sufficien t to pay 1/2 of his debts . C is entitle d to receive Rs. 500 from As estate , and Rs. 1,250 from B. (3) A, B and C are unde r a joint promis e to pay D Rs. 3,000. C is unabl e to pay anything, and A is compelle d to pay the whole. A is entitle d to receive Rs. 1.500 from B. Release of Joint Promisor (Section 44) Wher e two or more person s have made a joint promise , a releas e of one of such joint promisors by the promise e does not discharg e the othe r joint promiso r or promisors , neither does it free him from responsibilit y to the othe r joint promiso r or promisors. In Kirtee Chunde r v. Struthers , (1878), 4 Cal. 336, the plaintif f sued some of the partners of a firm for damages , but then he settle d his claim agains t one of them and agree d to withdraw his claim and suit agains t him. Held : Tha t the suit could be carrie d on agains t the rest of the partners . The position in Englis h Law is, howeve r, different . Unde r the Englis h Law, if the promise e discharge s one of the severa l joint promisors , such discharg e acts as a discharg e of all the joint promisors. Thus, unde r Englis h Law suit mus t be brough t agains t all the promisor s jointl y.

LAW OF CONTRACTS

DEVOLUTION OF JOINT RIGHTS (Section 45)


When a perso n has made a promis e to two or more person s jointl y, then , unles s a contrar y intentio n appear s from the contract , the righ t to claim performanc e rest s with all the joint promisee s and afte r the deat h of any of them with the representative s of such deceased promise e jointly with the survivo r or survivor s and afte r the deat h of the survivors also, with the representative s of all jointl y. Thus , unlik e the case of joint promisor s whose liability is joint as well as several , the righ t of the joint promisee s is only joint and thu s any of them canno t enforce performanc e unles s so agreed.

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Example A in consideratio n of Rs. 5,000 lent to him by B and C, promise s B and C jointly to repay them tha t sum with interes t on a day specified . B dies. The righ t to claim performance rest s with Bs representativ e jointly with C durin g Cs life, and afte r Cs deat h with the representative s of B, and C jointl y.

TIME, PLACE AND MANNER OF PERFORMANCE (Sections 46 to 50 and 55)


The rule s laid down regardin g the time , place and manne r of performanc e are summed up hereunder: 1. Wher e the time for performanc e has been specifie d and the promiso r has undertaken to perfor m it withou t applicatio n by the promisee , the promiso r mus t perfor m on the day fixed durin g the usua l busines s hour s and at the place at which the promise ough t to be performed. Example A promise s to delive r goods to B at his warehous e on 15th Jul y, 1999. A offers the goods at Bs warehous e but afte r the usua l hour s for closing it. The performanc e of A is not valid. 2. But, wher e the time of performanc e is not specified , and the promiso r agree d to perform withou t a deman d from the promisee , the performanc e mus t be made within a reasonabl e time . Wha t a reasonabl e time is, in each particula r case, a questio n of fact. 3. Wher e a promis e is to be performe d on a certai n day, and the promiso r has not undertaken to perfor m it withou t applicatio n by the promisee , the promise e must apply for performanc e at a prope r place and withi n the usua l busines s hours . What is a prope r time and place is, in each particula r case, a questio n of fact. 4. When a promis e is to be performe d withou t applicatio n by the promise e and no place is fixed for its performance , the promiso r mus t apply to the promise e to appoint a reasonabl e place for the performanc e of the promise , and perfor m it at such place. Example A undertake s to delive r 1,000 kilos of Jut e to B on a fixed day. A mus t apply to appoint a reasonabl e place for the purpos e of receivin g it, and mus t delive r it to him at such place. 5. The performanc e of any promis e may be made in any manne r, or at any time which the promise e prescribe s or sanctions. Examples (1) B owes A Rs. 2,000. A desire s B to pay the amoun t to As accoun t with C, a banke r. B who also bank s with C order s the amoun t to be transferre d from his accoun t to As credi t and this is done by C. Afterwards , and before A knows of the transfe r, C fails. Ther e has been a good paymen t by B. (2) A owes B Rs. 2,000. B accept s some of As goods in deductio n of the debt. The delivery of the goods operate s as a par t payment. (3) A desire s B, who owes him Rs. 100 to send him a note for Rs. 100 by post. The debt is discharge d as soon as B puts into the post a lette r containin g the note duly addresse d to A.

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PERFORMANCE OF RECIPROCAL PROMISES (Sections 51 to 54 and 57)


Reciproca l promis e mean s a promis e in retur n for a promise . Thus , wher e a contract consists of promis e by one part y (to do or not to do somethin g in future ) in consideratio n of a simila r promis e by othe r part y, it will be called a case of reciproca l promises . Reciprocal promises mayb e divide d into thre e groups: 1. Mutua l and Dependent, 2. Mutua l and Independent , and 3. Mutua l and Concurrent. 1. Mutual and dependent In such a case the performanc e of one part y depend s upon the prior performanc e of the other part y. Thus , if the promiso r who mus t perform , fails to perfor m it, he canno t claim the performance of the reciproca l promise . On the othe r hand , he mus t make compensatio n to the othe r part y to the contrac t for any loss which such othe r part y may sustai n by the nonperformance of the contract. Examples (1) A contract s with B to execut e certai n builde rs work for a fixed price, B supplying the necessar y timbe r for the work. B refuse s to furnis h any timbe r and the work canno t be executed . A need not execut e the work and B is bound to make compensation to A for any loss cause d to him by the non-performanc e of the contract. (2) A promise s B to sell him 100 bales of merchandise , to be delivere d next day and B promise s A to pay for them withi n a month . A does not delive r accordin g to his promise . Bs promis e to pay need not be performed , and A mus t make compensation. 2. Mutual and independent In such cases, each part y mus t perfor m his promis e withou t waitin g for the performance or readines s to perfor m on the par t of the othe r. Example X promise s Y to delive r him goods on 10th July and Y in tur n promise s to pay the price on 6th July. Ys payin g the price is independen t of Xs deliverin g the goods and even if Y does not pay the price on 6th Jul y, X mus t delive r the goods, on 10th July. He can of course , sue Y for compensation. 3. Mutual and concurrent In such cases the promise s have to be simultaneousl y performed . According to Section 51, when a contract consists of reciprocal promises to be simultaneously performed, no promiso r need perfor m his promis e unles s the promise e is ready and willing to perfor m his reciprocal promise. Examples (1) A and B contrac t tha t A shal l delive r goods to B to be paid by instalments , the first instalment to be paid on deliver y. A need not delive r, unles s B is ready and willing to pay for the goods on deliver y. And B need not pay for the goods unles s A is ready and willing to delive r them on payment. (2) A and B contrac t tha t A shal l delive r goods to B at a price to be paid for by B on deliver y. A need not delive r, unles s B is ready and willing to pay the first instalment

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on deliver y. And B need not pay the first instalment , unles s A is ready and willing to delive r the goods on paymen t of the first instalment. Reciprocal promises to do things legal and also other things illegal (Section 57) Wher e person s reciprocall y promise , firstl y, to do certai n thing s which are legal and secondl y, unde r specifie d circumstances , to do certai n thing s which are illegal , the first set of promise s is a contrac t but second is a void agreement. Example A and B agree tha t A shal l sell B a house for Rs. 10,000 but tha t if B uses it as a gamblin g house , he shal l pay A 50,000 rupee s for it. The first set of reciproca l promises, namel y, to sell the house and pay 10,000 rupee s for it is a contract . The second set is for unlawfu l object, tha t B may use the house as a gamblin g house and is a void agreement.

ASSIGNMENT OF CONTRACTS
Assignmen t mean s transfe r. When a part y to a contrac t transfer s his right , title and interest in the contrac t to anothe r perso n or othe r persons , he is said to assig n the contract. Assignment of a contrac t can take place by operatio n of law or by an act of the parties. 1. Assignment by operation of law The instances of assignment by operation of law are the assignment of interest by insolvenc y or deat h of the part y to the contract . In the case of insolvenc y, the Official Receiver or Assigne e acquire s the interes t in the contrac t and in the case of death , the legal representative. 2. Assignment by act of parties In this case, the partie s themselve s make the assignment. The rule s regardin g assignm en t of contract s are summarise d below: 1. The obligation s or liabilitie s unde r a contrac t canno t be assigned . Thus , if A owes B 1,000 rupees , he canno t transfe r his obligatio n to pay to C and compel B to collect his money from C. But, if the promise e agree s to such assignment , he will be bound by it. In such a case, a new contrac t is substitute d for an old one. This is called novation . Thus , in the above example , if B agree s to accep t paymen t from C, the assignmen t will be valid and A shal l stan d discharge d of his obligatio n to pay. 2. Right s and benefit s unde r a contrac t may be assigned . For example , wher e A owes B Rs. 1,000, B may assig n his righ t to C. But, even a righ t or benefi t unde r a contrac t canno t be assigne d if it involve s persona l skill, abilit y, credi t or other personal qualifications . For example , a contrac t to marr y canno t be assigned. In Namasivay a v. Kadir Amma l 1894, 17 Mad. 168, A, a salt manufacture r agree d with B to manufactur e for him for a period of 7 year s quantit y of salt as B required , at a fixed rate. B agreed , to execut e all repair s (except petty repairs ) in the manufacture rs workshop. Held : These latte r element s in the contrac t rendere d it as one based on the characte r, credit and substance of the part y and, therefore , B could not assig n it withou t As consent. 3. The right s of a part y unde r a contrac t may amoun t to actionabl e claim or chosein-action. An actionabl e claim is a claim to any debt (except a secure d debt) or

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to any beneficia l interes t ....whethe r such claim or beneficia l interes t be existent, accruing, conditiona l or contingent Sectio n 3 of the Transfe r of Propert y Act. Example s of actionabl e claim s area money debt; the interes t of a buye r in goods in a contrac t for forwar d delivery ; etc. Actionabl e claim s can be assigne d by a writte n documen t unde r Sectio n 130 of the Transfe r of Propert y Act. Notice of the assignmen t mus t be given to the debto r to make the assignment valid.

LAW OF CONTRACTS

APP ROPRI ATION OF PAYMENT


[Section s 59 61] When a debto r owes severa l debts in respec t of which the paymen t mus t be made (to the same creditor), the question may arise as to which of the debts, the payment is to be appropriated . In England , the law on the subjec t was laid down in Clayton s case.* In India, the rule s regardin g appropriatio n of payment s are containe d in Section s 59 to 61 which in fact have adopte d with certai n modification s the rule s laid down in Clayton s case. The provisions of thes e section s are summarise d below: Rule No. 1. Appropriatio n by Debtor. Wher e a debto r owing severa l distinc t debts to one person, make s a paymen t to him, with expres s intimatio n tha t the paymen t is to be applied to the discharg e of some particula r debt, the payment , if accepted , mus t be applie d to that debt . (Sectio n 59). Where , howeve r, no expres s intimatio n is given but the paymen t is made under circumstance s implyin g tha t it shoul d be appropriate d to a particula r debt, the payment , if accepted, mus t be applie d to tha t debt (Sectio n 59). Examples (1) A owes B, among othe r debts , Rs. 1,000 upon a promissor y note which falls due on the 1st June . He owes B no othe r debt of tha t amount . On the 1st Jun e A pays B Rs. 1,000, the paymen t is to be applie d to the discharg e of the promissor y note. (2) A owes B, among othe r debts , the sum of Rs. 567. B write s to A and demands payment of this sum. A send s to B Rs. 567. This paymen t is to be applie d to the discharge of the debt of which B had demande d payment. Rule No. 2. Appropriatio n by Credito r. Wher e the debto r does not intimat e and ther e are no circumstance s indicatin g to which debt the paymen t is to be applied , the credito r may apply it at his discretio n to any lawful debt actuall y due and payabl e to him from the debto r. The amount , in such a case can be applie d even to a debt whic h has become tim e barred . However, it canno t be applie d to a dispute d debt (Sectio n 60). Example A obtain s two loans of Rs. 20,000 and Rs. 10,000 respectivel y. Loan of Rs. 20,000 is guarantee d by B. A send s the bank Rs. 5,000 but does not intimat e as to how it is to be appropriate d toward s the loans . The bank appropriate s the whole of Rs. 5,000 to the loa n of Rs. 10,000 (the loan not guaranteed) . The appropriatio n is valid and canno t be questioned eithe r by A or B.
* (l816) 1 Mer 572, 610.

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Rule No. 3. Where neithe r party appropriates . Wher e neithe r part y make s any appropriation the paymen t is to be applie d in discharg e of the debts in order of time , includin g timebarred debts . If the debts are of equa l standing , the paymen t is to be applie d proportionately (Section 61). The above rule is generall y applicabl e in case of runnin g account s betwee n two parties, money being paid and withdraw n from time to time from the account , withou t any specific indication as to appropriatio n of the paymen t made . In such a case debit s and credit s in the accounts will be set-u p agains t one anothe r in order of thei r dates , leavin g only final balance to be recovere d from the debto r by the credito r. Rule in re Hallett s Estat e case. The rule in Hallett s Estat e case is an exceptio n of the above rule (i.e., Rule No. 3). The rule applie s wher e a truste e had mixed up trus t funds with his own funds . In such a case, if the truste e misappropriate s any money belongin g to the trust , the first amoun t so withdraw n by him would be first debite d to his own money and then to the trus t funds . Similarl y, any deposit s made by him would be first credite d to trus t fund and then to his own fund, whateve r be the order of withdrawa l and deposit. Example A truste e deposit s Rs. 10,000 being trus t money with a bank and subsequentl y deposits Rs. 50,000 of his own in the same account . Thereafte r, he withdraw s Rs. 10,000 from the bank and misappropriate s it. The said withdrawa l will not be appropriate d against the Trus t amoun t of Rs. 10,000 but only agains t his own deposit , thoug h this was made later tha n the first deposit , thu s leavin g the Trus t fund intact.

1.1 2 DISCHARG E OF CONTRACTS


[Section s 73 75] The cases in which a contrac t is discharge d may be classifie d as follows: A. By performanc e or tende r. B. By mutua l consent. C. By subsequen t impossibilit y. D. By operatio n of law. E. By breach.

A. BY PERFORMANCE
The obvious mode of discharg e of a contrac have done whateve r was contemplate d unde r Thus wher e A contract s to sell his car to B to B and B pays the agree d price for it, the t is by performance , tha t is, wher e the parties the contract , the contrac t comes to an end. for Rs. 85,000 as soon as the car is delivered contrac t comes to an end by performance.*

Tender The offer of performanc e or tende r has the same effect as performance . If a promisor
* For detail s see the precedin g Par t 1.11 Performanc e of Contracts.

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tender s performanc e of his promis e but the othe r part y refuse s to accept , the promiso r stands discharged of his obligations.*

LAW OF CONTRACTS

B. BY MUTUAL CONSENT (Section 62)


If the partie s to a contrac t agree to substitut e a new contrac t for it, or to rescin d it or alter it, the origina l contrac t is discharged . A contrac t may terminat e by mutua l consen t in any of the following s ways: 1. Novation Novation mean s substitutio n of a new contrac t for the origina l one. The new contract may be substitute d eithe r betwee n the same partie s or betwee n differen t parties. Examples (1) A who owes B Rs. 20,000 enter s into an arrangemen t with him thereb y giving B a mortgage of his estate for Rs. 15,000. This arrangement constitutes a new contrac t and terminate s the old. (2) A owes money to B unde r a contract . It is agree d betwee n A, B and C tha t B shall thenceforth accep t C as his debto r instea d of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted. Notice that , the contrac t which is substitute d mus t be one capabl e of enforcemen t in law. Thus , wher e the subsequen t agreemen t is insufficientl y stampe d and, therefore , canno t be sued upon, novatio n does not become effective , tha t is, the origina l part y shal l continu e to be liable. 2. Rescission Rescissio n mean s cancellatio n of all or some of the term s of the contract . Wher e parties mutually decide to cancel the term s of the contract , the obligation s of the partie s thereunder terminate. 3. Alteration If the partie s mutuall y agree to chang e certai n term s of the contract , it has the effect of terminatin g the origina l contract . Ther e is, howeve r, no chang e in the parties. 4. Remission (Section 63) Remissio n is the acceptanc e of a lesse r sum tha n wha t was contracte d for or a lesser fulfilment of the promis e made. Examples (1) A owes B Rs. 5,000. A pays to B who accept s in satisfactio n of the whole debt Rs. 2,000 paid at the time and place at which the Rs. 5,000 were payable . The whole debt is discharged. (2) A owes B Rs. 5,000. C pays to B Rs. 1,000 and B accept s them , in satisfactio n of his claim on A. This paymen t is a discharg e of the whole claim.

* Also see p. 66.

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Thus , in Indi a promise e may remit or give-up a part of his claim and promis e to do so is bindin g even thoug h there is no consideratio n for doing so. Accord and Satisfaction These two term s are used in Englis h Law. In Englan d remissio n mus t be supporte d by a fresh consideration . The accord is the agreemen t to accep t less tha n wha t is due unde r the contract. The satisfaction is the consideratio n which make s the agreemen t operative . In other words, satisfactio n mean s the paymen t or fulfilmen t of the lesse r obligation . An accord is unenforceable, but an accord accompanie d by satisfactio n is valid and thereb y discharge s the obligation unde r the old contract . Thus , in our above exampl e (1) wher e B agree s to accept Rs. 2,000 in full satisfaction , the agreemen t is an accord and canno t be enforce d unde r English Law but when Rs. 2,000 are actuall y paid to B who accept s them in full satisfactio n of his claim of Rs. 5,000 it is a valid discharge , tha t is the balanc e of Rs. 3,000 can neve r be claimed. 5. Waiver Waive r mean s relinquishmen t or abandonmen t of a right . Wher e a part y waive s his rights unde r the contract , the othe r part y is release d of his obligations. Example A promise s to pain t a pictur e for B. B afterward s forbids him to do so. A is no longer bound to perfor m the promise. 6. Merger A contrac t is said to have been discharge d by way of merge r wher e an inferio r right possessed by a perso n coincide s with a superio r righ t of the same person. Example A man who is holdin g certai n propert y unde r a lease , buys it. His right s as a lessee vanish. They are merge d into the right s of ownershi p which he has now acquired , the rights associate d with lease being inferio r to the right s associate d with the ownership.

C. BY SUBSEQUENT IMPOSSIBILITY (Section 56)


Impossibility in a contract may either be inherent in the transaction or it may be introduce d late r by the chang e of certai n circumstance s materia l to the contract. Examples of Inherent Impossibility (1) A promise s to pay B Rs. 50,000 if B rides on horse to the moon. The agreement is void. (2) A agree s with B to discove r treasur e by magic. The agreemen t is void. The impossibilit y in thes e cases is inheren t in the transaction . Such a contrac t is void ab-initio. On the othe r hand , wher e a contrac t originate s as one capabl e of performanc e but later due to chang e of circumstance s its performanc e become s impossible , it is known to have become void by subsequen t or supervenin g impossibilit y. We shal l now conside r this kind of impossibility in details. Subsequen t Impossibilit y in Englan d is referre d to as Doctrin e of Frustration . A contrac t is deeme d to have become impossibl e of performanc e and thu s void unde r the following circumstances:

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1. Destruction of subject-matter of the contract Wher e the subject-matte r of a contrac t is destroyed , for no faul t of the promiso r, the contract become s void by impossibilit y. A music hall was agree d to be let out on certai n dates , but before those date s it was destroyed by fire. Held, tha t the owner was absolve d from liabilit y to let the buildin g as promise d [Taylo r v. Caldwel l (1863) 122 E.R. 299]. 2. By the death or disablement of the parties Wher e the performanc e of the contrac t mus t be execute d personall y by the promiso r, his death or physica l disabilit y to perfor m shal l rende r the contrac t void and thu s exonerat e him from the obligation. Examples (1) A and B contrac t to marr y each othe r. Before the time fixed for the marriage , A dies. The contrac t become s void. (2) A, a singe r, agree s with B to give his performanc e at some particula r theatr e on a specifie d date . While on his way to the theatr e A meet s an acciden t and is rendered unconscious . The agreemen t become s void. (3) A contract s to act at a theatr e for six month s in consideratio n of a sum paid in advanc e to B. On severa l occasion s A is too ill to act. The contrac t to act on those occasions become s void. 3. Subsequent illegality Wher e by subsequen t legislatio n the performanc e of a contrac t is forbidde n by law, the parties are absolve d from liabilit y to perfor m it. Example A contract s to suppl y B 100 bottle s of wine. Before the contrac t is executed , i.e., bottles supplied, dealing s in all sorts of liquor are declare d forbidden , the contrac t become s void. 4. Declaration of war If war is declare d betwee n two countrie s subsequen t to the makin g of the contract , the parties would be exonerate d from its performance. Example A contract s to take indigo for B to a foreign port. As Governmen t afterward s declares war agains t the countr y in which the port is situated . The contrac t become s void when war is declared. 5. Non-existence or non-occurrence of a particular state of things When certai n thing s necessar y for performanc e cease to exist the contrac t become s void on the groun d of impossibilit y. Examples (1) A and B contrac t to marr y each othe r. Before the time fixed for the marriage , A goes mad. The contrac t become s void. (2) A contrac t was to hire a flat for viewing the coronatio n processio n of the king. The processio n had to be cancelle d on accoun t of king s illness . In a suit for the recover y of the rent , it was held tha t the contrac t becam e impossibl e of performance and tha t the hire r need not pay the ren t [Krell v. Henry (1903) 2 K.B. 740].

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Exceptions Apar t from the cases mentione d above, impossibilit y does tha t agree s to do an act shoul d do it, unles s absolutel y impossibl one of the ways discusse d above. Some of the circumstance s discharged on the groun d of subsequen t impossibilit y are state d 1. Difficulty of performance

not discharg e contracts . He e which may happe n in any in which a contrac t is not hereunder:

The mere fact tha t performanc e is more difficul t or expensiv e or less profitabl e tha n the parties anticipate d does not discharg e the duty of performance. Example X promise d to send certai n goods from Bomba y to Antwer p in Septembe r, In Augus t war broke out and shippin g space was not availabl e except at very high rates. Held : The increas e of freigh t rate s did not excuse performance. 2. Commercial impossibility It mean s tha t if the contrac t is performed , it will resul t in a loss to the promiso r. Commercia l impossibilit y to perfor m a contrac t does not discharg e the contract. Example A contrac t to lay gas main s is not discharge d becaus e the outbrea k of war make s it expensive to procur e the necessar y material s [M/s. Alopi Pd. v. Union of Indi a (1960) S.C. 589]. Howeve r, the Madra s High Cour t in Easu n Engineerin g Co. Ltd. v. The Fertiliser s and Chemicals Travancor e Ltd. and Anothe r (AIR 1991 Mad. 158} has held tha t the abnormal increase in price due to war condition s was an untowar d even t or chang e of circumstances which totally upset the very foundation upon which parties rested their bargain. Therefore , in a contrac t for suppl y of transformers , an increas e of 400 per cent in the price of transforme r oil due to war was held to be an impossibilit y of performanc e and the supplie r not held liable for breach. 3. The promiso r is not exonerate d from his liabilit y if the thir d person , on whose work the promiso r relied , fails to perform . Thus , a wholesale rs contrac t to delive r goods is not discharged becaus e a manufacture r has not produce d the goods concerned. 4. Strikes, lockouts and civil disturbances Event s like thes e do not terminat e contract s unles s ther e is a claus e in the contrac t to tha t effect. Example A agree d to suppl y B certai n goods to be produce d in Algeria . The goods could not be produced becaus e of riots and civil disturbance s in tha t countr y. Held : Ther e was no excuse for non-performanc e of the contrac t [Jacobs v. Credit Lyonnais (1884) 12 Q.B.D. 589]. 5. Failure of one of the objects If the contrac t is made for severa l purposes , the failur e of one of them does not terminate the contract.

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Example A agree d to let a boat to H to (i) view the nava l review at the coronatio n and (ii) to cruise roun d fleet. Owing to the king s illness , the nava l review was cancelled , but the fleet was assemble d and the boat could have been used to cruis e roun d the fleet. Held : The contrac t was not discharge d [Herne Bay Steamboa t Co. v. Hutto n K.B. 740]. SUBSEQUENT IMPOSSIBILITY (When does Contract Become Void?) By Destructio n of subjec t matte r of the contract. By the deat h or disablemen t of the parties. By subsequen t illegalit y. By declaratio n of wa r. By non-existenc e or non occurrenc e of a particula r stat e of things. Difficult y of performanc e does not amoun t to impossibilit y. Commercia l impossibilit y does not rende r a contrac t void. Strikes , lock-out s and civil disturbance s do not terminat e contract s unless provided for in the contract. 9. Failur e of one of the objects does not terminat e the contract. 10. Non-performanc e by the thir d part y does not exonerat e the promiso r from his liabilit y. Effects of Supervening Impossibility 1. A contrac t to do an act which, afte r the contrac t is made become s impossible , or by reaso n of some even t which the promiso r couldn t prevent , unlawful , becomes void when the act become s impossibl e or unlawful . (Sectio n 56, para 2). 2. According to para 3 of Sectio n 56, wher e a perso n has promise d to do something which he knew, or with reasonabl e diligence , migh t have known , and which the promisee did not know to be impossibl e or unlawful , such promiso r mus t make compensation to such promise e for any loss which such promise e sustain s through the non-performanc e of the promise. 3. When a contrac t become s void, any perso n who has receive d any advantag e under such contrac t is bound to restor e it, or to make compensatio n for it to the person from whom he receive d it (Sectio n 65). Examples (1) A is (2) A C contract s to sing for B at a concer t for Rs. 1,000, which is paid in advance . A too ill to sing. A mus t refun d to B 1,000 rupees. pays B 1,000 rupee s in consideratio n of Bs promisin g to marr y C, As daughte r. dies before marriage . B mus t repay A the 1,000 rupees. 1. 2. 3. 4. 5. 6. 7. 8.

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D. BY OPERATION OF LAW
Discharg e unde r this head may take place as follows:

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1. By death Deat h of the promiso r result s in terminatio n of the contrac t in cases involvin g personal skill or abilit y. 2. By insolvency The Insolvenc y Acts provid e for discharg e of contract s unde r certai n circumstances . So, where an order of discharg e is passe d by an Insolvenc y Court , the insolven t stand s discharged of liabilitie s of all debts incurre d previou s to his adjudication. 3. By merger When betwee n the same parties , a new contrac t is entere d into, and a securit y of a highe r degree , or a highe r kind is taken , the previou s contrac t merge s in the highe r securit y, for example , a righ t of action on an ordinar y debt which would be merge d in the righ t of suing on a mortgag e for the same debt. 4. By the unauthorised alteration of terms of a written document Wher e any of the partie s alter s any of the term s of the contrac t withou t seekin g the consent of the othe r part y to it, the contrac t terminates.

E. BY BREACH OF CONTRACT
A contrac t terminate s by breac h of contract . Breac h of contrac t may arise in two ways: (a) Anticipator y breach , and (b) Actua l breach. Anticipatory Breach of Contract Anticipator y breac h of contrac t occurs, when a part y repudiate s it before the time fixed for performanc e has arrive d or when a part y by his own act disable s himsel f from performing the contract. Examples (1) A contract s to marr y B. Before the agree d date of marriag e he marrie d C. B is entitle d to sue A for breac h of promise. (2) A promise d to marr y B as soon as his (As) fathe r shoul d die. Durin g the fathe rs life time , A absolutel y refuse d to marr y B. Althoug h the time for performanc e had not arrived , B was held entitle d to sue for breac h of promis e [Frost v. Knigh t L.R. 7 Ex. 111]. (3) A contract s to suppl y B with certai n article s on 1st of August . On 20th July, he inform s B tha t he will not be able to suppl y the goods. B is entitle d to sue A for breac h of promise. Consequences of Anticipatory Breach Wher e a part y to a contrac t refuse s to perfor m his par t of the contrac t before the actual time arrive s the promise e may either : (a) rescin d the contrac t and trea t the contrac t as at an end, and at once sue for damages , or (b) he may elect not to rescin d but to trea t the contract operativ e and wait for the time of performanc e and then hold the othe r part y liable for the consequence s of non-performance . In the latte r case, the part y who has repudiated may still perfor m if he can. Thus , from the above discussio n it follows tha t anticipator y breach of contrac t does not

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by itself discharg e the contract . The contrac t is discharge d only when the aggrieve d party accepts the repudiatio n of the contract , i.e., elects to rescin d the contract , Notice that if the repudiation is not accepted and subsequentl y an event happens , dischargin g the contract legall y, the aggrieve d party shall lose his right to sue for damages. Example A agree d to load a cargo of whea t on Bs ship at Odess a by a particula r date but when the ship arrive d A refuse d to load the cargo. B did not accep t the refusa l and continued to deman d the cargo. Before the last date of loadin g had expire d the Crimea n War broke out , renderin g the performanc e of the contrac t illegal. Held : The contrac t was discharge d and B could not sue for damage s [Avery v. Bowen (1856) 6 E. & B. 965]. Actual Breach of Contract The actua l breac h may take place (a) at the time when performanc e is due, or (b) during the performanc e of the contract. Actua l breac h of Contract , at the tim e whe n performanc e is due . If a perso n does not perfor m his par t of the contrac t at the stipulate d time , he will be liable for its breach. Example A selle r offers to execut e a deed of sale only on paymen t by the buye r of a sum higher than is payabl e unde r the contrac t for sale, the vendo r shal l be liable for the breach [Jaggo Bai v. Hari Har Prasa d Singh , A.I.R. 1947, P.C. 173]. Time as Essence of Contract But, if the promiso r offers to perfor m his promis e subsequentl y, the questio n arises whether it shoul d be accepted , or whethe r the promise e can refus e such acceptanc e and hold the promiso r liable for the breach . The answe r depend s upon whethe r time was considered by the partie s to be of the essenc e of the contrac t or not. Sectio n 55, in this respect , lays down as follows: When a part y to a contrac t promise s to do a certai n thing at or before a specifie d time, or certai n thing s at or before specifie d time s and fails to do any such thing at or before the specified time , the contract , or so much of it as has not been performe d become s voidabl e at the option of the promisee , if the intentio n of the partie s was tha t time shoul d be of the essence of the contract. If it was not the intentio n of the partie s tha t time shoul d be of the essenc e of the contract, the contrac t does not become voidabl e by the failur e to do such thing at or before the specifie d time but the promise e is entitle d to compensatio n from the promiso r for any loss occasioned to him by such failure . If in case of a contrac t voidabl e on accoun t of the promiso r s failur e to perfor m his promis e at the time agreed , the promise e accept s performanc e of such promise at any time othe r tha n agreed , the promise e canno t claim compensatio n for any loss occasioned by the non-performanc e of the promis e at the time agreed , unless , at the time of such acceptanc e he gives notice to the promiso r of his intentio n to do so. According to the above provisions , if performanc e beyond the stipulate d time is accepted, the promise e mus t give notice of his intentio n to claim compensation . If he fails to give such notice, he will be deeme d to have waived tha t right . In England , howeve r, no such notice is necessar y, and the promise e can, even afte r acceptin g the belate d performance , claim compensation. Breac h durin g the Performanc e of the Contract . Actua l breac h of contrac t also

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occurs when durin g the performanc e of the contrac t one part y fails or refuse s to perfor m his obligation unde r the contract. Example A contracte d with a Railwa y Compan y to suppl y it certai n quantit y of railway-chair s at a certai n price. The deliver y was to be made in instalments . After a few instalment s had been supplied , the Railwa y Compan y aske d A to delive r no more. Held : A could sue for breac h of contract . [Cort v. Am-bergate , etc. Rly. Co. (1851) 17 Q.B. 1271.

1.1 3 REMEDIE S FOR BREAC H OF CONTRACT


[Section s 73 75] As soon as eithe r part y commit s a breac h of the contract , the othe r part y becomes entitled to any of the following reliefs: 1. Rescissio n of the Contract. 2. Damage s for the loss sustaine d or suffered. 3. A decree for specific performance. 4. An injunction. 5. Suit on Quantu m Meruit. 1. Rescission of the Contract When a breac h of Contrac t is committe d by one part y, the othe r part y may sue to treat the contrac t as rescinded . In such a case, the aggrieve d part y is freed from all his obligations unde r the contract. Example A promise s B to suppl y 100 bags of rice on a certai n date and B promise s to pay the price on receip t of the goods. A does not delive r the goods on the appointe d day, B need not pay the price. Party Rightfully Rescinding Contract Entitled to Compensation (Section 75) A perso n who rightfull y rescind s the contrac t is entitle d to compensatio n for any damage which he has sustaine d throug h the non-fulfilmen t of the contract. Example A, a singe r, contract s with B, the manage r of a theatre , to sing at his theatr e for two nights in every week durin g the next two months , and B engage s to pay her Rs. 100 for each night s performance . On the sixth night , A wilfully absent s hersel f from the theatre , and B in consequence , rescind s the contract . B is entitle d to claim compensation for the damag e which he has sustaine d throug h the non-fulfilmen t of the contract. 2. Damages Damages , generall y speaking , are of four kinds: A. Ordinar y Damages, B. Specia l Damages,

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C. Vindictive , or Punitiv e or Exemplar y Damages , and D. Nomina l Damages. A. Ordinary Damages (Section 73) Ordinar y damage s are those which naturall y arose in the usua l course of thing s from such breach . The measur e of ordinar y damage s is the differenc e betwee n the contrac t price and the marke t price at the date of the breach . If the selle r retain s the goods afte r the breach, he canno t recove r from the buye r any furthe r loss if the marke t falls, nor be liable to have the damage s reduce d if the marke t rises. Examples (1) A contract s to delive r 100 bags of rice at Rs. 100 a bag on a futur e date . On the due date he refuse s to delive r. The price on tha t day is Rs. 110 per bag. The measure of damage s is the differenc e betwee n the marke t price on the date of the breach and the contrac t price, viz., Rs. 1,000. (2) A contract s to buy Bs ship for Rs. 60,000 but break s his promise . A mus t pay to B, by way of compensation , the excess, if any, of the contrac t price over the price which B can obtai n for the ship at the time of the breac h of promise. Notice tha t ordinar y damage s shal l be availabl e for any loss or damag e which arises naturally in the usua l course of thing s from the breac h and as such compensatio n canno t be claimed for any remot e or indirec t loss or damag e by reaso n of the breac h (Sec. 73). Example A railwa y passenge r s wife caugh t cold and fell ill due to her being aske d to get down at a place othe r tha n the Railwa y Station . In a suit by the plaintif f agains t the railwa y compan y, held tha t damage s for the persona l inconvenienc e of the plaintif f alone could be granted, but not for the sicknes s of the plaintif f s wife, becaus e it was a very remot e consequence. B. Special Damages (Section 73) Specia l damage s are claime d in case of loss of profit , etc. When ther e are certai n special or extraordinar y circumstance s presen t and thei r existenc e is communicate d to the promiso r, the non-performanc e of the promis e entitle s the promise e to not only claim the ordinary damages but also damage s tha t may resul t therefrom. Examples (1) A, a builde r, contract s to erect and finish a house by the first of Januar y, in order tha t B may give possessio n of it at tha t time to C, to whom B has contracte d to let it. A is informe d of the contrac t betwee n B and C. A build s the house so badly that , before the first of Januar y, it falls down and has to be rebuil t by B, who, in consequence, loses the ren t which he was to have receive d from C, and is obliged to make compensatio n to C for the breac h of his contract . A mus t make compensation to B for the cost of rebuildin g the house , for the ren t lost, and for the compensation mad e to C. (2) A deliver s to B, a common carrie r, a machin e to be conveyed , withou t delay, to As mill, informin g B tha t his mill is stoppe d for wan t of the machine . B unreasonably delay s the deliver y of the machine , and A in consequence , loses a profitabl e contract with the Government . A is entitle d to receive from B, by way of compensation , the average amoun t of profit which would have been made by the workin g of the mill

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durin g the time tha t deliver y of it was delayed . But, howeve r, the loss sustained through the loss of the Governmen t contrac t canno t he claimed. Notice that the communicatio n of the special circumstance s is a pre-requisit e to the claim for special damages. Examples (1) In Hadle y v. Baxendale , Xs mill was stoppe d due to the breakdow n of a shaft . He delivered the shaf t to Y, a common carrie r, to be take n to a manufacture r to copy it and make a new one. X did not make known to Y tha t delay would resul t in a loss of profits . By some neglec t on the par t of Y the deliver y of the shaf t was delaye d in transi t beyond a reasonabl e time . As a resul t the mill remaine d idle for a longer time than otherwis e would have been had the shaf t been delivere d in time. Held : Y was not liable for loss of profit s durin g the period of delay as the circumstance s commun icate d to Y did not show tha t a delay in the deliver y of shaft would entai l loss of profit s to the mill. (2) Wher e A contract s to sell and delive r to B, on the first of Januar y, certai n cloth which B intend s to manufactur e into caps of a particula r kind, for which ther e is no demand , except at tha t season . The cloth is not delivere d till afte r the appointed time and too late to be used tha t year in makin g caps. B is entitle d to receive from A only ordinar y damages , i.e., the differenc e betwee n the contrac t price of the cloth and its marke t price at the time of deliver y but not the profit s which he expected to obtai n by makin g caps, nor the expense s which he has put in making preparation for the manufacture. C. Vindictive Damages Vindictiv e damage s are awarde d with a view to punis h the defendant , and not solely with the idea of awardin g compensatio n to the plaintiff . These have been awarde d (a) for a breach of promis e to marry ; (b) for wrongfu l dishonou r of a chequ e by a banke r possessin g adequate funds of the custome r. The measur e of damage s in case of (a) is dependen t upon the severity of the shock to the sentiment s of the promisee . In case of (b) the rule is smalle r the amount of the chequ e dishonoured , large r will be the amoun t of damage s awarded. D. Nominal Damages Nomina l damage s are awarde d in cases of breac h of contrac t wher e ther e is only a technica l violatio n of the legal right , but no substantia l loss is cause d thereb y. The damages granted in such cases are called nomina l becaus e they are very small , for example , a rupee or a shilling. Duty to Mitigate Damages Suffered It is the duty of the injure d part y to minimis e damages . [Britis h Westinghous e & Co. v. Undergroun d Electric etc. Co., (1915) A.C. 673]. He canno t claim to be compensate d by the party in defaul t for loss which is reall y not due to the breac h but due to his own neglec t to minimise loss afte r the breach.

LIQUIDATED DAMAGES AND PENALTY


Sometime s partie s themselve s at the time of enterin g into a contrac t agree tha t a particula r sum will be payabl e by a part y in case of breac h of the contrac t by him. Such a

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sum may eithe r be by way of liquidate d damages , or it may be by way of penalty . Liquidated Damages The essenc e of liquidate d damage s is a genuin e covenante d pre-estimat e of damages. Thus, the stipulate d sum payabl e in case of breac h is to be regarde d as liquidate d damages, if it be found tha t partie s to the contrac t conscientiousl y tried to make a pre-estimat e of the loss which migh t happe n to them in case the contrac t was broke n by any of them. Penalty The essenc e of a penalt y is a paymen t of money stipulate d as in terorem of the offending part y. In othe r words, if it is found tha t the partie s made no attemp t to estimat e the loss that might happe n to them on breac h of the contrac t but still stipulate d a sum to be paid in case of a breac h of it with the object of coercing the offendin g part y to perfor m the contract , it is a case of penalt y. Thus , a term in a contrac t amount s to a penalt y wher e a sum of money, whic h is out of all proportio n to the loss, is stipulate d as payabl e in case of its breach. Englis h law recognise s a distinctio n betwee n liquidate d damage s and penalt y whereas liquidated damage s are enforceabl e but penalt y canno t be claimed . In India , ther e is no such distinction recognise d betwee n penalt y and liquidate d damages . Sectio n 74 which contain s law in this regar d state s When a contrac t has been broken , if a sum is name d in the contract as the amoun t to be paid in case of such breach , or if the contrac t contain s any other stipulation by way of penalt y, the part y complainin g of the breac h is entitle d (whethe r or not actual damag e or loss is proved to have been cause d thereby) , to receive from the part y who has broke n the contract , reasonabl e compensatio n not exceedin g the amoun t as name d or, as the case may be, the penalt y stipulate d for. Thus , wher e the amoun t payabl e in case of breach is fixed in advanc e whethe r by way of liquidate d damage s or penalt y, the part y may claim only a reasonabl e compensatio n for the breach , subjec t to the amoun t so fixed. Examples (1) A contract s with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on tha t day. B is entitle d to recove r from A such compensation , not exceedin g Rs. 1,000, as the Cour t consider s reasonable. (2) A contract s with B tha t if A practice s as a surgeo n withi n Calcutta , he will pay B Rs. 5,000. A practice s as a surgeo n in Calcutta . B is entitle d to such compensation, not exceedin g Rs. 5,000 as the Cour t consider s reasonable. (3) A gives B a bond for the repaymen t of Rs. 1,000 with interes t at 12% at the end of six months , with a stipulatio n tha t in case of default , interes t shal l be payable at the rat e of 75 per cent from the date of default . This is a stipulatio n by way of penalt y, and B is only entitle d to recove r from A such compensatio n as the Court considers reasonable. Payment of Interest Whethe r paymen t of interes t at a highe r rat e amount s to penalt y shal l depen d upon the circumstances of the case. Howeve r, the following rule s may be helpfu l in understandin g the legal positio n in this regard. 1. A stipulatio n for increas e from the date of defaul t shal l be a stipulatio n by way of penalty if the rat e of interes t is abnormall y high.

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Example A gives B a bond for the repaymen t of Rs. 1,000 with interes t at 12 per cent, at the end of six months , with a stipulatio n tha t in case of default , interes t shal l be payable at the rat e of 75% from the date of default . This is a stipulatio n by way of penalt y, and B is only entitle d to recove r from A such compensatio n as the court consider s reasonable. 2. Wher e ther e is a stipulatio n to pay increase d interes t from the date of the bond and not merel y from the date of default , it is alway s to be considere d as penalt y. 3. Compoun d Interest . Compoun d interes t in itself is not a penalt y. But it is allowed only in cases the partie s expressl y agree to it. Howeve r, a stipulatio n (claus e in the agreement) to pay compoun d interes t at a highe r rat e on defaul t is to be considered a penalt y. In Sunde r Koer v. Rai Sha m Krisha n (1907) 34 Cal. 150, the Privy Council observe d tha t compoun d interes t at a rat e exceedin g the rat e of interest on the principa l money being in excess of the ordinar y and usefu l stipulation , may well be regarde d as in the natur e of a penalt y. 4. An agreemen t to pay a particula r rat e of interes t with a stipulatio n tha t a reduced rate will be acceptabl e if paid punctuall y is not a stipulatio n by way of penalt y. Example Wher e a bond provide s for paymen t of interes t at 12 per cent per annu m with a proviso that , if the debto r pays interes t punctuall y at the end of every year, the credito r would accept interes t at the rat e of 9 per cent per annum . Such a claus e is not in the nature of a penalt y and hence interes t @ 12 per cent shal l be payable. 3. Specific Performance Wher e damage s are not an adequat e remed y, the court may direc t the part y in breach to carry out his promise according to the terms of the contract. This is called specific performance of the contract . Some of the instance s wher e Cour t may direc t specific performance are: a contrac t for the sale of a particula r house or some rat e articl e or any othe r thing for which monetar y compensatio n is not enoug h becaus e the injure d part y will not be able to get an exact substitut e in the market. Specific performanc e will not be grante d where: (a) Monetar y compensatio n is an adequat e relief. (b) The contrac t is of a persona l nature , e.g., a contrac t to marr y. (c) Wher e it is not possibl e for the Cour t to supervis e the performanc e of the contract, e.g., a buildin g contract. (d) The contrac t is made by a compan y beyond its objects as laid down in its Memorandu m of Association. 4. Injunction Injunctio n mean s an order of the Court . Wher e a part y is in breac h of a negativ e term of contrac t (i.e., wher e he does somethin g which he promise d not to do), the Cour t may, by issuing an orde r, prohibi t him from doing so. Examples (1) G agree d to buy the whole of the electri c energ y require d for his house from a certai n compan y. He was therefore , restraine d by an injunctio n from buying electricit y from any othe r person . [Metropolita n Electric Suppl y Compan y v. Ginde r].

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(2) N, a film sta r, agree d to act exclusivel y for a particula r produce r, for one yea r. Durin g the year she contracte d to act for some othe r produce r. Held : She could be restraine d by an injunction. 5. Quantum Meruit The phras e Quantu m Meruit mean s as much as is merited (earned) . The norma l rule of law is tha t unles s a part y has performe d his promis e in its entirel y, it canno t claim performance from the othe r. To this rule, howeve r, ther e are certai n exception s on the basis of Quantu m Meruit . A righ t to sue on a quantu m meruit arise s wher e a contract , partly performed by one part y, has become discharge d by the breac h of the othe r part y. This has already been discusse d unde r Quas i Contracts (Par t 110).

LAW OF CONTRACTS