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FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No.

1A

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Concept Notes Subject: Mercantile Law

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A

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FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A

THE INDIAN CONTRACT ACT ACT, 1872
Unit 1- Nature of Contracts Applicability: This act extends to the whole of except the State of Jammu and Kashmir; and it shall come into force on the first day of September, 1872. A. What is Contract? An agreement which is legally enforceable is a contract. Example: X enters into an agreement with Y to buy his land at a price agreed by both. This agreement is legally enforceable and his called a “Contract”. All contracts are agreements, but all agreements are not contracts. Example: X agrees to take Y to a movie. Though there is an agreement, this is not a contract as the agreement cannot be enforced. This can be better understood by the followi following process chart.

Proposal Promise Consideration Agreement Legally enforceable Contract Voidable agreement Legally not enforceable Void agreement

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Proposal: When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Example: X offer offers s to sell his land to Y for Rs. 2 lacs. This is called a proposal. Promise – Sec. 2(b): When a person to whom the proposal is m made, ade, signifies his assent thereto, the proposal is said to be accepted and it becomes a promise. Example: If Y accepts the offer made by X, the proposal when it is accepted, becomes a promise. Sec. 2(c) - The person making the proposal is called the "promisor", and the person accepting the th proposal is called "promisee". Consideration: When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the he promise. For example if Y agrees to pay X Rs. 2 lacs for the land, then Rs. 2 lacs is the consideration. Let us take another example: If X offers to pay Rs. 5000 to Y for not attending a competition, then the abstinence of Y is the consideration from his side and Rs. 5000 is the consideration from X. Agreement – Sec. 2(e): Every promise and every set of promises, forming the consideration for each other, is an agreement. Contract – Sec. 2(h): An agreement enforceable by law is a contract. Voidable Agreement – Sec. 2(i) 2(i): An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable agreement. Void Agreement – Sec. 2(g): An agreement not enforceable by law is said to be void. void B. Essentials of Valid Contract: S. 10 of Indian Contract Act, 1872 states that “a “all ll agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void”. Hence the essentials of Valid Contract are: Intention to create legal obligation through offer and acceptance should be present This should result in a moral duty on the person who promises or offers to do something. And this should also give right to the promisee to claim its fulfillment. Such duties and right should be legal and not merely moral. In Balfour v. Balfour, a husband promised to pay maintenance allowance ever every y month to his wife, so long as they remain separate. When he failed to perform this promise, she brought an action to enforce it. As it is an agreement of domestic nature, it was held that it does not contemplate to create any legal obligation. Free consent ent of the parties is necessary Consent would be considered as free consent if it is not vitiated by coercion, undue influence, fraud, misrepresentation or mistake. Wherever the consent of any party is not free, the contract is voidable at the option of that party. Illustration: A threatened to shoot B if he (B) does not lend him Rs. 2000 and B agreed to it. Here the agreement is entered into under coercion and hence voidable at the option of B.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A

Competency or capacity to enter into contract must be ensured Section 11 of the Indian Contract Act, 1872 provides that a person who who(a) (b) (c) has not attained the age of majority, is of unsound mind [excluding the Lucid intervals] and is disqualified from entering into a contract by any law (like an alien enemy, insolvents, inso convicts etc),

Shall be considered as not competent to enter into any contract. Lawful consideration should be present ‘Consideration’ refers to ‘compensation’ for doing or omitting to do an act or deed. It is also referred to as ‘quid pro quo’ meaning eaning thereby ‘something in return for another thing’. Illustration: A agrees to sell his books to B for Rs. 100, B’s promise to pay Rs. 100 is the consideration for A’s promise to sell his books and A’s promise to sell the books is the consideration for B’s promise to pay Rs. 100.

Lawful object should be the subject matter of contract The agreement entered must not be either illegal or void. An illegal agreement is an agreement expressly or impliedly prohibited by law. A void agreement is one withou without t any legal effects. For Example: Threat to commit murder or making/publishing defamatory statements or entering into agreements which are opposed to public policy is illegal in nature.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
C. Types of Contract:

a) Void contract: Sec. 2(j) enforceable e by law becomes void when it ceases to be enforceable. enforceable It A contract which ceases to be enforceabl is a contract ontract which cannot be enforced by a court of law. Some of the examples of Void c contracts are: Where both the parties to an agreement are under a mistake of fact fact. When the consideration or object of an agreement is unlawful unlawful. An agreement without consideration. An agreement in restraint of marriage, trade, legal proceedings, and agreement by way of wager. b) Voidable contract: Sec. 2(i) An agreement which is enforcea enforceable ble by law at the option of one or more the parties but not at the option of other or others is a voidable contract. Example: A contract brought about a result of coercion, undue influence, fraud or misrepresentation would be voidable at the option of the person whose consent was caused by any one of these factors.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Distinction between Void and Voidable contracts. Perspective i) Definition Void Contract Voidable Contract

ii) Nature

iii) Rights

A contract which ceases to be enforceable by An agreement which is enforceable by law. law at the option of one or more the parties thereon, but not at the option of other or others Void contract is valid when it is made but Voidable contract is voidable at the subsequently becomes unenforceable on option of the aggrieved party and remain certain grounds such as supervening valid until rescinded by him. Contract impossibility, , subsequent illegality; caused by coercion, undue influence, repudiation of voidable contract, a fraud, misrepresentation esentation are voidable. contingent contract becomes impossible. Void contract does not provide any legal In voidable contract, the aggrieved party remedy for the parties to the contract. They gets a right to rescind the contract. even cannot get it performed when they so When the aggrieved party rescinds it, the desire. contract becomes void. In case it is not rescinded within a reasonable time, then the contract remains valid.

c) Illegal contract: Illegal contracts are those that are forbidden by law. All illegal agreements are void but all void agreements / contracts are not necessarily illegal. The illegal contracts and the connected contracts shall not be enforced by court of law. Example: Contract to commit crime. Contract that is immoral or opposed to public are illegal in nature. Distinction between illegal and Void contracts. Perspective Illegal Contract i) Scope An illegal contract is always void. Void Contract A void agreement may not be illegal. It may be void due to some other factor. (Example: An agreement the terms of which are not uncertain is void but not illegal.

ii) Effect collateral transaction

on Collateral transaction to an illegal The collateral transaction to the agreement also becomes illegal and agreement which is merely void and not hence cannot be enforced. illegal may be enforced for execution.

Collateral transactions mean transactions which are to be compiled with before or after or concurrently along with the main contract. iii) Void-ab-initio Illegal contracts are void from the Valid contracts can subsequently change very beginning. its character and can become void. void

iv) Penalty or All illegal agreements punishable There is no punishment to the parties to punishments. under different laws. a void agreement.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
d) Express contract: A contract which is made by words either spoken or written is said to be an express contract. According to sec. 9, if the proposal or acceptance of any promise is made in words, the promise is said to be express. e) Implied contract: Implied contracts means contracts implied by law (i.e.) the law implies a contract though parties never intended. According the sec. 9, if the proposal or acceptance is made otherwise than in words, the promise is said to be implied. Example: ‘A’ delivers goods by mistake at B’s warehouse instead of C’s place. Here there is an obligation in part of B to return the goods to A, though they never intended to enter into a contract. f) Tacit contract: A contract is said to be tacit when it has to be inferred from the conduct of the parties. Example: Obtaining g cash through automatic teller machine (ATM), sale by fall of hammer at an auction sale. g) Executed contract: If the consideration for the promise in a contract (i.e., any act or forbearance) ) is given or executed, such type of contract is called contract with executed consideration. h) Executory contract: In executory contracts the reciprocal promises or obligations, which serves as consideration, will be performed in future. i) Unilateral contract: Unilateral contract is a one-sided sided contract in which only one p party arty has to perform his promise or obligation. j) Bilateral contract: Where the obligation or promise in a contract is outstanding on the part of both the parties, it is known as bilateral contract.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
a) Contract of Record: Contracts of record derive their binding force from the authority of the court. A contract of record is either a judgment of a court or a recognisance. ‘Judgment’ is an obligation imposed by a court upon one or more persons in favour of another or others. The Judgment of a court is technically not a contract as it is not based on the agreement between two parties. However it shall be binding on all the persons who are litigants. A ‘recognizance’ ’ is a written acknowledgement of a debt due to the state which is usually met me with the connection with criminal proceedings. b) Contract under seal: A contract under seal is one which derives its binding force from its form alone. It is in writing, duly signed and sealed and delivered to parties. It is also referred to as a deed or a specialty contract. Simple contracts are lacking of all the formalities referred above. D. Proposal / Offer: According to sec. 2(a), a person is said to make proposal when he signifies to another his willingness to do or to abstain from doing anything With a view to obtaining the assent of that other to such act or abstinence. Example: (a) Where “A” tells “B” that he desires to marry ‘B’ by the end of 2006, there is no offer made unless, he also asks “will you marry me?”, conveying his willingness and t tries to obtain the assent of ‘B’ in the same breadth. (b) Where “A” offers to sell his car to “B” it conveys his willingness to d do o an act. Through this offer not only willingness is being conveyed but also an intention to obtain the assent can be seen. Classification of Offer:

General offer Special offer Classification of offer Cross offers Counter offer Standing, open or continuing offer

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A

General offer:

It is an offer made to the public in general and hence anyone can accept and do the desired act. Sec. 8 stipulates that, anyone performing the conditions of the offer can be considered to have accepted the offer. The general offer can be accepted by anyone at any time, until the same is retracted or withdrawn. When offer is made to a definite person, it is known as specified offer and such offer can be accepted only by that specified person. When two parties exchange identical offers in ignorance at the time of each other’s offer, the offers are called Cross offers. There is not binding contract in such a case, as one’s offer cannot be construed as acceptance by the other.

Special offer: Cross offer:

Example: If A makes a proposal to B so sell some goods at a specified price and B, without knowing proposal of A, makes a proposal to purchase the same goods at a price specified in the proposal of A, it is not an acceptance , as B was not aware of proposal made by A.

Counteroffer:

When the offeree offers to qualified acceptance of the offer subject to modifications and variations in terms of original offer, he is said to have made a counter offer. Counter offer amounts to rejection of the original offer. An offer made to a public at large, and allowed to remain open for acceptance over a period of time is known as a standing / open / continuing offer. Tender for supply of goods is a kind of standing offer.

Standing / open / continuing offer:

Rules as to Offer: i) The offer must be capable of creating legal relation. ii) The offer must be certain, definite and not vague. iii) The offer may be expressed or implied. iv) The offer must be distinguished from an invitation to offer v) An offer may be specific or general. vi) The offer must be communicated. vii) The offer must be made with a view to obtaining the consent of the offeree. viii) An offer may be conditional. ix) The offer should not contain a term ‘the non non-compliance compliance of which would amount to acceptance’.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Distinction between Invitation to offer and offer. Invitation to offer An invitation to an offer is only a circulation of an offer; it is an attempt to induce offers and precedes a definite offer. Acceptance of an invitation to an offer does not result in contract. Example: When a person advertises that he has a stock of books to sell.

Offer An offer is definite and capable of converting an intention into a contract Acceptance to an offer results in contract. Example: When a person advertises that he is selling a stock of books at specified prices. prices

In order to ascertain whether a particular statement amounts to an ‘offer’ or an ‘invitation to offer’, the test would be intention with which such statement is made. -- Offer Does the person who makes the statement intend to be bound by it as soon as it is accepted by the other? Does the person who makes the statement intend to do some further act, before he becomes bound by it?

-- Invitation to offer

E. Acceptance: Sec. 2(b) of the act: “A proposal or offer is said to have been accepted when the person to whom the proposal is made signifies his assent to the proposal to do or not to do something”. Rules as to Acceptance: i) Acceptance must be absolute and unqualified ii) It must be communicated to offeror iii) Acceptance must be in the mode prescribed iv) Acceptance must be given within reasonable time (before the offer lapses) v) Mere silence is not acceptance vi) Acceptance by conduct (either in writing or by word of mouth or by performance of some act) act Relationship ionship between Offer and Acceptance: “Acceptance is to offer what lighted match is to train of gun powder” -- Sir William Anson. Here the offer is compared to gun powder and the acceptance is compared to the lighted match. The following are the important observation from the above quotation: Once the offer is accepted, it cannot be recalled or withdrawn. However there is a chance to withdraw the offer before it is accepted. Once the offer is accepted, it becomes promise and it cannot be withdrawn or revoked. An offer by itself cannot create any legal relationship but it is the acceptance by the offeree which creates a legal relationship.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A

F. Communication of offer and acceptance: Communication of offer: (i) The communication of an offer is complete when it comes to the knowledge of the person to whom it is made (Sec. 4). It may be communicated either by words spoken or written or it may be inferred from the conduct of the parties. (ii) When the proposal is made by post its communication will be complete when the t letter containing the proposal reaches the person to whom it is made. Communication of Acceptance: Modes of communicating acceptance: i) By any act: It includes any expression of words whether written or oral. Communication would also include any conduct intended to communicate like positive acts or signs so that the other person understands what the person means to say or convey. ii) By omission to do something: This may be conveyed by a conduct or by forbearance on the part of one person to convey his willin willingness gness or assent. However ‘silence’ would not be treated as communication by ‘omission omission’. iii) By conduct: Some of the examples are delivery of goods at a price by a seller to a willing buyer, dropping a coin in a weighing ighing machine or buying a ticke ticket when entering a public bus. Communication of acceptance is complete: (i) As against the proposer, when it is put in course of transmission to him. (ii) As against the acceptor, when it comes to the knowledge of the proposer. When a proposal is accepted by a letter sent by the post, then the communication of acceptance will be complete: i) As against the proposer, when the letter of acceptance is posted. ii) As against the acceptor, when the letter reaches the proposer. If there is no delivery of the letter, the acceptance could be t treated reated as having been completed from the viewpoint of proposer but not from the viewpoint of acceptor. Communication of special conditions: The special conditions are conveyed tacitly and the acceptance acceptances s of these conditions are also conveyed by the offeree again tacitly or without him even realizing it. The lucid examples for the above communication of special conditions are the conditions stipulate on the backside of the travel tickets, conditions displayed as notice in public buses and public trains etc. These conditions are communicated through conduct and the offeree has been treated as having accepted the conditions. This has been affirmed in Mukul Datta Vs. Indian Airlines (1962) case law.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
G. Communication of Performance: If an offer is made in the form of a promise in return for an act, the performance of that act, even without any communication thereof, is to be treated as an acceptance of the offer. H. Revocation of offer and acceptance: Under sec. 4, the communication of a revo revocation cation (to offer and to acceptance) is complete: As against the person who makes it, when it is put into a course of transmission to the person to whom it is made so as to be out of the power of the person who makes it; As against the person to whom it is made, when it comes to his knowledge. Example: : If ’A’ revoke proposal made to ‘B’ by a telegram, the revocation will be complete, as for as ‘A’ is concerned when ‘A’ have dispatched the telegram. But as far as ‘B’ is concerned, it will be complete only when ‘B’ receives the telegram. As regards revocation of acceptance, ‘A’ can revoke his acceptance to ‘B’ by a telegram. This revocation of acceptance for ‘A’ will be complete when ‘A’ dispatches the telegram and against ‘B’, it will be complete when it reaches ‘B’ Under Sec.5, a proposal may be revoked at any time, before the communication of its acceptance is complete as against the proposer. An acceptance may be revoked at any time before the communication of acceptance is complete as against the accep acceptor. Important points to be noted: Where the acceptor fails to fulfill certain conditions precedent to acceptance, then the proposal p gets revoked. Death or insanity of the proposer would result in automatic revocation of the proposal but only if the fact of f death or insanity comes to the knowledge of the acceptor. The time for acceptance lapses, if the acceptance is not given within the specified time and where no time is specified, then within a reasonable time.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Unit 2 – Consideration What is Consideration? Definition – Sec. 2 (d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. From the above definition it is observed that: Consideration is doing or not doing something, which the promisor desires to be done or not done Consideration must be at the desire of the promisor Consideration may move from one person to any other person Consideration may be past, present or future and Consideration should be real though not adequate. Consideration is identified as quid pro quo (something for something) from its promise of the promisor prom

A.

B.
a) b) c)

d) e) f) g) h)

Legal requirements regarding consideration: Consideration must move at the desire of the promisor, either from the promisee or some other third party. Consideration can flow either from the promise or any other person. There can be a stranger to a consideration nsideration but not stranger to a contract. Executed or Executory Consideration Where consideration consists of performance, it is called “executed” consideration; where it consists only of a promise, it is executory. Past consideration Adequacy of consideration Performance of what one is legally bound to perform Consideration must be real and competent Consideration must not be unlawful, immoral, or opposed to public policy.

C.

Suit by a third party on an agreement: It is general rule of contract t that only parties to contract can sue & be sued on that contract . This rule is known as ‘Doctrine of privity’ i.e relationship between the parties to contract . Exceptions for the above rule: (i) In the case of trust, a beneficiar beneficiary y can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee. (ii) In the case of family settlement, if the terms of the settlement are reduced into writing, the members of family who originally has not been parties to the settlement may enforce the agreement.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
In the case of certain marriage contracts, a female member can enforce a provision for marriage expenses, made on the partition of the Hindu Undivided Family. (iv) In the case of assignment of a contract contract, , when the benefit under the contract has been assigned the assignee can enforce the contract. (v) In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, and admits to C the receipt of that amount, but subsequently refuse refuses s to pay C. Now C can sue and enforce him claim. (vi) Whenever the promisor is by his own conduct stopped from denying his liability to perform the promise, the person who is not a party to the contract can sue upon it to make the promisor liable. (vii) In cases where e a person makes a promise to an individual for the benefit of third party and creates a charge on certain immovable property for the purpose, the third party can enforce the promise "though, he is stranger to the contract. (iii)

D.

Validity of an agreement withou without consideration: The general rule is that an agreement made without consideration is void (“No consideration, No contract”). But Section 25 of the Indian Contract Act lays down certain exceptions which make a promise without consideration valid and binding binding. . Thus the following agreements without consideration are valid: (i) If it is expressed in writing and registered and is made out of natural love and affection between parties standing in a near relation to each other; or (ii) If it is made to compensate a person who has already done something voluntarily for the promisor, or done something which the promisor was legally liable to do; or (iii) If it is a promise in writing and signed by the person to be charged therewith, or by his agent, to pay a debt barred by the law of limitation. (iv) According to Section 185 of the Indian Contract Act, consideration is not required to create an agency. (v) No consideration is required to effect the bailment (vi) In the case of gift actually made, no consideration is necessary. There need not be nearness n of relation and even if it is, there need not be any natural love and affection between them. Important Notes: Gratuitous promise (free of cost) will not result in an agreement in the absence of consideration. For instance, a promise to subscribe t to a charitable cause cannot be enforced.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Unit 3 – Other Essential Elements of Contract

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

A.Free Consent:
Consent means acquiescence or act of assenting to an offer. “Two or more persons are said to consent when they agree upon the same thing in the same sense”. (Sec. 13) Sec. 14 stipulates that, Consent is said to be free when it is not caused by (i) Coercion as defined in Sec. 15 or (ii) Undue influence as defined in Sec. 16, or (iii) Fraud as defined in Sed. 17, or (iv) Misrepresentation as defined in Sec. 18, or (v) Mistake. When there is no consent, there is no contract. Example: A is forced to sign a promissory note at the point of pistol. A knows what he is signing but his consent is not free. The contract in this case is voidable at this option. (i) Coercion: When a person is compelled to enter into a contract by the use of force by the other party or under a threat, “coercion” is said to be employed. According to Sec 15 coercion means Committing or threatening hreatening to commit any act forbidden by Indian Penal Code 1860, or Unlawful detaining or threatening to detain any property with the intention of causing any person to enter into an agreement. The threat amounting to coercion need not necessarily be fr from om a party to contract, it may also proceed from a stranger to the contract. It is immaterial whether the IPC is or is not in force where the coercion is employed. A threat to commit suicide also amounts to coercion. Example: A threatens to kill B if he does not lend Rs. 1000 to C. B agrees to lend the amount to C. The agreement is entered into under coercion. (ii) Undue Influence: Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. Sec. 16: A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and Uses that position to obta obtain an unfair advantage over the other.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Essentials of undue influence: There are two persons The relations are satisfying between them One must dominate the other There must be unfair advantage It involves the moral pressure The following relationships usually raise a presumption of undue influence viz. Principal and agent Doctor and patient Father and son Teacher and student Promoter and company Spiritual advisor and devotee Finance and fiancée Difference between coercion and undue influence: Perspective Way of consent Coercion Undue Influence The consent is given under the threat The consent is given by a person who is so of an offence situated in relation to another that the other person is in a position to dominate his will Coercion is a physical character. It Undue influence is of moral character. It involves use of physical or violent involves use of moral force or mental force. pressure. of It involves a criminal act No criminal act is involved

Nature

Involvement criminal action Relationship between parties

In coercion there need not to be any In undue influence, there must be some relationship between parties. kind of relationship between parties which enables to exercise undue influence over the other. Where there is coercion, the contract Where there is undue influence the is voidable. contract is voidable or court may set aside or enforce it in a modified form. The court has the discretion to direct the aggrieved party to return the benefit in whole or in part or not to give any such directions

Enforceability

Position of benefits In case of coercion where the contract received is rescinded by the aggrieved party, as per sec. 64, any benefit received has to be restored back to the other party.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A

(iii)

Fraud: According to Sec 17, Fraud means and includes any of those acts committed by a party to contract or with his connivance or by his agent with intent to deceive or induce a person to enter a contract: The suggestion that a fact is true when it is not true and the person making it does not believe it to be true The active concealment of a fact by a person having knowledge or belief of the fact A promise made without any intention of performing it Any other act fitted to deceive Any such act or omission as the law specially declares to be fraudulent Any fraud committed by a party which does not lead the other party to enter into a contract is not covered by this section. Mere silence as to facts likely to affect the willingness of a person to enter into a contract is no fraud. d. However in the following circumstances, silence amounts to fraud: Where there is a duty to speak or Where his silence is equivalent to speech.

(iv)

Misrepresentation: Misrepresentation is a false statement which the person making it honestly believes to be true t or which he does not know to be false. It also includes non-disclosure disclosure of a material fact or facts without any intent to deceive the other party. According to sec. 18, there is misrepresentation When a person positively asserts that a fact is true wh when en his information does not warrant it to be so, though he believes is to be true. When there is any breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice. When a party causes, however innoc innocently, ently, the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

Distinction between Fraud and Misrepresentation. Fraud Misrepresentation In case of fraud the person making representation In case of misrepresentation, the person believed knows that his statement is untrue / false. that it to be true, which is not true. Fraud not only enables the party to avoid the Misrepresentation merely provides prov a ground for contract but is also entitled to bring action. avoiding the contract and not for bringing an action in court.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
General consequences of coercion, fraud, misrepresentation etc. (Sec. 19) When consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, then the contract is voidable at the option of the party those consent was so obtained. However the aggrieved party may insist that the contract should be performed and that he should be put in the same position in which he would have been, if the represen representation tation made had been true. When the person has the means of discovering the truth with ordinary diligence cannot avoid a contract on the ground that his consent was caused by misrepresentation or silence amounting to fraud. Where the party to a contract co commits mmits fraud or misrepresentation, but the other party is not misled by such fraud or misrepresentation, then the contract cannot be avoided by the later. (v) Mistake: Mistake of law of the country: “Ignorance of laws is no excuse” is a well settled rule of law. A party cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of law. Therefore a mistake of law is no excuse, and the contract cannot be avoided. Example: xample: A and B enter into a contract on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. This contract may be voidable. Mistake of law of a foreign country: Such a mistake is treated as mistake of fact and the agreement agreeme in such a case is void. Mistake of fact may be: Bilateral Mistake: Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake. In such a case the agreement is void. Unilateral Mistake: When in a contract only one of the parties is mistaken regarding the subject matter or, in expressing or understanding the terms or, the legal effect of the agreement, Then the mistake is a unilateral mistake. A contract is not voidable mer merely ely because it was caused by one of the parties to it being under a mistake as to a matter of fact. A unilateral mistake is not allowed as a defense in avoiding a contract unless the mistake is brought about by the other party’s fraud or misrepresentation. Essentials of Mistake: (i) Mistake should be matter of fact. (ii) Mistake should not be a matter of law. (iii) Mistake should be a matter of essential fact. (iv) Mistake should not be unilateral but of both the parties and (v) Mistakes renders agreement void and neither party can enforce the contract against each other. Mistake of law may be:

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A

B. Capacity to contract:
Section 11 explains that, every person who (a) Has attained the age of majority, (b) Is of sound mind and (c) Is not otherwise disqualified from contracting Is competent to contract. (a) Age of majority: According to Indian majority act, , every person domiciled in India attains majority on the completion of 18 years of age. However he attains majority on completion of 21 years, when his property is managed by a court of wards or a guardian. Position of minor’s agreement: (i) (ii) (iii) (iv) (v) (vi) A contract by a minor is altogether void. (Mohiri Bibi vs. Dharmodas Ghose). A minor is incapable of giving a promise imposing a legal obligation. A minor can be a promisee or a beneficiary. He can hold other parties liable for the performance perfo of their promise. A minor cannot be a partner in a firm. However, be may be admitted to the benefits of partnership with the consent of all the partners. There are no estoppels against the minor. He can always plead minority in a suit attempting to hold him liable, no matter he might have earlier misrepresented himself to be major in age. A minor cannot ratify contracts which he might have made during minority, after becoming major. A minor's agreement being void cannot be specifically enforced. Howe However, ver, the estate of a minor can be held liable for the necessities supplied to him or to his dependents suited to his status in life.

(vii) Though the agreement of a minor is void, his guardian can, under certain circumstances and for the benefit of minor, enter into contracts. (viii) A minor can be an agent, but not a principal. (ix) (x) (xi) A minor can hold property, fully paid up shares and can seek contracts of employment or apprenticeship. The principle of restitution does not apply against a minor. A person giving guarantee for a minor debtor can be held liable as surety on the default of the minor

(xii) A minor can never be adjudicated insolvent.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
(b) Sound mind: Section 12 lays down that, a person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person, who is usually ually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. The burden of proof of ‘unsound mind’ is on the person who challenges the validity of the contract. A lunatic who estate is managed by a committee or a manager is not capable of entering a contract even during the periods of lucidity. The following persons are considered as unsound mind: Lunatic, Idiot, Drunken or intoxicated persons. (c)Disqualified persons: The following persons are disqualified fro from m contracting, partially or wholly, hence the contracts by such person are void: Foreign Sovereigns and Ambassadors: They may enter into contracts. But they cannot be sued except with the permission of the Central Government and certified by the Secretary. Alien Enemy: During the war, the alien enemy cannot enter into a contract with an Indian subject. If a contract is already entered into before the declaration of war, its performance will be suspended during the period of war and in case the war continues, the contract becomes void on the ground of impossibility of particular contract. Convict: He is no competent to c contract during the period of sentence. Bankrupt: He cannot enter into contract and bind his property as his property shall be vested in the official receiver when he is adjudged an insolvent. Artificial Person - Corporation: It is a person in the eye of law. w. It is a legal entity. It can purchase properties enter into contracts, sue and be sued on such contracts. Its contractual capacity is limited. For example, it cannot enter into contract to marry or which is ultra vires its powers.

C. Lawful object and consideration: ideration:
Every agreement of which the object or consideration is unlawful is void. As per sec. 23 of this act, the consideration or object of an agreement is lawful, unless It is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or any rule for a time being in force

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or Is an agreement opposed to public policy? (i) Forbidden by law: Acts forbidden by law are those which are punishable under any statute or rules or regulations made under any statute. Example: ‘A’ promise to obtain for ‘B’ an employment in the public service and ‘B’ promises to pay Rs. 1,00,000/- to ‘A’. The agreement is voi void, as the consideration is unlawful. (ii) Defeat of the provision of law: Where an agreement is entered into with the object of defeating any provision of law then it is prohibited. ‘Law’ includes any legislative enactment or rule for the time being in force in India. Example: N agreed to enter a company’s service in consideration of a weekly wage of Rs. 75 and a weekly expense allowance of Rs. 25. Both the parties knew that the expense allowance was a device to evade tax. Held the agreement was unlawful. (iii) Fraudulent: An agreement which is made for a fraudulent purpose is void. Example: ‘A’ & ‘B’ are partners in a firm. They agree to defraud a Government department by submitting a tender in the individual name and not in the firm name. This agreement is void as it is a fraud on the Government department. (iv) Injury to the person or property of another: Example: B borrowed Rs. 100 from L and executed a bond promising to work for L without pay for a period of two years. In case of default B was to pay interest at a very exorbitant rate and the principal sum of once. The contract was void as it involved injury to t the he person of B. (v) Immoral: Example: A agrees to let her daughter to B for concubinage (state of living together as man and wife without being married). The agreement is unlawful, being immoral. (vi) Agreement opposed to public policy: An agreement is said to be opposed pposed to public policy when it is harmful to the public welfare. Some of the agreements which are opposed to public policy and are unlawful are as follows. 1) Agreements of trading with enemy: An agreement made with an alien enemy in time of war is illegal on n the ground of public policy. 2) Agreement to commit a crime: Where the consideration in an agreement is to commit a crime, the agreement is opposed to public policy. The Court will not enforce such an agreement. 3) Agreements which interfere with administratio administration of police: An agreement, the object of which is to interfere with the administration of justice is unlawful, being opposed to public policy. It may take any of the following forms.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Interference with the course of justice: An agreement which obstructs the ordinary process of justice is unlawful. Stifling prosecution: It is in public interest that if a person has committed a crime, he must be prosecuted and punished. Maintenance and champerty: Maintenance is an agreement to give assistance, financial or otherwise, to another to enable him to bring or defend legal proceedings when the person giving assistance has got no legal interest of his own in the subjectsubject matter. 4) Agreements in restraint of legal proceeding: Sec. 28 which deals with these agreements. Agreements restricting enforcement of rights: An agreement which wholly or partially prohibits any party from enforcing his rights under or in respect of any contract is void to that extent. Agreements curtailing period of lim limitation: Agreements which curtail the period of limitation prescribed by the Law of Limitation are void because their object is to defeat the provisions of law. 5) Trafficking in public offices and rules: Agreements for the sale or transfer of public offices and titles or for the procurement of a public recognition like Padma Vibhushan or Param Veer Chakra for monetary consideration are unlawful being opposed to public policy. Example: R paid a sum of Rs, 2,50,000 to A who agreed to obtain a seat for R’s son in i a Medical College. On A’s failure to get the seat, R filed a suit for the refund of Rs. 2,00,000. Held, the agreement is void on the ground of public property. 6) Agreements tending to create interest opposed to duty: If a person enters into an agreement whereby ereby he is bound to do something which is against his public or professional duty the agreement is void on the ground of public property. 7) Agreements in restraint of paternal rights: A father, and in his absence the mother, is the legal guardian of his/her minor child. These rights of guardianship cannot be bartered away by any agreement. 8) Agreements restricting personal liberty: Agreements which unduly restrict the personal freedom of the parties to it are void as being against public policy. 9) Agreements in restraint of marriage: Every agreement in restraint of the marriage of any person, other than a minor, is void (Sec. 26). This is because the law regards marriage and married status as the right of every individual. 10) Marriage brokerage or brokerage agreemen agreements: An agreement by which a person for a monetary consideration promises in return to procure the marriage of another is void being opposed to public policy. 11) Agreements interfering with marital duties: Any agreement which interferes with the performance of marital duties is void being opposed to public policy. Such agreements have been held to include the following. A promise by a married person to marry during the lifetime or after the death of spouse. An agreement in contemplation of divorce e.g. an agreement to lend money to a woman in consideration of her getting a divorce and marrying the lender.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
An agreement that the husband and wife will always stay at the wife’s parents’ house and that the wife will never leave her parental house. 12) Agreements to defraud creditors or revenues authorities: An agreement the object of which is to defraud the creditors or the revenue authorities is not enforceable being opposed to public policy. 13) Agreements in restraint of trade: An agreement which interferes with the liberty of a person to engage him in any lawful trade profession or vocation is called an agreement in restraint of trade.

D.

Agreements expressly declared void: A void agreement is one which is not enforceab enforceable le by law. Such an agreement does not give rise to any legal consequences and void void-ab-initio. The following agreements have been expressly declared to be void by the Contract Act. 1) Agreements by incompetent parties – Sec. 11 Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. 2) Agreements made under a mutual mistake of fact – Sec. 20 Where both the e parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. 3) Agreements the consideration or object of which is unlawful – Sec. 23 The consideration or object of an agreement is lawful, unless It is s forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or any rule for a time being in force is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immo immoral, or Is an agreement opposed to public policy. 4) Agreements the consideration or object of which is unlawful in part – Sec. 24 If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void. 5) Agreements made without consideration – Sec. 25 Agreement without consideration is void, unless it is in writing and registered, or is a promise to compensate for something done, or is a promise to pa pay y a debt barred by limitation law. 6) Agreements in restraint of marriage – Sec. 26 Every agreement in restraint of the marriage of any person, other than a minor, is void.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
7) Agreements in restraint of trade – Sec. 27 Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. 8) Agreements in restraint of legal proceedings – Sec. 28 Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to the extent. 9) Agreements the meaning of which is uncertain – Sec. 29 Agreements, the meaning of which is not certain, or capable of being made certain, are void. 10) Agreements by way of wager – Sec. 30 A wager is an agreement between two parties by which one promises to pay money or money’s worth on the happening of some u uncertain ncertain event in consideration of the other party’s promise to pay if the event does not happen. Thus if A and B enter into an agreement that A shall pay B Rs. 100 if it rains on Monday, and that B shall pay A the same amount if it does not rain, it is a wagering agreement. Essentials of Wagering Agreement: Promise to pay money or money’s worth: The wagering agreement must contain a promise to pay money or money’s worth. Uncertain event: The promise must be conditional on an event happening or not happening. Each party must stand to win or lose: Upon the determination of the contemplated event, each party should stand to win or lose. No control over the event: Neither party should have control over the happening of the event one way or the other No other interest nterest on the event: Neither party should have any interest in the happening or non-happening happening of the event other gdfgjdg sum or stake he will with or lose 11) Agreements contingent on impossible events – Sec. 36 Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. 12) Agreements to do impossible acts – Sec. 56 An agreement to do an act impossible in i itself is void. A contract to do an act which, after the contract is made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

FINPREP - Concept Notes Chapter Name Indian Contract Act Chapter No. 1A
Other Important Notes: Speculative Transactions In speculative transaction, there is (a) Mutual intention of parties to acquire or deliver goods or commodities and (b) Undertaking of risk arising from movement prices. Insurance policy An insurance policy is a valid contract. But if an insurance policy is taken by a person who has no insurable interest, then it is void. Example: A person, who has no insurable interest in a ship, takes a policy against it being sunk, and then the contract is void. Wager and collateral The validity lidity of a collateral transaction cannot be challenged because the main transactions contract is a wager and void. If the main transaction is illegal, the collateral transaction cannot be valid.