DR.

RAM MANOHAR LOHIYA NATIONAL

LAW UNIVERSITY

LAW OF TORTS

CASE ANALYSIS: BHIM SINGH VS STATE OF J&K

Submitted to Submitted by

Ms Ankita Yadav Aniket Sachan

Assistant Professor, Law Roll no – 28

Dr. Ram Manohar Lohiya Enrollment id-170101028

National Law University B.A. LLB(HONS),Ist semester

SECTION-“A”
A contract means an agreement which is enforceable by law. An agreement consists of two
reciprocal promises between two parties. In contract, each party is legally bound by the
promise made by him. When one party makes an offer and the other accepts the same, there
arises an agreement, which may be enforceable by law. And sometimes there may be no
agreement and contract in strict sense of the term, but a person making a promise may
become bound because of the application of the equitable doctrine of estoppel. Section 2(h)
of ICA defines contract as “an agreement enforceable by law is contract.”

A promises to deliver his watch to B and in return B promises to pay a sum of

Rs.2000 to A. There is said to be an agreement between A and B.

“All agreements are contract if they are made by free consent of the parties competent
to contract, for a lawful consideration and with a lawful object and are not hereby
expressly declared to be void.” – S.10

Essential Ingredients for a valid contract

1. Agreement between two parties.
2. Parties should be competent to contract.
3. Lawful consideration and lawful object.
4. Free consent of the parties.
5. Agreement must not be expressly declared to be void.

Section 24 to 30 makes a specific mention about agreements which are void. This includes
agreement without consideration, agreement in restraint of marriage, agreement in restraint of
trade.

Proposal/Offer

S. 2(a) defines proposal. The term ‘proposal’ is synonymous with the term ‘offer’ in English
law. A’s willingness to sell his radio set to B for Rs. 500 if B accepts to purchase the same, it
will amount to proposal by A for the sale of the radio. But if the statement is said without any
intention to obtain the assent of the other party thereto, that cannot be termed as proposal. A
catalogue is not an example of offer, rather it is an ‘invitation to offer’. So is an auction and
an advertisement calling for tenders. An offer can be withdrawn before it can be accepted. It
has been held that display of price tags in a show-window merely amounts to invitation to
offer and not offer itself.

When an offer is addressed to a certain individual, such an offer is called a specific offer.
When offer is made to a group of persons, it is called general offer. An offer is signified by
words spoken or in black and white (absolute terms).

Acceptance
The person making the promise does not become bound thereby until acceptance. As soon as his
proposal is accepted that is known as promise whereby both parties become bound. As per S.9,
when proposal or acceptance is made in words, the promise is said to be express. When the
proposal or acceptance is made otherwise than in words, the promise is said to be implied. A
contract is created only after an offer is accepted. Before the acceptance is made, neither
party is bound thereby. At that stage, the offeror is free to revoke or withdraw his offer, and
the offeree is free not to accept the offer or reject the same. After acceptance, each party is
bound by the promise made by him through the medium of the offer and acceptance of it.
Acceptance has been explained as “Acceptance is to an offer what a lighted match is to a
train of gunpowder. It produces something which cannot be recalled or undone.”

Essentials of a valid acceptance

1. Should be communicated by the offeree to the offeror.
2. Should be absolute and unqualified.
3. Should be made in some usual and reasonable manner, unless the proposal prescribes
the manner of acceptance.
4. Should be made while order is still existing.

The communication of proposals, acceptance and revocation are deemed to be made by an act
or omission by which the party intends to communicate such proposals, acceptance and
revocation which has the effect of communicating it.
1. Communication of acceptance is for the benefit of the offeror.
2. It can also be accepted by conduct.
3. There should be intention to create legal relationship and there should be no
ambiguity.

Section 29 of the Act defines ambiguity as double meaning words. Agreements, the meaning
of which is not certain, or capable of being made certain, is void. An agreement must be
based on consensus ad idem.

An offer is accepted when the acceptance is communicated. The communication must be

made to the offeror and a communication of acceptance made to a third party creates no
contract [Felthouse v. Bindely (1862)]. Knowledge of the terms of the offer is essential for
acceptance.

A person sent his servant in search of his missing boy and subsequently offered a reward to
anyone who would find the boy. The servant after finding boy could not claim the reward, as
his search for the boy could not be regarded as consideration for the promise of the reward
[Lalman Shukla v. Gauri Dat (1913)].

In Carlill v Carbolic Smoke Ball Co. (1893), where The Carbolic Smoke Ball Company
made a product called the "smoke ball" which claimed to be a cure for influenza and a
number of other diseases. The Company published advertisements claiming that it would pay
£100 to anyone who got sick with influenza after using its product according to the
instructions set out in the advertisement. Mrs. Carlill saw the advertisement, bought one of
the balls and used it until she contracted the flu. She claimed £100 from the Carbolic Smoke
Ball Company. The court held that an advertisement can constitute a unilateral contract,
which can be accepted by fulfilling the conditions of the contract; no formal acceptance
required. Also,
The determination of a serious offer will be determined from the words and actions.
 The terms of the contract (if vague) will be interpreted purposively from the contract.

The offeror can determine how acceptance of offer will be made.

In Hadley v. Baxendale (1854), where the defendants were transporting a broken crankshaft
of the plaintiff but failed to deliver it on the due date. The defendant contended that they did
not know that plaintiff would suffer any loss for late delivery. The court held that in order for
a non-breaching party to recover damages arising out of any special circumstances, the
special circumstances must be communicated to and known by all parties at the time of
formation. Since Hadley failed to disclose his special circumstances to Baxendale, he was
barred from the award of lost profits.

Section 8 (Acceptance of Proposal) - Performance of the conditions of proposal, for the

acceptance of any consideration for a reciprocal promise which may be offered with a
proposal, is an acceptance of the proposal.
In the absence of S.8, applicable part of common law can be borrowed from English Law.
Doctrine developed by judiciary becomes provisions when the legislature passes law for it.
Also, judges by S.8 can say that contract is concluded [Kamal Nath Case (1997)].

As held in the Carbolic Smoke Ball Company case that contract was accepted by being
acted upon, that the defendant had not stipulated for any communication of acceptance and
therefore the plaintiff was entitled to recover the amount.

COMMUNICATION WHEN COMPLETE

Communication of a proposal is complete when it comes to the knowledge of the person to

whom it is made.
Communication of acceptance
Against the proposer – when it is put in a course of transmission to the acceptor so at to be
out of the power of the acceptor;
As against the acceptor - when it comes to the knowledge of the proposer.
Offeror has the right to withdraw till the letter of acceptance has not been posted.
Communication of revocation
Against the proposer - when it is put in a course of transmission to the acceptor so at to be out
of the power of the proposer.
Against the acceptor – when it comes to his knowledge.

Section 5 (Revocation of Proposal and Acceptance) - A proposal may be revoked by the

proposer before the letter of acceptance is posted by the acceptor, but not afterwards.

An acceptance may be revoked by the acceptor before the letter of acceptance reaches the
proposer. Also, only mental intent is not sufficient to revoke a proposal. An act must be
performed for the same.
Section 6 – A proposal is revoked either by communication of revocation to the other party,
or by lapse of time prescribed for the performance of the contract (reasonable time if no time
is prescribed), or by death or insanity of the proposer or by the failure of the acceptor to fulfil
a condition precedent to acceptance.

In the case of advertisement, the revocation letter should be there in the same newspaper
(Carbolic Smoke Ball). What is reasonable time is to be determined by the nature of the
transaction and is to be decided by the court.

The Supreme Court of India has recognized the principle of Intention to create legal
relationship in Commissioner of Wealth-Tax, v. Abdul Hussain (1988), where the taxpayer
gave an argument that the parties did not intend to create legal relations, thus there was no
obligation to pay the debt or for him to enforce it. The Supreme Court accepted that a valid
contract can be set aside on the grounds that the parties did not intend to create legal
relations. In the House of Lords case of Rose and Frank Co. v. Crompton Bros. (1925),
where one of the clause stated that the arrangement was not intended to be a formal legal
agreement. Defendants cancelled the agreement because they were unhappy with plaintiff’s
proceedings and the plaintiff sued for breach. It was held by the court that in contract law, it
is the intention of the parties that matters which ultimately forms a legally enforceable
contract.

It is generally assumed that parties in business relationships intend to be bound.


If parties expressly state in an agreement that they do not wish to be bound, the courts
must respect their actual intentions.

Onus to prove there’s no intention is on the party who asserts the same. Intention means
party’s serious commitment towards the performance of the contractual obligation.
Consideration is also equivalent to intention.

What is the purpose of creating an intention of legal relationship?

In family agreements, it is presumed that there is no intention to create a legal relationship. In
commercial agreements, it is presumed that there is an intention to create a legal relationship.
If they don’t have any, it should be proved as in Rose and Frank. Intention should be
inferred from the text of the contract.

In the case of Balfour v. Balfour (1919), where The Plaintiff and the Defendant were a
married couple and the husband promised to pay his wife a £30 per month allowance. The
Plaintiff brings suit to enforce the Defendant"s promise to pay her £30 per month. It was held
by that the law of contracts is not made for personal family relationships. As there was no
intent to be legally bound when the agreement was agreed upon, there can be no legally
binding contract. Since then, it is generally accepted that arrangements made between
husbands and wives are not generally contracts as the parties do not intend to be legally
bound by the agreements.
The language used in the agreement will be taken into consideration by the court to decide
whether an agreement is commercial or family. In C.S.B.C., there was an intention to create a
legal relationship which is clear from the language of the advertisement.

PERFORMANCE OF PRE-EXISTING LEGAL OBLIGATION

If one person make a promise to exchange for another's promise, in that time they already
have "pre-existing obligation.” When the promisee has to execute a legal duty under a
contract, the execution does not institute consideration. Once both parties already agree to do
something or withhold from doing a thing under a legitimate contract, both parties have no
authority to change the term of contract without any new consideration. That is, when the
promisee is already done something or forbear from doing something under a duty, the
promisee cannot demand for supplementary benefit. For example, when the price of goods
and services are categorical, the changes of price are unenforceable and no extra
imbursements can be made. This does not constitute as consideration as per S.2(d) since this
does not satisfy the word “something” mentioned in it.

In the case of Glasbrook Bros v. Glamorgan County Council (1925), the defendant owners
of a colliery asked the police to provide protection during a miner's strike. The police
provided the protection as requested and provided the man power as directed by the
defendants although they disputed the level of protection required to keep the peace. At the
end of the strike the police submitted an invoice to cover the extra costs of providing the
protection. The defendants refused to pay arguing that the police were under an existing
public duty to provide protection and keep the peace. House of Lords in this case held that
though it is the duty of the police to protect a person, special protection was asked by the
defendant in addition to legal protection and hence is liable to pay.

In Williams v. Roffey Bros (1991), the appellants Roffey Bros, were builders who were
contracted to refurbish 27 flats belonging to a housing corporation. The contract had a
penalty clause for late completion. The appellants subcontracted some work to Williams, a
carpenter. When Williams fell behind with his work the appellants offered him bonus
payment to finish on time. Williams carried on working until the payments stopped. He sued
the appellants for breach of contract. The court here held that there is no economic duress or
fraud involved, consideration can be provided for the promise to pay more for an existing
duty if the promisor obtains a practical benefit for paying more. A pre-existing duty to the
promissor can be legally sufficient consideration if there is a practical benefit to the
promissor. Benefit derived by the promisor can also constitute consideration.

Performance of pre-existing legal obligation is not a competent consideration. By virtue of

status, one is bound to perform its duty. Performance of legal obligation is not a
consideration.

COMPOSITION WITH CREDITORS

It is an exception to S.25 which states that Agreement without consideration is void, unless it
is in writing and registered or is a promise to compensate for something done or is a promise
to pay a debt barred by limitation law. Under this, no consideration is required for springing
an contract into existence. If the debtor does not have enough resources to pay off debt,
creditor may accept the loan in composition.
CREDITOR
GURANTEE

SURETY PRINCIPAL DEBTOR

No separate consideration is required by surety. If the surety suffers due to the breach by
principal debtor, he is entitled to recover from principal debtor.

In Pao On v. Lau Yiu Long (1980), the plaintiffs (P) owned the shares of a private company
which owned a building that the defendants (D) wanted to buy. The defendants were majority
shareholders in a public company. P agreed to sell their shares in the private company to D so
that D could acquire the building. In return, P would get shares in the public company.
Fearing a drop in share value of the public company would result, P and D made another
agreement that P would not sell their shares for a while. However, P realized that D might
profit from this agreement and demanded that this second agreement be replaced with one in
which P was indemnified for any fall in share value but might also benefit from any rise in
share value. Fearing that not agreeing to this would delay the main contract, D agreed. The
share value did drop, and P sought to rely on the indemnity contract. D refused to comply
with this and P filed a suit against D. The court held that the parties understood that the act
would be remunerated in some way and, if the promise had been given in advance of the act,
it would be legally enforceable.

Consideration must be real and need not be adequate - A contract which is supported by
consideration is valid, irrespective of the fact that the consideration is inadequate. The court
will not go into the question of adequacy or inadequacy of the consideration. The adequacy
of consideration is for the parties to consider at the time of making the agreement. However,
it is necessary that it should be real and should not be unsubstantial and must have a legal
value in the eyes of law. Doing something which a person is already legally bound to do is no
consideration. In Ward v. Byham (1956), it was held that doing somethings more than what
may have been done under a statutory duty is also good consideration for the promise.

If A is already bound to perform a particular contractual duty owed to B, B’s

promise to pay something additional for the same promise is no consideration.

DOCTRINE OF PROMISSORY ESTOPPEL

Doctrine of promissory estoppel is based on the principle that when one party with the
intention of creating a legal relationship, makes a promise with another party and that party
acts on it, that promise should be binding for the party who is making it. The term ‘estoppel’
is defined in S.115 of Indian Evidence Act, 1872. Once the contract is concluded, the
doctrine becomes of no value. It is only applicable at the stage of promise.
INDIA – PE should be included in S. 25.
UK – PE should be accepted since several arguments can’t be enforced sue to lack of
consideration.
US – PE is a substitute for consideration.

Ingredients
1. Promisee has altered his position.
2. Promisor is entitled to resign from his promise by serving necessary notice not being
a formal notice providing an opportunity to the promisee to resume his position.
3. If promisee is not able to resume his position, then promise becomes final and
ireevocable.

A landlord know that the tenant is not in a position to pay Rs. 2,500 as rent. The landlord
decreased it to Rs. 1250 but instituted a suit to claim Rs. 2,500 from date when complete
accommodation was provided. Had the landlord claimed 2,500 from the beginning, he would
have been estopped from recovering 2,500. Once the tenant reaches the position where 2,500
could be given, the tenant is bound to give 2,500.

Necessity for developing this doctrine

Due to lack of consideration, many contract could not be enforced even if there was an
intention to create legal obligation on part of the parties. To avoid necessity of consideration
and to provide enforceability to the promise where there is no consideration, promissory
estoppel is developed. The 13th Law Commission Report has said that this doctrine is an
exception to S.25 of Contract Act.

In Abdul Aziz v. Mausam Ali (1914), the defendant promised to pay a sum of Rs. 500 as
donation for the reconstruction of the mosque. No work was done for the reconstruction of
the mosque. Later, he refused to pay the amount. It was held that since nothing was done on
the faith of the promise, there was no consideration in this case and, therefore, the defendant
was not liable to pay the subscription promised by him.

In the case of Kedarnath Bhattacharji v. Gauri Mohammad (1887), where the defendant
had agreed to pay Rs. 100 towards the construction of a Town Hall. The plaintiff on faith of
his promise, called for plans and entrusted work to contractors and undertook liability to pay
them. D refused to pay the promised amount. The court here held that though promise was
for charitable purpose and there was no benefit to D yet he was liable for the promise made
by him.

In another case of Doraswamy v. Arunachala Ayyar (1936), where the repair of a temple
was in progress. As the work proceeded, more money was required and to raise this money
subscriptions were invited. The defendant put himself down on the list for Rs. 125 and it was
to recover this sum that the suit was filed. The learned judges here observed that since the
temple repairs were already in progress when the subscriptions were invited, the action was
not induced by the promise to subscribe but was rather independent of it. Hence, no recovery
was allowed.

Application of doctrine against the government

In some cases it has been pleaded that this doctrine is not applicable against the state as State
cannot bind itself to fetter its future executive action. This plea has been rejected by the SC
and the government has been held bound to honour the promises made by it. In UoI v. Anglo
Afghan Agencies (1968), it was stated that the government is not exempt from liability to
carry out the representation made by it as to its future conduct and it cannot on some
undefined and undisclosed ground of necessity or expediency fail to carry out the promise
solemnly made by it. In another landmark case of Motilal Sugar Mills (1979) it was
observed that where the Government makes a promise knowing or intending that it would be
acted on by the promise and the promise alters its position, the government would be held
bound by the promise and the promise would be enforceable against the government at the
instance of the promise, notwithstanding that there is no consideration for the promise and the
promise is not recorded in the form of a formal contract as required by Art. 299 of
Constitution.

Execptions
1. If the promise made are ultra vires, the doctrine does not apply.
2. When a statute consists of provisions declaring a particular transaction to be void and
unenforceable, such statutory provision should be relied on social and public policy,
thus such transaction are null and void.
3. Where a transaction is declared to be void and unenforceable in view of public policy.

In Central Inland Water Transport Corporation Case (1986), plaintiffs were arbitrarily
kicked out of the Corporation by virtue of Rule 9(i) of T&C which provided for termination
of employees’ services on three months notice on either side upon which three months’ salary
to be paid by Corporation.
4. When promises made do not change or alter the position of aggrieved party.
5. If the object in making the promises is to promote welfare measures in general public.
6. It does not apply to concluded contracts.
7. The doctrine cannot be applied to matters of policy (sovereign power).

In the case of Gujarat State Financial Corporation Ltd. v. Lotus Hotels Ltd., where
GSFC is established under state and Companies Act and Lotus Hotel made a mortgage deal
for loan as security. At the time of construction, they want to enforce it but the corporation
resiled from the contract. The matter was taken into the court where it was held that since at
the desire of the promisor, promise has done something, the promisor becomes bound to pay.
The court also stated that S.10 of ICA is applicable here since both the parties gave their
consent to the contract, for a lawful consideration and with a lawful object, and not expressly
declared to be void. The doctrine of promissory estoppel is applicable in this case.

In Paradise Printers v. Union Territory of Chandigarh (1988), the administration invited

applicatoion of the sites. The authorities decided to draw lots as the applicants were more
than the number of sites available. Lots were drawn and the appellants won but the authorities
did not issue the letters of allotment. The administration introduced changes in its policy
which incurred in loss for the appellants. The appellants moved the Court, challenging the
revised policy of the allotment of the sites. The court held that change in policy in public
interest does not make the government liable. Doctrine of promissory estoppel is not
applicable here.

The 13th and 108th LCR suggested addition of S.2(d) must be embodied in Contract Act and
Doctrine of PE does not apply when government resile. The government can breach its
promise if promise is contrary to public policy.

As per S.37, if the promisor dies, then the legal representatives are bound to perform unless:
1. It is a personal contract.
2. A contrary intention appears from the contract.
Executory Promise – Promise to do work in future.

S.40 – It is the obligation of the parties to perform either by himself or by a competent person
the obligation mentioned in the contract. In case of personal skills, the contract must be
performed by the promisor himself.

S.46 – In commercial world, chain of contract are being entered into and hence need of time
and place are also important. If not specified, performance should be done in a reasonable
period of time. Parties can decide among themselves the duration of reasonable time.

Reciprocal Promise – Promises which form the consideration or a part of the consideration
for each other are called reciprocal promise. In other words, it is a promise in exchange of a
promise. If one party does not perform its duty because the other party is not ready and
willing to pay, it will not amount to breach of contract. Promise of one promise depends on
other reciprocal promise.

A pays price on 1st Feb and B is to deliver the property on 15th Feb. (S. 37 & 52
applicable).

A pays price on 1st Feb and on doing so, B is to deliver the property on 15th Feb.
(S.54 applicable).

A agreed to pay on 1st Feb and B has to deliver property on the same day. (S. 51
applicable).

PRIVITY OF CONTRACT

The doctrine of privity of contract is that a contract cannot confer rights or impose those
obligations arising under it, on any person except the parties to it. A stranger to contract
cannot enforce a contract even though the contract may have been entered into for his benefit.
If A makes a contract with B, he comes under a legal obligation to pay damages if he fails to
keep his promise. The enforceability or liability as regards this contract lies firmly in the
hands of A and B to the exclusion of others, this is the foundation of the doctrine of privity of
contract. No third party can enforce the contract; the terms of contract consists of conditions
and warranties.

In Dunlop Pneumatic Tyre Co. Ltd. v Selfridge & Co. Ltd. (1915), where Dunlop, a tyre
manufacturing company, made a contract with Dew, a trade purchaser, for tyres at a
discounted price on condition that they would not resell the tyres at less than the listed price
and that any reseller who wanted to buy them from Dew had to agree not to sell at lower
price either. Dew sold the tyres to Selfridge at the listed price. Selfridge sold the tires below
the agreed price and Dunlop sued for damages and an injunction to prevent them from
continuing this activity. Dunlop brought action against Selfridge and the court here held that
a stranger to a contract cannot sue for the enforcement of contract, as no legal relationship
arises, even though a third party is a beneficiary.

In Beswick v. Beswick (1968), where P was in poor health and agreed with the defendant, his
nephew, that he would transfer the trade and good will of his coal business to him on the
basis that the nephew employed him as a consultant for the rest of his life and paid him for
this. The nephew also agreed to pay P’s wife after P died for the rest of her life. She was not a
party to the agreement. Upon the death of P, the nephew paid P’s wife once but then not
again. P’s widow brought an action claiming for specific performance. The court granted the
widow an order of specific performance for the payment owed by P’s nephew as an
administrator to her husband’s estate. However, the court found that P’s widow could not
claim under her personal capacity as she was a third party to the contract and was not a party
to the original agreement.

In case of Jamna Das v. Ram Avtar, A had mortgaged some property to X. A then sold his
property to B, B having agreed with A to pay off the mortgage debt to X. X brought an action
against B to recover the mortgage money. It was held that since there was no contract
between X and B, X could not enforce the contract to recover the amount from B.

Exceptions

1. Covenents running with the land (Agreements pertaining with land) – If a piece of
land is sold, then all contracts will be transferred to transferee. Rest can be
transferred. Assignor can transfer liability to assignee if consent of assignee is given.
In SAIL v. State of MP (1999), where the centre assigned a piece of land to its own
corporate undertaking with rights, liberties and privileges one of which was
exemption from land revenue. It was held that the assignee became entitled to the
exemption as a successor in interest of the Central Public.
2. Where contract charges money to be paid out of some immovable property -
beneficiary is entitled to enforce the contract. It has been held the person beneficially
entitled under the contract can sue even though not a party to the contract itself. In
Khirod Behari Dutt v. Man Gobinda (1934), it was held that though ordinarily only
a person who is a party to the contract can sue on it, where a contract is made for the
benefit of a third person, there may be an equity in the third person to sue upon the
contract.
3. Trust – Trust is a well-established exception to the rule of privity. This means that if
A makes a promise to B for the benefit of C, C can enforce this promise if B has
constituted himself trustee of A’s promise for C. A promisee can be held to be a
trustee for a third party only if he has the intention to create a trust and this intention
must be to benefit the particular third party and not third parties generally.
 4. Acknowledgement or Estoppel – Sometimes there may be no privity of contract
between the two parties but if one of them by his conduct, acknowledgement, or
admission recognises the right of the other to sue him, he may be liable on the basis of
law of estoppel. Acknowledgement may be express or implied. CASE(Deb Narayan
Dutt).
5. Family Settlement - Where an agreement is made in the matter of family settlement
and a provision is made for the benefit of a person, he may take advantage of that
agreement although he is no party to it. In Khwaja Mohd. v. Hussaini Begum
(1910), there was an agreement between the father of a boy and a girl that if the girl
(P) marries his boy, the boy’s father (D) would pay her certain personal allowances. It
was also stated that this allowance would be paid out of the income of a property. P
married D’s son but D failed to pay allowances agreed to by him. It was held that the
basis of P’s claim being a specific charge on an immovable property in her favour,
she is entitled to claim the same as a beneficiary.

Privity of Consideration – As per Indian laws, consideration may be given by the promise
or any other person. In English law, the position is different. There the rule is that
consideration must move from the promise and nobody else.

A promises to give his watch to B and a consideration for Rs. 2000 for the same is
given to A by X and not by B.

The above example will not constitute a valid contract in Englans as considetation
for A’s promise in favour of B was not provided by the promisee B himself but by
somebody else. Such a contract will be valid in India as S. 2(d) itself mentions
“the promisee or any other person” may provide consideration.

In the case of Chinnayya v.Ramayya (1882), A, a lady, granted estate to her daughter with
the condition that she would pay an annuity of certain some to A’s brother. The defendant
agreed to this but failed to pay the stipulated sum. The Court, however, held that the words
‘the promisee or any other person’ in Section 2(d) clearly show that the consideration need
not necessarily move from the promisee, it may move from any other person. A is stranger to
consideration, he can still enforce the contract. Hence, A’s brother was entitled to maintain
the suit.

Section 59 – The debtor needs to inform the creditor which debt needs to be discharged by
the money he pays, when there are several distinct debts.

Section 60 – When there is neither explicit nor implicit circumstances, the creditor can use
the money to discharge any lawful actual debt according to his discretion.

Section 61 – Payment is done, no appropriation is done, debts are going to be discharged in

chronological manner.
Section 63 – Agreement is not needed for dispensing contractual rights. (Promisor = Debtor.
Promisee = Creditor).

DOCTRINE OF SEVERABILITY
Doctrine of severability provides that if an enactment cannot be saved by construing it
consistent with its constitutionality, it may be seen whether it can be partly saved. If a
contract contains both legal and illegal acts, they can be severed and the legal act could be
enforced but not illegal. If legal part is supported by independent consideration, then only
severability is followed.

Forbearance to Sue (Abstaining from enforcing a claim) – It constitutes consideration in

so far as the delay in the proceedings is a benefit to the person intended to be sued. Promise
to forbear may be implied and it may be forbearance only for some unspecified time.
Extension of time for launching judicial suit. It can be either expressed or implied. It will
constitute a consideration as under S. 2(d). It is a compromise of disputed or doubtful claim
to a legal or equitable right. In Alliance Bank Ltd. v. Broom (1864), the plaintiff Bank
asked the defendant security for overdraft taken by him. The defendant thereupon promised
to assign certain documents of title for the purpose. Subsequently, he refused to do the same
and the plaintiff Bank sued him to enforce the promise. It was held that even though it has not
been mentioned by the Bank that it would forbear to sue for any specified time but some
degree of forbearance was obviously there, and this constituted consideration for the promise
which was enforceable. In Tulsabai v. Narayan (1947), the creditor had given up all the
rights to recover a sum of money by giving full discharge to his debtor in writing. Thereafter,
he made the debtor to sign a Promissory Note for the same amount for which the discharge
had been given. It was held that after the said discharge, there being no subsisting right, there
was no forbearance to sue which could constitute consideration for recovering the amount of
the Promisory Note.

EXCEPTIONS WHEN AGREEMENT WITHOUT CONSDIERATION IS VALID

S.25 of ICA states that every agreement without consideration is void unless 25(1),(2)(3).

1. When Promise is due to natural love and affection [S. 25(1)].

A, out of love and affection, promises to give his son Rs. 1000. A puts his promise
into writing and registers it. This is a contract.

When promise is made in favour of a near relation on account of natural love and affection,
the same is valid even though there was no consideration for such a promise. An agreement
without consideration is valid provided
1. The parties to agreement must be standing in a near relationship to each other.
2. The promise should be made by one party out of natural love and affection for the
other.
3. The promise should be in writing and registered.

2. Compensation for past voluntary scheme [S. 25(2)]

Where a person without the knowledge of the promisor, or otherwise than at his request, does
the latter some service, and the promisor undertakes to recompense him for it, the promisor
becomes bound by it. The exception also covers a situation where the promise is for doing
something voluntarily “which the promisor was legally compellable to do.”
 A finds B’s purse and gives it to him and then B promises to pay A Rs. 50.
A supports B’s infant son and B promises to pay A’s expenses.
Both these agreement is a valid contract as A’s act was a voluntary one.

This exception works only when the act must have been done for a person who is in existence
at the time of doing of the act. It is also necessary that at the time of doing of the act, the
promisor must have been competent to contract.

3. Promise to pay time barred debt [S. 25(3)]

1. The promise must be to pay wholly or in part a time barred debt.
2. The promise must be in writing and signed by the person to be charged therewith, or
his duly authorised agent.

The debt must be one of which the creditor might have enforced payment but for the law for
the limitation of suits. If borrower had acknowledged his debt, then under S.25, period of
filling suit was saved and it would commence from date of such acknowledgement. In
Pestonji v. Bai Meherbai (1928), it was held that promise should be to pay time barred debt
due from the promisor, and not a promise to pay time barred debt from other persons.

A owes B Rs. 1000 but the debt is barred by Limitations Act. A signs a written
promise to pay B Rs. 500 on account of debt. A is bound to pay Rs. 500.

FREE CONSENT

As per S.10, one of the essentials of a valid contract is that the parties should enter into the
contract with their free consent. According to S.14, consent is said to be free when it is not
caused by coercion(S.15), undue influence(S.16), fraud(S.17), misrepresentation(S.18) or
mistake(S.20,21,22). When consent to an agreement is caused by coercion, undue influence,
fraud or misrepresentation, the agreement is said to be voidable at the option of the party
whose consent was so caused. If the consent is caused by mistake, the agreement is void.

Fraud

When the consent of a party to contract has been obtained by fraud, the consent is not free
which is necessary for the formation of valid contract. In such a case, the contract is voidable
at the option of the party whose consent has so been obtained. Fraud contains action such as
suggestion of fact which is not true by the person who does not believe it to be true, active
concealment of necessary fact, promise made without intention or any other act used to
deceive the other party. Therefore, any act done to deceive the other party to contract is fraud.

In Lucknow Development Authority v. Union of India ()

A consent is said to free when the parties agree upon the same thing in the same sense
(consensus ad idem) [S.13].

Mere silence is no fraud – A contracting party is not obliged to disclose each and everything
to the other party. If a person is to sell his goods, he is under no duty to disclose the defects of
the goods. In Keates v. Lord Cadogan (1851), A let his house to B which he knew was in
ruinous condition. A did not disclose the condition of the house to B. It was held that A
committed no fraud.

When the circumstances of the case are such that it is the duty of the person keeping silence to
speak, keeping silence in such cases amount to fraud. By remaining silent, one may be
responsible for creating a false impression in the mind of the others. Withholding the facts,
which ought to be disclosed, is fraud. For example, contracts of insurance are contracts
uberrima fides (of utmost good faith). Since some of the facts may be in the sole knowledge
of the insured, he must make full disclosures to the insurer.

In Felthouse v. Bindley (1862), the complainant’s nephew owned a horse and a letter was
sent to the nephew by his uncle to buy the horse The nephew did not reply to this letter. The
horse was then sold by mistake at auction. The auctioneer had been asked not to sell the horse
but had forgotten. The action depended upon whether a valid contract existed between the
nephew and the uncle. It was held that since the nephew had not communicated the
acceptance to Felthouse, no contract had arisen and the complainant had not become the
owner of the house. Silence does not amount to acceptance.

If a statement is true when made, but subsequently becomes false by the changes in
circumstances, there is a duty to disclose the change, before the other party acts upon it. If the
change is not notified to the other party, it would amount to fraud. [Briess v. Woolley (1866)]

CONTINGENT CONTRACT

According to S.31, a contingent contract is a contract to do or not to do something, if some

event, collateral to such contract, does not happen.
A contracts to pay B Rs.1,000 if B’s house is burnt. This is a contingent contract.

All contracts of insurance or indemnity aim at payment of money only after a certain event
happens. Therefore, they are contingent contract. A wagering agreement is also a contingent
contract, but that type of contingent contract has been specifically declared to be void by S.30.
When the performance of the contract is not dependant on the happening of some event
collateral to the contract, it is an absolute contract and it must be performed unconditionally.

Enforcement of contingent contract

1. Contingent contract on an event happening.
A makes contract with B to buy B’s house if A marries C. This contract is enforceable
when A marries C.
2. Contingent contract on an event not happening.
A agrees to pay B a sum of money if a certain ship does not return. The ship sinks. The
contract can be enforced when the ship sinks.
3. Contingent contract on happening of a specified event within a fixed time.
A promises to pay B if a certain ship returns within a year. The contract is enforceable
when the ship returns within a year.
4. Contingent contract on not happening of a specified event within a fixed time.
 A promises to pay B if a certain ship does not return within a year. The contract is
enforceable if the ship does not return within a year.
5. Agreements contingent on impossible event.
A agrees to pay B if B he can make an omelette without breaking an egg. This is an
impossible event and hence, void.

QUASI CONTRACT

S.68-72 deals with “certain relations resembling those created by contract”. These sections
include those obligations which are known as “Quasi Contract”. The Indian contract Act,
1872 does not define quasi contract, it calls them relation resembling those of contracts.
However, a quasi-contract may be defined as, “a transaction in which there is no contract
between the parties”. It is not a contract, but instead is a remedy that allows plaintiff to
recover a benefit conferred on the defendant. In other words, a contract made by law for
reasons of equity with no statement of consent is a quasi-contract. Quasi contracts bring a
situation which imposes obligations or duties upon the parties by law rather than the assent
given by them to the contract terms.

S.68 - Claim for necessaries supplied to person incapable of contracting, or on his

account

When one supplies necessaries suited to the condition in life of a person, who is incompetent
to contract (eg. minor or lunatic) or to anyone who the incompetent person is legally bound to
support (lunatic’s wife), the person providing the necessaries is entitled to reimbursement
from the property of such incompetent person.

A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B‟s property.

No action under a contract can be brought against a person for a claim for necessities supplied
to such incompetent person or his dependants, but reimbursement can be claimed only from
the property of such a person.

S.69 - Reimbursement of person paying money due by another

A person who is interested in the payment of money which another is bound by law to pay,
and who therefore pays it, is entitled to be reimbursed by the other. For the application of this
S., two essentials are necessary.

1. One person is interested in the payment of money.

The person, who makes the payment, and then claims its reimbursement must have an interest
in making the payment. The purpose of making the payment should be bona fide protection of
his interest by the plaintiff.

2. Another person is bound by law to pay the same.

The provision is based on the principle that the plaintiff, having discharged the defendant’s
debt, is entitled to be reimbursed by him. If the plaintiff is not merely interested but he
himself is bound to pay and also pays, he cannot have an action against the defendant.
The person so making the payment is entitled to be reimbursed by the person who was bound
to pay.

S.70 – Obligation of person enjoying benefit of non-gratuitous act

Where a person lawfully does anything for another person, or delivers anything to him, and
such person enjoys the benefit thereof, the latter is bound to make compensation to the former
in respect of, or to restore, the thing so done or delivered.
For the application of this section, following conditions are to be satisfied:
1. A person should lawfully do something for another person.
2. The person making the payment must not do so gratuitously.
3. The person should enjoy the benefit of this payment or the delivery of the thing.

S.70 prevents unjust enrichment and it applies as much to individuals as to corporations and
Government. In State of WB v. BK Mondal & Sons (1962), a work was assigned to the
respondent to construct certain structures for the use of Civil Supplies Department of the
government. The appellant alleged that the request of the respondent were invalid and
unauthorised and did not constitute valid contract binding the appellant, under S. 175(3) of the
Government of India Act, 1935. It was held that the appellants having accepted the benefit of
the structures constructed for it, was liable under S.70 to pay for the same.

S.71 – Responsibility of finder of goods

When a person is a finder of goods (a person who finds goods belonging to another and takes
the goods into his custody), is subjected to same responsibility as a bailee. The finder is bound
to take as much care of the goods as a man of ordinary prudence would, under similar
circumstances. He is bound to return the goods to the true owner. The finder of the goods is
however authorised to sell the goods found by him under S.169 if –

1. The true owner of the goods cannot with reasonable diligence be found, or if he
refuses, upon demand, to pay the lawful charges to the finder.
2. Either the thing found is in danger of perishing or of losing the greater part of its
value, or, in case the goods are not of perishable nature.

If the situation is not covered by S.169 and the finder sells the goods, he can be made liable
for conversion.

S.72 – Liability of a person getting benefit under mistake or coercion

According to S.72, a person to whom money has been paid, or anything delivered, by mistake
or under coercion, must repay or return it.

A and B jointly owe Rs.100 to C. A alone pays the amount to C, and B, not
knowing this fact, pays 100 to C. C is bound to repay the amount to B.

Payment towards tax or duty, which is without authority of law, is a payment towards tax or
duty, which is without authority of law, is a payment under mistake within the meaning of
S.72 and the same ought to be refunded by the government because the government cannot be
allowed to unjustly enrich itself by retaining the tax so received.

Under S.72, insurance company can recover the amount paid under mistake or coercion. If
loan contracts are to exercise right pressure, then it is legal but if it is for one’s own
enrichment, then it is not.

DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION

A false representation willfully made by a party to contract in order to mislead the other party
and inducing him to enter into the contract is known as fraud. A representation of a material
fact made by a party to contract who believes it to be true, the other party relied on the
statement, entered into the contract and acted upon it which later on turned out to be incorrect
is known as misrepresentation.

BASIS FOR
FRAUD MISREPRESENTATION
COMPARISON

A deceptive act done intentionally The representation of a misstatement, made

by one party in order to influence innocently, which persuades other party to
Meaning
the other party to enter into the enter into the contract, is known as
contract is known as Fraud. misrepresentation.

Section 2 (17) of the Indian Section 2 (18) of the Indian Contract Act,
Defined in
Contract Act, 1872 1872

Purpose to deceive
Yes No
the other party

In misrepresentation, the party making the

In a fraud, the party making the
Variation in extent representation believes the statement made
representation knows that the
of truth by him is true, which subsequently turned
statement is not true.
out as false.

The aggrieved party, has the right to The aggrieved party has no right to sue the
Claim
claim for damages. other party for damages.

The contract is voidable even if the

The contract is not voidable if the truth can
Voidable truth can be discovered in normal
be discovered in normal diligence.
diligence.

In Lucknow Development Authority v. MK Gupta (1993), the respondent after seeing an

advertisement in a newspaper decided to buy property from the plaintiff. He fulfilled all the
formalities but he was not provided with the property on the specified date as

ECONOMIC DURESS
It is unconscionable exercise of superior contractual bargaining position to deprive victim of
commercially and legally alternative to voluntarily submission to the coercion. The prime
factual determinant of its presence is the absence of alternative other than insolvency and
bankruptcy which in turn points to the abuse of bargaining position.

In D & C Builders v. Rees (1966), the builders sought payment from Rees for building work
done and materials supplied in respect of alterations and repairs completed on Rees’ shop.
Rees did not pay, but the work continued and a second bill was issued. Builders started to
have financial difficulties so requested the funds again. Rees offered Builders a reduced lump
sum in payment of the debt and stated that if it was not accepted, they would get nothing. A
cheque was issued after Builders feared they would receive no payment at all and Rees
provided a receipt stating the funds were in full payment of the account. Builders brought
action for the balance and Rees filed a defence stating that the work was defective and that
Builders had entered into a binding agreement. The court held that the agreement was invalid
as there was no consideration in favour of Builders for reducing the value of the amount
owing by Rees. The pressure placed on D & C by Rees forced them to accept an agreement
that was unsatisfactory.

To constitute duress in commercial pressure, the pressure be such that the parties on whom
duress is performed must have entered into the contract against his will, no alternative course
be available to him and must have been confronted with coercive acts by party exercising the
pressure.

Grounds for economic duress

1. Fear of disastrous economic consequences – In Universe Tankships v International

Transport Workers Federation (1983), The ITWF blocked a ship, to prevent it from
leaving port. They made several demands in relation to pay a large sum of money to the
in order to let the ship pass. The ship owners agreed in order that the ship could leave port
and then sought to recover the sum paid to the welfare fund. The court here held that
forceful entering into a special contract where there is no “willingness to pay” i.e.
coercion , then the pressure is not lawful and unjustified. As the consent acquired is not
free, the agreement is voidable.
2. Threat to commit breach of contract – In North Ocean Shipping v. Hyundai
Construction (1979), the defendants agreed to build a ship for the claimants for a certain
price. After entering the contract the US dollar devalued. The defendants threatened not
to complete unless the claimants paid an addition on the contractually agreed price. The
claimants had a valuable charter lined up so they agreed to pay the additional money.
After delivery of the ship, the claimants brought an action to recover the additional sums
paid. The court here held that contract was voidable for duress, since the claimants had
left it so long in bringing their claim they had affirmed the contract and lost their right to
rescind.

In India, Economic Duress is dealt either under S.16(3) or S.23, thus pressurised agreement
either becomes voidable or void respectively.

Also, if proper consent is signified even if all the elements of economic duress is fulfilled, the
stand of economic duress cannot be taken.
UNDUE INFLUENCE

S. 16 mentions undue influence and is defined as if the consent of the party of the contract has
been obtained by undue influence i.e. one of the parties is in a position to dominate the will of
the other, the consent is not free which is needed for the validity of the contract. If consent is
caused by undue influence, the agreement becomes voidable at the option of the parties whose
consent is so obtained. A person is said to be in a dominating position if:

1. he holds a real or apparent authority over the other or where he stands in a fiduciary
relation to the other.
2. He makes a contract with a person whose mental capacity is temporarily or
permanently affected by illness.

The burden of proof lies on the person who is in a dominating position to prove that the
contract was not induced by undue influence.

When two people who are competent to contract are related to each other on relationship of
confidence and trust, such relationship is based on fiduciary relationship. Spiritual advisor and
devotee, medical assistant and patient, creditor and debtor, guardian and ward are some
examples of fiduciary relationship.

Effect of undue influence

S.19(A) mentions that When consent to an agreement is caused by undue influence, the
agreement is a contract voidable at the option of the party whose consent was so caused.

A’s son has forged B’s name to a promissory note. B under threat of prosecuting
A’s son, obtains a bond from A for the amount of the forged note. If B sues on this
bond, the Court may set the bond aside.

MISTAKE
When one or both the parties under some misunderstanding and misapprehension of facts
relating to agreement, enter into a contract which they would not have entered had the
misunderstanding not been there, the contract is said to have been caused by mistake.

Mistake when there is no consensus ad idem

As per S.13, for a valid contract, both parties should have given their consent and the consent
should also be free. If the offer and acceptance do not coincide with each other, no contract
comes into force and hence the contract becomes void. In Tarsem Singh v. Sukhminder
Singh (1998), the seller intended to sell the land in terms of ‘kanals’ whereas the buyer
intended to purchase it in terms of ‘bighas’. It was held that mistake relating to a matter is
essential to the agreement. The parties to agreement were not at idem with respect to the unit
of measuring of land. The agreement was therefore held to be void.

Mistake as to matter of fact essential to the agreement

S. 20 deals with this type of mistake. It states that where both the parties to an agreement are
under a mistake as to a matter of fact essential to the contract, the agreement becomes void.
A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of
bargain, though neither party was aware of the fact. The agreement is void.

The essentials of S. 20 are –

1. Both parties to the contract should be under a mistake.
2. Mistake should be as regards a matter of fact.
3. The fact regarding which the mistake is made should be essential to the agreement.

This section makes an agreement void if there is a mistake on the part of both the parties. But,
if the mistake is a unilateral one, the validity of the agreement is not affected thereby as made
clear in S.22 of the Act. In Ayekam Anghal Singh v. UoI (1970), the plaintiff was the
highest bidder at an auction of fishery rights for three year. He sought to avoid the contract on
the ground that he made a bid being the rent for all three years and not per year. It was held
that since the mistake is unilateral, the contract was not affected thereby and the same could
not be avoided.

The law allows mistake of fact but not mistake of law. The validity of the contract is not
affected by mistake of law. S.21 states that a contract is not voidable because it was caused by
a mistake as to any law in force in India. If a person wants to avoid the contract on the ground
that there was a mistaken impression in his mind as to the existence of some law while he
entered into the contract, he will get no relief.

A owes B Rs 1000. Both mistakenly think that the debt is time barred and agree
that A may pay only Rs 500 to clear the debt. It is a mistake of law and the
contract to pay Rs 500 is valid.

Mistake as to the identity of the contracting parties

In Cundy v Lindsay (1878), a man (A) obtained goods from a manufacturer (B) by using a
false address and a false name that was similar to a company that resided in the same street.
He did so by sending the letters to the B. B sent the goods to A thinking that A to be the the
company. After receiving the goods, he immediately sold the goods to another person (C)
who had no idea about the fraud that has taken place. B brought an action against C to
recover his goods. It was held that as there was no consenus ad idem, the contract is void. It
was because of mistake, A did not get any title to the goods and C did not get any title and
they were bound to return the goods to the plaintiff.
The ratio of this case was given in 1878 but today, it is as per the discretion of the judge to
determine whether there was fraud or mistake as per the facts and circumstances. When the
fraud is applied, the plaintiff (B) cannot recover the goods from the defendant (C) but if
mistake is applied, B cannot recover his goods from C.
In Ingram v. Little (1961), the petitioners sold their car to a person calling himself to be A.
He fooled them into believing him to be someone else, and they sold him the car, after
checking the name in the telephone directory. Before the cheque bounced, the rogue sold the
car to the defendant from whom the ladies now sought the return of the car. It was held that
the plaintiff had intended to sell car to A and not the rogue and therefore neither A nor the
defendant could get the title of the car and the defendant was liable to return the car, or pay
damages instead.
LEGALITY OF OBJECT AND CONSIDERATION
S.23 mentions the circumstances when the consideration or object of an agreement is not
lawful. It mentions that consideration or object of an agreement is lawful unless –
1. It is forbidden by law,
2. It would defeat the provisions of any law,
3. It is fraudulent,
4. It involves or implies injury to the person or property of another,
5. The Court regards it as immoral,
6. The Court regards it as opposed to public policy.
In Amrit Banaspati v. State of Punjab (1992), the government made a promise to give
concession and incentives to the petitioner who decided to set up a Vanaspati industry. The
appellant on that promise purchased the land and invested substantial amount in setting up
the unit. Subsequently, the appellant claimed refund of sales tax as stated by the government
in the promise. The respondent failed to refund the amount and the case was filed. It was held
that the representation could not be enforced against the Government because the Court
found that the Government's assurance was incompetent, illegal and contrary to the
provisions of law.
The Court does not allow a concubine or a prostitute to enforce a promise given by the
customer to be enforced as it is opposed to morality. If the property is always given, then it
comes down to the Court to decide whether it is immoral or not. Some say that rendered
property has been acquired by providing services and hence she is entitled to keep it. Others
deny it on the grounds of immorality.
In Lily White v. Munuswami (1966), the plaintiff gave a new saree for dry-cleaning but it
was never returned as it disappeared by the negligence of the dry-cleaners. The plaintiff
claimed the market value of the article. The dry-cleaners stated that on the back of the
receipt, the terms and condition are printed. One of the clause stated that in case of loss of an
article, a customer is entitled to claim 50% of the value of the article and by accepting the
receipt, the plaintiff has accepted the terms. It was held that the claim of 50% is not
enforceable on public grounds. The term opposed both public policy and the fundamentals of
law of contract and hence the plaintiff is entitled to receive full and not partial compensation.
As per S.23, these types of contract are void.
Mistake as to private rights to ownership
Sometimes the parties may be under a mutual mistake as to the title of the goods sold. The
buyer may already be the owner of what the seller is trying to sell. Such an agreement is void
due to mutual mistake. The position in this case is similar to the one where the subject matter,
unknown to the parties, is not in existence. In Cooper v. Phibbs (1867), A agreed to take a
lease of a fishery from B. Unknown to both the parties, A was already the tenant for life of
the fishery rights and B had no title to the same. The agreement was set aside on the ground
of common mistake.
Mistake of fact essential to the contract

DAMAGES
Damages entitles the injured party to recover the compensation for the loss suffered by him
due to the breach of contract, from the party who causes the breach. S.73-75 incorporate the
provisions in this regard. When the injured party has performed a part of his obligation under
the contract before the breach of contract has occurred, he is entitled to recover the value of
what he has done, under this remedy.
Under S.73, it is the right of the injured party to recover compensation for the loss or damage
which is caused to him by the breach of contract. In Hadley v. Baxendale (1854), it was held
that on the breach of contract such damages can be recovered –
1. As may fairly and reasonably be considered arising naturally i.e. according to the
usual course of things from such breach.
2. The parties deem to know the likelihood of such loss.
Breach should be direct cause of loss. Remote damage is not taken into account i.e. breach
should be only dominant cause and not proximate cause. It is necessary that the resulting
damage is the probable result of breach of contract. Sometimes, contracts has clauses for
compensation that the other party may suffer for such loss. If the parties can estimate such
loss, then it is termed as “liquidated damages”.
If breach is committed on due date of performance of promise, then it is termed as normal
breach and if it is prior to due date, then it is anticipatory breach.
In Maula Bux v. Union of India (1969), the petitioner entered into two separate contracts
with the Government of India, one for supply of potatoes and the other, for poultry, eggs etc.
He committed breach of both the contracts. On his breach, the contracts were rescinded and
said amounts were forfeited, as provided in the contracts. The Court asked what was the loss
suffered by the government but the government was unable to show any loss. It was stated by
the Court that forfeiture of earnest money does not come under S. 74 but if the amount is in
nature of penalty, S. 74 applies. The party complaining of the breach is entitled to receive
reasonable compensation, whether or not actual loss has occurred.
Liquidated Damage Penalty

It is a sum fixed or ascertained by the parties

Penalty is the sum mentioned in the contract
to the contract, which is a fair and genuine
at the time of its formation which is
per-estimate of the probable loss that might
disproportionate to the damages likely to
occur as a result of breach of contract. Thus,
occur as a result of the breach of the contract.
liquidated damages are an assessment of loss
Penalty is fixed with a view to getting the
which in the opinion of the parties will occur
contract performed, but it has no concern
due to breach. Such damages are effective
with the probable loss likely to occur to the
and recoverable by the aggrieved party from
parties due to the breach of the contract.
the other

Every damage causes agony of some sort and the courts are providing damages for the same.
If a tourism company offers different types of scheme but after availing the schemes, one
does not find it up to the mark as per the clauses specified, the courts will award damages to
the injured party.
AGREEMENT IN RESTRAINT OF TRADE
S.27 states that every agreement by which anyone is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void. S.27 does not allow any
distinction between a total restraint or a partial restraint. In employment contract, negative
covenants (disclosing important information to competitor/be in office time/full capacity
work) can sometimes be brought under S.27. These are upheld in cases where the negative
covenants are reasonable.
Q. When employer’s interests can be protected and to what extent?
A. When he honestly believes that information is necessary and its disclosure will result in
his loss of business. Special information attained can be protected by law such that the
confidential information does not reach the public domain.
In the case of Superintendent Co. of India Pvt. Ltd. v. Krishan Murgai (1980), the
defendant was employed as branch manager of the an office. One of clauses of the terms and
conditions of employment placed him under a post-service restraint that he would neither
serve any other competitive firm nor carry on business on his own in similar line for two
years at the place of his last posting; and the restriction would come into operation after he
left the company. When he was terminated from service, the employee started a business on
similar lines. When the matter came for appeal, the Supreme Court held that under Section 27
of the Indian Contract Act, 1872, a service covenant extended beyond the termination of the
service was void. If the employee is restrained from applying the information acquired by
him in his previous course of employment, he will not be able to use it for the benefit of thr
nation.
In Niranjan Shankar v. Century Spinning & Manufacturing Co. Ltd. (1967), the
employee acquired special knowledge in training programme of the employer. Later, he
joined the opponent of employer. The question here arose that whether the interest of the
previous employee should be safeguarded? The court here observed that restraints or negative
covenants in the appointment or contract may be valid if they are reasonable. A person may
be restrained from carrying on his trade by reason of an agreement voluntarily entered into by
him with that object. But, if a person gained advantage himself, he can use it. Even the
Competitions Act 2002, provides that a former employee can compete with his former
employer.
AUCTION SALES (Mentioned in S.64 of Sale of Goods Act, 1930)
Auction sales is one of the modes of sale by public competition. It is an exception to standard
form of contract. Here, seller wants to sell at the best possible price. If the seller makes use of
pretended bidding to raise the price, the sale is voidable at the option of the buyer. Once, the
decision to sell by auction is taken, auction notice must be given in a newspaper regarding the
details of property which is to be sold, place and time of the auction. Any person who joins
will be eligible to bid. Government department uses vehicle but after certain duration, the
vehicle needs to be disposed off. Auction sales come into force here.
Auctioners are the agent to the owners of the property. They dispose off the property as per
the direction of the owner. The publishing of advertisement in the newspaper for auction is an
invitation to offer Auction sale is of two kind –
1. Without reserve - The property is sold to the highest bidder, regardless of the price.
Many sellers, including financial institutions and government agencies have begun to
use this method more frequently. A contract is concluded with the highest bidder.
Auctioner shall have to dispose off the property in favour of highest bidder.
2. With reserve - The seller reserves the right to accept or reject the highest bid within a
specified time. Sellers are not obligated to confirm a sale other than at a price that is
 entirely acceptable to them. Here, the bid is an offer and the seller is not bound to
accept it. If it only when the seller signifies his assent, the contract is concluded.
In the case of Rajah Of Bobbili v. Akella Suryanarayana Rao (1918), Rajah and another
person made a bid in an auction having only Re.1 as their difference. The highest bidder died
and his bid was revoked. The auctioneers decided to go on with Rajah, being the second
highest bidder, and granted him time to deposit the necessary amount. He refused to do so
and contended that as his bid was lapsed by the another bidder, his offer was not accepted
and no contract came into force and thus he is not bound to pay. His contention was accepted
by the Court and he was not required to pay the amount.
If the clause of auction contains that the lowest bidder (generally in case of government
tenders), then an obligation lies on the part of the state. In such cases, the authorities can
refuse when the bid price is too low, only if the officials think that the lower bid cannot
perform up to the expectation. If reasons are not justifiable, then he can enter.