Contract PDF

Chapters
1. Definition of Contract 1
2. Basic Elements of a Contract:
Offer, Acceptance, Consideration
and Contractual Capacity 5
3. Factors Vitiating Consent 23

4. Void, Voidable, Illegal and Unenforceable Agreements 31
5. Wagering Agreements 39
6. Contingent Contracts 41
7. Performance of Contract 42
8. Dissolution of Contractual Obligations:
Frustration of Contract 50
9. Quasi-Contract 54
10. Remedies for Breach o f Contract 57
t
l. DEFINITION OF CONTRACT
The law o f contract lays down the legal rules relating to prom ises: their formation,
their performance, and their enforceability. Explaining the object o f the law o f contract.
Sir W illiam A nson observes: “The law o f contract is intended to ensure that what a
man has led to expect shall com e to pass; that what has been prom ised to him shall
be performed."
A nson also said: “The law o f contract d oe s not lay dow n a number o f rights and
duties which the law will enforce; it con sists o f rather a number o f limiting principles
subject to which the parties m ay create rights and duties for them selves w hich the law
will uphold.” Thus the law shall not lay dow n absolute rights and liabilities o f the
contracting parties; rather it shall lay dow n only the essentials o f a valid contract
“The parties to a contract, in a sense, make the law for themselves.”
The law o f contract in India is contained in the Indian Contract Act, 1872. This
A ct is based mainly on English C om m on law consisting o f ju d icia l precedents. The
A ct is not exhaustive as it d oes not deal with all the branches o f the law o f contract.
There are separate Acts which deal with contracts relating to negotiable instruments,
transfer o f property, sale o f goods, partnership, insurance, etc. B efore 1930, the A ct
also contained provision s relating to contracts o f sale o f g o o d s and partnership.
The Act (w.e.f. Septem ber 1, 1872) d oes not affect any usage o r custom o f trade
(not inconsistent with the provision s o f the Act) (Sec. 1). A m inor amendment in Sec.
28 o f the A ct was made by the Indian Contract (Amendment) Act, 1996. The general
principles o f the law o f contract are laid dow n under Secs. 1-75 o f the Act.
“T o consummate a contract there must b e mutuality as w ell as a m eeting o f the
minds o f parties.” ‘Mutuality’ means equality o f rights betw een the parties. Either
party should’ve equal right to enforce the contract. F or example, where on e o f the
parties to a contract is a minor, there is no mutuality. Further, in a contract there is
a consensus a d idem i.e. ‘m eeting o f m inds’. “A contract, like a tort, is not unilateral.”
In a tort, a w rong is com m itted by one person against the other.
A ccordin g to Anson: “A contract is a legally binding agreement betw een two
or m ore persons by which rights are acquired by one o r m ore to acts or forbearances
on the part o f the other or others.” Salm ond said: "It is an agreement creating and
defining obligation s betw een the parties.” W hile, a ccordin g to P ollock: “Every
agreement and prom ise enforceable at law is contract.”
Section 2(h) o f the Indian Contract Act, 1872, defines the term “contract” as ‘an
agreement enforceable by law.’ A n ‘agreement’ is a prom ise and a ‘p ro m ise’ is an
accepted proposal. Thus, every agreement is made up o f a proposal o r offer from one
side and its acceptance by the other (there must be two or m ore persons; on e person
cannot enter into an agreement with himself). A n agreement is a w ider term than a
contract. Every contract is an agreement, but every agreement is not a contract (i.e.
Ml
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legally binding agreement). An agreement becom es a contract when the follow in g

conditions are satisfied (Sec. 10):
(1) There is some consideration for it
(2) The parties are competent to contract.
(3) Their consent is free.
(4) Their object is lawful.

(5) The agreement mustn’t be expressly declared to be void.
(6) The terms o f the agreement must not be vague or uncertain (Sec. 29).
(7) The agreement must be capable o f performance (Sec. 56).
Salmond has rightly observed: ‘T h e law o f contract is not the w hole law o f
agreements, nor is it the whole law o f obligations. It is the law o f those agreements
which create obligations, and those obligations, which have their source in agreements.”
A contract arises from an agreement, which arises m ostly through the p rocess
o f negotiation between the parties, one making the offer and the other accep tin g it.
A contract may be oral or in writing. But in certain special cases the A ct lays dow n
that the agreement, to be valid, must be in writing or/ and registered, viz. an agreement
to make a gift must be in writing and registered (Sec. 25).
Intention to C reate a Legal O bligation

There is no provision in the Indian Contract Act requiring that an offer or its acceptance
should be made with the ‘intention o f creating a legal relationship’, w hile under
English law it is so. The intention o f the parties is to be ascertained from the terms
o f the agreement and the surrounding circumstances. In ‘socia l’/ ‘fam ily’ agreem ents
(viz. agreements between husband and wife, an agreement to entertain a person with
a dinner, or to go to movie, etc.) it is usual that the parties d o not intend legal
consequences, while in ‘business’ agreements it is usual that the parties intend legal
consequences to follow. However, the parties could intend legal co n seq u en ces in
family agreements and likewise do not intend so in business agreements.
Test o f contractual intention is objective, not subjective. M erely b eca u se the

promisor contends that there was no intention to create legal obligations w ou ld not
exempt him from liability (See Carlill v C arbolic Smoke Ball Co. case). In M cG re g o r
v McGregor (1888) 21 QBD 424, a husband and a w ife withdrew their com plaints
under an agreement by which the husband promised to pay her an allow an ce and she
to refrain from pledging his credit. Held that there is a binding contract. How ever, in
Balfour v Balfour (1919) 2 K.B. 571, a couple went to England on leave. F or health
reasons the wife was unable to accompany the husband again to C ey lon (H usband’s
place o f work). The husband promised to pay 30 pounds per month to his w ife as
maintenance, but he failed to pay. The husband was held not liable, as there w as n o
intention to create legal relationship.
In Jones v Padavatton (1969) 2 All ER 616, the daughter acting on her m oth er’s
promise left her service and gone to another country for education. T he m other
undertook to foot the expenses. For five long years the daughter could not co m p le te
her education. Differences arose between them and the mother stopped the payments.
Held, the engagement did result in a contract, but only for a reasonable period.
Law o f Contract 3
Kinds o f C o n tra cts
(A) From the point o f view o f Enforceability

(i) Valid contract- It is an agreement enforceable b y law [Sec. 2{h)\.
(ii) Voidable contract- It is an agreement which is enforceable by law at the
option o f one or m ore o f the parties thereto, but not at the option o f the
other or others [Sec. 2(0]. Until it is avoided or rescinded by the party
entitled to do s o by exercising his option in that beh alf it is a valid
contract; after it is repudiated, it becom es a void contract.
(iii) Void contract- A contract which ceases to be enforceable by law becom es
void [Sec. 2(f)]. Such a contract is a nullity, as for there has been no
contract at all.
‘A n agreement not enforceable by law is said to be v o id ’ [Sec. 2(g)], Thus a
void agreement is void ab initio i.e. no agreement at all from its very inception (e.g.
an agreement with a minor or an agreement without consideration). A ‘void agreement’
never amounts to a contract; a ‘void contract’ is valid when it is entered into, but
subsequent to its formation something happens which makes it unenforceable by law.
A contract cannot b e void ab initio. A valid contract becom es void because o f
supervening im possibility or illegality (Sec. 56) or repudiation o f a voidable contract,
or when the event in a contingent contract becom es im possible (Sec. 32).
(iv) Unenforceable contract- It is one which is valid in itself, but is not
capable o f being enforced in a court o f law because o f som e technical
defect such as absence o f writing, registration, etc., or time barred by
the law o f limitation.
(v) Illegal o r Unlawful contract- The term ‘illegal contract’ is inappropriate
as it w ould mean an agreement enforceable by law and contrary to law.
The term ‘illegal agreement’ is appropriate. A n illegal agreement is
narrower in scop e than a void agreement. ‘All illegal agreements are
void but all void agreements are not necessarily illegal.’ For example,
an agreement with a minor is void as against him but not illegal.
(B) From the point o f view o f M od e o f Creation

(i) Express contract- W here both the offer and acceptance constituting an
agreement are made in words spoken or written, it is an express contract.
(ii) Im plied contract- W here the offer and acceptance are made otherwise
than in w ords i.e. by acts and conduct o f the parties, it is an implied
contract.
Sometimes, an offer is expressed in w ords and the acceptance is im plied from
acts and circumstances. Such contracts may be called as contracts o f mixed character.
(iii) Constructive or quasi-contract- Such a contract does not arise by virtue

o f any agr eement between the parties but the law infers or recognizes a
contract under certain special circumstances. The Contract Act has named
such contracts as “certain relations resembling those created by contract”
(Secs. 68-72). An example- liability o f a person to whom m oney is paid
under mistake to repay it back.
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(C) From the point o f view o f the Extent o f Execution

(i) Executed contract- A contract is said to be executed when both the
parties tb contract have completely performed their share o f obligation
and nothing remains to be done by either party under the contract. F or
example, when a bookseller sells a book on cash payment.
However, where only one o f the parties to a contract has perform ed his share
o f obligation and the other party is still to perform his share o f obligation, then also
the contract is called ‘executed’. Such contracts are called Unilateral contracts. F or
example, a public advertisement offering a reward to anyone who finds a m issin g
thing/ person.
(ii) Executory contract- A contract is said to be executory when either both
the parties to a contract have still to perform their share o f obligation
in toto or there remains something to be done under the contract on both
sides. Such contracts are called Bilateral contracts or Future contracts.
For example, A agrees to coach B, a pre-medical student, from first day
o f the next month and B promises to pay A Rs. 500 per month.
Standard Form C on tract

When a large number o f contracts have got to be entered into by a person, from a
practical point o f view and for the sake o f convenience, a standard form for the
numerous contracts may be used. An insurance policy, shares or a railway ticket are
few examples o f such standardized contracts. The “special terms and conditions”
becom e binding as part o f the contract only i f they are brought to the n otice o f the
acceptor before or at the time o f contract. In view o f the unequal bargaining p ow er
o f the two parties, the courts and the legislature have evolved certain rules to protect
the interest o f the weaker party: -
(1) Reasonable notice - e.g. by printing on a ticket, ‘T o r conditions see
back”, or obtaining signatures on the document containing terms, or
otherwise explaining the terms. Where an adequate notice is not given
the offeree is not bound by the terms.
(2) Notice should be contemporaneous with the contract - I f a party to the
contract want to have exemption from liability he must give a notice
about the exemption while the contract is being entered into and not
thereafter (Olley v M arlborough Court, Ltd. (1949) 1 K.B. 532).
(3) Terms o f contract should be reasonable - I f the terms o f the contract are
unreasonable and opposed to public policy, they will not be enforced.
(4) Fundamental breach o f contract - N o exemption clause is allow ed to
permit the non-compliance o f the basic contractual obligation i.e.
obligation which is fundamental or ‘core’ o f the contract. Thus, a dry
cleaner has to be answerable, even i f the contract contains all sorts o f
exemption clauses, i f the cloth is altogether lost.
(5) Strict construction - A strict construction shall be applied to exemption
clause, and any ambiguity is to be resolved in favour o f the weaker
party.
Law o f Contract 5
(6) Statutory protection - The English Unfair Contract Terms Act, 1977
severely limits the right o f the contracting parties to exclude or limit
their liability through exemption clauses in the agreement. India lacks
such an Act; Indian Airlines v Madhuri Chowdhury (AIR 1965 Cal
252) highlights the inadequacy o f the Indian Contract A ct in providing
relief to the weaker party against the exemption clauses.
(Note: Government Contracts include tenders, auctions and standard form
contracts).
2. BASIC ELEMENTS OF A CONTRACT
The four basic elements o f a contract are: Offer, Acceptance, Consideration, and
Contractual capacity.
[I] O ffer (Proposal)

(1) The first essential for creating a contract is a valid offer or proposal (the
term ‘offer’ has been used in English law and the term ‘proposal’ under the
Indian law). A s per Sec. 2(a), an offer or p roposal has the follo w in g
ingredients:
(i) one person signifies to another,
(ii) his willingness to d o or abstain from d oin g anything,
(iii) with a view to obtaining the assent o f that other.
(2) A c c o r d in g to Sec. 3, to ‘s ig n ify ’ m ean s that the p ro p o sa l m ust b e
communicated to the other party. Sec. 9 provides that a valid proposal may
b e m ade by w ords (written or spoken) or b y conduct. Thus stepping into a
taxi and consum ing eatables at a restaurant, both create im plied prom ise to
pay for the benefits enjoyed. Similarly, a bid at an auction. In Upton Rural
District C ou n cil v P ow ell (1942) i All E R 220, a fire broke out in the
defendant’s farm. B elieving that he was entitled to the free service o f Upton
F ire B rigad e (which he w as not), he su m m on ed it. U p ton cla im ed
com pensation for its services. Held, the services were rendered on an im plied
prom ise to pay for them.
(3) Certainty o f offer- The terms o f the offer must b e certain and not vague (Sec.
29). A agrees to sell to B “m y white horse for Rs. 500 or Rs. 1000”. There
is nothing to show which o f the tw o p rices was to be given, thus it is not a
valid offer.
(4) Com m unication o f offer - A ccordin g to Sec. 4, the com m unication o f a
proposal is com plete when it com es to the know ledge o f the person to whom
it is made. A cting in ignorance o f an offer d oe s not amount to the acceptance
o f that offer. Thus, kn ow ledge o f an offer is must before the offer can be
accepted. In Lalman Shukla v Gauri Dutt (1913) 11 All LJ 489, the defendants
by handbills offered to pay Rs. 501 to anyone discovering the lost boy. The
servant o f defendant came to know o f this offer only when he had already
traced the missing child and had informed the defendant. H is action to recover
the reward failed.
The court observed: “Where an offer has been accepted with knowledge o f the
reward, the fact that the informer was influenced by motives other than the reward
will be immaterial.” In Williams v Carwardine (1833) 2 U K B 101, where information
was given about the murderers o f her husband by a woman, not s o much for reward,
but to assuage her feelings, she was allowed to recover. The court further observed
that in the case o f public advertisements offering a reward, the ‘performance o f the
act’ raises an inference o f acceptance (Sec. 8). But, in the present case, the plaintiff
was already under an obligation to do what he did (acting under the servant’s duty)
and, therefore, the performance o f act cannot be regarded as a consideration for the
defendant’s promise.
In an Australian case, R. v Clarke (1927) 40 CLR 227, it was held that even
i f the acceptor had once known o f the offer but had com pletely forgotten about it at
the time o f acceptance, he would be in no better position than a person w ho had not
heard o f the offer at all (e.g. an accom plice giving the information to save himself,
completely forgetting the reward).
(5) General offers - There are two kinds o f offers - general and specific. The
specific offer is made to specific person, while the general offer is made to
the public or world at large. However, in case o f general offers, the contract
is made only with that person who com es forward and performs the conditions
o f the proposal as such performance amounts to acceptance o f performance
(Sec. 8).
A s stated by Anson, “An offer need not be made to an ascertained person, but
no contract can arise until it has been accepted by an ascertained person”. Thus, in
Carlill v Carbolic Smoke Ball Co. (1893) 1 Q B 256, the com pany offered £ 100
reward to anyone who caught influenza after using their sm oke ball accordin g to
printed directions. The plaintiff, who used the smoke ball, caught influenza. She was
held entitled to recover the promised reward. The court also noted that, in this case
as the transaction was advantageous to the Com pany (for increasing sale), this is
enough to constitute consideration for the prom ise (a requirement o f a valid contract).
(6) Cross-offers- When two parties make identical offers to each other, in
ignorance o f each other’s offer, the offers are ‘cross-offers’. Such offers do
not constitute acceptance o f one’s offer by the other and as such there is no
completed agreement [Tim v Hoffman & Co.(1873)29 LT 271]. For example,
A wrote to B offering to sell him certain goods. O n the same day, B wrote
to A offering to buy the same goods. The letters crossed in the post. There
is no concluded contract between A and B.
(7) Offer and invitation to treat [offer) - An ‘offer’ is the final expression o f
willingness by the offeror to be bound by his offer. Where a party, without
expressing his final willingness, proposes certain terms on which he is w illing
to negotiate, he does not make an offer but merely ‘invites’ the other party to
make an offer on those terms. For example, a book-seller sends catalogue o f
books indicating price o f various books to many persons. This is an ‘invitation
to treat’. The interested party may make an offer and the book-seller may
Law o f Contract 7
accept or reject the offer. Similarly, bids/ tenders are only, an ‘invitation to
offer’. An auctioneer is not bound to accept even the highest bid (offer). Where
an auctioned sale was cancelled, the plaintiff cannot recover travel expenses, as
there was no contract. An offer can be withdrawn before it is accepted.
In M cPherson v Appana (AIR 1951 SC 184), it was held that m ere statement
o f the low est price at which the offeror w ould sell contains no im plied contract to sell
at that price. The Supreme Court relied on the principle enunciated in Harvey v F acey
(1893) A C 552. In that case the plantififs telegraphed to the defendants, writing: “Will
you sell us Bumper Hall Pen? Telegraph low est cash price”. The defendants replied,
also by a telegram: “Lowest price for Pen, £ 900”. The plaintiffs immediately sent
their last telegram stating: “We agree to buy Pen for £ 900 asked by you”. The
defendants, however, refused to sell the plot o f land at that price. The court observed
that the defendants had made n o offer. The plaintiffs’ last telegram w as an offer to
buy, but that was never accepted by the defendants.
In Pharm aceutical S ociety o f G.B. v B oots Cash Chemists Ltd. (1953) 1 All ER
482, held that the display o f g o o d s in a shop with price tags attached is not an offer
even i f there is a “self-service” system in the shop. The custom er by picking up makes
an offer to buy which is subject to acceptance by the shopkeeper. Likewise, an
inducement o f special discount by a shopkeeper is a “com m ercial p u ff’ or an invitation
to treat and not an offer. A banker’s catalogue o f charges is also not an offer.
[II] A cce p ta n ce
A proposal when accepted, results in an agreement. It is only after the acceptance o f
the proposal that a contract between the two parties can arise. W hen the person to
w hom the proposal is made, signifies his assent thereto, the proposal is said to be
accepted [Sec. 2(b)].
There are two essential requirements o f a valid acceptance: firstly, acceptance
should be communicated by the offeree to the offeror. Secondly, acceptance should
be absolute and unqualified.
(A) Communication o f A cceptance

(1) A cceptance express or im plied - A cceptance may b e in the form o f
express w ords (written or spoken) or may b e signified through conduct
(implied or tacit viz. cashing o f a cheque). In every case, there should
be som e external manifestation or overt act o f acceptance (e.g. fall o f
hammer in auction sale). A mere mental determination (or intent) to
accept is not enough (e.g. keeping agreement in a drawer) [Brogden v
M etropolitan Rail Co. (1877) 2 A C 666].
(2) When communication not necessary - In all cases o f general offers

(unilateral contracts), the acceptance is usually by conduct. Sec. 8 provides
that perfonnance o f the conditions o f a proposal is an acceptance o f
proposal (Carlill v C a rbolic Smoke B all Co.).
(3) Communication to offeror himself- A communication to any other person
is no communication in the eyes o f law. In Felthouse v Bindley (1863)
7 LT 835, the nephew intended his uncle to have the horse, but had not
communicated this to the uncle, instead he told the auctioneer not to sell
the horse as it was already sold to his uncle. H eld that a com m unication
to a stranger, like the auctioneer in this case, w ill not do. In this case,
also.held that an offeror can’t im pose upon the o fferee the burden o f
refusal or ‘duty to reply’. The offeror cannot say that i f n o answer is
received within a certain time, the same shall be deem ed to have been
accepted. Mere silence is no acceptance o f offer.
(4) Communication by acceptor him self - Information received from an
unauthorized person is ineffective as it is like over-hearing from behind
the door [Powell v Lee (1908) 24 TLR 606]. In this case, the plaintiff’s
appointment as a teacher was communicated to him unofficially; later,
the managers o f school by a resolution cancelled h is appointment. The
plaintiff sued for breach o f contract, but failed.
(5) Mode o f communication - Sec. 7 provides that acceptance has to be

made in the manner prescribed by the proposer (if not prescribed, then
in some usual and reasonable manner). Further, a duty is cast on the
offeror to reject such acceptance within reasonable tim e and i f he fails
to do so, the contract is concluded.
(6) When communication o f acceptance com plete - W hen the parties are in
the presence o f each other, the contract is concluded w hen acceptance
is communicated to the proposer. This is the ordinary rule. H owever, an
exception has been engrafted upon this rule by Sec. 4. W hen the parties
are at a distance and are contracting through post or by m essengers, the
proposer become bound as soon as the acceptance is put in the course
o f transmission to him (e.g. when letter o f acceptance is p oste d by
acceptor). But the acceptor w ill b e c o m e b o u n d o n ly w h en the
communication o f acceptance is received by the p rop oser i.e. ‘co m e s to
the knowledge o f the proposer’ (Sec. 4). Under both the Indian and
English laws, a contract is made at a place where letter o f acceptance
is posted (rather than where it is posted). Under the English law, however,
when a letter o f acceptance is posted, both the offeror and acceptor
become bound.
When the acceptance is by telep h on e o r telex (i.e. direct/

instantaneous communication), the contract is complete only when the acceptan ce is
received (clearly heard and understood) by the offeror. A contract is deem ed to be
made at the place where acceptance is received or heard (offeror hears the acceptance
at his end, rather than when the acceptor speaks words o f acceptance) (B hagw andas
Kedia v Girdharilal & Co. AIR 1966 SC 543).
A ° ffer B B accepted ^
(Ahmedabad) on phone (Delhi) the offer (receives/ heard
the acceptance)
The majority view in this case, which is an exception to Sec. 4, is based on the
decision in Entores Ltd. v Miles Far East Corpn. (1955) 2 A ll E R 493. The court
observed: “Where the parties are in the presence o f each other, say, two persons
Law o f Contract 9
across a river... one shouts an offer, but d o not hear another’s reply because o f an
aircraft noise. There is no contract at that m o m en t... to b e a contract, acceptance has
to b e shouted again and heard by the other. Similarly, in case o f a telephonic
conversation, if the line goe s ‘dead’ so that one do not hear other’s words o f acceptance,
there is n o contract at that moment.” The minority view in this case was that Sec. 4
covers telephonic communication also.
Just as when the lighted match com es into contact with gunpowder, there w ould
be an explosion and then it will not be possib le to bring the things back to the original
position, similarly, after the offer is accepted it creates a contract whereby both the
parties becom e bound and none o f them can g o back (Anson). However, an offer may
lapse for want o f acceptance or be revoked before acceptance. A lso the offeree may
d ecide to reject the offer. O n ce the offer lapses or revoked it is incapable o f being
converted into a contract by being accepted.
Sec. 4 o f the Contract A ct lays dow n that the communication o f acceptance is
com plete as against the proposer, when it is put in the course o f transmission to him
so as to be out o f the pow er o f the acceptor. T he proposer or offeror becom es bound
immediately on the posting o f the letter (correctly addressed) to him and it makes no
difference that the letter is delayed in transit o r it is even lost in the post and offeror
never receives it, or even where the offeror refused to recieve it. This is the position
under the Indian as w ell as English law. The position is advantageous to an acceptor
because he is not bound by the letter o f acceptance till it reaches the offeror. Thus
if the letter is delayed or lost in transit, he is at an advantage. In Bhagwan D as Kedia
it w as observed that the rule about ‘com m unication by p ost’ makes the position o f the
offeror m iserable as there is no consensus or “m eeting o f minds.”
(B) Absolute and Unqualified A cceptance

Sec. 7 provides that in order to convert a proposal into a promise, the acceptance
must b e absolute and unqualified i.e. without any qualification or condition. For a
valid acceptance, there must be an ad idem “concurrence o f mind” i.e. agreeing on
the sam e thing in the same course/ sense and at the same time.
(1) Counter p roposals - An acceptance with a variation (e.g. introduction o f
new terms) is no acceptance: it is simply a counter proposal, which must
be accepted by the original prom isor before a contract is made. A counter
offer im plies that the stage o f negotiation has not yet passed. A counter
offer puts an end to the original offer and it cannot b e revived by
subsequent acceptance by the acceptor. Thus in H yde v Wrench (1840)
3 Beav 334, an offer to sell a farm for £ 1,000 was rejected b y the
plaintiff, w ho offered £ 950 for it. This was turned dow n by the offeror
and then the plaintiff agreed to pay £ 1,000. But, the defendant again
refused to sell. Held that the plaintiff’s offer w as a counter proposal and
it put an end to the offer previously m ade by the defendant, thus there
was no contract. I f he (offeror) repeats the original offer which then is
accepted by the offeree, then a contract arises.
A m ere inquiry into the terms o f a proposal is not the same thing as a counter
proposal. T o seek an explanation o f the terms is som ething different from introducing
new terms. Further, i f an acceptance carries a condition subsequent, it may not have
the effect o f a counter offer. Thus, where an acceptance said: “terms accepted, remit
cash down Rs. 25,000 by Feb. 5, otherwise acceptance subject to withdrawal”. This
was not a counter offer, but an acceptance with a warning.
(2) Provisional acceptance- An acceptance made subject to final approval
is called provisional acceptance. It does not ordinarily bind either party
until the final approval is given. Meanwhile, the offeror is at liberty to
cancel his offer unless there is a contrary condition supported by
consideration (Union o f India v S. Narain Singh A IR 1953 Punj 274).
(3) Tenders - A tender is in the same category as a quotation o f prices. It
is not an offer but an invitation to offer. When a tender is approved it
is converted into a ‘standing offer’ (an offer which is allowed to remain
open for acceptance over a period o f time is known as standing, open
or continuing offer). A contract arises only when an order is placed on
the basis o f tender. A standing offer thus can be revoked or withdrawn
before the order has been placed. Just as the tenderer has the right to
revoke his tender as to future orders, so also the acceptor o f the tender
has a right to refuse to place any order whatsoever. The offer o f the
tenderer and each successive order o f the acceptor o f tender together
constitutes a series o f contracts {Bengal C o a l Co. v H om ee Wadia & Co.
ILR (1899) 24 Bom 97). In fact, the acceptance o f a tender m ay result
into different types o f agreements dpending upon the terms o f the tender
notice {Union o f India v M addala Thathiah A IR 1966 S C 1724).
Revocation
The Contract Act gives both proposer and acceptor the option o f revoking their
communication, before a completed contract com es into existence. Thus, revocation
is an option given to the parties to stop the contract from com in g into existence.
(A) Revocation o f Proposal

Sec. 6 lays down the circumstances when an offer lapses i.e. m odes o f revocation. A
proposal is revoked under the follow ing circumstances:
(1 ) N otice o f revocation
Sec. 5 provides that “a proposal may be revoked at any time before the com m unication
o f its acceptance is complete as against proposer, but not afterwards”. A s against the
proposer, the communication o f acceptance is com plete “when it is put in a cou rse
o f transmission to him, so as to be out o f the pow er o f acceptor” (Sec. 4). Thus, for
the communication o f revocation to be effective, it must reach the acceptor b e fo re he
mails his acceptance and makes it out o f his power. N o question o f revocation can
possibly arise in case o f a contract over telephone.
Illustration: A proposes by letter sent by post, to sell his house to B. B accep ts the
proposal by a letter sent by post. A may revoke his proposal at any time b e fo re or
at the moment when B posts his letter o f acceptance, but not afterwards.
In Henthorn v Fraser (1892) 2 Ch 27. the court observed that a person w ho has
made an offer must be considered as continuously making it until he has brought to the
knowledge o f the person to whom it was made that it is withdrawn. Where an offeror
Law o f Contract 11
giv es the offeree (acceptor) an option to accept within a fixed period, he may withdraw
it even before the expiry o f that period. In Alfred Schonlank v M. Chelli (1892) 2 Mad
LJ 57, the defendant left an offer to sell certain g o o d s at the plaintiff’s office allowing
him 8 days’ time to give his answer. On the 4th day, however, the defendant revoked
his proposal. The plaintiff accepted it on the 5th day. However, where the agreement
to keep the offer open for a certain period o f time is for som e consideration (even one
pound), the offeror cannot cancel it before the expiry o f that period.
N otice o f revocation shall be deem ed to have been served when it reaches the
a ccep to r’s address. In The Brimmes (1974) 3 All ER 88, a notice o f revocation was
sent by telex and was received by the plaintiff’s telex machine during normal business
hours, but the plaintiff read the m essage the next day. H e was, however, held bound
by the n otice when his machine received it.
Under the Indian law, it is necessary that the com m unication o f revocation
should be from the offeror or from his duly authorized agent. However, under the
English law, it is enough i f the acceptor knows reliably that the offer has been
withdrawn. Thus, in Dickinson v D odds (1876) 2 Ch D 463, the plaintiff was informed
by a third person that the properly (about which an offer was made) had already been
sold to another. H eld that a sale to a third person, which cam e to the know ledge o f
the person to whom the offer made was an effectual withdrawal o f the offer.
(2) Lapse o f tim e
An offer lapses on the expiry o f the time, i f any, fixed for acceptance. H owever it is
enough if the acceptor has ‘posted the acceptance before the stipulated time', even if
it reaches the offeror after the stipulated date. Where no time for acceptance is prescribed,
the offer has to be accepted within a reasonable time. Where the subject matter o f the
contract is an article, like gold, the price o f which rapidly fluctuates in the market, very
short period will be regarded as reasonable, but not so in reference to land.
(3) By failure to fu lfill a condition precedent
W here the offer is subject to a condition precedent, it lapses i f it is accepted without

fulfilling the condition (e.g. deposit o f earnest money).
(4) By death o r insanity o f offeror
An offer lapses on the death or insanity o f the offeror, provided that the fact com es
to the know ledge o f the offeree before he makes his acceptance. It means that i f such
fact has not com e to his know ledge while he accepts the offer, it is valid acceptance
g iv in g rise to contractual obligations. The A ct is silent about the effect o f death o f
the offeree. A s an offer can be accepted only by an offeree, where he died before
postin g the letter o f acceptance, the offer lapses.
(B) Revocation o f A cceptance

In India, unlike the English law, acceptance is generally revocable. Sec. 5 provides
that ‘an acceptance may be revoked at any time before the communication o f the
acceptance is com plete as against the acceptor, but not afterwards’. A s against the
acceptor, the communication is com plete when the acceptance com es to the know ledge
o f offeror i.e. when the letter o f acceptance reaches the offeror (Sec. 4). Thus, an
acceptor m ay cancel his acceptance by a speedier m ode o f communication, w hich will
reach earlier than the acceptance itself.
Illustration: A proposes, by letter sent by post, to sell his h ouse to B. B accepts the
proposal by a letter sent by post. B may revoke his acceptance at any time before or
at the moment when the letter communicating it reaches A, but not afterwards.
Thus, if the letter o f acceptance and the letter o f revocation reach together, then
also the acceptance will be deemed to have been revoked. However, some authors are
o f the view that in such a case, the formation o f contract wall depend on the fact that
which o f the two letters is opened first; if letter o f acceptance is opened first, the
revocation is not possible, and, if letter o f revocation is opened first, revocation is
valid. Thus such contracts are called ‘accidental form o f contracts’.
[Ill] Consideration
Consideration constitutes the very foundation o f the contract. A n agreement not
supported by consideration is void (Sec. 25, Contract Act). Consideration is the
cause o f the promise and its absence would make the prom ise a gratutious or bare
promise (nudum pactum). The fact that a promise has been made for consideration
goes to show that parties contemplated the creation o f a legal obligation. A nson said
that the offer and acceptance bring the parties together and constitute the outward
semblance o f a contract; but m ost systems o f law require som e further evidence o f
the intention o f the parties, which is provided by consideration and form. It m ay be
noted that consideration is a cardinal necessity o f the formation o f a contract, but no
consideration is necessary for the discharge or m odification o f a contract.
Blackstone defined consideration as the recompense given by the party contracting
to the other. In other words, it is a price o f the promise (Pollock). A valuable consideration
in the sense o f the law, may consist either in som e right, interest, profit or benefit
accruing to the one party, or some forbearance, detriment, loss or responsibility given,
suffered or undertaken by the other. This is the most com m only accepted definition.
Consideration is a return or quid p ro quo (something for something), something o f
value received by the promisee as inducement o f the promise.
Section 2(d) o f the Indian Contract A ct defines consideration as follow s: “when
at the desire o f the promisor, the promisee or any other person has don e or abstained
from doing, or does or abstain from doing, or prom ises to d o or to abstain from doing,
something, such act or abstinence or promise is called a consideration for the promise.”
This definition is wider and more comprehensive then is accepted in English courts.
The three ingredients o f this definition o f consideration are:
(1) that the act or abstinence, which is to be a consideration for the promise,
should be done at the desire o f the promisor,
(2) that it should be done by promisee or any other person,
(3) that the act or abstinence may have been already executed or is in the process
o f being done or may still be executoiy i.e. it is promised to be done.
(A) At the Desire o f the Promisor (Promissory Estoppel)

An act shall not be a good consideration for a promise unless it is don e at the desire
o f the promisor. Thus in Durga Prasad v Baldeo (1880) 3 All 221, the plaintiff built
a shopping com plex on the order .of the Collector. The shops cam e to b e occu p ied by
the defendants who, in consideration o f the plaintiff having expended m on ey in the
Law o f Contract 13
construction, promised to pay him com m ission on articles sold by them. The plaintiff's
action to recover the com m ission was rejected on the ground that plaintiff’s act was
the result not o f the prom ise but o f the C ollector’s order.
In Kedar Nath v G orie Mohd. (1886) ILR 14 Cal 64, on the faith o f the
prom ised subscription the plaintiff entered into a contract with a contractor for the
purpose o f building a town hall. Held that the plaintiff’s act in entering into contract
with the contractor was done ‘at the desire o f the defendant (the promisor)’ s o as to
constitute consideration. In Doraswam y Iyer v A. Ayyar (AIR 1936 Mad 135), the
tem ple repairs were already in progress when the subscription were invited. Held that
the action w as not induced b y the prom ise to subscribe but was rather independent
o f it. Thus, the subscriber (defendant) who had prom ised to pay but had later refused
was not held liable. A mere prom ise to subscribe to a charitable institution cannot be
sued upon if nothing has been done in furtherance o f the fund raised.
(B) Promisee or Any O ther Person

A prom ise is enforceable i f there is som e consideration for it and it is quite immaterial
that it m oves from the prom isee or any other person.This is som etim es called as
‘Doctrine o f Constructive Consideration’. Under English law, however, there is a
privity o f consideration i.e. consideration must m ove from the prom isee and prom isor
only, a stranger or third person cannot furnish consideration [Tweedle v Atkinson
(1861) 1 All ER 762],
In Chinnaya v Ramaya (1882) 4 M ad 137, A, a landlord, executed a gift deed
o f certain lands in favour o f his son B, with a direction that he should pay to his uncle
C an annuity o f Rs. 8,000 for a period o f three years. O n the same day, B also
executed a separate undertaking in favour o f C agreeing to pay the annuity. B
subsequently refused to keep his promise. C sued B to recover the amount due under
the agreement. H eld that the consideration (gift o f lands) furnished by A is enough
to enforce the agreement between B and C. I f there w as no agreement between B and
C, though B agreed with A to pay annuity to C, then the case falls under ‘privity o f
contract’: a stranger or third person cannot sue upon a contract between the two
parties unless the contract benefits a third person (by way o f trust, charge or under
a family arrangement). Thus, C will succeed in this situation also.
In Dutton v P oole (a 1677 case), a person intended to sell a w ood in order to
provide his daughter a marriage portion. His son (defendant) promised that if he (father)
abstains from selling he would pay the daughter £ 1,000. The father accordingly forbore
but the defendant did not pay. The daughter and her husband (plaintiffs) sued the
defendants for the same. Held that ...as the consideration m oved indirectly from the
plaintiff to the defendant and the action o f defendant operated to shut out the plaintiff
from a certain benefit, the plaintiff can sue. It is a legal com m on place that i f a promise
causes som e loss to the promisee, that is sufficient consideration for the promise.
Privity o f C o n tra ct
T he doctrine o f privity o f contract means that a contract is a contract between the
parties only and no third party (i.e. stranger to contract) can sue upon it even if it is
avow edly made for his benefit. Similarly, the third person is not bound by the contract
as there is n o mutuality (doctrine o f mutuality). The doctrine is rooted in the English
com m on law especially in the famous case o f Tweddle v Atkinson (1861) 123 E R 762,
and Dunlop Pneumatic Tyre Co. Ltd. v Selfridge <6 Co. (1915) A.C. 847. In the latter
case, the plaintiff (Dunlop Co.) sold goods to one Dew & Co. and secured an agreement
from them not to sell good s below the list price and i f they sold goods to another
trader they would obtain from him a similar undertaking to maintain the price list.
D ew & Co. sold good s to the defendants (Selfridge & Co.) w ho agreed n ot to sell
good s at less than list price. On their not doing so, the plaintiffs sued them for the
breach o f contract, but failed as there was no privity o f contract between them and
the plaintiffs.
The rule o f privity o f contract has been generally criticized. One o f the criticism
is that the general rule that ‘no third person can sue’ is only a rule o f procedure. It
goes to the form o f remedy, not to the underlying right. Indian law expressly negatives
the English doctrine o f ‘privity o f consideration’. However, there is no provision in
the Indian Contract Act either for or against the rule o f ‘privity o f contract’. But the
common law doctrine o f privity o f contract is generally applicable in India.
The authority for the application o f the rule in India is the decision o f the Privy
Council in Jamna Das v Ram Avtar (1911) 30 l.A.7. In that case, A had m ortgaged
som e property to X. A then sold this property to B, B having agreed with A to pay
o ff the mortgaged debt to X. X brought an action against B to recover, but failed as
there was no contract between X and B. Similarly, in Subbu Chetti v Arunachalam
Chettiar (AIR 1930 Mad 382), held that "where all that appears is that a person
transfers property to another and stipulates for the payment o f m oney to a third
person, a suit to enforce that stipulation by the third party will not lie.”
The Supreme Court o f India has approved the rule o f privity o f contract in
M. C. Chacko v State Bank o f Travancore (AIR 1970 SC 504). In this case, the creditor
bank was not allowed to recover its debt from the debtor bank; the form er sought to
rely on an agreement between the debtor bank’s manager and his family members.
Exceptions to Privity Rule

In. the course o f time, the courts have introduced a number o f exceptions in which the
rule o f privity o f contract does not prevent a person from enforcing a contract, which
has been made for his benefit but without his being a party to it (Besw ick v Beswick
(1966) 3 ALL ER 1).
(1) Trust or Charge - A trust is the property held and m anaged by one or
more persons for another’s benefit (See C h im aya case).
A person in whose favour a charge or other interest in som e sp e cific property
has been created may enforce it. In Khwaja Muhammad Khan v H ussain i Begum
(1910) 37 IA 152, there was an agreement between the lady’s father-in-law and her
father that in consideration o f her marriage with his son, he would pay to her Rs. 500
per month in perpetuity for the betel-leaf expenses. Som e im m ovable property was
specifically charged for the above purpose. A suit by the wife (not a party to the
agreement) for the recovery o f arrears o f annuity was upheld.
(2) Marriage settlement. Partition or other Family arrangem ents - Where

a girl’s father entered into an agreement for her m arriage with the
defendant, it was held that the girl could sue the defendant for damages
Law o f Contract 15
for the breach o f the prom ise o f marriage even though she was not a
party to the agreement {Rose v Joseph A IR 1925 B om 97). Agreem ent
between tw o brothers to maintain their mother has been upheld.
(3) Acknowledgement o r E stoppel - W hereby the terms o f a contract a party
is required to make a payment to a third person and he ackn ow ledges
it to that third person (viz. while m aking a part-payment), a binding
obligation is thereby incurred towards him. A cknow ledgem ent can be
express o r implied.
(4) Covenants running with lan d - A person w ho purchases a land with
notice that the owner o f the land is bound by certain duties created by
an agreement or covenant affecting the land, shall b e bound by them
although he was not a party to the agreement [Talk v M oxhay (1919)].
(C) Has D one o r Abstained from D oing

Under Sec.2 (d), consideration is an act, which has already been done at the desire
o f the prom isor (past consideration), or is in progress (executed or present consideration
i.e. consideration is p rovided simultaneously with the m aking o f the contract) o r is
prom ised to be done in future (executory or future consideration i.e. a sim ple exchange
o f promises). Thus consideration m ay consist o f a past, present or a future a c t
Past Consideration
I f the act has been done before any prom ise is made, it is called past consideration.
It means that the consideration for any p rom ise was given earlier and the prom ise is
m ade thereafter. Under English law, a past consideration is no consideration; the
consideration and the prom ise ought to g o together. However, a past act don e at
request will be g o o d consideration for a subsequent promise. Further, a prom ise to
pay time-barred debt and a negotiable instrument issued for a past consideration are
both valid.
In India, Sec. 25 (2) adequately covers a past voluntary service i.e. a service
rendered without fcny request or prom ise and there is a subsequent prom ise to pay for
the same. Thus, where A finds B ’s purse and giv es it to him and B prom ises to giv e
A Rs. 50, this is a contract. Similarly, where A supports B ’s infant son and B prom ises
to pay A’s expenses in s o doing, this is a contract.
(D) Such Act, Abstinence or Promise is called Consideration
Consideration Must be Real a n d N o t Illusory
W here consideration is physically im possible, illegal, uncertain or illusory, it is not

real. English com m on law has always insisted that "Consideration must b e o f som e
value in the eyes o f the law.” Thus where A p rom ises to giv e his new car to B,
provided B will fetch it from the garage, or where a prom ise made by the father in
consideration that his son w ould not bore him, there is no legal consideration. The
position is the sam e in India.
Consideration N e e d N o t be Adequate
Explanation 2 to Sec. 25 lays dow n that "an agreement to which the consent o f the
prom isor is freely given is not v oid m erely because the consideration is inadequate."
Thus, if A agrees to sell a horse worth Rs. 1,000 for Rs. 10 and A’s consent to the
agreement was freely given, the agreement is a contract notwithstanding the inadequacy
o f the consideration.
In D e La Bere v Pearson (1908) 1 KB 280, the defendants, the newspaper
proprietors, offered to answer inquiries from readers o f the paper desiring financial
advice. The plaintiff wrote to them asking for a safe investment and also for the name
o f a good stockbroker. The editor, unknowingly, recommended a person w ho was an
undischarged bankrupt. The plaintiff’s sums were misappropriated b y that person.
The question was whether there was sufficient consideration for the offer o f the
advice. Held that such publication have a tendency to increase the sale o f the defendant’s
paper; this offer, when accepted, resulted in a contract for g o o d consideration.
Explanation 2 to Sec. 25 Anther lays down that “inadequacy o f consideration
may be taken into account by the court in determining the question whether the
consent o f the promisor was freely given”. For “inadequacy o f consideration, may in
circumstances suggest fraud, coercion, mistake, etc.”
Abstinence, etc.
Forbearance to sue (or compromise o f a pending suit) has always been regarded as
valuable consideration. It is a kind o f abstinence. Thus, in K astoori D ev i v Chiranji
Lai (AIR 1960 All 446), the withdrawal o f a pending suit by a w ife against her
husband was held to be a g ood consideration for his promise to pay her maintenance.
Perform ance o f Existing Duties

(1) Perform ance o f le g a l obligation - In order to con stitu te p ro p e r
consideration there should be a promise to do something m ore than what
a person is already bound to do. Doing o f something, which a person is
already legally bound to do, is no consideration. For instance, where a
person having received summons to give evidence in a case; a prom ise
to pay to such person for appearing in case is no consideration (Collins
v Godefroy). Similarly, a promise to pay a sum o f m oney to a p olice
officer for investigating into a crime will b e without consideration.
However, where the police authority provides a special form o f protection
outside the scope o f their public duty (e.g. performing an extraordinary
act) they may demand payment o f it.
(2) Performance o f contractual obligations
(a) Pre-existing contract with promisor- 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. Likewise, a
promise to pay a special reward to a pleader (apart from usual fee)
if the suit decided in the prom isor’s favour, does not constitute
consideration. Similarly, held in Lalman Shukla's case.
On the same principle, a promise to pay less than what is due under a contract
cannot be regarded as a consideration (Pinnel's case, 1602). However, there are
certain exceptions to the Pinnel's rule. Thus, part-payment by a third party may be
g oo d consideration for the discharge o f the whole debt. In India, the prom isee may
Law o f Contract 17
accept in satisfaction o f the w hole debt an amount smaller than that. N o consideration
is needed for such a prom ise (Sec. 63, Contract Act).
(b) Pre-existing con tract with third p arty - W here a p erson has
contracted to d o an act, and a third person p rom ises to pay him a
sum o f m oney i f he w ould g o ahead with the performance, is there
a consideration for the prom ise? In Shadw ell v Shadw ell (1860)
9CB (NS) 159, the plaintiff A had already prom ised to marry one
M iss Nicholl. A’s uncle sent him a letter: “I am glad to hear o f your
intended marriage with N icholl; and as I prom ised to assist y ou at
starting, I w ill pay to you £ 150 yearly during m y l i f e ...” Thereafter,
A married Nicholl. The m ajority judgm en t was that there is a
sufficient consideration for the promise. T he prom ise o f the annuity
m ight’ve intended as an inducement to the marriage.
In Scotson v P e g g (1861) 30 LJ E x 225, it has been held that there is a
possibility that A may m ake a prom ise to d o som ething in favour o f B and then A
m ay make another prom ise to d o the sam e thing in favour o f C. A can enforce the
agreement against C. But, i f a person contracts with another to d o a certain thing, he
cannot make the performance o f it a consideration for a n ew prom ise to the sam e
individual.
The position in India is also the same. In G op al Co. Ltd v Hazarilal Co. (AIR 1963
M.P. 37), held that the second agreement brings into existence a new contract between
different parties and ‘herefore a prom ise to d o a thing, which the promisee is already
bound to do, under a contract with a third party can be g o o d consideration to support a
contract. Thus, where A contracts with B to build a fence between their premises; C, a
neighbour, also interested in the idea o f fence, promises B that i f he will carry out his
contract with A, he will pay him Rs. 1,000. B can recover Rs. 1,000 from C.
E x cep tion s t o C on sid e ra tio n

A ccordin g to English law, contracts are o f tw o kinds - sim ple contracts and contracts
under seal, or in the form o f a deed. There, consideration is required only as regards
sim ple contracts. A contract under seal (formal or real i.e. w hich is in w riting and
which is signed, sealed and delivered) is enforceable without consideration.
Indian law, however, d oes not recogn ize any such exception. But Sec. 25 o f the
Contract A ct lays dow n a few exceptions, w hen an agreem ent m ade w ithout
consideration is not void. It may be noted that even in the case o f negotiable instruments,
where the consideration is presum ed under Sec. 118, they w ould b e v o id i f it is
proved that no consideration has passed betw een the parties.
Explanation 1 makes it clear that Sec. 25 d o e s not apply to the ca ses o f gifts.
A gift (which is not an agreement) d oe s not require consideration in order to b e valid.
There need not be natural love and affection or nearness o f relationship betw een the
donor and donee. The gift must, however, be ‘com p lete’ i.e. it has been delivered; a
prom ise o f gift, being without consideration, is void.
Explanation 2 makes it clear that the consideration must have som e value in the
eyes o f law, even though it need not b e adequate.
Exception I. Natural Love and A ffection
A written and registered agreement based on natural love and affection betw een near
relatives is enforceable without consideration. The expression ‘near relative’ w ill
include parties related by blood or marriage. In Rajlucky D abee v Bhootnath M ookerjee
(1900) 4 Cal WN 488, held that near relation between the two parties d o e s not
necessarily imply natural love and affection between them. In this case, the defendant
promised to pay his wife a fixed sum o f money every month for her separate residence
and maintenance. The court could find no trace o f love and affection betw een the
parties. The agreement was held to be void for lack o f consideration.
Exception 2. Past Voluntary Service
A promise to compensate a person, who has already voluntarily done som ething for
the promisor, or something which the promisor was legally com pellable to do, is
enforceable. However, such service should have been rendered voluntarily and without
promisor’s knowledge, and for the promisor only. This im plies that the act must have
been done for a person who is in existence at the time o f the doin g o f the act. In
Karan Chand v Basant Katir (1911) PR 31, a promise made after attaining majority
to pay for goods supplied to the promisor during minority was held to b e within the
exception.
It may be noted that as per the exception the prom ise must be to compensate
a person who has him self done something for the prom isor and not to a person who
has done nothing for the promisor. An illustration- A and B are friends. B treats A
during A’s illness. B does not accept payment from A for the treatment and A prom ises
B ’s son, C, to pay him Rs. 1,000. Here, C, to whom the prom ise was made, did
nothing for A, so A’s promise is not enforceable.
Exception 3. Time-barred Debt
A promise to pay a time-barred debt is enforceable. The prom ise referred to in Sec.
25 (3) must be express. Thus a debtor’s letter to his creditor “to com e and receive”
what was due to him, was held to disclose no express promise. W here a tenant in a
letter to the landlord referred to the arrears o f time-barred rent and said: “I shall send
by the end o f Vysakh month”, it was held that the document satisfies the requirements
o f Sec. 25 (3). The Bombay High Court has held that a statement in the balance sheet
o f a film signed by a partner showing that the firm was indebted to the plaintiff in
respect o f the stated sum became an implied promise to pay.
O ther Exceptions
Some other instances where a consideration is not required to make a contract valid
are- a contract o f agency; remission by the promisee, o f performance o f the prom ise;
an agreement to extend time for performance o f a contract; a prom ise to contribute
to charity in certain circumstances.
[IV] Capacity to C on tract

Section 10 o f the Contract Act requires that the parties must be com petent to contract.
Sec. 11 defines who are competent to contract: “Every person is com petent to contract
who is the age o f majority according to the law to which he is subject, and w ho is
o f sound mind, and is not disqualified from contracting by any law to w hich he is
Law o f Contract 19
subject.” Thus minors, persons o f unsound mind and persons disqualified by law are
incom petent to contract. The age o f the majority is 18, but where a guardian is
appointed it is 21. However, by an amendment in 1999 to the Indian M ajority A ct
1875, the age o f majority is fixed as 18 years for every person (irrespective o f the
fact o f appointment o f a guardian).
N atu re o f M in or’s A g r e e m e n t
Neither Sec. 10 nor Sec. 11 makes it clear whether, if a minor enters into an agreement,
it w ould b e voidable at his option or altogether void. However, after the d ecision in
M ohoribibi case, it is n ow w ell settled that a m inor’s agreement is absolutely void.
A m inor cannot make a prom ise enforceable in law (Raj Rani case). The ‘specific
perform ance’ o f a contract (actual carrying out o f the contract as agreed) is not
possib le in the case o f an agreement by a minor. Law acts as the guardian o f minors
and protect their rights, because their mental faculties are not mature.
It is important to note that the parents or guardian o f a minor can contract on
behalf o f the minor. I f the contract is within the com peten ce o f the guardian and it
is for the benefit o f the minor it is specifically enforceable. The m inor w ill be bound
with such contract and could obtain specific perform ance o f the contract.
Effects o f M inor’s A g r e e m e n t
A m inor’s agreement being void, ordinarily it should b e w holly devoid o f all effects
(except where the contract is for the benefit o f minor). A s there is no contract, all the
effects o f a m inor’s agreement must be w orked out independently o f any contract.
(1) No Estoppel against Minor

W hen a minor misrepresents at the time o f the contract that he is a major, the question
arises- does the law o f estoppel apply against him, so as to prevent him from alleging
that he was a minor when the contract was m ade? It is n ow w ell settled that there is
no such estoppel against the minor even i f he has acted fraudulently. There can b e no
estoppel against a statute. The p olicy o f the law o f contract is to protect persons
below the age from contractual liability and naturally the doctrine o f estoppel cannot
b e used to defeat that policy. In Khan G u l v Lakha Singh (AIR 1928 Lah 609), held
that the law o f estoppel, which is the rule o f evidence, is a general law and this has
to be read subject to the special law contained in the Indian Contract Act.
(2) No Liability in Contract o r in Tort arising out o f Contract

T he m inor w ill not b e liable for a tort arising out o f contract, for the reason that such
liability is an indirect way o f enforcing his agreement. But where the tort is independent
o f the contract the mere fact that a contract is also involved, w ill not absolve the
m inor from liability.
Thus where an infant borrow ed a mare for riding only, he was held liable when
he lent her to one o f his friends w ho ju m ped and killed her [Barnard v H a ggis (1863)
4 C B N S 45], Here the defendant was liable on the ground that the act resulting in
injury to the mare was quite outside the contract. In Jennings v Rundall (1799) 8 TR
335, on the other hand, where an infant had hired a horse to b e ridden for a short
journ ey and took it on a much longer journey, with the result that it was injured, the
court held him not liable on the ground that the action was founded in contract.
(3) Doctrine o f Restitution

The proposition that “the lack o f capacity goes to the root o f the contract and invalidates
it completely” is subject to the equitable doctrine o f restitution and the beneficial
contracts in the case o f a minor.
English Law: If the minor has unjustly enriched himself, equity demands that such
property or goods be restored. The English courts developed the equitable ‘doctrine
o f restitution’ to deal with the matter. In Leslie (R) Ltd. \ S h e ill (1914) 3 KB 607,
the court laid down the three main propositions o f this doctrine:
(i) If an infant obtains property or g oo d s by misrepresenting his age, he can

be com pelled to restore it, but only so lon g as the same is traceable in
his possession.
(ii) Where the infant has sold the g oo d s or converted them, he cannot be
made to repay the value o f goods, because that would amount to enforcing
a void contract.
(iii) The doctrine o f restitution is not applied where the infant has obtained
cash instead o f goods, for ‘restitution stopped where repayment began’.
Indian Law: The English doctrine o f restitution is contained in the Indian law, though
with som e modifications:
(a) M ohoribibi v Dharmodas G hose (1903) 30 Cal 539- In this case, a
minor executed a mortgage for Rs. 20,000 and received Rs. 8,000 from
the mortgagee. The mortgagee filed a suit for the recovery o f his mortgage
money and for the sale o f property in case o f default. The Privy Council
held that an agreement by a minor was absolutely void as against him,
thus the mortgagee could not recover the m ortgage m oney nor cou ld he
have the minor’s property sold under his mortgage. The court observed
that Secs. 64 and 65 o f the Contract A ct (‘Restoration o f benefits received
under a voidable or void contract’) starts from the basis o f there being
a contract between competent parties, while in a m inor’s case there
ne\er was and never could’ve been any contract.
(b) Khan Gul v Lakha Singh (AIR 1928 Lah 609)- In this case, the court
observed that the doctrine o f restitution w ould not be o f any help unless
it was extended in India to cover money cases also. The learned C h ief
Justice, Sir Shadilal, found sufficient reason for the extension as he said:
‘‘While in India all contracts made by infants are void, there is no such general
rule in England. There should therefore be a greater scope in India than in England
for the application o f the doctrine o f restitution. The doctrine rests upon the salutary
principle that an infant cannot be allow ed by a court o f equity to take advantage o f
his own fraud.”
i
(c) Sec. 33, The Specific R elief Act, 1963 clears the position- T he Law
Commission o f India (9th report) preferred the view enunciated in Khan
Gul case and accordingly the controversy has n ow been set at rest by the
new Specific R elief Act, 1963. The principle o f restitution is contained
in Sec. 33 o f the new Act:
(1) Where a void or voidable contract has been cancelled at the instance
Law o f Contract 21
o f a party thereto (i.e. minor g o e s to the court as p lain tiff for

cancellation o f contract), the court may require him to restore such
benefits as he has received under the contract and to make any
compensation to the other party which justice may require.
(2) Where the minor is defendant in a case and he resists the enforcement
o f the suit on the ground that he is incompetent to contract, the
court may ask him to restore such benefits to the other party, to the
extent he or his estate has benefited thereby (Clause b).
The object o f sub-sec. (1) is to restore the parties to their original position, as far
as possible. But the court will not com pel any restitution by a minor even i f he is a
plaintiff, where the other party w as aware o f the infancy so that he was not deceived,
or where the other party has been unscrupulous in his dealings with the minor, or where,
though the minor has misrepresented his age, the other party was so zealous to enter into
the transaction that the false representation exerted no influence on him.
Through sub-sec. (2) the parties are tried to be put to the pre-contract position.
Moreover, compensation in terms o f m oney (excluding interest) is also permitted. A
minor (as a defendant) can be com pelled to account for such portion o f m oney or
anything else received by him as has gon e to benefit him personally, such as education
or training, or has resulted in an accretion to his estate (viz. buying the assets, o r deposit
in bank account). The phrase ‘estate has benefited’ means som e permanent benefit as
opposed to a transient one (viz. entertainment, eating, gifts to friends, etc.). Thus m oney
spent by the minor on watching a film cannot be said to benefit his estate.
Beneficial C on tra cts

The meaning o f the proposition that an infant is incompetent to contract o r that his
contract is void is that the law will not enforce any contractual obligation o f an infant.
The decision in M ohoribibi case is confined to cases w here a m inor is charged with
obligations and the other contracting party seeks to enforce those obligation s against
him. Accordingly, a minor is allow ed to enforce a contract, w hich is o f som e benefit
to him and under which he is required to bear n o obligation. A m inor w ill have the
option o f retiring from a beneficial contract on attaining majority.
The follow ing are the instances o f contracts ben eficial to a minor:
(i) I f a minor has advanced m ortgage m oney and there is a m ortga ge in his
favour, he can sue for enforcem ent o f the contract.
(ii) Similarly, a minor can sue on a P rom issory Note executed in his favour.
(iii) A contract for the m arriage o f a m inor is also prim a facie for his o r her
benefit. W hile the contract o f marriage cou ld b e en forced against the
other contracting party at the instance o f the minor, it cannot b e en forced
against the minor.
(iv) A m inor can also be supplied with “n ecessaries suited to his con dition
in life” (e.g. food, lodging, education) and the supplier o f such necessaries
is entitled to be reimbursed from the property o f the minor.
(v) A lease to a minor is void.
(vi) Trade contracts are not included in beneficial contracts. Thus when a
minor, while carrying on business, enters into a trade contract such

contract, will not be binding on him.
(vii) A minor is bound by the contract o f apprenticeship under the Indian

Apprenticeship Act, 1850. Under English law, infant is bound by the contract
o f apprenticeship as well as contract o f service because such contracts are
beneficial to him and help him in earning his livelihood. Unlike English law,
contracts o f service entered into by a minor are void in India.
In Raj Rani v Prem Adib (AIR 1949 Bom 215), the father o f Raj Rani, who was
a minor, entered into a contract on her behalf with Prem Adib, a film producer. According
to the contract, Raj Rani was to act as a film actress on payment o f a certain amount.
Raj Rani was not given any work. She sued the producer for the breach o f contract. The
Bombay High Court held that neither she nor her father could have sued on the promise.
I f it was a contract with the plaintiff, she being a minor, it was a nullity. I f it was a
contract with her father it was void for being without consideration.
A minor cannot be a partner in a partnership firm, but under Sec. 30 o f the
Indian Partnership Act, he can be admitted to the ‘benefits o f partnership’. The minor
shall not share losses except when liability to third parties has arisen but then too upto
his share in the partnership assets; he cannot be made personally liable. Where a
minor and an adult jointly enter into an agreement with another person, the minor has
no liability but the contract as a whole can be enforced against the adult [Jamna Bai
v Vasanta Rao (1916) 39 Mad 409 (PC)].
A minor can be an agent, but the liability will be o f the principal. A minor
cannot be adjudicated an insolvent, for, he is incapable o f contracting debts. It may
be noted that the parents o f a minor are not liable for agreements made by a minor,
whether the agreement is for the purchase o f necessaries or not. The parents can be
1'p'd liable only when the minor is contracting as an agent for the parents.
Ratification o f the Minor's A g r e e m e n t

A person cannot on attaining majority ratify an agreement made by him during his
minority. Ratification relates back to the date o f the making o f the contract and,
therefore, a contract, which was then void, cannot be made valid by subsequent
ratification. If it is necessary, a fresh contract should be made on attaining majority.
And a new contract will also require a fresh consideration.
In Suraj Narain v Sukhu Aheer (AIR 1928 All 440), a person b o rro w ed som e
money during his minority and then made a fresh promise, after attaining majority, to
pay that sum plus interest thereon. Held that the consideration received b y a person
during his minority cannot be called consideration within the meaning o f S ec. 2(d),
and there is no question o f that consideration being considered valid for a fresh
promise. A person can always make a fresh promise after attaining m ajority in terms
o f the promise made during minority. All that is necessary is that there sh o u ld be
some fresh consideration for it.
Persons o f Unsound Mind

A ccording to Sec. 12, “a person is said to be o f sound mind for the purpose o f m ak in g
a contract if, at the time when he makes it, he is capable o f understanding it an d o f
Law o f Contract 23
form ing a rational judgm ent as to its effect upon his interests. A person, w ho is
usually o f unsound mind, but occasionally o f sound mind, may make a contract when
he is o f sound mind. A person who is usually o f sound mind, but occasion ally o f
unsound mind, may not make a contract when he is o f unsound mind.”
Illustrations: (a) A patient in a lunatic asylum, w ho is at intervals o f sound mind, may
contract during those intervals.
(b) A sane man, who is delirious from fever, or w ho is s o drunk that he cannot
understand the terms o f a contract, or form a rational judgm ent as to its effect on his
interests, cannot contract whilst such delirium or drunkenness lasts.
Under English law, a person o f unsound mind is competent to contract, although
he may avoid his contract if he satisfies the court that he was incapable o f understanding
the contract and the other party knew it. The contract is voidable at his option.
An agreement by a person o f unsound mind is absolutely v oid as against him but
he can derive benefit under it Further, the property o f an insane person is always liable
for necessaries supplied to him or to any one w hom he is legally bound to support.
D isqualified Person s
The third type o f incompetent persons, as per Sec. 11, are those w ho are “disqualified
from contracting by any law to which they are subject”. Thus alien enemies, foreign
sovereigns and ambassadors, convicts, married w om en (with respect to their husband’s
properties), insolvents in certain cases, and joint-stock com panies and corporations
incorporated under a special A ct (like L.I.C., U.T.I.) are disqualified persons.
3. FACTORS VITIATING CONSENT
A mere consent is not enough for a valid contract. O ne o f the essentials o f a valid
contract mentioned in Sec. 10 is that the parties should enter into the contract with
their fre e consent. A ccordin g to Sec. 14, consent is said to b e free when it is not
caused by-
(1) coercion (Sec. 15), or
(2) undue influence (Sec. 16), or
(3) fraud (Sec. 17), or

(4) misrepresentation (Sec. 18), or
(5) mistake, subject to the provision s o f Secs. 20, 21 and 22.

W here consent to an agreement is caused by coercion, undue influence, fraud
or misrepresentation, the agreement is a contract voidable at the option o f the party
w hose consent was so caused. If, for example, a person is induced to sign an agreement
by fraud, he may, on discoverin g the truth, either uphold the contract or reject it.
W here consent is caused by mistake, the agreement is void. A void agreement is not
enforceable at the option o f either party.
Examples o f No free consent
(i) A threatens to shoot B, if B does not agree to sell his property to A at

a stated price. B’s consent has been obtained by coercion.
(ii) A, a man enfeebled by disease or age, is induced, by B ’s influence over
him as his medical attendant, to agree to pay B an unreasonable sum for
his professional services, B employs undue influence.
(iii) A husband persuaded his illiterate wife to sign certain documents telling
her that by them he was going to mortgage her two lands to secure his
indebtedness and in fact mortgaged four lands belonging to her. This
was an act done with the intention o f deceiving her i.e. a case o f fraud.
(iv) The Government auctioned certain forest coupes. A part o f the land was
occupied by tenants. The Forest Department knew this fact but did not
disclose to the purchaser. The contract is vitiated by misrepresentation.
(v) A agrees to buy from B a certain horse. It turns out that the horse was
dead at the time o f the bargain, though neither party was aware o f the
fact The agreement is void on account o f mistake.
Coercion
An agreement to which the consent is caused by coercion is voidable at the option
o f the party whose consent was so caused. According to Sec. 15, consent is said to be
caused by coercion when it is obtained by pressure exerted by either o f the following
techniques- (i) committing or threatening to commit any act forbidden by the Indian
Penal Code, or (ii) unlawfully detaining or threatening to detain any property. The
party exercising coercion also exposes himself to criminal liability.
A clear illustration o f coercion would be consent obtained at the point o f pistol,
or by threatening to cause hurt, or by intimidation. The threat o f suicide amounts to
coercion within Section 15. Where a contract wras made to avoid the threatened
prosecution, this was held to be no coercion (Askari Mirza v Bibi Jai Kishori (1912)
16IC 344). To threaten a criminal prosecution is not per se an act forbidden by I.P.C.
Such an act could be so forbidden if it amounted to a threat to file a false charge.
Threat to strike is no coercion, because the strike may be a lawful weapon for
collective bargaining. Similarly, when a contract is made under a statutory compulsion,
there is no coercion.
Duress under English Law
Under Common law, duress consists in actual violence or threat o f violence to a

person. It only includes fear o f loss to life or bodily harm, and not to his goods, unlike
Sec. 15 o f the Indian Contract Act. Further, in England duress should proceed from
a parly to the contract and also should be directed against the party to the contract
himself, or his wife, child, or near relative. In India, coercion may proceed from a
person who is not party to the contract, and it may also be directed against a person
who, again may be a stranger to the contract. Thus if P unlawfully detain Q, R’s
friend, and thereby obtains R’s consent to the contract, it would amount to coercion.
Law o f Contract 25
Undue Influence
According to Sec. 16(1), where the relations subsisting between the parties are such
that one o f the parties is in a position to dominate the will o f the other, and uses that
position to obtain an unfair advantage over the other, there is said to be undue
influence. 1
According to clause (2), a person is said to be able to dominate the will o f
another (a) where he holds a real or apparent authority over the other, or where he
stands in a fiduciary relation to the other, or (b) where he makes a contract with a
person whose mental capacity is temporarily or permanently affected by reason o f
age, illness, or mental or bodily distress.
According to clause (3), where a person who is in a position to dominate the
will o f another enters into a contract with him, and the transaction appears, on the
face o f it or on evidence adduced, to be unconscionable, the burden o f proving that
such contract was not induced by undue influence shall lie upon the person in a
position to dominate the will o f the other.
Undue influence is said to be a subtle species o f fraud. Sometimes the result is
brought about by fear, coercion, or other domination. For example, where spiritual
adviser (guru) induced the plaintiff, his devotee, to gift to him the whole o f his
property to secure benefits to his soul in the next world.
Illustration (a) to Sec. 16 reads: A, having advanced money to his son, B, during his
minority, upon B ’s coming o f age obtains, by misuse o f parental influence, a bond
from B for a greater amount than the sum due in respect o f the advance. A employs
undue influence.
Relations which involve Domination
In all cases where there is active trust and confidence between the parties or the
parties are not on equal footing, it can be said that one party is able to dominate the
will o f the other. A person in authority is definitely able to dominate the will o f the
person over whom the authority is held. The authority may be real or apparent. An
employer may be deemed to be having authority over his employee, an income-tax
authority over the assessee, a police or judicial officer over the accused, etc.
Fiduciary relationship means a relationship o f confidence and trust. Examples
o f fiduciary relationship are solicitor and client, trustee and beneficiary, spiritual
adviser and devotee, medical attendant and patient, parent and child, husband and
wife, creditor and debtor, master and servant, etc.
Undue influence by a person, who is not a party to the contract, may make the
contract voidable. In other words, it is not necessary that the person in a position to
dominate the will o f the other party must himself be benefited. It is sufficient if the
third person in whom he is interested is benefited (Chinnamma v Devenga Sangha
AIR 1973 Mys 338).
A person is said to be in distress when his mental capacity is temporarily or
permanently affected. Such a person is easily persuaded to give consent to a contract,
which may be unfavorable to him. For example, a poor Hindu widow, who was in great
need o f money to establish her right to maintenance, was persuaded by a moneylender
to agree to pay 100 per cent rate o f interest. It may be noted that a contract made under
statutory compulsion can’t be regarded as one made under undue influence.
Presumption o f Undue Influence (Unconscionable bargains)
An ‘unconscionable bargain’ is one as no sane man, not setting under a delusion,

would make, and no honest man would take advantage of. The term ‘unconscionable’
means something as shows no regard for conscience and which is irreconcilable with
what is right or reasonable. As between parties on equal footing, the mere
unconscionableness o f the bargain does not create the presumption o f undue influence.
Some examples o f unconscionable bargains are as follows:

(i) A person, without having the means o f subsistence, in order to prefer an
appeal against a judgment, borrowed Rs. 3,700 on a bond promising to
pay Rs. 25,000 within a year from recovery o f the possession o f an
estate [Churmi Kaur v Rup Singh (1899) 11 All 57].
(ii) A presumption o f undue influence arises in case o f a contract by or with
a pardanashin woman.
(iii) As regards exorbitant price charged by the trader, it is never considered
a case o f undue influence.
(iv) Where a song writer’s copyright was purchased on terms that he was not
to publish his songs through any other company but the company had
the right to reject his songs. It was held to be unconscionable.
Hard bargains Not Necessarily Unconscionable
It is important to note that every transaction where the terms are to the disadvantage
o f one o f the parties need not necessarily to be unconscionable. For example, A
applies to a banker for loan at a time when there is stringency in the money market.
The banker declines to make the loan except at an unusually high rate o f interest. This
is a transaction in the ordinary course o f business, and the contract is not induced by
undue influence (Illustration (d) to Sec. 16).
Therefore, mere urgent need o f money on the part o f borrower is not, o f itself,
a sufficient evidence o f mental distress. Thus where a person was facing a criminal
prosecution at the instance o f his father and borrowed on exorbitant terms a sum o f
money to defend himself, it was held that he was not in mental distress as would
enable a moneylender to dominate his will, even though the bargain had been
unconscionable (Raghunath Prasad v Sarju Prasad AIR 1924 PC 60).
Fraud
An agreement to which the consent is caused by fraud is voidable at the option o f the
party whose consent was so caused. According to Sec. 17, “Fraud” means and includes
any o f the following acts done with “intent to deceive” or to induce a person to enter
into a contract -
(i) the suggestion that a fact is true when it is not true and the person
making the suggestion does not believe it to be true,
(ii) active concealment o f a fact by a person who has knowledge or belief
o f the fact,
(iii) promise made without any intention o f performing it,
(iv) any other act fitted to deceive, or

Law of Contract 27
(v) any such act or omission as the law specially declares to be fraudulent
(viz. according to Transfer o f Property Act, the seller o f immovable
property must disclose to the buyer any material defect in the property
o f the seller’s title).
Thus, the essentials o f fraud are that there should be a “ false statement o f fact"
by a person who himself does not believe the statement to be true (however, a mere
expression o f opinion do not amounts to fraud). Further, there must be a “wrongful
intention” i.e. an intention to deceive and induce the other party to enter into the
contract. Intentional misrepresentation is o f die essence o f fraud. Thus if the person
making such representation honestly believes in its truth, he is not guilty o f fraud
[Deny v Peek (1889) 14 App Cas 337].
Fraud by a stranger to the contract does not affect contract However, ’coercion’
as well as ‘undue influence’ by a stranger to a contract affect the contract While
fraud is a civil wrong, ‘coercion’ is a criminal wrong also.
Si/ence (Mere silence is no fraud)
Ordinarily, ‘passive concealment’ or mere silence is no fraud, as a contracting party

is not obliged to disclose each and every thing to the other party. Merely because a
person does not disclose the defects in the goods sold by him, there is no fraud. Thus
a seller who puts forth an unsound horse for sale, but says nothing about its quality,
commits no fraud. But silence may become deceptive in certain cases (‘constructive
fraud’), as discussed below.
The first such case is when the person keeping silence is under ‘duty to speak’,
which arises where one contracting party reposes trust and confidence in the other. A
contract o f insurance is, therefore, called a contract o f absolute or utmost good faith,
uberrima fiaes. Similarly, a father, selling his horse to his son must tell him if the
horse is unsound, as the son is likely to rely upon his father.
Sometimes, silence is itself ‘equivalent to speech’. Where, for example, a buyer
asks the seller whether the horse is sound, and he remains silent. This is fraud if the
horse is unsound. Sometimes, a statement is true when made but because o f ‘change
o f circumstances’ it subsequently becomes false, there is then a duty to disclose the
truth. For example, a medical practitioner, who wants to sell his business, states that
his average practice is £ 2000 per annum, but before the transaction is finalised his
practice is considerably reduced due to his illness, it is his duty to inform about this
fact to the other party (With v O'Flangan (1936) Ch.575).
Lastly, a person may keep silence, but if he speaks, a duty arises to disclose the
whole truth. ‘Half-truths’ amount to fraud. It may be noted that when the silence
amounts to fraud, but the other party could discover the truth by ordinary diligence,
he cannot avoid the contract. This is not so in the other cases o f fraud, as “fools have
to be protected against knaves”.
Misrepresentation
A contract the consent to which is induced by misrepresentation is voidable at the
option o f the deceived part) . Misrepresentation means misstatement o f a fact material
to the contract. When a person makes a false statement which he himself believes to
be true, and he does not intend to deceive the other party, there is “misrepresentation”.
The representation must’ve been instrumental in inducing the other party to enter into
a contract.
Sec. 18 includes the following types o f misrepresentation:
(i) Unwarranted statements - Where the directors o f a com pany mentioned
in the prospectus that they had got the authority to run tramways with
steam power; the permission had not yet been granted but the directors
believed that it will be granted. The permission was refused. The directors
were held liable not for fraud (as they had n o intention to decieve) but
for misrepresentation (Derry v Peek).
(ii) Breach o f duty - Any breach o f duty which brings an advantage to the
person committing it by misleading the other to his prejudice is a
misrepresentation (‘constructive fraud’).
In Oriental Banking Corporation v John Flem ing (1879) 3 B om 242, the

plaintiff having no time to read the contents o f a deed, signed it as he was given the
impression by the defendant that it contained nothing but formal matters already
settled between them. The deed, however, contained a release in favour o f the defendant.
Accordingly, the defendant was allow ed to avoid the deed.
(iii) Inducing mistake about subject-matter - Causing, how ever innocently, a
party to an agreement to make a mistake as to the substance o f the thing
which is the subject o f the agreement is also misrepresentation.
It may be noted that misrepresentation should be o f facts ‘material’ or ‘vital’
to the contract. Mere “commendatory expressions” such as men o f business will
habitually make about their g ood s are not sufficient to avoid the contract. For example,
in a sale o f land, a mere general statement that the land is fertile and improvable,
whereas part o f it is abandoned as useless, cannot be considered a misrepresentation.
A mere expression o f opinion cannot be regarded as misrepresentation o f facts even
i f the opinion turns out to be wrong.
Distinction between Fraud and Misrepresentation

In both there is a false representation, but in fra u d the person making the statement
knows it to be false (intentional wrong) while in the misrepresentation he believes
that the statement is true (innocent act).
Right o f Rescission o f C on tra ct

Sec. 19 deals with the effect o f flaw in consent caused by coercion, misrepresentation
and fraud and Sec.l9-A when the consent obtained by undue influence. A contract
induced by coercion, undue influence, fraud or misrepresentation is voidable at the
option o f the party whose consent was so caused (i.e. a “right o f rescission o f the
contract”). However, the right to rescind is subject to certain limitations.
Thus, where the party, after becom ing aware o f his right to rescind, expressly
o r im pliedly affirms the contract, the right o f rescission is lost (viz. where he
appropriates to his use the g o o d s received under a voidable contract o r has sold or
attempted to sell them). The right o f rescission may be lost due to a lon g la p se o f
time. Further, the right o f rescission is lost as soon as a third party, acting in g o o d
faith, acquires rights in the subject-matter o f the contract.
Law o f Contract 20
Still further, rescission is subject to the condition that the party seeking rescission
must be in a position to restore the benefits (restitution) he may have obtained under
the contract (Sec. 64). Even where the party seeking rescission is not in a position to
restore to the defendant his status qu o ante, the court may allow rescission b y doin g
what is particularly just in the circumstances.
Com pensation on Rescission - Apart from a right to rescind the contract, the aggrieved
party also has a “right to claim com pensation” for any damage which he has sustained
through the non-fulfilment o f the contract (Sec.75).
Exception to Sec. 19 (W hen rescission may be refused)
I f the consent to the contract was caused by misrepresentation or by fraudulent

silence, the contract is not voidable i f the party w hose consent was s o caused had the
means o f discovering the truth with ordinary diligence. Illustration (b) to Sec. 19
reads: A, by a misrepresentation, leads B erroneously to believe that 500 maunds o f
indigo are made annually at A’s factory. B exam ines the factory’s accounts, which
show that only 400 maunds have been made. After this B buys the factory. The
contract is not voidable on account o f A ’s misrepresentation. Thus i f a person ’s mind
has not been influenced by the false statement when he enters into the contract, there
is no fraud.
Mistake
Consent obtained by mistake is also not free consent. Mistake o r error makes the
contract void i.e. it is not enforceable at the option o f either party. Mistake may
operate upon a contract in two ways : it m ay defeat the consent altogether or it may
mislead the parties as to the purpose which they contemplated. The form er case falls
under Sec. 13 (‘Tw o or m ore persons are said to consent when they agree upon the
sam e thing in the same sen se’ i.e. consensus a d idem). I f the mistake prevents the
consent itself, then there is no consensus a d idem and thus n o contract. The latter case
falls under Sec. 20 (‘Mistake as to a matter o f fact essential to the agreement’).
Sec. 20 will com e into operation: (i) when both the parties to an agreement are
mistaken, (ii) their mistake is as to a matter o f fact, and (iii) that fact is essential to
the agreement. Broadly speaking, certain facts are essential to the agreement, viz.
identity o f parties, subject-matter and the nature o f promise.
(i) Mistake as to Identity
Mistake as to identity occurs when one o f the parties represents h im self to be som e
other person than he really is. In Boulton v Jones (1857) 27 LJ E x 117, Jones sent
an order to Brocklehurst for the purchase o f certain goods. B y the time this order
reached, Brocklehurst has sold his business to Boulton. B oulton supplied the g o o d s
to Jones. Jones refused to pay on the ground that he had never placed an order with
B oulton and had never intended to make a contract with him. H eld that Jones had
never made any agreement with Boulton and he was not bound to pay for the goods.
Similarly, in Cundy v Lindsay (1878) 3 A C 459, the defendants who had secured
g o o d s from the plaintiffs by fraudulently imitating signatures o f a well-known firm
(Blenkam & Co.) known to the plaintiffs, w ere bound to return the g o o d s to the
plaintiffs. However, where the name assumed b y the swindler is fictitious (not known
to the plaintiff), there w ill b e n o mistake o f identity and a con tract in su ch a c a s e w ill
b e v o ida b le on ly on accou n t o f fraud.
In Ingram v Little (1961) 1 Q B 31, X offered to bu y a car from Y and to pay
by cheque. Y refused the offer and the cheque, sin ce she d id not k n ow him. X then
con v in ced her that he w as a well-known person, and bein g con vin ced, sh e a ccep te d his
ch eque and let him take the car. H e sold the car to L and the ch equ e p ro v ed w orthless.
Y filed a suit to recov er the car from L. T he court held that X ’s right to the car w as
n o m ore than that o f a th ief o r a finder (as the lady intended to contract on ly w ith the
real o r well-known X) and he co u ld not co n v e y a g o o d title to the defendant.
B ut in a subsequent case, Lew is v Avery (1972) 1 Q B 198, it w a s h eld that i f
the parties are present face to face w hile the contract is made, and o n e o f the parties
g iv e s h is w ron g identity, there arises a valid contract. T h e presu m ption in su ch ca s e s
is that the contract is m ade with p erson actually present, even though there is a
fraudulent im personation.
(ii) Mistake as to Subject-matter
In the first place, the subject-m atter m ay have ce a se d to exist b e fo re the con tract w as
m ade, viz. the sale o f a h orse w hich, unknow n to the parties, w as d ead at the tim e
o f the bargain. Similarly, where, un know n to the parties, the bu yer is already the
o w n er o f that w h ich the selle r purports to sell to h im (mistake as to title o r rightr «.
W here the parties, due to a reason ab le m istake o f fact, have different subject-
matters in m ind, the agreem ent w ill b e v o id fo r the want o f true consent. In R affles
v W ichelhaus E xch (864) 2 H & C 906, the defendant bou gh t o f the p la in tiff a
quantity o f Surat C otton “to arrive ex P e e r le ss from B om bay’’. T w o sh ip s with the
nam e P e erle ss sailed from Bom bay, o n e in O ctober, w hich the defendant had in m ind
and the other in D e ce m b e r w h ich the p lain tiff had in mind.
(iii) M istake as to the Nature o f Promise

W hen a d e ed o f o n e character is execu ted under the m istaken im p ression that it is o f
a different character (viz. g ift deed sig n ed under the im p ression that it is on ly a p o w e r
o f attorney), then it is w h o lly v o id and inoperative. A m istake o f this kind is often
brou gh t about b y the fraud o f on e party, viz. a party fails to d is c lo s e to the other the
true nature o f the docum ent. In N in gaw a v B yra pp a Hirekurctbar (A IR 1968 S C 956),
the h usban d o b ta in ed h is w ife ’s sign ature to a g ift d e e d w ithout m a k in g any
m isrepresentation as to its character, but later in clu ded tw o m o re p lots in the deed,
it w as h eld that the transaction w as o n ly v o ida b le and n ot void.
T h e d e fen ce o f n on est fa ctu m en ables a p erson w h o has sig n e d a contract to
say that it is not his d ocum en t b e ca u se he sig n e d it under s o m e mistake. T h e d e fe n ce
w as intially available to illiterate o r blin d p e o p le but subsequ en tly extended to others;
how ever, the plea c o u ld n ot b e available to a ‘ca r e le ss’ person. Further, the p lea
c o u ld not b e available to a p erson w h o se m istake w as really a m istake as to the lega l
e ffect o f the docum ent.
Limitations
M ista k e o perates to a v oid an agreem ent su b je ct to the f o llo w in g c o n d itio n s o r

lim itation s ;
Law o f Contract 31
(i) M istake o f both p a rties- T o m ake an a greem ent v o id on accou n t o f the

mistake, the m istake must b e co m m on o r mutual. Sec. 22 says that a
contract is not v o id a b le m erely b eca u se o f the m istake by o n e o f the
parties (unilateral mistake). Thus, w here the govern m en t s o ld b y auction
the right o f fishery and the p lain tiff offered the highest b id under the
im p ression that the right w as s o ld for 3 years, w hen in fact it w a s for
o n e year only, h e c o u ld not a v oid the agreem ent beca u se it w as h is
unilateral m istake (A.A .Singh v U nion o f In dia A IR 1970 M ani 16).
H o w e v e r , w h e r e th e u n ila te ra l m is t a k e is c a u s e d b y fra u d o r
m isrepresentation on the part o f the other party, the contract is voidable.
(ii) E rron eou s opinion- T h e explanation to Sec. 20 p rovides that an erroneous
o p in io n as to the valu e o f the thing (subject-matter o f agreement) is not
a mistake.
(iii) M istake o f f a c t n ot o f law- Sec. 21 declares that a contract is not voida b le
b e ca u se it is ca u se d b y a m istake as to any law in fo r ce in India, viz.
A and B m ak es a con tract grou n d ed o n the erron eou s b e lie f that a
particular d ebt is barred b y the Indian L a w o f Limitation. But a mistake
as to a fore ig n law w ill avoid.
4. V O ID . V OIDA BLE. ILLEGAL AND

U NENFORCEABLE AGREEM EN TS
F or the validity o f a contract it is essential that the consideration and ob ject should be
lawful. A contract the o b je ct o f w hich is o p p o se d to the law o f the land m ay be either
unlawful o r sim ply void, depending upon the provision s o f the law to which it is opposed.
T h e “o b je ct" and “consideration” m ay in som e cases b e the sam e thing but may also be
different. F or example, where m oney is borrow ed for the purpose o f the marriage o f a
minor, the consideration for the contract is the loan and the o b je ct the marriage.
It m ay b e noted that the parties to a s o ca lle d “illeg a l agreem ent” are n ot liab le
to punishment, u n less it is e x p ressly pun ish able b y law o r am ounts to a crim inal
conspiracy. T h ey have com m itted n o offence. T hey have m erely con clu d ed a transaction
that w ill b e sp u m ed b y the courts (Chesire & Fifoot).
U nlaw ful A g r e e m e n t s
A c c o r d in g to Sec. 23, the con sid eration o r o b je c t o f an agreem ent are law ful unless
: (i) it is forb id d en b y law, o r (ii) is o f su ch a nature that it w ou ld defeat the p ro v ision
o f law, o r (iii) it is fraudulent, o r (iv) it in v olv es o r im p lies injury to the p e rso n o r
property o f another, o r (v) the court regards it as im m oral o r o p p o s e d to p u b lic policy.
(i) F orbidden by Law

W h en som eth in g is forbid d en by law an agreem ent to d o that is unlawful, viz. sale
o f liq u or w ithout licen ce, an agreem ent to pay m o n e y i f a p e rso n co m m its a crim e o r
32 Low Guide for Competitive Examinations
tort, etc. However, merely because a person d oes not observe statutory requirements
does not mean that the agreement is void, especially when the intention o f the legislature
is to regulate an act by prescribing certain terms and conditions. In other words, the
object o f the statute is not to forbid certain transactions, but only to im p ose a penalty.
Where a sub-lease as such is not forbidden by law, but can be m ade only with
the consent o f the landlord, the agreement o f sublease w ould not b e v o id and the
person making the sublease without the landlord’s consent w ill be entitled to recover
the rent from the tenant (Banarsi D ass v Shakuntala A IR 1989 D el 184). In Abdul
Jabbar v Abdul Muthaliff (AIR 1983 P & H 180), where a rice m ill had been
constructed with monies remitted by the plaintiff in contravention o f the FERA, it was
held that although the remittances w ere illegal, the construction o f the rice m ill by
itself did not involve the execution o f any unlawful object.
(ii) Defeats the Provisions o f an y Law

Sometimes the object of, or the consideration for, an agreement is such that, though
not directly forbidden by law, it would, if permitted, defeat the provisions o f any law
(Ram Sewak v Ram Charan A IR 1982 A ll 177). Thus, according to the M ohammedan
law it is not competent to parties contracting a marriage to enter into a separation
deed by which the husband convenanted that his w ife might live with her parents.
Likewise, accepting a son in adoption in consideration o f m oney is unlawful. An
agreement to maintain an illegitimate child has been held to be not unlawful.
I
When a transaction is not p e r se illegal, for example, giving loan for the marriage
o f borrower’s daughter, the lawfulness or otherwise o f the particular transaction w ould
depend on the lender’s knowledge o f that fact.
(iii) Fraudulent Purpose

An agreement made for a “fraudulent” purpose is illegal, viz. an agreement to
defraud creditors, or to defraud revenue authorities, or investors in a company. But
i f two persons agree not to com pete with each other, and one o f them in consideration
for the other person not com peting in the submission o f tenders agrees to pay a
certain sum o f money, the agreement does not aim at defrauding anybody, and the
same is enforceable (Jai Ram v Kahrta Ram A IR 1963 HP 3). However, i f the object
o f an agreement is to manage to procure a contract for one party which w ould
otherwise be refused, the object is fraudulent.
(iv) Injurious to Person or Property

An agreement between two persons to injure the person or property o f another is
unlawful, viz. an agreement to commit a crime or civil wrong, for example, to assault
or beat a person or to publish a libel against him.
(v) Immoral
The law does not allow an agreement tainted with (sexual) immorality to b e enforced.
For instance, A agrees to let her daughter for hire to B for concubinage. T he agreement
is void, because it is immoral though the letting may not b e punishable under the
I.P.C. [Illustration (k) to Sec. 23].
A promise to marry a married woman after the death o f her husband o r after
she obtains a divorce from him is immoral. It may be noted that what is im m oral is
Law o f Contract 33
‘interference with marital status’; thus where a married man prom ised to marry a
w om an (plaintiff) as soon as the decree o f divorce with his w ife was made absolute
(the decree had been pronounced), but he committed breach o f this prom ise by
marrying another woman, the plaintiff was allowed to recover (Fender v St. John
M ildmay (1938) A C 1). An agreement for future separation between a husband and
w ife is void.
Dealing with prostitutes have always been regarded as immoral. I f articles are
sold or something is hired to a prostitute for the purpose o f enabling her to carry on
her profession, neither the price o f the articles sold nor the rent o f the thing hired can
b e recovered. A s noted above, i f the ob ject or consideration for an agreement is
future illicit cohabitation between a man and a woman, the agreement is unlawful
whether such cohabitation amounts to the offen ce o f adultery or not. But a prom ise
to pay for the p ast cohabitation has been held to b e valid. A help given or prom ised
to a dancing girl is not tainted with immorality.
(vi) O p p o se d to Public Policy

I f the court regards an agreement as o p p o se d to public policy, the agreement is void.
Public p olicy means the policy o f the law at a stated time. A n act which is injurious
to the society (social o r econ om ic interests) is against public policy. The con cept o f
‘freedom o f contract’ (laissez faire) has been considered to b e o f great significance
and, therefore, i f the courts are given freedom to interfere with contracts on their own
notions o f public policy, this may be unjust. Public p olicy o r the p olicy o f the law is
an illusive concept : it has been described as an ‘untrustworthy guide’, ‘variable
quality’, ‘uncertain on e’, etc. In the view o f BurTough, J. public p olicy “is an unruly
horse, and when once you get astride it you never know where it wall carry you”.
Subba Rao, J. in Gherulal v M ahadeo D as (1959) 2 SC A 342, cautioned against
the evolution o f new heads o f public policy and said that the courts should rely on the
well-settled heads only in clear cases o f harm to the public. In England, a contract o f
marriage brokerage, the creation o f a perpetuity, a contract in restraint o f trade, a gaming
or wagering contract, or the assisting o f the king's enemies, are all unlawful things.
The heads o f public p olicy in India are discussed below :
(1) Trading with an enemy - i.e. a government at war with the king.
(2) Trafficking in p u b lic offices - A n agreement by which it is intended to
induce a public officer to act corruptly is contrary to public policy.
(3) Interference with administration o f justice - A n agreement to delay the
execution o f a decree and a promise to give money to induce a person to
give false evidence have been held void. An agreement not to prosecute an
offender or to withdraw a pending prosecution is void if the offence is o f
public nature. Such agreements are called agreements to stifle prosecution.
S om e m inor offen ces have been recognised as com poundable offences, which
permit o f a com prom ise. In all other cases (i.e. non-compoundable offences) any
com prom ise to frustrate an action against a criminal, w ould be deem ed to be unlawful.
A prom ise o f reward by a M uslim litigant to a Hindu devotee in consideration o f
offerin g prayers for the su ccess o f his suit has been held not against public p olicy
(Balasundara M udaliar v M ahom ed Usman A IR 1929 M ad 812).
In Narasimha Raju v Gurumurthy Raju (AIR 1963 SC 107), certain partners

who had filed criminal complaints against co-partners for falsification an d forgery
allowed the complaint to go by default because they agreed to refer the matter to
arbitration, the arbitrator’s award was held to be unenforceable. However, i f A has a
choice to bring a civil or a criminal action against B, and he procures a prom issory
note from B instead in satisfaction o f his claim and drops the idea o f brin gin g any
kind o f action against B, there is no stifling o f prosecution and the p ron ote is valid.
(4) Maintenance and Champerty - Maintenance consists in a idin g a party
in civil proceedings by providing financial or other assistance without
lawful justification. When a person (stranger) intermedles in the litigation
between others by providing assistance to one o f the parties, and he has
no interest o f his own in the litigation, such intermedling is unlawful.
Maintenance has been considered to be both a crime and a tort. Champerty
is a kind o f maintenance in which the person assisting in proceedin g is
to receive a share in the gain made in the proceedings made by him.
Because o f peculiar Indian conditions, English law o f maintenance and champerty
have no application in India. A fair agreement to assist a person in the enforcement o f
his legal rights (viz. recovery o f property) may be held valid even if the person providing
the assistance is to be reimbursed out o f the proceeds o f the action. However, the share
should not be unconscionable; agreements to pay 3/6th share, l/4th share and l/8th
share have been upheld but not a promise to pay one-half. An agreement by a client to
pay his lawyer according to the result o f the case is against public policy.
(5) Marriage brokerage contracts - Such contracts under which a person
agrees to procure a marriage between two persons on som e consideration
are opposed to public policy and thus void. Similarly, an agreement the
consideration o f which is dowry is void.
(6) Agreements creating an interest opposed to duty - For example, A agrees
to pay B, the lieutenant colonel in the army, Rs.50,000 i f he will assist
her brother to desert the army. The object o f the agreement is o p p o se d
to public p olicy and thus void.
Consideration and O b je c t Unlawful in Part

According to Sec. 24, if any part o f a single consideration for one or m ore objects,
or any one or any part o f one o f several considerations for a single object, is unlawful,
die agreement is void. This means that i f a part o f the consideration/object w hich is
unlawful can be separated from the other lawful part the court will enforce only the
lawful part. If no such severance is possible, the w hole o f the agreement is void.
Thus, partial illegality may avoid the whole agreement.
Thus, if A promises to superintend, on behalf o f B, legal manufacture o f indigo

and an illegal traffic in other articles, and B prom ises to pay to A a salary o f Rs. 10,000
for both the jobs, the whole o f the agreement is void [111. to Sec. 24], Similarly, where
the plaintiff, a married woman, agreed to live in adultery with the defendant and also
agreed to serve him as his housekeeper, and the defendant agreed to pay her Rs.50
per month, the whole o f the agreement is void. I f the agreement had stipulated
payment o f Rs.30 p.m. for living in adultery and Rs.20 for housekeeping, the agreem ent
would have been void as to the first object, but valid as to the second.
Law o f Contract 35
Void A g r e e m e n ts
Sec. 2(g) says : “An agreement not enforceable by law is said to be void”. There are
som e agreements which have been specifically or expressly declared as void by the
Indian Contract Act. T hese are :
(i) Agreements o f which the consideration or object is unlawful (Ss. 23 and 24).
(ii) A greem ents without consideration (Sec. 25).
(iii) Agreements in restraint o f marriage (Sec. 26).
(iv) A greem ents in restraint o f trade (Sec. 27).
(v) A greem ents in restraint o f legal proceedin gs (Sec. 28).
(vi) Agreem ents which are uncertain and am biguous (Sec. 29).
(vii) A greem ents by way o f w ager (Sec. 30).
(viii) A greem ents to d o im p ossible acts (Sec. 56).
(1) R estraint o f M arriage

Every agreement in restraint o f the marriage o f any person, other than a minor, is
v o id (Sec. 26). T h e restraint m ay b e g e n e ra l o r partial. A party m ay b e
restrained from m arrying at all, o r from m arrying for a fix ed period, o r from
marrying a particular person, or a class o f persons, or not to marry outside a group
o f families, in all such cases the agreement is void. I f the agreement is not in the form
o f prom ise to marry a particular lady, but it stipulates that the prom isor will n ot marry
any other lady than the prom isee, the agreement is void [Lowe v P eers (1768)4 Burr.
2225]. A penalty upon remarriage may not b e construed as a restraint o f marriage.
A prom ise to marry a particular person d oe s not im ply any restraint o f marriage.
Where A and B enter into an agreement that B ’s daughter ‘C ’ shall marry A’s son ‘D ’
and in case ‘C ’ fails to marry ‘D ’, B w ill pay Rs.10,000 to A, the contract is valid
as there is n o restraint o f marriage, and an action w ould lie for dam ages for breach
o f contract under Sec. 73. However, if A and B make a family arrangement for
intermarriages o f their sons and daughters, the agreement w ould b e co m e unlawful
under Sec. 26 being in restraint o f marriage.
(2) Restraint o f Trade

An agreement by which anyone is restrained from exercising a lawful profession, trade
or business o f any kind, is to that extent void (Sec. 27). "T he law concerning restraint
o f trade has changed from time to time with the changing conditions o f trade, but these
changes have on the w hole been a continuous development o f a general rule” (Anson).
Whether the restraint is general or partiable, unqualified or qualified, i f the
agreement is in the nature o f a restraint o f trade, it is void. Thus, an agreem ent
requiring a person not to trade within a certain area or for a certain duration is void.
A contract by a newspaper proprietor not to com m ent on the conduct o f a particular
person is void. In Gujarat Bottling C o Ltd. v C o c a C o la \A IR 1995 S C 2372), an
agreement by the C oca C ola com pany with a licen cee for use o f certain trade marks
like Thumps Up, Limca, etc. with a condition that the licencee/franchisee shall not
deal with com peting g o o d s was held to be valid.
In England all agreements in restraint o f trade are void, unless there is som e
justification for the restraint making it reasonable. Indian law is stricter. It recognises
only certain exceptions through statutes and judicial decisions. Any agreement which
is not covered by anyone o f the recognised exceptions is void.
Statutory Exceptions
(i) Sale o f Goodw ill - The only exception mentioned in Sec. 27 is that
relating to sale o f goodwill. An agreement by a person, w ho sells the
goodwill o f his business not to carry on a similar business within specified
local limits, so long as the buyer carries on a similar business, is valid
provided that the restrictions are reasonable. W here the aim o f an
agreement is prevention o f competition, it will be void.
Thus, in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co. Ltd. (1894)
A C 535, there occurred a sale o f goodw ill by an inventor and manufacturer o f guns
and ammunition who agreed with the buyer company : (1) not to practise the sam e
trade for 25 years, and (2) not to engage in any business com peting or liable to
compete in any way with the business for the time being carried on by the company.
It was held that the first part o f the agreement was valid being reasonably necessary
for the protection o f the purchaser’s interest, but the second part was considered to
be unreasonable and void.
(ii) Partnership Act - There are four provisions in Partnership A ct w hich
validate agreements in restraint o f trade. Sec. 11 enables partners during
the continuance o f the firm to restrict their mutual liberty by agreeing
that none o f them shall carry on any business other than that o f the firm.
Sec. 36 enables them to restrain an outgoing partner from carrying on
a similar business within a specified period/ local limits. A similar
agreement may be made b y partners un der Sec. 54 u p o n o r in
anticipation o f dissolution by which they may restrain each other from
carrying on a business similar to that o f the firm. Sec. 55 relates to the
sale o f goodw ill o f the firm.
Judicially Recognized Exceptions
(i) Trade combinations - Sometimes the traders and manufacturers com bine
together (e.g. via an Association) to eliminate com petition as between
themselves and make agreements fixing minimum price, regulating the
supply o f goods and putting profits in a com m on p oo l and then dividing
the same amongst themselves.
But the court would not allow a restraint to be im posed disguised as trade
regulations. Thus, an agreement between certain persons to carry on business with the
members o f their caste only has been held void.
(ii) Solus or exclusive dealing agreements - In such a case on e party agrees

to deal with the other party and none else. It is a com m on business
practice that a producer or manufacturer likes to market his g o o d s through
a sole agent/distributor and the latter agrees in turn not to deal with the
goods o f any other manufacturer. S o long as the ob ject o f the agreement
is the benefit o f the parties to the contract rather than m on op olisin g the
trade, there is nothing unreasonable in it.
Law o f Contract 37
But where a manufacturer o r supplier, after meeting all the requirements o f a

buyer, has surplus to sell to others, he cannot be restrained from selling it to others.
Further, when the o bject o f the agreement is to com er g o o d s or to m on op olise trade,
or the restraint is for unduly lon g time, for example binding a party with such agreement
“from generation to generation” the agreement cannot be considered to be lawful.
(iii) Contract o f service - An agreement o f service by which an em ployee
agrees that he will serve a particular em ployer for a certain duration, and
that he will not serve anybody else during that period, is a valid
agreement. Trade secrets, name o f customers, etc., may not b e given
away by a servant, they are his master’s property. A servant may, therefore,
be restrained from taking part in any business in direct com petition with
that o f his employer. But an agreement to restrain a servant from
com peting with his em ployer after the termination o f employment may
not b e allow ed by the courts.
(3) R estraint o f Legal P r o c e e d in g s

Sec. 28 states that an agreement absolutely restraining a party from enforcing his
rights through a court o f law, or an agreement which places a limit as to the time
within which a right can b e enforced, is void. Further, the right to appeal d o e s not
com e within the purview o f the section. A party to a suit m ay agree not to appeal
against the decision.
An agreement to oust the jurisdiction o f the courts is o p p o se d to public p olicy
and thus void. The agreement is void if restraint is an absolute one. A partial restriction
will be valid. Thus, if two com petent courts can p ossib ly deal with the subject matter
o f litigation, it is open to the parties to a contract to agree that a dispute should be
adjudicated upon one o f the courts only e.g. a clause that the D elhi Court alone shall
have the jurisdiction to adjudicate.
Another kind o f agreement rendered void by the section is where an attempt is
made by the parties to restrict the time within w hich an action may be brought s o as
to make it shorter than that prescribed by the Law o f Limitation. A ccord in g to the
Indian Limitation Act, for example, an action for the breach o f contract m ay be
brought within 3 years from the date o f breach. I f a clause in an agreem ent p rovides
that n o action should b e brought after 2 years, the clause is void.
A n agreement curtailing the period o f limitation should b e distinguished from
an agreement resulting in the release or forfeiture o f the rights i f an action is not
brought within a certain period. Such clau ses are generally there in insurance
.greements. However, Sec. 28 has been amended by the Indian Contract (Amendment)
Act, 1997. The amended section p rovides that, “Every agreement w hich extinguishes
the rights o f any party thereto, or discharges any party thereto, from any liability,
under or in respect o f any contract on the expiry o f a specified period s o as to restrict
any party from enforcing his rights, is void to that extent”. The amendment has
brought about the change that all clauses which reduced the period o f limitation
w ould b e void to that extent; it, however, d oes not enhance the limitation period.
Exceptions to Sec. 28
Exception 1 to Sec. 28 allow s an agreement to refer dispute to an arbitration. Thus,

' 38 Law Guide for Competitive Examinations
the right to proceed against the arbitrator’s award, for example, to have it set aside,
cannot be excluded by the contract. Exception 2 states that contracts to refer to
arbitration questions that have already arisen are valid. <
(4) Uncertain A greem en ts

Agreements, the meaning o f which is not certain, or capable o f bein g m ade certain,
are void (Sec. 29). For example, A agrees to sell to B “a hundred tons o f oil” . There
is nothing whatever to show what kind o f oil was intended. However, A, w ho is a
dealer in coconut oil only, agrees to sell to B “one hundred tons o f oil” , then there
is a certainty in the agreement. Similarly, where A agrees to sell to B “all the grain
in my granary at Ram Nagar”, there is no uncertainty to make the agreement void.
A promises to pay B for his services whatever A him self will think right or
reasonable. Later, being dissatisfied with the payment made, B sues A. B ’s suit w ill
not be admitted by the court because i f the performance o f a prom ise is contingent
upon the mere will and pleasure o f the promisor, there is no contract.
In Guthing v Lynn 1831(2 B A d 232, a horse was bought for a certain price
coupled with a promise to give £5 more if the horse proved lucky. The agreement was
held to be void for uncertainty. Where goods are sold ‘at such price as should be agreed
upon between the parties’, the agreement were held to be void for uncertainty as to
price. An ‘agreement to agree in the future’ is a void contract, for there is no certainty
whether the parties will be able to agree. There cannot be a contract to make a contract.
Where the price is left to be fixed by a third party, there is n o uncertainty and
the agreement will be enforceable. Similarly, if the agreement is totally silent as to
price, it will be valid, for, in that case, Sec.2 o f the Sales o f G o od s Act, 1932, will
apply and the reasonable price shall be payable.
Distinction B etw een Illegal and Void A gre e m en ts

An illegal transaction is one which is actually forbidden by law (Sec. 23), but a v o id
agreement may not be forbidden, “ the law may merely say that i f it is made, the
courts will not enforce it” (Ss. 25 to 30). Thus every illegal contract is also void, but
a void contract is not necessarily illegal. However, in both, the main or the primary
agreement is unenforceable. But a collateral transaction to the main agreement is
enforceable if the main agreement is void but not illegal. If the main transaction is
illegal, for instance, smuggling, a collateral transaction like m oney given to enable a
person to smuggle, will also be illegal.
E xception s
A ccording to Anson, there are three exceptional cases in which a man will be relieved
o f the consequences o f an illegal contact into which he has entered:
(i) Where the contract is still executory - Where no part o f the illegal
purpose has been carried into effect, the money paid or g o o d s delivered
under it may be recovered. A debtor executed a transfer to d eceiv e the
creditors, but before any creditor could b e deceived, he repented and
sought to recover back the property, which he w as allow ed to d o so.
Where money is paid to a person to induce him to com m it a crime, the
court may not allow its recovery even on the ground o f repentance.
Law o f Contract 39
(ii) Parties not ‘in p a r i d e licto ' - P ari delicto means ‘in equal fault’. W here
the parties are not in p a ri delicto the less guilty m ay b e able to recover
m oney paid, or property transferred, under the contract. Thus, w here the
contract is o f the kind made illegal by the statute in the interest o f a
particular class o f persons o f w hom the plaintiff is one; or, where the
plaintiff was induced by fraud or strong pressure; or, the defendant is
under a fiduciary duty to the plaintiff, the plaintiff may recover back the
m oney or property.
(iii) Where recovery p ossib le without relying on the illegal contract- Where a
building was let out for gam bling purpose, the tenancy being for unlawful
purpose, the rent could not be recovered but possession can be recovered.
R estorin g B en efits R eceiv ed u n d er a V o id C o n tr a c t

A ccordin g to Sec. 65, when the parties have entered into an apparently valid contract
and som e benefits have been passed under it, and subsequently the contract is either
discovered to be void or becom es void, the party w ho has received the benefits must
restore them to the other. The section d oe s not apply to a contract which the party
knew at the time o f making it to be void. The section also m ay not apply to a case
where the benefits are bein g passed at a time when the contract has, though unknown
to the parties, already ceased to be enforceable.
The first part o f Sec. 65 is concerned with an agreement which never amounted
to a contract, it being v oid ab initio. But the parties d iscovered this at a later stage.
For example, Sec. 65 will apply in cases where a contract is void by reason o f
“unlawful object”, but the parties were not aware o f it. The secon d part o f Sec. 65
is concerned with the agreement which b ecom es void. This w ill co v er cases where the
contract was valid initially, but due to the happening o f som e event the performance
o f it becom es im possible or unlawful (frustration o f contract).
5. WAGERING AGREEMENTS
An agreement by way o f wager is void (Sec. 30). But, it is not immoral. The w ord
‘w ager’ means a ‘bet’. In a wagering agreement, two parties have opposite view s
regarding an uncertain event, and they stipulate that upon the determination o f the event
in a certain way the parties shall win or lose from each other a certain sum o f money,
and the parties have no other interest in the event except winning or losing a bet. For
instance, A and B may enter into a contract that i f it rains today, B will pay him Rs.
1,000 or if it does not tain today, A will pay him Rs. 1,000, it will be a wagering
agreement. I f either o f the parties may win but cannot lose, it is not a wagering contract.
The essential characteristics o f a w agering agreement are as follow s:
(i) Uncertain event - Such event generally is a future event, but may be a past
event when the parties are not aware o f its result or the time o f its happening.
(ii) Mutual chances o f ga in or loss - There should be a chance o f one party
winning and the other losing, on the determination o f the event. For
example, A agrees to sell his c o w to B for Rs. 500 i f the c o w giv es 6
k g milk every day, but for Rs. 10 only i f it fails to do so. The c o w fails;
but B will not succeed as the transaction, though ostensibly a sale, is in
reality a wager [Brogden v Marriott 5 LJ (CP) 302],
In Babasaheb v Rajaram (AIR 1931 B om 264), two wrestlers agreed to play

a wrestling match on the condition that the party failing to appear on the day fixed
was to forfeit Rs. 500 to the opposite party, and the winner was to receive Rs.1,125
out o f the gate money. The defendant failed to appear in the ring and the plaintiff sued
him for Rs.500. The defendant’s plea o f a ‘contract by w ager’ was rejected by the
court on the ground that neither side stood to lose according to the result o f wrestling
match. In D iggle v H ige (1877) 2 ExD. 422, each one o f the two parties in a walking
match deposited £ 200 with the stakeholder with the condition that the loser w ould
forfeit the amount o f £ 200 paid by him. The agreement was held to be a wagering
one, as the stakes com e out o f the pocket o f the loser.
In Carlill v Carbolic Smoke Ball Co. (1892) 2 QB 434, the defendant com pany
agreed to pay £ 100 if a person contracted influenza after using the sm oke ball
manufactured by it, for a certain period according to a prescribed manner. The plaintiff
used the smoke ball but contracted influenza. She was held entitled to recover the
amount It was not held to be a wagering agreement because the plaintiff w as not to
lose anything i f she did not contract influenza and the defendant com pany was not
to gain anything from the plaintiff if the ball had the desired effect.
(iii) Neither party to have control over the event. A w ager is a gam e o f
chance. ^
(iv) N o other interest in the event - Lastly, neither party have any interest in
the contract than the sum or stake he will so win or lose and there is no
other real consideration for the making o f such contract. This distinguishes
a wagering contract from a contract o f insurance which requires an
“insurable interest” i.e. an interest in the existence and preservation o f the
thing insured. A wife, for example, has an insurable interest in her
husband’s life and she can take an insurance policy on her husband’s life.
Specu lative transactions- O ne o f the form s o f w a g erin g agreem en t is an
agreement to pay differences (between contract price and market price o f goods) only,
rather than actually making or taking the delivery o f goods. Such transactions are not
the commercial one but a wager on the rise or fall o f the market which com es within
the connotation o f “gaming”. A ‘chit’ fund is not a wager.
Effects o f Wagering Agreements a nd Collateral Transactions
A wagering agreement is non-enforceable, thus the amount w on on a w ager cannot

be recovered. A and B entered into wagering transactions in shares. B becam e indebted
to A. B then executed a promissory note in favour o f A to pay the amount. A could
not recover the amount.
Though a wagering agreement is void and unenforceable, it is not forbidden by

law, and therefore transactions collateral to the main transaction are enforceable.
Thus, the plaintiff who lent money to the defendant to enable him to pay o f f a
gambling debt could recover the same from the defendant. The Supreme Court held
>
*
m
Law o f Contract 41
in G h eru la l Parekh v M ahadeo D a s (AIR 1959 SC 781), that a partnership to enter

into w a g erin g transactions is not illegal, and therefore a partner who has paid the
losses on such transactions may recover proportionate indemnity from his co-partners.
In States like Maharashtra and Gujarat, wagering agreements have been declared
illegal also. Thus in these States the collateral transactions to wagering agreements
are a ls o void.
E xceptions
Sec. 30 d oes not render void a subscription/contribution, or an agreement to subscribe/

contribute towards any plate, prize or sum o f money (of the value o f Rs. 500 or
upwards) to the winner or winners o f any horse-races. Thus a bet on a horse race
carrying a prize o f Rs. 500 or m ore to the winners is valid. Further, crossw ord
com petitions in which skill plays a substantial part are not wagers. But where prizes
d epen d upon a chance, that is a ‘lottery’, it is a wager.
6. CONTINGENT CONTRACTS
A ccording to Sec. 31, a “contingent contract” is a contract to d o or not to d o something,

if som e event, collateral to such contract, d o e s o r d oe s not happen. Thus the contract
is dependent or conditional upon the happening or non-happening o f a future event
or contingency. For example, A contracts to pay B Rs. 10,000 i f B ’s house is burnt,
this is a contingent contract. The payment o f the amount is contingent on the happening
o f the collateral event i.e. burning o f the house. A ll contracts o f insurance o r indemnity
and guarantee are contingent contracts.
A distinction is to b e drawn betw een a contract under which a present obligation
is created but performance is postpon ed to a future date, and a contract under which
there is no present obligation at all and the o bligation is to arise by reason o f som e
condition being com plied with or som e contingency arising in future. Thus when the
agreement states that the delivery is to be m ade when the g o o d s are received from the
m ills or when they arrive, such contracts are not contingent contracts.
In a contingent contract there should be som e event collateral or incidental to
the contract. A ccordin g to P ollock and Mulla, a ‘collateral event’ means an event
which is “neither a performance directly prom ised as part o f contract, nor the w hole
o f the consideration for a prom ise”. It is one which d oes not form part o f consideration
o f the contract, and is independent o f it. I f the event consists in performance o f the
contract itself by one party, it is not a contingent contract. F or instance, A announces
a reward o f Rs.100 to be paid to any on e w ho finds his lost dog. B finds the dog. It
is not a contingent but an absolute contract.
Similarly, where C contracts to pay Rs. 100 to D for white-washing his house on
the terms that no payment shall be m ade till the com pletion o f the work, it is not a
contingent contract because the event (D’s com pleting the work) is an integral part o f
the contract and not collateral to the contract However, where A contracts to pay Rs.
50,000 to B, a contractor for constructing a building, provided the construction is
42 Law Guide for Competitive Exam inations
approved by an architect, it is contingent contract because approval by an architect is

a collateral event which is independent o f consideration i.e. construction o f the building.
Where with a view to set up a com pany for the manufacture and sale o f Unani
medicines, a State Government paid an advance to B for the purchase o f his b ook on
Unani medicine; however, the scheme o f manufacturing medicines could not materialize.
Held that the contract was not contingent on the happening o f collateral event (setting
up o f the company) and thus B can claim the remaining sum from the Government
(Bashir Ahmed v Govt, o f A.P. AIR 1970 SC 1089).
A ‘wagering agreement’ is also a contingent contract, but it has been declared
void by Sec. 30. The only chief element o f a contingent contract is that its performance
is linked with the happening o f a contingency. The performance o f a w agering
agreement is also linked with an uncertain event. But a contingent contract serves
some business or social purpose while a wagering contract is an attempt to make gam ,
out o f a pure chance. There is no business or consideration in it. Further, in a w agering I
contract, there are mutual chances o f gain or loss, if either o f the party may win bijt.
cannot lose, it is not a wagering contract. It then becom es a contingent contract. Thus
i f A enters into a contract with B to pay him a sum o f Rs.5,000 if India wins the w orld
cup, it is a contingent contract.
Enforcem ent o f C on tin gen t C on tra ct

The rules governing the enforcement o f various kinds o f contingent contracts are as
follows:
(i) Contracts contingent on an event happening (Sec. 32).
(ii) Contracts contingent on the event not happening (Sec. 33).
(iii) Contracts contingent on the future conduct o f a living person- I f the
event contemplates the way in which a particular individual will act at
an unspecified time, the event shall be considered to becom e im possible
when such person does anything which renders it im possible that he
should act so within any definite time, or otherwise than under further
contingencies (Sec. 34).
(iv) Contracts contingent on happening o f specified event within fix e d time-
If the contract contemplates the happening o f the event within a certain
time, the contract becom es void if the event does not happen or its
happening becom es im possible before the expiry o f that time (Sec. 35).
(v) Contracts contingent on impossible event - If the performance is made
to depend upon an event which is already impossible, the contract is
void whether or not the fact is known to the parties (Sec. 36). For
example, A agrees to pay B Rs. 1,000 if two straight lines should en close
a space, the agreement is void.
7 . PERFORMANCE OF CONTRACT
When the rights and obligations arising out o f a contract are extinguished, the contract is
said to be dischaiged or terminated. A contract may be discharged in the following ways:
Law o f Contract 43
(1) B y Performance o f the contract (Ss. 37-67);

(2) B y Breach o f the contract (including anticipatory breach- Sec. 39);
(3) B y Im possibility o f performance (doctrine o f frustration- Sec. 56);
(4) B y Agreement and N ovation (Ss. 62-67).
(5) B y Operation o f law.
[I] P erfo rm a n ce o f C o n tr a c t
Every contract consists o f reciprocal and actionable promises. A ccordin g to Sec. 37,
•‘parties to the contract have a duty to perform, o r offer to perform their respective
prom ises, unless the perform ance is d ispensed with or excused under the provisions
o f the Contract Act, or o f any other law.” Thus i f A prom ises to deliver g o o d s to B
on a certain day on payment o f Rs. 1,000 but A died, then A’s representatives are
bound to fulfil the contract m ade by A. However, where the contract depends on
personal skill, such as painting a picture, on the death o f the prom isor the representatives
are not bound by the obligation. Likewise, w here the contract becom es im possible to
perform under Sec. 56, the contract b e co m e s void and need not be performed.
Offer or Tender o f Performonce

The prom isor must offer to perform his obligation under the contract to the promisee.
The offer is called “tender o f performance.” It is then for the prom isee to accept the
performance. If he does not accept, the prom isor is not responsible for non-performance,
nor d oes he thereby lose his rights under the contract (Sec. 38). T he promisor, then,
can sue the prom isee for breach o f the contract.
Sec. 38 further lays dow n that every such offer o f perform ance must fulfil the
follow in g conditions:
(i) The tender must be unconditional. A tender b eco m es conditional when
it is not in accordance with the terms o f contract. Payment by cheque
is deem ed to be subject to encashment and, thus, it is only a conditional
tender.
(ii) The tender must b e m ade at p ro p e r time and p la c e , and under such
circumstances that the prom isee may have a reason able opportunity o f
ascertaining that the prom isor is able and w illing there and then to d o
the w hole o f what he is bound by his prom ise to do.
(iii) An offer to one o f several jo in t prom isees has the same legal con sequ en ces
as an offer to all o f them.
By W hom Contract should be Performed

A ccord in g to Sec. 40, i f the contract is on e w hich is based on personal con fiden ce,
or in volves the exercise o f p erso n a l skill like painting, dancing, singing, marrying, or
writing a book, etc., it must be perform ed by the p rom isor h im self and n ob od y else.
If, on the other hand, the contract d oes not involve personal skill, the p rom isor o r his
representatives may em ploy a com petent person to perform the same.
A ccordin g to Sec. 41, when the prom isee accepts perform ance o f the p rom ise
from a third p e rso n , he cannot afterwards enforce it against the promisor. T hus i f A
ow es B a sum o f Rs. 5,000; C, w ho is A’s friend pays to B Rs. 5,000. The paym ent
by C to B discharges A from the debt.
Performance o f Joint Promises

Sections 42-45 deal with the question o f liability o f the join t promisors. T he follow ing
rules are contained in these sections :
(i) The liability o f the joint promisors is joint and several. When a joint promise
is made, and there is no express agreement to the contrary, the promisee
may compel any one or more joint promisors to perform the w hole o f the
promise (Sec. 43). For example, A, B and C jointly promise to pay D, Rs.
3000. D may compel either A or B or C to pay him Rs. 3000.
Contracts involving personal skill (e.g. to paint a picture) com e to an
end on the death o f any o f the joint promisors.
Successive action against different jo in t prom isors - If the prom isee brings an action
against one or some o f the joint promisors only, and leaves others, a judgement
against those some promisors does not bar an action against others, if the full amount
has not being recovered from them. Under English law, such an action is barred.
(ii) According to Sec. 42, “joint promisors” must, during their join t lives,
fulfil the promise. And if any one o f them dies, his representatives must,
jointly with the surviving promisors, fulfill the promise.
(iii) There can be contribution between joint promisors i.e. one joint prom isor
is made to pay more than his share, he can recover contribution from the
other joint promisors, according to their shares. I f any one joint prom isor
makes a default in making contribution, the remaining joint prom isors
must bear the loss arising from such default in equal shares (Paras 2 and
3, Sec. 43).
(iv) The creditor is also given the right to release anyone o f the joint prom isors
from his liability (Sec. 44).
(v) A ccording to Sec. 45, when a promise is made to several persons jointly,
then, unless a contrary intention appears from the contract, the right to
claim performance rests with all the prom isees jointly and a sin gle
promisee cannot demand performance. Thus if A and B execute a
promissory note in favour o f C and D; C will not succeed i f he sues
alone, D must jo in him. Under the terms o f Sec. 45, a payment to one
o f several joint prom isees does not operate as a com plete discharge o f
a debt. Thus if A borrows Rs. 3,000 from B, C and D, and when the
debt becom es due A tenders it to B who accepts it, A is not discharged
by the payment.
Time and Place for Performance

According to Sec. 46, even though no time for performance is fixed by the parties,
the contract is not rendered void for uncertainty. The performance, in such a case, has
to be made within a ‘reasonable’ time. A ccording to Sec. 47, when the prom ise is to
be performed on a certain day, the prom isor’s duty in such a case is to perform the
contract during the usual business hours on such day, otherwise it would amount to
non-fulfilment o f the promise. It may be noted that where the place for perform ance
is fixed in the promise, the performance must be offered at that place.
According to Sec. 50, the performance o f any prom ise may be made in any
Law o f Contract 45
manner, or at any tim e which the prom isee prescribes o r sanctions. W here A o w e s B
Rs.2,000 and B accepts som e o f A’s g o o d s in reduction o f the debt, the delivery o f
the g o o d s operates as a part payment.
Ordinarily it is expected that either party w ill perform his obligation at the
stipulated time (if m entioned in the contract). I f the intention o f the parties w as that
time should be o f the essen ce o f the contract, then a failure to perform at the agreed
time renders the contract voidable at the option o f the opp osite party (Sec. 55). Tim e
is generally considered to b e o f the essen ce o f the contract: (1) where the parties have
expressly agreed to treat it as o f the essence, (2) where delay operates as an injury,
(3) where the nature and n ecessity o f the contract requires it to be so construed, for
example, where a party asks for extension o f tim e for performance.
In “com m ercial contracts” tim es is ordinarily o f the essen ce o f the contract
(W asoo Enterprises v J.J. O il M ills A IR 1968 Guj. 57); similarly when the prices o f
the g o o d s like shares or bullion are subject to rapid fluctuation. In case o f sale o f
im m ovable property, the time is generally not the essen ce o f the contract. W hen the
time is not the essen ce o f the contract, the delay in the performance o f such a contract
does not make the contract voidable, but the rem edy available to the aggrieved party
in such a case is to claim com pensation for any lo ss caused by delay. Even where time
is o f the essence, the injured party m ay at his option accept the delayed performance.
Perform ance o f R eciprocal Promises

Sec. 2(f) says: “ Prom ises which form the consideration o r the part o f consideration
for each other are called reciprocal prom ises". Thus when a contract con sists o f an
exchange o f promises, they are called reciprocal o r mutual promises. “W hen such
prom ises have to be perform ed simultaneously, the prom isor is not bound to perform
unless the prom isee is ready and w illin g to perform his p rom ise” (Sec. 51- mutual
and concurrent promises).
The order in which reciprocal prom ises must be perform ed may b e fixed by the
contract, but where it is not expressly fixed, they w ill have to b e perform ed in the
order in which the nature o f the transaction admits (Sec. 52- mutual and independent
promises). Thus when A and B contract that A shall build a house for B at a fixed
price, A’s prom ise to build the house must be perform ed before B ’s prom ise to pay
for it. It may be noted that in the ordinary course o f business, w ork is not usually paid
for before it is done.
Sec. 53 lays dow n the principle that w here one o f the parties to reciprocal
prom ises prevents the other from performing his promise, the contract becom es voidable
at the option o f the party so prevented; and he is entitled for com pensation from the
other partj' for any loss s o occasioned.
Sec. 54 lays dow n that where the nature o f the reciprocal prom ises is such that
one cannot be performed or its performance cannot be claim ed unless the other party
perfon n s his prom ise in the first place, then i f the latter fails to perform, he cannot
claim performance from the other, but must make com pensation to him for his loss
(mutual an d dependent promises). For instance, A hires B ’s ship to take in and
convey, from Calcutta to Mauritius, a cargo to be provided by A, B receivin g a certain
freight for its conveyance. A does not provide any cargo for the ship. A cannot claim
the performance o f B ’s promise, and must com pensate B for the loss which B sustains
by the non-performance o f the contract.
Reciprocal Promise to do Things Legal and Illegal

In such cases, the first set o f promises is a contract, but the secon d is a v o id agreement
(Sec. 57). For instance, A and B agree that A shall sell B a house for Rs. 10,000, but
that if B uses it as a gambling house he shall pay Rs. 50,000 for it. T he first set o f
promises is valid but the second void. It may b e noted that when the legal and illegal
parts are inseparable, the whole o f the agreement is void (See Sec. 24).
Alternative Promises, One branch being Illegal
In the case o f an alternative promise, one branch o f which is legal and the other
illegal, the legal branch alone can be enforced (Sec. 58). When A and B agreed that
A shall pay B Rs. 1,000, for which B afterwards deliver to A either rice or sm uggled
opium, this is a valid contract to deliver rice only.
A ppropriation o f Payments
When a debtor, owing several distinct debts to one person, makes a payment, which
is not sufficient to discharge all the debts, the question arises to which particular debt
the payment is to be applied. Sections 59 to 61 lays down the following three principles:
(i) Appropriation by debtor- Sec. 59 confers the right o f appropriation
upon the debtor i.e. the debtor has the right to request the creditor to
apply the payment to the discharge o f som e particular debt. I f the creditor
accepts the payment, he is bound by the appropriation. I f the creditor
does not want to do that, he must not accept the payment.
(ii) A ppropriation by creditor- Sec. 60 enables the creditor to m ake
appropriation. If the debtor makes payment without any appropriation,
the creditor may use the payment at his discretion to w ipe out any debt
which is due lawfully (even though it may be time-barred); he cannot
make the appropriation to an illegal or void debt.
(iii) Appropriation by law- Sec. 61 applies when neither party makes an
appropriation. In such a situation the law gets the right to appropriate
the payment and the law prefers to w ipe out the debts in the order o f
time in which they were incurred.
[2] Breach o f C on tract

When a party having a duty to perform a contract fails to do that, or does an act
whereby the perfoimance o f the contract by him becom es impossible, or he refuses to
perform the contract, there is said to be a breach o f contract on his part. On the breach
o f contract by one party, the other party is discharged from his obligation to perform
his part o f the obligation, and also gets a right to sue the guilty party for damages.
The breach o f contract may be either (i) actual or present i.e. non-performance
o f the contract on the due date o f performance, or (ii) anticipatory i.e. before the due
date o f performance has come. For example, A is to supply certain g o o d s to B on 1st
January. On 1st January, A does not supply the goods. H e has made actual breach o f
contract. On the other hand, if A informs B on 1st D ecem ber that he will not p erfon n
the contract on 1st Jan. next, A has made anticipatory breach o f contract.
Law of Contract 47
Anticipatory Breach o f Contract

"An anticipatory repudiation occurs when, prior to the prom ised date o f performance,
the prom isor absolutely repudiates the contract (expressly or impliedly).” Sec. 39 lays
down that “anticipatory breach o f contract could be made by promisor, either by
refusing to perform the contract, or disabling him self from performing the contract in
its entirety."
Illustration (a) to Sec. 39 reads: A, a singer enters into a contract with B, the
manager o f a theatre to sing at his theatre two nights in every w eek during the next
two months, and B engages to pay her Rs.100 for each night’s performance. O n the
sixth night, A wilfully absents h im self from the theatre. B is at liberty to put an end
to the contract.
W hen one person makes anticipatory breach o f contract, the other party has two
alternatives open to him, viz. (i) H e may rescind the contract immediately and may
bring an action for the breach o f contract without waiting for the appointed date o f the
performance o f contract (ii) H e may not put an end to the contract but treat it as still
subsisting and alive and wait for the performance o f the contract on the appointed date.
In H ochster v D e La Tour (1853) 2 E & B 678, A engaged B on 12th April, 1852
as a courier for accom panying him on a tour o f Europe, which was to begin on 1st
June. B was to b e paid £ 10 per month for his services. O n 11th May, 1852 A
informed B that B ’s services were not needed. O n 22nd May, 1852, B sued A for the
breach o f contract. Held that even though B had brought an action on 22nd M ay (i.e.
before the due date o f performance o f the contract), he had a right to do so.
If a man prom ises to marry a w om an on a future day, and before that day
marries another woman, he is instantly liable to an action for-%reach o f prom ise o f
marriage. The principle applies to contingent contracts. W here a person prom ises to
marry a woman on the death o f his father, and during the life time o f his father
married another, he was held liable [Frost v Afmg^6fl872) LR 7 Exch 111].
When the contract is kept alive by the prom isee (aggrieved party), the prom isor
may perform the same inspite o f the fact that he hat) earlier repudiated it. However,
i f the prom isor still fails, the prom isee will be entitled for the compensation. In case
the prom isee has elected to keep the contract alive and subsisting it is just possib le
that before the due date o f perform ance som e event happens (viz. supervening
im possibility or frustration) because o f which the prom isor gets excused from the
performance o f the contract. The prom isor w ill b e benefited in such a situation as he
will be discharged from the performance o f the contract.
M in o r Breach N o t a Repudiation o f Contract
Every minor irregularity in the performance o f the contract cannot b e seized upon as
a repudiation s o as to put a premature end to the contract. ‘I f there has been a
substantial though not exact and literal perform ance by the promisor, the prom isee
cannot treat h im self as discharged.' The court has to take into account the effect o f
the breach upon the contract as a whole. W here out o f the several deliveries by
instalments, on e delivery was b elo w the standard, it could not be treated as a breach
o f the contract.
W here A agreed to purchase from B under tw o contracts 30 tons o f sugar to

be delivered at different dates, A having failed to take the delivery under the first
contract, B claimed to rescind both contracts, it was held that as there was no refusal
on the part o f A to perform his promise in its entirety within the meaning o f Sec.39,
B was not entitled to rescind the contract.
[3] Impossibility o f P erform ance

Discussed later ('Frustration o f Contracts’).
[4] D ischarge by A greem en t and N ovation

Sections 62 and 63 deal with the contracts in which the obligation o f the parties to
it may end by the ‘mutual consent’ o f the parties.
Contracts which Need Not be Performed

Sec. 62 deals with the effect o f novation, rescission and alteration o f contract. “ I f the
parties to a contract agree to substitute a new contract for it, or to rescind or to alter
it, the original contract need not be performed”.
When the parties to a contract agree to substitute the existing contract for a new
contract, that is called novation. In such a case the liability o f the parties as regards
the original agreement is extinguished and in its place they becom e bound by the new
altered agreement. When the novation is by a ‘change o f contract’, the original contract
must be subsisting and unbroken. The substitution o f a new contract is not possib le
after there has been a breach o f the original agreement. It is further necessary that the
new agreement should be valid and enforceable.
Thus, A owes B Rs. 10,000. A enters into an agreement with B, and giv es a
mortgage o f his (A’s) estate for Rs.5,000 in place o f debt o f Rs. 10,000. This is a new
contract and extinguishes the old. But, where A ow es B Rs.1,000, and B ow es C
Rs. 1,000, and B orders A to credit C with Rs. 1,000 in his books but C does not assent
to the agreement, no new contract has been entered into and B still ow es C Rs. 1,000.
‘Alteration’ o f a contract means change in one or m ore o f the material terms
o f a contract. The parties to the contract remain the same. In novation, there may be
a change o f parties also; when the parties are not changed then to be a novation the
terms o f the contract must be altered substantially.
A contract may be discharged by agreement between the parties that it shall no
longer bind them. Such an agreement amounts to ‘rescission’ or cancellation o f the
contract and no new contract is substituted in its place.
ti
Remission o f Performance
According to Sec. 63, the party who has the right to demand the perform ance o f the
contract may (i) remit or dispense with it, wholly or in part, or (ii) extend the time
for performance, or (iii) accept any other satisfaction instead o f performance. Law
cannot force the parties to take a legal action for breach o f contract. ‘An agreem ent
to excuse performance’ is valid, while an ‘agreement not to sue for breach’ is void
being an agreement in restraint o f legal proceedings.
(i) Dispensing with or remitting perform ance - The prom isee may rem it or
dispense with performance o f the contract without any consideration. To
Law o f Contract 49
“dispense with” means that the party entitled to claim performance may
waive it i.e. abandon his right. The acceptance o f less sum o f m oney
where m ore is due is a g o o d discharge o f the w hole o f the liability.
(ii) Extending the time o f perform ance - Sec. 63 permits the prom isee to
grant extension o f time for the performance o f the contract, and no
consideration is needed for the same. The extension o f time must b e by
mutual understanding between the parties.
(iii) A ccord and satisfaction - Sec. 63 permits the prom isee to accept any
other satisfaction in lieu o f agreed performance, and this w ould discharge
the promisor. F or example, A ow es B, under a contract, a sum o f money,
the amount o f which has not been ascertained. A without ascertaining
the amount giv es to B, and B, in satisfaction thereof, accepts the sum
o f Rs.2,000. This is a discharge o f the w hole debt, whatever may be its
amount. Likewise, P w ho claim s Rs.50,000 from Q, may accept a house
o f Q in satisfaction o f the d e b t A ccepting som e other satisfaction instead
o f actual performance is known as principle o f “A ccord (agreement) and
Satisfaction” under English law.
Assignment o f Contract
“Assignm ent” means transfer o f contractual rights or liabilities by a party to the
contract to som e other person w ho is not a party. The liability under a contract cannot
be assigned without the consent o f the prom isee, how ever the rights and benefits may
be assigned and the assignee can demand performance from the other party to the
contract. The assignment thus m ade will, however, o e subject to the activities, i f any,
between the original contracting parties. The rights under a lottery ticket are assignable.
[5] D isch a rge by O p e ra tio n o f Law

A contract terminates by operation o f law in the follow in g cases:
(a) Lapse o f time- The Limitation A ct lays dow n that in case o f breach o f
a contract, legal action should be taken within a specified period, called
the period o f limitation, otherw ise the p rom isee is debarred from
instituting a suit and the contract stands discharged. Under the Limitation
Act, the limitation period for sim ple contracts is three years.
(b) Insolvency- A contract is discharged by insolvency o f one o f the parties
to it when an Insolvency Court passes an order in this regard.
(c) Merger- W hen an inferior right contract m erges into a superior right
contract, the former stands discharged automatically. For example, when
a man holding property under a contract o f tenancy buys the property,
his rights as a tenant are m erged into the rights o f ownership.
(d) Unauthorised material alteration- A material alteration made in a written
document/ contract by one party without the consent o f the other, will
make the w hole contract void.
50 L a w Guide for Competitive Examinations
8. DISSOLUTION OF CONTRACTUAL OBLIGATIONS:

FRUSTRATION OF CONTRACT
When the performance o f the contract becom es impossible, the purpose, which the
parties have in mind, is frustrated. If the performance becom es impossible, because
o f a supervening event, the promisor is excused from the performance o f the contract.
This is known as doctrine o f frustration under English law, and is covered by Section
56 o f the Indian Contract Act.
Sec. 56. Agreement to do impossible act- An agreement to do an act im possible in
itself is void (Initial impossibility).
Contract to do act afterwards becom ing impossible or unlawful- A contract to do
an act which, after the contract is made, becom es impossible, or, by reason o f som e
event which the promisor could not prevent, unlawful, becom es void when the act
becom es impossible or unlawful (Supervening impossibility).
Compensation f o r loss through non-performance o f act known to be im possible o r
unlawful- Where one person has promised to do something which he knew, or, with
reasonable diligence, might have known, and which the prom isee did not know, to be
impossible or unlawful, such promisor must make compensation to such prom isee for
any loss which such promisee sustains through the non-performance o f the promise.
Illustrations
(a) A agrees with B to discover treasure o f magic. The agreement is void.

(b) A and B contract to marry each other. Before the time fixed for the
marriage, A goes mad. The contract becom es void.
(c) A contracts to marry B, being already married to C, and being forbidden
by the law to which he is subject to practise polygamy. A must make
compensation to B for the loss caused to her by the non-performance o f
his promise.
Frustration
The “doctrine o f supervening impossibility” as enunciated in Sec. 56 (Para 2) is
similar to the “doctrine o f frustration” known to the English law. However, the former
is wider than the latter and covers both the physical impossibility (initial impossibility)
as well as failure o f object (‘frustration’ or subsequent impossibility) (Satyabrata
Ghose v Mugneeram Bangur A- Co. AIR 1954 SC 44). The “doctrine o f im plied
term” was in vogue before the doctrine o f frustration, i.e. an im plied condition w ould
be read into the contract when the performance becom es im possible from the perishing
o f the thing without default o f the contracting parties.
“Frustration o f the contract” means “occurrence o f an intervening event or change

o f circumstances so fundamental as to be regarded by the law both as striking at the root
o f the contract, and as entirely beyond what was contemplated by the parties when they
entered into the contract”. The word “frustration” is a sort o f shorthand: it means that
a contract has ceased to bind the parties because the common basis on which by mutual
understanding it was based has failed. It is not that the contract has been frustrated, but
Law o f Contract 51
that there has been a failure o f what in the contemplation o f both parties w ould be the
essential condition or purpose o f the performance.
The doctrine o f supervening im possibility com es into play in tw o types o f
situations:
(i) W here the perform ance b e co m e s p h ysically im p ossible beca u se o f
disappearance o f the subject matter (See below).
(ii) W here the ob ject the parties had in mind failed to materialize. The
performance o f an act may not b e literally (or physically) or legally
im possible but it may be im practicable and useless from the point o f
view o f the ob ject and purpose w hich the parties had in view. Thus in
Krell v Henry (1903) 2 KB 740, where a flat was hired only for viewing
a coronation p rocession but the procession having been cancelled due to
king’s illness, it was held that object o f the contract was frustrated by
non-happening o f the coronation.
The effect o f frustration is that the dissolution o f the contract occurs automatically,
it d oe s not depend on the ch oice o r election o f either party (as in the case o f novation
or rescission o f contract) or on their intention o r the opinion or even kn ow iedge as
to the event. A very important principle follo w s from this, that frustration should not
be due to the act o f a party to the contract i.e. self-induced. W hen a contract becom es
frustrated (i.e. becom es void), the party w ho has received the benefits must restore
them to the other (Sec. 65). Thus, where a singer has recieved an advance for singing
at a function, and he could not perform his obligation because o f his illness, he must
refund the advance [111. (d). Sec. 65].
S p ecific G rou n d s o f Frustration

The follow in g grounds o f frustration have b eco m e w ell established:
(1) Destruction o f the Subject-matter

Taylor v C aldw ell (1863) 3 B & S 826 is the best exam ple o f this class. There a
prom ise to let out a m usic hall was held to have frustrated on the destruction o f the
hall. Similarly, in H ow ell v C ouplan d (1876) 1 Q B D 258, the defendant was not held
liable when he contracted to sell a specified quantity o f potatoes to be grow n on his
farm, but failed to supply them as the crop was destroyed by a disease.
(2) Change o f Circum stances

The change o f circumstances must be such as to make performance o f the contract
im p ossible or even extremely difficult in the manner and at the time contemplated,
and thus upset altogether the purpose o f the contract. Thus, where a ship was chartered
to carry som e goods, but b efore it could p roceed there was an explosion in the ship
b o ile r m aking it im possible to undertake the journ ey in the scheduled time, held that
the ch an ge in circum stances amounted to frustration o f the contract,
(3) N on-occurrence o f a C on tem plated Event

S om etim es the performance o f a contract remains possible, but ow in g to the non
occu rren ce o f a contemplated event as the reason for the contract, the value o f the
perform ance is destroyed. Thus in Parshotam D as v Batala M unicipal Committee
(A IR 1949 EP 301), the Municipal Com m ittee leased out certain tonga stands to the
plaintiff for Rs. 5,000, but no tonga driver used the stands throughout the year. The
contemplated event not having occurred, the doctrine o f frustration applied.
(4) Death or Incapacity o f Party

Where the nature or terms o f a contract require person al perform ance by the promisor,
his death or incapacity puts an end to the contract. The performance o f the contract
depends upon the existence o f g o o d health o f the prom isor in such cases e.g. to paint
a picture, to play piano, to sing in a concert (Robinson v Davison (1871) L R 6 Exch).
(5) Government or Legislative Intervention

A contract will be dissolved when legislative or administrative intervention has so
directly operated upon the fulfillment o f the contract o f a specific work so as to
transform the contemplated conditions o f performance (i.e. when resumed, a different
contract from the contract when broken-off)- Thus, where a vendor o f land could not
execute the sale-deed because he ceased to be the owner by operation o f law, held
that the contract had becom e im possible o f performance. The follow ing cases explain
the effect o f Government or Legislative intervention:
(i) Boothalinga A gencies v V.T.C. Poriasw am i (AIR 1969 SC 110)- The
defendant had a licence to import ‘ch icory’ for manufacturing coffee
powder. The licence was subject to the condition that he w ould use it
only in his factory. He agreed to sell the w hole shipload. B efore the
arrival o f the ship, the sale o f such imported g o o d s was banned. The
contract thus held to have becom e void.
(ii) Satyabrata Ghose v Mugneeram Bangur & Co. (AIR 1954 SC 44)- The
case shows that an intervention o f a temporary nature, which d oes not
uproot the foundation o f the contract, will not have the dissolving effect.
The defendant company started a scheme for the development o f a land tract
into a housing colony. The plaintiff was granted a plot on payment o f earnest money.
The company undertook to do the development work, but a considerable portion o f
the land was requisitioned by the Government for military purposes. The defendant
attempted to cancel the contract on the ground that by reason o f the supervening
events its performance had becom e impossible. Held that the contract was not frustrated.
(iii) Naihati Jute Mills Ltd. v Khyaliram Jagannath (AIR 1968 S C 522)- In
this case, held that the effect o f an administrative intervention has to be
viewed in the light o f the terms o f the contract, and if the terms show
that the parties have undertaken an absolute obligation regardless o f
administrative changes, they cannot claim to be discharged.
In that case, for an agreement to purchase the imported raw jute, the buyer was
to supply the import licence. The buyer failed to do so because o f a change in government
rules which required the buyer to use an equal quantity o f Indian jute to obtain licence.
Disallowing the plea o f frustration and holding the buyer liable, it was held that if the
Government had completely forbidden imports, Sec. 56 would have applied.
(6) Intervention o f War

Intervention o f war or warlike conditions in the performance o f a contract has often
created difficult questions. Generally, it is a ground o f frustration o f the contract.
However, where a ship has to take a longer route because o f the closure o f the nonnal
Law o f Contract 53
route (due to the war), causing the inconvenience and loss to the shipper, it was held
that there was no frustration o f contract when the normal route was closed; i f there
are more than one ways o f performing a contract and the war cuts o f f only one o f
them, the party is still bound to perform by the other way (reasonable or practicable)
though it might be inconvenient or expensive [Tsakiorglou & Co. Lid. v N oblee &
Throl Gm B H (1962) A C 93].
C a se s N o t C o v e r e d by D o ctrin e o f Frustration
‘Im possibility o f performance is, as a rule, not an excuse for non-performance o f a
contract’. Som e o f the cases where im possibility o f performance is not an excuse are:
( I ) Com m ercial hardship o r difficulty
“Com m ercial hardship” may make the performance unprofitable o r more expensive
or dilatory, but it is not sufficient to excase performance, for it does “not bring about
a fundamentally different situation such as to frustrate the venture”.
Thus, merely because the procurement o f the g o o d s becom e difficult due to mill
strike, or there is a rise in prices, o r there is sudden depreciation o f currency, or a
person will not be able to earn the expected profits, or there is an unexpected obstacle
to execution or the like, it is not enough to frustrate the contract. D isappoin ted
expectations d o not lead to frustrated contracts. “H e that agrees to d o an act must
d o it or pay dam ages for not doin g it” is the general rule o f the law o f contract.
The follow ing cases d o not fall within the purview o f Sec. 56:
(i) Sachindra Nath v G o p a l Chandra (AIR 1949 Cal 240)- The defendant
agreed to pay high rent for a restaurant because the British troops were
stationed in the town and a clause in the agreement specially provided
that “this agreement will remain in force so lon g as British troops will
remain in this town”. After som e months, the locality was declared out
o f bounds to the British troops. H eld that though it was possib le that the
defendant w ould not have paid such a high rent apart from the expectation
o f deriving high profits from the British troops, that was not sufficient
to make out a case o f frustration.
(ii) G anga Saran v Ram Char an G o p a l (AIR 1952 S C 9)- In this case, a
contract was made for supplying certain bales o f cloth manufactured by
the N ew Victoria Mills, Kanpur. The contract added: “W e shall g o on
supplying g o o d s to you o f the Victoria M ills as soo n as they are supplied
to us by the said mills". The m ill failed to supply g o o d s to the sellers
and, therefore, the sellers pleaded frustration. H eld that there is no
frustration and the sellers are liable for sim ple breach o f contract.
(iii) Samuel Fitz & Co. v Standard Cotton Co. (AIR 1945 M ad 291)- In this
case, the defendant placed an order with the plaintiffs for the supply o f
certain goods, making it clear that they intended to sell it in Australia.
But the Australian Government prohibited the import o f such goods.
The defendants lost their market. Held that the foundation o f the contract
was not that the g o o d s should be resold by the defendants to their clients
in Australia. It was a case o f breach o f contract.
(v) An abnormal rise or fall in price is a com m ercial hardship. But. in a

case, a 400% escalation o f prices w as held to have ended (on account
o f frustration) the contract.
(2) Self-induced frustration
The doctrine o f frustration does not apply to cases o f non-performance o f the contract
due to the events happening because o f the default o f the contracting party himself.
For example, if the intervention o f war is due to the delay caused by the negligence
o f a party, the principle o f frustration cannot be relied upon.
(3) Failure o f one o f the objects
When there are several purposes for which the contract is entered into, failure o f one
o f the objects does not teiminate the contract. Thus, where a ship was chartered by
the defendant for two days for the purpose o f viewing the naval review and for a day’s
cruise round the fleet, but the review was cancelled, the defendant was held liable to
pay the hire amount (Herne Bay Steam Boat Co. v Hutton (1903) 2 KB 683).
(4) Completed transfers or Executed contracts
Sec. 56 covers cases o f executory (future) contracts only, and does not apply to
executed (present) contracts. Thus, in R aja Dhruv D ev v Raja Harm ohinder Singh
(AIR 1968 SC 1024) where there was a lease o f land for one year and the lessee was
given possession, the fact that the lessee could not work the land (for any crops) due
to partition o f the country was held not to attract Sec. 56, as it was the case o f a
completed transfer. The lessee’s action for the refund o f the rent was thus dismissed.
It has been held that if the transfer o f lease has not been made complete, the doctrine
o f frustration would apply.
Where a tenant was initially evicted but later on granted p ossession by the
court; meanwhile, the municipality demolished the tenanted building and thus the
landlord pleaded frustration, it was held that the contract o f lease had not b eco m e
impossible o f performance because the landlord could reconstruct the prem ises (Amir
Chand v Chuni Lai A IR 1990 P & H 345).
In K. J. C oal Co. Ltd. v Mercantile Bank (AIR 1981 Cal 418), the Mercantile
Bank had advanced a huge amount o f money to K. J. Coal Co. through overdraft.
Thereafter the coal company was nationalized. In an action to recover back the loan,
the company pleaded non-liability to pay on the ground o f frustration o f contract in
view o f nationalization o f company. H eld that such change in the management
simpliciter cannot amount to supervention o f an event frustrating the contract.
9. QUASI-CONTRACT
Sections 68 to 72 deals with “certain relations resembling those created by contract”.

It incorporates those obligations which are known as “Quasi-Contracts” or “Constructive
Contracts” under English law. It covers cases were the obligation to pay arises neither
on the basis o f a contract nor a tort, but because a person has obtained an unjust
L a w ot Contract 55
benefit at the cost o f another. The principle o f ‘natural ju stice and equity’ is thus the
determining factor in such obligations.
The quasi-contractual obligations are based on the principle that law as w ell as
ju stice should try to prevent unjust enrichment, i.e. enrichment o f one person at the
cost o f another [Lord Mansfield in M oses v Macferlcm (1760) 2 Burr 1005] o r to
prevent a man from retaining the m oney of, or som e benefit derived from, another
which it is against con scien ce that he should keep.
Supply o f N e cessa rie s

M in or’s agreement bein g void ab initio, he cannot therefore, as a general rule, be
asked to pay for the services rendered or g o o d s supplied to him. Sec. 68, however,
permits reimbursement to a person, w ho supplies “necessaries" to a minor or a lunatic
person. For reimbursement n o personal action can lie against the minor, etc., but
reimbursement is permitted from the property or estate o f such incapable person.
W h a t are Necessaries?
N ecessaries d oe s not mean bare necessities o f life (e.g. food, cloth, shelter, etc.), but
means such things as may be necessary to maintain a person ‘according to his conditions
in life’ (i.e. his status and requirements). A rticles o f mere luxury are always excluded,
though luxurious articles o f utility are in som e cases allowed. The infant must not
have already a sufficient supply o f the necessaries.
The follow ing have been held to b e ‘necessaries':
- Supply o f racing cy cle for an infant apprentice
- Debt incurred for perform ing the funeral rites o f m inor’s father
- H ouse given to a m inor on rent for living and continuing his studies
- W edding presents for a bride o f m inor
- M oney advanced for defending criminal proceedin gs
But where a minor is engaged in trade, contracts entered into by him for trading
purposes are not for necessaries and are not binding on him. It may h e noted that the
necessaries may be supplied to som eon e w hom the m inor is legally bound to support,
such as his w ife and children.
P aym ent by an In terested P erson >

A person w ho is interested in the payment o f money, w hich another is bound b y law
*o pay, and w ho therefore, pays it, is entitled to b e reimbursed by the other. For
.-xample, where a party had agreed to purchase certain mills, he w as allow ed to
recover from the seller the amount o f already overdue municipal taxes paid by him
in order to save the property' from being so ld in execution.
The conditions o f liability under Sec. 69 are:

(i) The plaintiff should be interested in making the payment. It is not
necessary' that he should have a legal proprietary interest in the property
in respect o f which the payment is made.
(ii) The plaintiff h im self should not be bound to pay. H e should only be
interested in m aking the payment in order to protect his ow n interest.
(iii) The defendant should be under legal com pulsion to pay.

(iv) The plaintiff should have made the payment to another person and not
to himself.
Liability to Pay for N on-G ratuitous A ct

Three conditions must be satisfied before Sec. 70 can be invoked:
(1) a person should lawfully do something for another person or deliver
something to him;
(2) in doing the said thing or delivering the said thing he must not intend
to act gratuitously; and
(3) the other person for whom something is done or to w hom something is
delivered must enjoy the benefit thereof.
Illustrations: (a) A, a tradesman, leaves g oo d s at B ’s house by mistake. B treats
good s as his own. He is bound to pay A for them.
(b) A save B ’s property from fire. A is not entitled to compensation from
B i f the circumstances show that he intended to act gratuitously.
Similarly, where a coolie takes the luggage at the railway station without being
asked by the passenger or a shoe-shiner starts shining shoes o f the passenger without
being asked to do so, and i f the passenger does not object to that, then he is bound
to pay reasonably for the same as the work w as not intended to be gratuitous.
In cases falling under Sec. 70, the person doin g something for another cannot
sue for specific performance, nor ask for damages for breach, as there is no contract
between the parties. All that Sec. 70 provides for is that i f the services or g o o d s are
accepted a liability to pay arises.
The person for whom the act is done is not bound to pay unless he had the
choice to reject the services. It is only where a person voluntarily accepts the thing
or enjoys the work done that the liability under Sec. 70 arises. Further, it is necessary
that services should have been rendered without any request. However, reasonable
compensation may be recovered for services rendered at request. Services rendered
to a person incompetent to contract (e.g. minor) at the time cannot be made the basis
o f an action under this section.
Sec. 70 applies even i f there is a non-compliance o f constitutional requirement
o f contracting with the State (viz. Art. 299 o f the Constitution). Thus, in State o f IV.
B. v B.K. Mondal & Sons (AIR 1962 SC 779), the plaintiff made certain constructions
at the request o f an officer o f State. The State accepted the work but refu sed to pay
pleading that there was no valid contract. The Court held in favour o f the plaintiff.
Similarly, in another case, the corporation tried to escape liability on the g ro u n d that
the contract was not made in accordance with B om bay Municipal C orp oration Act.
The Corporation was held liable under Sec. 70.
Finder o f G o o d s
A person, who finds g o o d s belonging to another and takes them into his cu stody, is
subject to the same responsibility as a bailee (Sec. 71).
Law o f Contract 57
Mistake o r C o e r c io n
A person to whom m oney has been paid, o r anything delivered, by mistake or under
coercion, must repay or return it (Sec. 72).
Illustrations: (a) A and B join tly o w e Rs. 100 to C. A alone pays the amount to C,
and B, not knowing this fact, pays Rs. 100 over again to C. C is bound to repay the
amount to B.
(b) A railway com pany refuses to deliver up certain g o o d s to the consignee,
except upon the payment o f an illegal charge for carriage. The con signee pays the
sum charged in order to obtain the goods. H e is entitled to recover so much o f the
charge as was illegally excessive.
In Sales Tax Officer v Kanhaiya Lai S a r a f (AIR 1959 SC 135), it has been held
that the m oney paid under mistake is recoverable whether the mistake be o f fact or
o f law. And the term ‘mistake’ has been used without any limitation under Sec. 72.
In this case, a certain amount o f sales tax w as paid b y a firm under the U.P. Sales Tax
laws on its forward transactions. Subsequently to the payment the Allahabad High
Court ruled the levy o f sales tax on such transactions to be ultra vires. The firm
sought to recover back the tax money. The Supreme Court allow ed it. The court
observed: Payment ‘by mistake' in Sec. 72 must refer to a payment w hich was not
legally due and which could not have been enforced; the ‘mistake’ is thinking that the
m oney paid was due when, in fact, it was not due.
In Tilok Chand M oti Chand v Commr. o f Sales Tax (AIR 1970 S C 898), a firm
paid sales tax in respect o f sales to consumers outside the State o f Bom bay and which
were, therefore, not liable to any sales tax. The firm had itself collected the tax money
from its customers. The amount was ordered to be refunded to the customers. The
firm paid back the amount, however, the A ct under which the recovery was made
from the firm w as declared to be ultra vires. The firm sought to recover back the
m oney as having been paid under either mistake o f law or coercion. The Supreme
Court held that the firm did not suffer from any “m istake" under Sec. 72. The court,
however, held that the payment was m ade under coercion and w ould have been
recoverable under Sec. 72.
IO. REMEDIES FOR BREACH OF CONTRACT
A ‘breach o f contract’ occurs when-

(i) a party renounces his liability' under the contract, or
(ii) by his ow n act makes it im possible that he should perform his obligations
under the contract, or
(iii) totally or partially fails to perform his part o f the contract.
The law tries to giv e an appropriate remedy for every type o f breach. But even
so the maxim ubi ju s ibi remedium (‘where there is a right, there is a rem edy’) is not
wholly true. There are cases, for example, where a contract has been broken and the
plaintiff has suffered no loss, according to a few decisions o f the Suprem e Court,
damages would not be allowed.
The remedies for breach o f contract are: R escission and Dam ages; S pecific
Performance and Injunction; and, Quantum Meruit.
[A] D am ages for Breach

It is the most common remedy. The party who is injured by the breach o f a contract
may bring an action for damages. ‘Damages' means compensation in terms o f m oney
for the loss suffered by the injured party. Applying to the court for ‘rescission o f the
contract’ is necessary for claiming damages for breach. However, in certain cases a
suit for ‘rescission’ may be filed even when no damages are to be claimed.
In every case o f assessment o f damages, there are two problems: (1) Rem oteness
o f damage, and (2) Measure o f damages.
(I) Remoteness o f Damage

Theoretically the consequences o f a breach may be endless (e.g. loss o f profits, loss
o f social prestige and o f business reputation), but there must be an end to liability.
The defendant cannot be held liable for all that follow s from his breach. In other
words, the compensation is not to be given for any remote or indirect loss or damage
sustained by reason o f the breach.
The decision in Hadley v Baxendale (1854) 9 E x 341, laid dow n two rules:
(i) General damages- those which arise naturally in the usual course o f
things from the breach itself. This rule is ‘objectiv e’ as it makes the
liability to depend upon a “reasonable man’s foresight” o f the loss that
will naturally result from the breach.
(ii) S pecial damages- those w hich arise on accoun t o f the un usual
circumstances affecting the plaintiff. They are not recoverable unless the
special circumstances are brought to the knowledge o f the defendant so
that the possibility o f the special loss was in the “contemplation o f the
parties”. This rule is ‘subjective’ as the extent o f liability depends upon
the actual knowledge o f parties at the time o f the contract about the
likely result o f breach.
In Heron II, Koufos v Czarnikow Ltd., (1967) 3 All ER 686, the decision also
laid emphasis upon the “contemplation o f the parties”, as laid down in H adley case.
In Hadley case, the plaintiff’s mill had been stopped due to the breakage o f a crankshaft.
The defendants, a firm o f carriers, were engaged to carry the shaft to the manufactur ers.
The plaintiff’s servant told the defendants that the mill was stopped, and that the shaft
must be sent immediately. But the defendants delayed the delivery. The action was
brought for the loss o f profits arising out o f the delay. The defendants w ere held not
liable for the loss o f profits, as the fact that the mill was out o f action fo r the want
o f shaft was a ‘special circumstance’ affecting the plaintiff’s mill and the sam e should
have been pointed out to the defendants in clear terms.
In British Columbia Saw Mills v Nettleship (1868) LR 3 CP 499, also, lack o f

knowledge o f special circumstances once again prevented recovery o f special damages.
The court gave an illustration: “I f a banister on his way to practice at the Calcutta
Law o f Contract 59
Bar, where he may have a large number o f briefs awaiting him, got stranded in the
Suez boat through the default o f Peninsular and Oriental Company, is the com pany
to be responsible for that, because they happened to know the purpose for w hich the
traveller w as goin g?”
In Simpson v London & North Western Railway Co. (1876) 1 Q B D 274, held that
if the special circumstances are already within the knowledge o f the party breaking the
contract, the formality o f communicating them to him may not be necessary. The plaintiff
was in the habit o f exhibiting samples o f his implements at cattle shows. H e delivered
his samples to the defendant company for consignment to the show ground at N ew
Castle. The consignment note said: “must b e at N ew Castle on Monday certain”.
Due to defendant’s negligence, the g o o d s reached the destination only after the
exhibition was over. It was held that since the defendant com pany was having the
know ledge o f the special circum stances that the plaintiff’s g o o d s were bein g sent for
the N ew Castle show, they were liable for the lo ss o f profits resulting from the late
arrival o f goods. However, in M adras Railway Co. v G ovinda Rau (1898) 21 M ad
172, such dam ages were not allow ed as the ‘special p u rp ose’ was not communicated.
S e ctio n 73, C o n tr a c t A ct
Com pensation f o r loss o r dam age ca u sed by breach o f contract- "W hen a contract
has been broken, the party w ho suffers by such breach is entitled to receive, from the
other party w ho has broken the contract, com pensation for any loss o r dam age caused
to him thereby, which naturally arose in the usual course o f things from such breach,
or which the parties knew, when they m ade the contract, to be likely to result from
the breach o f it.
Such com pensation is not to be given for any rem ote and indirect lo ss or
damage sustained by reason o f the breach.”
Thus, Sec. 73 is declaratory o f the com m on law as to dam ages (i.e. rule o f
H adley v Baxendale). The section also provides that the sam e p rinciples w ill apply
in relation to breach o f a quasi-contract.
Illustration (i) (D elay cau sed by carrier)- A delivers to B, a com m on carrier, a
machine, to be conveyed without delay, to A’s mill, inform ing B that his m ill is
stopped for want o f the machine. B unreasonably delays the delivery o f machine, and
A in consequence, loses a profitable contract with the Government. A is entitled to
receive from B, by way o f compensation, the average amount o f profits w hich w ould
have been made by the w orking o f the m ill during the time that delivery o f it w as
delayed, but not the loss sustained through the lo ss o f the Governm ent contract (This
illustration is a H adley v Baxendale module). A is entitled to profit as A has brought
to the know ledge o f B the ‘special circum stance’ affecting him i.e. m ill is stop p ed for
want o f machine. A is not entitled to lo ss sustained through the lo s s o f Governm ent
contract as this fact was not brought to the kn ow ledge o f B.
In D om inion o f India v A ll India R eporter Ltd. (AIR 1952 N ag 32), the lo s s
by railways o f three volum es o f a set o f b o o k s without which the set o f 8 volu m es
becam e useless, recovery allow ed only for the lost volumes. Sin ce the fact that the
loss o f three volum es w ould render the w hole set useless w as not brought to the
know ledge o f the defendant, the value o f w hole set cou ld not be claimed.
Illustration (n) to Sec. 73 reads: A contracts to pay a sum o f m oney to B on a sp ecific

day. A does not pay money on that day. B, in consequence o f not receiving the m oney
on that day, is unable to pay his debts, and is totally ruined. A is not liable to make
g oo d to B anything except the principal sum he contracted to pay, together with
interest upto the date o f payment.
Loss o f Profits is a Special Loss
The loss o f profits, which were to accrue upon resale, cannot b e recovered unless it
is communicated to the other party that the g o o d s are for resale upon a special
contract.
Illustration (f) (knowledge o f resale, loss o f profit)- A, having contracted with B to
supply B with 1,000 tons o f iron at 100 R s./ ton, to be delivered at a stated time,
contracts with C for the purchase o f 1000 tons o f iron at 80 Rs./ ton, telling C that
he does so for the purpose o f performing his contract with B. C fails to perform his
contract with A, who cannot procure other iron, and B in consequence, rescinds the
contract. C must pay to A Rs. 20,000, being the profit, which A w ould have made
by the performance o f his contract with B.
Illustration (k) (Where no knowledge o f resale agreement, no more than market

difference recoverable)- A contracts with B to deliver to B, by a fixed day, for a
specified price, a machinery. On A’s failure to do so, B is obliged to procure another
piece at a higher price, and is prevented from performing a contract which B had
made with a third person at the time o f his contract with A (but which had not been
communicated to A), and is com pelled to make compensation for breach o f that
contract. A must pay to B the difference between the contract price o f the p iece o f
machinery and the sum paid by B for another, but not the sum paid by B to the third
person by way o f compensation
In almost all sale transactions, which fail to g o through, the normal yardstick
for working out the sum o f money to which the aggrieved party is entitled is the
difference between the contract and market/current price. Thus, i f A breaks his prom ise
to sell and deliver certain g oo d s to B, B is entitled to receive from A the difference
between the contract and market price o f goods.
(2) Measure o f Damages

Once the extent o f recoverable loss is determined, it has to be evaluated in terms o f
money. It may be noted that the fact that damages are difficult to assess d oe s not
prevent the injured party from recovering them.
(a) Damages are Compensatory, not Penal
Damages are compensatory in nature. The object o f awarding damages to the aggrieved
party is to put him in the same position in which he w ould have been i f the contract
had been performed. Motive for and the manner o f breach are not taken into account
because generally “punitive damages” are not recoverable for the breach o f contract.
Where the plaintiff suffered no loss the court may still award him nom inal
damages (small sum o f money) in recognition o f his right. However, Sec. 73 d o e s not
give any cause o f action unless and until damage is actually suffered. “I f actual loss
is not proved, no damages will be awarded.”
Law o f Contract 61
But the inconvenience caused by the breach may b e taken into account. Thus,
in Hobbs v L ondon & South-Western Rly. Co. (1875) LR 10 Q B 111, due to the
negligence o f the defendant railway company, the plaintiff and his family w ere set
down at a w rong station. Neither any nearby hotel accom m odation nor any conveyance
was available to them, and they had to walk several m iles in rain. The plaintiff's w ife
caught cold. The plaintiff was entitled to substantial dam ages for inconvenience to the
family. But, n o dam ages were awarded on account o f m edical expenses incurred for
treatment o f the p la in tiffs w ife and her loss due to pay-cut in office.
S om etim es the expenditure incurred by on e party to the contract before the

contract was entered into is wasted because o f breach o f contract by other party. Such
p re-con tract expenditure m ay b e re co v e re d as dam ages i f it w as within the
contemplation o f the parties. However, in such cases, the plaintiff can either claim for
his loss o f profits or his wasted expenditure. H e cannot claim both.
(b) Mental Pain and Suffering

The position today is that in every proper case dam ages for mental distress can be
recovered. Thus, in Westesen v Olathe State Bank (1925) 78 C o lo 217, the defendant,
a banking corporation, agreed to loan plaintiff m oney for a trip to California by
crediting his account with such sum s as he might need there. The plaintiff reached
California, but the defendant refused to giv e him the prom ised credit. The court
allow ed dam ages for humiliation and mental suffering.
Where a photographer failed to appear at wedding, as a result the bride had no
photographs o f her wedding, she was allow ed dam ages for the resulting injury to her
feelings. Similarly, the court allow ed dam ages when the hotel management cancelled
the contract two days before the w edding and the plaintiff was forced to organize only
a sim ple function for his only daughter’s w edding reception (H otson & H otson v
Payne (1988) CLY 1047). In R aj Kishore v B in od (AIR 1989 Pat 111) there was a
contract to purchase an American car, which the seller failed to supply. T he court
allow ed com pensation for pain and agony.
(c) Exemplary or Vindictive Damages
These are awarded with a view to punishing the guilty party for the breach and not by
way o f compensation. Thus these damages have no place in the law o f contract. There
are, however, certain exceptional cases, viz. breach o f a contract to marry, dishonour o f
a cheque by a banker when there are sufficient funds to the credit o f the customer.
(d) Duty to Mitigate
Explanation to Sec. 73 says: In estimating the loss or dam ages arising from a breach
o f contract, the means, which existed o f rem edying the inconvenience caused by the
non-performance o f the contract, must b e taken into account.
Thus, the injured party has to make reasonable efforts to avoid the losses
resulting from the breach s o that his loss is kept to the minimum. The onus o f p ro o f
is on the defendant to show that the plaintiff has failed in his duty o f mitigation and
the plaintiff is free from the burden o f proving that he tried his best to mitigate the
loss. The loss to be ascertained is the loss at the date o f the breach o f contract. If
at that date the plaintiff could do something to mitigate the damage, the defendant is
entitled to the benefit o f it. However, the rule in regard to mitigation must be applied
62 Law G u id e for C om p e titiv e E xa m in a tion s
w ith d iscretion and a m an w h o has already put h im s e lf in the w ron g b y brea k in g h is

con tract has n o right to im p o se n ew and extraordinary duties o n the a g g riev ed party
( P ollock and Mulla).
T h e m ost frequent application o f this rule takes p la ce in contracts for sale o r
purchase o f goods. O n the buyer's refusal to take delivery, the seller co u ld resell the
g o o d s at the prevailing market price. I f the seller d o e s not resell the g o o d s and his lo s s
is aggravated b y the falling market, he cannot re co v e r the enhanced loss. Similarly,
w here the seller refuses to p erform the contract, the bu yer sh ould bu y the g o o d s i f they
are available from any alternative sou rce and cannot re co v e r any further lo ss that m ay
b e due to his o w n n eglect [Jamal v M o ot a D a w o o d S o n s & Co. (1916) 43 IA 6],
L iq u id a te d D a m a g e s
S om e tim e s the parties to a contract, at the lim e o f m ak in g the contract, a g re e d to the
am ount o f co m p e n sa tio n paya ble in the event o f the breach o f contract. S u ch amount,
w h ich has b e e n a g re e d beforehand, m ay b e eith er liquidated d a m a ges o r penalty. I f
the su m to b e paid o n the brea ch o f contract is the gen u in e pre-estim ate o f the
p r o sp e ctiv e dam ages, it is kn ow n as liq u id a te d dam ages. I f such sum is e x c e s s iv e and
h igh ly d isp ro p o rtion a te to the lik ely loss, viz. the am ount is fix e d in terrorem , with
a v ie w to d isco u ra g in g breach o f contract, it is kn ow n as penalty. ‘P enalty’ as a rule
is n ev er aw arded as d a m a ge in the la w o f contract (dam age w ill then b e ca lcu la ted
a c c o r d in g to the ordin ary prin ciples); w h ile the w h o le o f liq u id ated d a m a g e is
reco v e ra b le (English law).
T h e stipulation con ta in ed in a contract, w h ich s p e c ify the d a m a g es o r p en a lties
to b e p a id b y the party in breach to the other party, reflects g o o d b u sin ess s e n s e and
is advan tageous to both parties. In D u n lo p P n eu m atic Tyre Co. Ltd. v N ew G a r a g e
& M o to r Co. Ltd. (1915) A C 79, the court laid d o w n that the e x p re ssio n u se d b y the
parties is n ot con clu siv e. T h e cou rt m ust find out w hether the paym en t stip u lated is
in truth a penalty o r liquidated dam ages.
A n illustration o f ‘liquidated dam ages' is D u n lo p P n eu m a tic Tyre Co. case, in
w h ich a m anufacturer o f tyres su p p lied a quantity o f tyres on the co n d itio n that they
w o u ld n ot b e s o ld b e lo w the list p ric e s and that liq u idated dam ages, n ot penalty, o f
£ 5 w ou ld b e p a y a b le fo r ev e ry tyre s o ld in breach o f the agreem ent. H e ld that the
stipulated sum w as intended to b e gen u in e co m p e n sa tio n fo r the lo s s suffered, and
thus liqu idated dam ages.
A n illustration o f ‘penalty’ is F o r d M o to r Co. v A rm stron g (1915) 31 T L R 267,
in w hich the defendant, a retailer, re ce iv e d from the plaintiffs, su p p lies o f cars and parts
and agreed not to sell any item b e lo w the listed price. A sum o f £ 250 w as p a ya ble for
every breach as “agreed d am ages” . H eld that the sum fix ed w as penalty as it m ight
happen that a part s o ld in breach w as o f le sse r value than the d a m a ges payable. T h e
sum b o re n o relation with the d e g re e o r extent o f breach. Similarly, w here two-third o f
the price w as m ade payable in the event o f a default, it w a s h eld to b e penalty.
S e c t io n 74, C o n t r a c t A c t
S ectio n 74 o f the Indian C ontract A ct lays d o w n a slig h tly differen t rule:
C o m p en sa tion f o r brea ch o f co n tra ct w here p e n a lty stip u la te d fo r - W h en a con tra ct

Law o f C ontract 63
has b een broken, i f a sum is nam ed in the contract as the am ount to b e p aid in case
o f su ch breach, o r i f the contract contains any other stipulation b y w ay o f penalty, the
party co m p la in in g o f the breach is entitled, whether or not actual dam age o r lo s s is
p ro v ed to have been cau sed thereby, to receiv e from the party w h o has broken the
contract reason able com pen sation not e x ce e d in g the amount s o nam ed or, as the case
m ay be, the penalty stipulated for.
E xplanation- A stipulation for increased interest from the date o f default m ay b e a
stipulation b y w ay o f penalty. It m ay b e n oted that unless the parties have m ade a
stipulation for the payment o f interest, o r there is a usage to that effect, interest cannot
b e re co v e re d lega lly as dam ages, generally speak in g (Afahabir P ra sa d v D u rga Datta
A IR 1961 S C 990).
Illu stration (a)- A contracts with B to pay B Rs. 1000 i f he fails to pay B Rs. 500
on a g iv en day. A fails to pay B Rs. 500 o n that day. B is entitled to recov er from
A su ch com pen sation , not e x ce e d in g Rs. 1000. as the court con sid ers reasonable.
Illu stration (e)- A, w h o o w e s m on ey to B, a m oney-lender, undertakes to repay him
by deliv erin g to him 10 m ou n ds o f grain on a certain date, and stipulates that, in the
event o f his not deliverin g the stipulated am ount by the stipulated date, he shall be
liable to deliv er 20 mounds. T h is is stipulation b y w ay o f penalty and B is only
entitled to reason able com pen sation in ca se o f breach.
C o m p a riso n with E n glish law- Sec. 74 dispen ses with the requirement o f distinguishing
liquidated dam ages from penalty. Further, unlike English law where the court must
either a ccep t the amount in w h ole o r reject it in whole, the court m ay either accept the
amount or reduce it to what appears reasonable. The named sum constitutes the maximum
limit o f liability. T he court cannot order dam ages beyon d that. Further, the actual loss
o r dam age suffered by the party is immaterial. Thus, even if the actual loss ex ce e d the
liquidated dam ages, the dam ages payable w ill not ex ce e d the stipulated sum.
H ow ever, like the E n glish law, under Sec. 74 the amount contem plated by the
patties w ill b e red u ced only i f it appears to b e b y w ay o f ‘penalty'. O therw ise the
w h ole o f it is recoverable as liquidated damages. Further, by providing for com pensation
in ex p re ss term s the right to cla im d am ages under the general law is n ecessarily
excluded. Thus, excep tion to Sec. 74 p ro v id es that w hen any p erson enters into any
bail-bond, recogn iza n ce, etc., o r under the p ro v isio n s o f any law o r under the
G ov ern m en t’s order, g iv e s any b o n d for the perform ance o f any p u b lic duty/ act, he
shall b e liable to pay the w h ole sum m en tioned therein up on breach o f the con d ition
o f any su ch instrument.
F o rfe itu re o f E a rn e st M o n e y o r D e p o sit
Today, m any com m ercia l contracts in volve either ‘earnest m on ey ’ o r ‘security d ep osit’
as a way o f ensuring the prom isor's seriousn ess tow ards the contract. In the application
o f Sec. 74 to forfeiture clause in the contract, a distinction has been drawn betw een
earnest m on ey and security deposit. T h e essen ce o f the distinction is the fact that earnest
m on ey is part paym ent o f the purchase p rice w hile security deposit is not. A s a general
rule, the rule o f forfeiture applies to earnest m on ey but not to security deposit.
In M a n ia Bux v U nion o f In dia (1969) 2 S C C 554, the plaintiff con tracted to
su p ply to M ilitary Headquarters with potatoes, e g g s and fish for on e year and deposited
Rs. 18,500 for due p erform a n ce o f the contract. O n breach o f the contract, the
G overn m en t forfeited the am ount d e p o s ite d b y the plaintiff. T h e S u p re m e C o u rt in

this ca se laid d ow n that the forfeiture o f earnest m o n e y un der a co n tra ct o f sale, i f
the amount is reason able d o e s n ot fall w ithin Sec. 74 (as it d o e s n o t am ount to
im p o sin g a penalty). B ut i f forfeiture is o f the nature o f penalty i.e. am ount t o b e
forfeited is unreasonable, Sec. 74 applies.
In Shree H anum an C o tton M ills v Tata A ircraft Ltd. (A IR 1970 S C 1986), it
w as h eld that i f a contract requ ires the bu yer to d e p o s it 2 5 % o f th e total value o f the
g o o d s as earnest m on ey w h ile p la cin g the order, w ith a stip u lation that the am oun t
shall b e forfeited in ca se o f default in p aym en t o f p rice, the term is reason ab le and
bin din g on the parties.
It m ay b e n oted that Sec. 74 c o m e s in to o p era tion o n ly w h en there is a ‘b r e a ch ’
o f contract. A ‘d isch a rg e ’ o f contract, on th e oth er hand, n e c e ss a r ily p re su m e s
termination o f contract b y o peration o f la w an d n ot b y breach. T h u s earnest m o n e y
can n ot b e forfeited i f the con tract has b e e n d isch a rg e d b y frustration.
[B] S p e c ific P e r fo r m a n c e a n d In ju n c tio n

S p e c ific p erform a n ce is an equ itable r e lie f g iv e n b y the courts, under the S p e c if ic
R e lie f Act, requirin g the defendant to actually o r exactly p erform the contract a cc o rd in g
to its term s and stipulations.
T h e courts issu e a d e cre e for s p e c ific p erform a n ce o n ly w here it is ju s t and
equitable s o to d o i.e. w here the le ga l re m e d y is inadequate o r in effective. S p e c if ic
p erform an ce is not granted w here m onetary co m p e n sa tio n is an a dequ ate relief, o r
w here the court cannot su p ervise the actual e x e cu tion o f the con tract (viz. a b u ild in g
con stru ction contract), o r w here the contract is fo r p erson al se r v ice s (viz. a con tra ct
to paint a picture). S p e c ific p erform a n ce is usually granted in con tracts w ith lands,
buildin gs, rare articles and un ique g o o d s h avin g s o m e sp e cia l valu e to the party suing.
A n injunction restrains the other party from m ak in g a breach o f the contract. It
is a lso issu ed under the S p e c ific R e lie f Act. It is a preven tiv e r e lie f and is a p p rop ria te
in ca se s o f ‘anticipatory breach o f con tract’ w h ere d a m a g es w ou ld n ot b e an a d eq u a te
relief. It secu res the s p e c ific p erform a n ce o f the n ega tiv e term s o f the con tract (i.e.
w here a party is d o in g som eth in g w h ich he p ro m ise d not to do). In con tra cts fo r
person al services, an injunction is gran ted in p la c e o f s p e c ific perform ance.
[C] Q u a n tu m M eru it
It literally m eans “as m uch as is earn ed” o r “in p ro p o rtio n to the w ork d o n e ” . It is
an o b lig a tion o r debt im p o se d b y o p era tion o f law w h ich arises in the d efen d a n t
having taken the ben efit o f the w ork done, g o o d s su p p lied o r ser v ice s rendered. W h en
the injured party has p erform ed a p a r t o f h is o b lig a tio n under the contract b e f o r e the
breach o f contract has occurred, h e is entitled to re co v e r the value o f what h e h as
done, under this remedy. T h e party in default cannot su e upon quantum m eruit.
It is an action w hich is alternative to an action for the breach o f contract. W h e r e
the injured party, desp ite a breach b y the oth er party, co m p le te d the w ork u n d e r th e
contract, this action w ill not lie. T h is action in e sse n ce is on e o f restitution, p u ttin g
the party injured by the breach o f con tract in a p o sitio n in w h ich he w ou ld h a v e b e e n
had the contract not been entered into.
Law o f C ontract 65
In P la n c h e v C o lb u r n (1831) 8 B in g 14, the defen dan ts co m m e n c e d the

p u b lica tio n o f a p e rio d ica l entitled 'Juvenile Library1. T h e p la in tiff w as e n g a g e d to
w rite a v o lu m e o n C o stu m e and A n cien t Arm our, and h e w a s to b e p a id £ 100 o n the
co m p le tio n o f the jo b . A fter the p la in tiff had already c o lle c te d the m aterial and
written a part o f the b o o k the defendants discon tin ued the publication o f the periodical.
It w a s h eld that the origin a l con tract h avin g b een disch a rged b y the breach o f contract
b y the defendants, the p la in tiff w a s en titled to re co v e r £ 50 b y w a y o f rem uneration
fo r the part o f the j o b he has already p erform ed.
T h e real nature o f the re m e d y is quast-contractual. T h e rem edy has, therefore,
b e e n h eld to b e av ailab le w hen the w ork has b e e n d o n e b y the p lain tiff un der a v o id
agreem ent. T h o u g h the rem ed y is in dep en den t o f contract, but the contract, i f any,
shall n ot b e w h o lly irrelev a n t Thus, w h ere a sh ip w a s d e liv e re d for repair and the
contract u se d m o re e x p en siv e m aterial than that auth orised b y the co n tr a ct h e c o u ld
n ot r e c o v e r under the con tract b e ca u se h e had n ot carried it ou t precisely, n or under
gwas/'-contract, b e ca u se the oth er party had n o ch a n ce to re je ct the ex p en siv e material
[Farm an & Co. L td v The L id d e sd a le (1900) A C 190 PC].

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Chapters

3. Factors Vitiating Consent 23

legally binding agreement). An agreement becom es a contract when the follow in g

(1) There is some consideration for it

(2) The parties are competent to contract.

(3) Their consent is free.

(4) Their object is lawful.

(7) The agreement must be capable o f performance (Sec. 56).

Intention to C reate a Legal O bligation

Test o f contractual intention is objective, not subjective. M erely b eca u se the

Kinds o f C o n tra cts

(A) From the point o f view o f Enforceability

(B) From the point o f view o f M od e o f Creation

(iii) Constructive or quasi-contract- Such a contract does not arise by virtue

(C) From the point o f view o f the Extent o f Execution

Standard Form C on tract

2. BASIC ELEMENTS OF A CONTRACT

[I] O ffer (Proposal)

(A) Communication o f A cceptance

(2) When communication not necessary - In all cases o f general offers

(5) Mode o f communication - Sec. 7 provides that acceptance has to be

When the acceptance is by telep h on e o r telex (i.e. direct/

(B) Absolute and Unqualified A cceptance

(A) Revocation o f Proposal

(2) Lapse o f tim e

(3) By failure to fu lfill a condition precedent

W here the offer is subject to a condition precedent, it lapses i f it is accepted without

(4) By death o r insanity o f offeror

(B) Revocation o f A cceptance

(A) At the Desire o f the Promisor (Promissory Estoppel)

(B) Promisee or Any O ther Person

Exceptions to Privity Rule

(2) Marriage settlement. Partition or other Family arrangem ents - Where

(C) Has D one o r Abstained from D oing

(D) Such Act, Abstinence or Promise is called Consideration

Consideration Must be Real a n d N o t Illusory

W here consideration is physically im possible, illegal, uncertain or illusory, it is not

Perform ance o f Existing Duties

E x cep tion s t o C on sid e ra tio n

Exception I. Natural Love and A ffection

Exception 2. Past Voluntary Service

Exception 3. Time-barred Debt

[IV] Capacity to C on tract

(1) No Estoppel against Minor

(2) No Liability in Contract o r in Tort arising out o f Contract

(3) Doctrine o f Restitution

(i) If an infant obtains property or g oo d s by misrepresenting his age, he can

o f a party thereto (i.e. minor g o e s to the court as p lain tiff for

Beneficial C on tra cts

minor, while carrying on business, enters into a trade contract such

(vii) A minor is bound by the contract o f apprenticeship under the Indian

Ratification o f the Minor's A g r e e m e n t

Persons o f Unsound Mind

3. FACTORS VITIATING CONSENT

(3) fraud (Sec. 17), or

(5) mistake, subject to the provision s o f Secs. 20, 21 and 22.

Examples o f No free consent

(i) A threatens to shoot B, if B does not agree to sell his property to A at

Duress under English Law

Under Common law, duress consists in actual violence or threat o f violence to a

Relations which involve Domination

Presumption o f Undue Influence (Unconscionable bargains)

An ‘unconscionable bargain’ is one as no sane man, not setting under a delusion,