LAWgistics

INTRODUCTION TO CONTRACT NATURE OF CONTRACT
The law of contract is that branch of law which determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. Its rules define the remedies that are available in a court of law against a person who fails to perform his contract, and the conditions under which the remedies are available. The law of contract introduces definiteness in business transactions. The Indian Contract Act, 1872 The law relating to contracts is contained in the Indian Contract Act, 1872. The Act deals with – (1) The general principles of the law of contract. (2) Some special contracts only. Nature of the law of contract The law of contract differs from other branches of law in an important respect. It does not lay down a number of rights and duties which the law will enforce; it consists rather of a number of limiting principles, subject to which the parties may create rights and duties for themselves which the law will uphold. The parties to a contract, in a sense, make the law for themselves. So long as they do not infringe some legal prohibition, they can make what rules they like in respect of the subjectmatter of their agreement, and the law will give effect to their decisions. Definition of Contract A contract is an agreement made between two or more parties which the law will enforce. Sec. 2(h) defines a contract as an agreement enforceable by law. Every agreement and promise enforceable at law is a contract.

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AGREEMENT AND ITS ENFORCEABILITY Contract = Agreement + Enforceability by law An agreement is defined as “every promise and every set of promises, forming consideration for each other.” A promise is defined thus: “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. This, in other words, means that an agreement is an accepted proposal. In order, therefore, to form an agreement, there must be a proposal or offer by one party and its acceptance by the other. Agreement = Offer + Acceptance. Consensus ad idem The essence of an agreement is the meeting of the minds of the parties in full and final agreement. There must, in fact, be consensus ad idem. This means that the parties to the agreement must have agreed about the subject-matter of the agreement in the same sense and at the same time. Unless there is consensus ad idem, there can be no contract. Example: A, who owns two horses named Rajhans and Hansraj, is selling horse Rajhans to B. B thinks he is purchasing horse Hansraj. There is no consensus ad idem and consequently no contract. Obligation An agreement, to become a contract, must give rise to a legal obligation or duty. The term ‘obligation’ is defined as a legal tie which imposes upon a definite person or persons the necessity of doing or abstaining from doing a definite act or acts. Example: A agrees to sell his car to B for Rs. 10,000. The agreement gives rise to an obligation on the part of A to deliver the car to B and on the part of B to pay Rs. 10,000 to A. This agreement is a contract.

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ESSENTIAL ELEMENTS OF A VALID CONTRACT According to Sec. 10, all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not expressly declared to be void. In order to become a contract, an agreement must have the following essential elements: 1. Offer and acceptance: There must be two parties to an agreement, i.e., one party making the offer and other party accepting it. The terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the offeror. 2. Intention to create a legal relationship: When the two parties enter into an agreement, their intention must be to create legal relationship between them. If there is no such intention on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationship; as such they are not contracts. 3. Lawful consideration: An agreement to be enforceable by law must be supported by consideration. ‘Consideration’ means an advantage or benefit moving from one party to the other. In simple words, it means ‘something in return’. The agreement is legally enforceable only when both the parties give something and get something in return. Consideration need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing something) or promise to do or not to do something. It may be past, present or future. But it must be real and lawful. 4. Capacity of parties-competency: The parties to the agreement must be capable of entering into a valid contract. Every person is competent to contract if he(a) is of the age of majority, (b) is of sound mind, and (c) is not disqualified from contracting by any law to which he is subject. 5. Free and genuine consent: It is essential to the creation of every contract that there must be free and genuine consent of the parties to the agreement. The consent of the parties is said to be free when they are of the same mind on all the material terms of the contract.

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6. Lawful object: The object of the agreement must not be (a) illegal, (b) immoral, or (c) opposed to public policy. If an agreement suffers from any legal flaw, it would not be enforceable by law. 7. Agreement not declared void: The agreement must not have been expressly declared void by law in force in the country. 8. Certainty and possibility of performance: The agreement must be certain and not vague or indefinite. Example: A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. 9. Legal formalities: A contract may be made by words spoken or written. As regards the legal effects, there is no difference between a contract in writing and a contract made by word of mouth. It is, however, in the interest of the parties that the contract should be in writing. CLASSIFICATION OF CONTRACTS 1. Classification according to validity. Voidable contract. An agreement made which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. When the consent of a party to a contract is not free, the contract is voidable at his option. [Sec. 2 (i)]. Example: A promises to sell his car to B for Rs. 2,000. His consent is obtained by use of force. The contract is voidable at the option of A. He may avoid the contract or elect to be bound by it. Void agreement and void contract. Void agreement. An agreement not enforceable by law is said to be void. A void agreement does not create any legal rights or obligations. It is a nullity and is destitute of legal effects altogether. It is void ab initio. Void contract. A contract which ceases to be enforceable by law becomes void when it ceases to be. A contract, when originally entered into, may be valid and binding on the parties, e.g., a contract to import goods from a foreign country. It

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may subsequently become void, e.g., when a war breaks out between the importing country and the exporting country. Illegal agreement: An illegal agreement is one which transgresses some rule of basic public policy or which is criminal in nature or which is immoral. Unenforceable contract: An unenforceable contract is one which cannot be enforced in a Court of law because of some technical defect such as absence of writing or where the remedy has been barred by lapse of time. 2. Classification according to formation. Express Contract: If the terms of a contract are expressly agreed upon (whether by words spoken or written) at the time of formation of the contract, the contract is said to be an express contract. Implied Contract: An implied contract is one which is inferred from the acts or conduct of the parties or course of dealings between them. Example: there is an implied contract when, A gets into a public bus, Quasi Contract: Strictly speaking, a quasi-contract is not a contract at all. A contract is intentionally entered into by the parties. A quasi contract is created by law. It resembles a contract in that a legal obligation is imposed on a party who is required to perform it. Example: T, a tradesman, leaves goods at C’s house by mistake. C treats the goods as his own. C is bound to pay for the goods. 3. Classification according to performance. 1. Executed Contract: Executed means that which is done. An executed contract is one in which both the parties have performed their respective obligations. Example: A paints a picture of B and B pays for the same. 2. Executory Contract: Executory means that which remains to be carried into effect. An executory contract is one which both the parties have yet to perform their obligations. Example: A agrees to engage the services of B as his servant from next month.

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Bilateral Contract: Obligations on the part of both the parties to the contract are outstanding at the time of formation of the contract. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 6 .LAWgistics 3. Similar to executory contracts. Unilateral or one-sided Contract: Only one party has to fulfill his obligation at the time of the formation of the contract. the other party having fulfilled his obligation at the time of the contract. 4.

it is called as general offer. When the offeree accepts the offer. he is called the acceptor or promisee. This is known as implied offer. it is called specific offer. A mere making of an offer does not become a contract. General Offer: When an offer is made to the world at large. with a view to obtaining his assent for such act or abstinence”. proposer or promisor and the person to whom it is made is called the offeree or promisee. to carry passengers for a certain fare. when he “signifies to another his willingness to do or abstain from doing anything. Offer and its types – Express Offer: An offer may be made by express words. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 7 . Ordinarily it is the acceptance of the offer and intimation of that acceptance which results in a contract.LAWgistics OFFER AND ACCEPTANCE OFFER An offer is a proposal by one party to another to enter into a legally binding agreement with him. Such an offer is known as an express offer. A person is said to have made a proposal. An offer by the Transport Co. Implied Offer: An offer may also be implied from the conduct of the parties or the circumstances of the case. The person making the offer is known as offeror. spoken or written. Specific Offer: When an offer is made to a definite person. For example.

The communication of the proposal is complete when B receives the letter. “I will sell you a car”. A owns three different cars. ‘A’ proposes. is not an offer but merely an invitation to the public to make an offer to buy the goods at the marked price. 4. An acceptance of an offer. Example: An advertisement for a concert or an auction sale does not amount to an offer to hold such concert or auction sale. Offer must be made to obtain the assent of the party addressed and not merely with a view to disclosing the intention of making an offer. (b) An invitation to make an offer or do business: Display of goods by a shopkeeper in his window. An Offer may be distinguished from: (a) A declaration of intention and an announcement: A declaration by a person intending to do something gives no right of action to another. Offer must be such as in law is capable of being accepted and thus giving rise to legal relationship. A recognized exception to this is a general offer of reward to the public. Terms of offer must be definite. An offer to be complete must be communicated to the person to whom it is made. 2. For example. Offer must be made with a view to obtaining the assent. is not acceptance and does not confer any right on the acceptor. An offer must be such as would result in a valid contract when it is accepted. to sell a house to ‘B’ at a certain price. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 8 . 5. Example: A says to B. unambiguous and certain and not loose and vague. Newspaper advertisements are not offers. in ignorance of the offer. Such a declaration only means that an offer will be made or invited in future and not that an offer is made now. The offer is not definite. with prices marked on them. by letter. Offer must be communicated.LAWgistics Legal Rules as to Offer: 1. 3.

Merely stating of the price does not amount to an offer. In such a case. the offers are cross offers. Legal Rules as to acceptance. the offer would be considered as accepted. in ignorance of each other’s offer. 1. Acceptance may be express or implied.e. the Court will not construe one offer as the offer and the other offer as the acceptance and as such there can be no concluded contract.. it must conform to the offer. A statement of price is not an offer.and if you do not reply. Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance. It is well settled that both offer and acceptance must be based on three components- Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 9 . Acceptance of general offer: When an offer is made to world at large. must be absolute and unqualified in respect of all terms of the seller. in order to be binding. 5. “I will sell you my horse for Rs. Cross Offers: When two parties make identical offers to each other. whether material or immaterial. Who can accept? Acceptance of a particular offer: When an offer is made to a particular person. It is implied when it is to be gathered from the surrounding circumstances or the conduct of the parties. major or minor. spoken or written or by doing some required act.000/. I shall assume you have accepted the offer. any persons to whom the offer is made can accept it. it can be accepted by him alone and no one else.” There is no contract if B does not reply.LAWgistics 6. Thus a man cannot say that if acceptance is not communicated by a certain time. It is express when it is communicated by words. ACCEPTANCE A contract emerges from the acceptance of an offer. Example: A writes to B. An acceptance. The offer must be absolute and unqualified i. Acceptance is the act of assent by the offeree to an offer. 7.

If the acceptance is not according to the mode prescribed. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 10 . to whom the offer is made. It must be communicated to the offeror. If no such intention is present. Example: A tells B that he intends to marry C. It must be given by the party or parties. the acceptance must be communicated in some perceptible form. Example: A makes an offer to B and say – “if you accept the offer. It must be given before the offer lapses or before the offer is withdrawn. To conclude a contract between the parties. If the acceptance precedes an offer. There is no contract. or some usual and reasonable mode.LAWgistics certainty. It cannot be implied from silence. the acceptance must be given within that time. unless the offeree has by his previous conduct indicated that his silence means that he accepts. even if C is willing to marry A. It must be given within a reasonable time. where no mode is prescribed the offeror may intimate to the offeree within a reasonable time that the acceptance is not according to the mode prescribed and may insist that offer must be accepted in the prescribed mode only. 3. 9. The acceptance of an offer cannot be implied from the silence of the offeree or his failure to answer. It must be according to the mode prescribed or usual and reasonable mode. is not sufficient. when there is no external manifestation of the intention to do so. It will be a valid acceptance unless A informs B that the acceptance is not according to the mode prescribed. If any time limit is specified. 8. it must be given within a reasonable time. commitment and communication. If no time limit is specified. If any of the three components is lacking either in the offer or in acceptance it does not give rise to a valid contract. A mere resolve or mental determination on the part of the offeree to accept an offer. reply by wire”. It cannot precede an offer. B sends the reply by post. 2. 7. the acceptance is not valid. 4. 6. it is not a valid acceptance and does not result in a contract. It must show an intention on the part of the acceptor to fulfill terms of the promise. 5. but tells C nothing of his intention.

when it comes to the knowledge of the proposer.. when it comes to his knowledge. 2. Communication of revocation Revocation means ‘taking back’. The letter is posted on 10th July. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 11 . Example: A proposes. The communication of the offer is complete when B receives the letter.As against the person who makes it. so as to be out of the power of the acceptor.e. The communication of revocation is complete – . It reaches B on 12th July. ‘recalling’ or ‘withdrawal’. but not afterwards. Time for revocation of offer and acceptance.LAWgistics Communication of Offer. i. on 12th July. when it is put into a course of transmission to the person to whom it is made. It may be a revocation of offer or acceptance. Acceptance and its Revocation. by a letter. to sell a house to B at a certain price. Revocation of proposal: A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer. when it is put into a course of transmission to him. as against the acceptor. as against the proposer. -As against the person to whom it is made. When is communication complete? The communication of an offer is complete when it comes to the knowledge of the person to whom it is made. so as to be out of the reach of the power of the person who makes it. Communication of acceptance The communication of acceptance is complete – 1.

B accepts the proposal by a letter as against the acceptor.P. It would not be open to any party to deny its existence on the ground of it being only a general term -Estoppel- Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 12 . ----------------------------------------------------------------------------------------------------- Sec 2(a) (1989) 2 SCC 163 ABC Laminart Pvt.where parties transacted the business. The letter is posted on the 1st day of the month. it formed part of the agreement and the parties would be bound by it. For example: A proposes by a letter sent by post to sell his house to B. but not afterwards.Agencies Agreement. on the basis of that clause.Ltd v/s A.whether a particular clause formed part of the agreement or were merely general term. but not afterwards.LAWgistics Revocation of acceptance: An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor. held. inter aila.

“coercion” is said to be employed. 1860 or the unlawful detaining. It may proceed even from a stranger to the contract. i. Undue influence. or threatening to commit. ‘A’ knows what he is signing but his consent is not free. where it is caused by coercion. Where there is no consent.” All agreements are contracts if they are made by the consent of parties”. the contract is voidable at the option of the party whose consent is so obtained. any property. to the prejudice of any person whatever.. they agree upon the same thing in the same sense at the same time and their consent must be free and real. When consent is not free.e. Fraud. The contract in this case is voidable at his option. Coercion includes fear. Coercion is the committing. Example: ‘A’ is forced to sign a promissory note at the point of pistol.. there is no contract. any act forbidden by the Indian Penal Code. Misrepresentation and Mistake. The threat amounting to coercion need not necessarily proceed from a party to the contract. undue influence. COERCION When a person is compelled to enter into a contract by the use of force by the other party or under a threat. i. physical compulsion and menace to goods.LAWgistics FREE CONSENT It is essential to the creation of a contract that the parties have a consensus ad idem. with the intention of causing any person to enter into an agreement. or threatening to detain. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 13 . fraud or misrepresentation.e. Meaning of free consent Consent is said to be free when it is not caused by – Coercion.

Effect of coercion: When consent to an agreement is caused by coercion. doctor and patient. parent or child) with a view to obtaining his consent to the agreement. 2. Example: The relationship between master and servant. UNDUE INFLUENCE Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. Duress involves actual or threatened violence over the person of another (or his wife. The contract act says a person to whom money has been paid. This happens when a special kind of relationship exists between the parties such that one party is in a position to exercise undue influence over the other. the near equivalent of the term “coercion” is “duress”. Where a person holds an apparent authority over the other. fraud or misrepresentation. Consent is said to be caused by coercion when it is obtained by: 1. If the threat is with regard to the goods or property of the other party. it is not duress. Committing or threatening to commit any act forbidden by the Indian Penal Code. or anything delivered by mistake or under coercion. The release has been brought about by coercion. Unlawful detaining or threatening to detain any property. Duress In the English Law. “undue influence” is defined as follows: A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. the agreement is a contract voidable at the option of the party whose consent was so caused. Or Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 14 . ‘B’ releases ‘A’ under the threat. must repay or return it.LAWgistics Example: ‘A’ threatens to shoot ‘B’ if ‘B’ does not release him ‘A’ from a debt which ‘A’ owes to ‘B’.

to agree to pay ‘B’ an unreasonable sum for his professional services. Fiancé and fiancée. the plaintiff has to establish that – The other party was in a position to dominate his will. vi. the contract is voidable at the option of the party whose consent was so obtained. iii. relation of trust and confidence to the other. ‘B’ employs undue influence. is induced by ‘B’s influence over him as his medical attendant. Effect of undue influence When consent to an agreement is obtained by undue influence. The other party actually used his influence to obtain the plaintiff’s consent to the contract. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 15 . Religious adviser and disciple. E. Mere proof of nearness of relationship is not sufficient for the Court to assume that one relation was in a position to dominate the will of the other. i. v. Where a contract is made with a person whose mental capacity is temporarily or permanently affected by reason of age. Burden of proof In an action to avoid a contract on the ground of undue influence. illness or mental or bodily distress. Any such contract may be set aside either absolutely or if the party who is entitled to avoid it has received any benefit thereunder. Example: ‘A’. Doctor and patient. Solicitor and client and vii.LAWgistics Where a person stands in a fiduciary relation. Relationships which raise presumption of undue influence: The following relationships usually raise a presumption of undue influence.g. Trustee and beneficiary. parent and child. and the transaction is unconscionable (unreasonable). iv. ii. a man enfeebled by disease or age. Guardian and ward. viz. upon such terms and conditions as to the Court may seem just and equitable.

though he believes it to be true.LAWgistics MISREPRESENTATION AND FRAUD A statement of fact which one party makes in the course of negotiation with a view to inducing the other party to enter into a contract is known as a representation. The representation made by ‘A’ is a misrepresentation. It also includes non-disclosure of a material fact or facts without any intent to deceive the other party. either innocently or intentionally. there is misrepresentation– When a person positively asserts that a fact is true when his information does not warrant it to be so. ‘A’ genuinely believes the mare to be sound although he has no sufficient ground for the belief. Misrepresentation may be – An innocent or unintentional misrepresentation. A representation. is a misrepresentation. while selling his mare to ‘B’. when wrongly made. When there is any breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice. MISREPRESENTATION Misrepresentation is a false statement which the person making it honestly believes to be true or which he does not know to be false. It must relate to some fact. The former is called “misrepresentation” and the latter “fraud”. or An intentional. Example: ‘A’. It may be expressed by words spoken or written or implied from the acts and conduct of the parties. Later on ‘B’ finds the mare to be unsound. deliberate or willful misrepresentation to deceive or defraud the other party. which is material to the contract. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 16 . tells him that the mare is thoroughly sound. Accordingly.

It must be made without any intention to deceive the other party. Loss of right of rescission The aggrieved party loses the right to rescind or avoid the contract for misrepresentation or fraud – If he. 4. the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement. Accept the contract but insist that he shall be placed in the position in which he would have been if the representation made had been true. in case of misrepresentation by the other party. however innocently. It must actually have been acted upon and must have induced the contract. or 2. after becoming aware of the misrepresentation or fraud. It must be made before the conclusion of the contract with a view to inducing the other party to enter into the contract. 2. can – 1. Requirements of misrepresentation A misrepresentation is relevant if it satisfies the following requirements: 1. It must be wrong but the person who made it honestly believed it to be true. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 17 . 3. 6. It need not be made directly to the plaintiff. It must be made with the intention that it should be acted upon by the person to whom it is addressed. Consequences of misrepresentation The aggrieved party. Mere expression of opinion does not amount to misrepresentation even if it turns out to be wrong. also amounts to misrepresentation. 5.LAWgistics When a party causes. It must be a representation of a material fact. Avoid or rescind the contract. takes a benefit under the contract or in some other way affirms it. 7. A wrong statement of facts made to a third person with the intention of communicating it to the plaintiff.

by auction. There is a concealment of a material fact or that there is a partial statement of a fact in such a manner that the withholding of what is not stated makes that which is stated false. Any other act fitted to deceive. A promise made without any intention of performing it. Recklessly... restoration to the original position) of the parties is not possible. Knowingly. “Fraud” means and includes any of the following acts committed by a party to a contract. or b.e. to B a horse which A knows to be unsound. or with his connivance intentional active or passive acquiescence. or d. Any such act or omission as the law specially declares to be fraudulent. where the subject matter of the contract has been consumed or destroyed. Without a representation or assertion there can be no fraud except in cases where silence may itself amount to fraud or where there is an effective concealment of a fact. Without belief in its truth. A says nothing to B about horse’s unsoundness. Example: A sells. This is not fraud in A. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 18 . FRAUD Fraud exists when it is shown that – A false representation has been madea. not caring whether it is true or false and the maker intended the other party to act upon it. or by his agent with intent to deceive or to induce a person to enter into a contract: 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. or c.LAWgistics If restitutio in integrum (i. e. The active concealment of a fact by a person having knowledge or belief of the fact.g. If a third party has acquired rights in the subject matter of the contract in good faith and for value. Essential elements of fraud There must be a representation or assertion and it must be false.

A sells the goods to X before B avoids the contract. the agreement is a contract voidable at the option of the party whose consent was so caused. an innocent third party has acquired an interest in the property for value. but in the following cases. A mere falsehood is not enough to give a right of action. The representation must have been made before the conclusion of the contract with the intention of inducing the other party to act upon it. Until it is avoided. Example: A purchases certain goods from B by making a misrepresentation. The other party must have relied upon the representation and must have been deceived. not caring whether it is true or false. The other party.LAWgistics The representation must relate to a material fact which exists now or existed in the past. he cannot rescind the contract. He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been if the representation made had been true. fraud or misrepresentation. it is valid. the contract is not voidable. B loses the right to avoid the contract. It must have induced the other party to act upon it. It is common rule of law “that there is no fraud without damage”. he must act within a reasonable time. The representation or statement must have been made with a knowledge of its falsity or without belief in its truth or recklessly. Where he does so. The other party must have been induced to act upon the representation or assertion. He can sue for damages. however. the following remedies: He can rescind the contract. If in the interval. Consequence of fraud A contract induced by fraud is voidable at the option of the party defrauded. Not only must the representation be false and made with the knowledge of its falsity. while he is deliberating. The party defrauded has. acting on the representation or assertion must have subsequently suffered some loss. but it must also be made with intent to deceive the other party. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 19 . Contract not necessarily voidable – Exceptions When consent to an agreement is caused by coercion.

he was not liable in deceit as the tenant should have inspected the house.LAWgistics Where the consent of a party to a contract was caused by misrepresentation or fraud and that party could discover the truth by ordinary diligence. cannot be put in the position in which he would have been if the representation made had been true. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 20 . Where a party to a contract. leads B erroneously to believe that five hundred tonnes of indigo are made annually at his factory. a landlord failed to tell the tenant that it was in a ruinous condition. This means mere silence is not fraud. B examines the accounts of the factory. The contract is not voidable on account of A’s misrepresentation. in itself. After this B buys the factory. Example: A. by a misrepresentation. it is the duty of the person keeping silence to speak. the interests of third parties intervene. Where silence is. equivalent to speech. before the contract is avoidable. Silence as to facts The general rule is that a person before entering into a contract need not disclose to the other party the material facts which he knows. Statutory exceptions: There are two statutory exceptions to the above rule: Where the circumstances of the case are such that. but he must refrain from making active concealment (like concealing a crack on the surface of a table by filling it and repolishing it). But it is important that the third parties acquire interest in the subject matter for value and act bona fide. whose consent was caused by misrepresentation or fraud. Where. The phrase “ordinary diligence” means such diligence as a prudent man would take in his own case under similar circumstances. Example: Before letting his house. regard being had to them. Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud. Held. Where a party enters into contract in ignorance of the misrepresentation or fraud. which show that only four hundred tones of indigo have been made.

e.e. A party cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of law. the car and garage were completely destroyed by fire a day earlier. Ignorance of law is no excuse. the agreement is void. Unknown to either party. Example: A agreed to purchase B’s motor car which was lying in B’s garage. Ignorantia Juris non excusat. It may be a mistake of law or a mistake of fact.LAWgistics MISTAKE Mistake may be defined as an erroneous belief about something. no excuse and the contract cannot be avoided. is a well settled rule of law. Mistake of law of a foreign country. The following two conditions have to be fulfilled for the above: 1. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 21 . The agreement is void. i. i. As to what facts are essential in an agreement will depend upon the nature of the promise in each case. Such a mistake is treated as a mistake of fact and the agreement in such a case is void. therefore. there is a bilateral mistake. both the parties should misunderstand each other and should be at cross purposes. A mistake of law is. In such a case. The mistake must relate to a matter of fact essential to the agreement. Mistake of fact Mistake of fact may be : 1) A bilateral mistake. 2. The mistake must be mutual. Mistake of Law Mistake of law of the country. or 2) A unilateral mistake Bilateral mistake Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement.

Example: In an auction sale. If the seller is selling a thing which he is not entitled to sell and both the parties are acting under a mistake. There was no contract in such a case. which in fact at the time of the contract is non-existent. thinking it was hemp. the agreement is void. It usually arises where one party intends to deal in one thing and the other intends to deal in another. If both the parties are working under a mistake as to the quantity of the subject matter.(fiber) A bid for a lot. In fact the napkins were Georgian. the agreement is void. The various cases which fall under bilateral mistake are as follows: Mistake as to the subject matter: where both the parties to an agreement are working under a mistake relating to the subject matter the agreement is void. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 22 . Mistake as to the quantity of the subject matter. The agreement was void as there was a mistake as to the quality of the subject matter. the auctioneer was selling tow.(plant from which rope is made) The bid was extravagant for tow. Example: Table napkins were sold at an auction by a description “with the crest of Charles I and the authentic property of that monarch”. but reasonable for hemp. Example: A agrees to buy from B a certain horse. If the subject matter is something essentially different from what the parties thought it to be. Mistake as to the title to the subject matter. the agreement is void.LAWgistics But an erroneous opinion as to the value of a thing which forms the subject matter of an agreement is not to be deemed a mistake as to a matter of fact. Mistake as to the subject covers the following cases: Mistake as to the existence of the subject matter. Mistake as to the identity of the subject matter. the contract is void. though neither party was aware of the fact. If both the parties believe the subject matter of the contract to be in existence. It turns out that the horse was dead at the time of the bargain. The agreement is void. Mistake as to the quality of the subject matter.

the agreement is void. Mistake as to the nature of contract. Exceptions Mistake as to the identity of the person contracted with. in such case. A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. He cannot plead mistake as a defence. Mistake as to the possibility of performing the contract. the mistake is a unilateral mistake. If there is a mutual mistake as to the price of the subject matter. Consent is nullified if both the parties believe that an agreement is capable of being performed when in fact this is not the case. the lease is void. already belonged to him. The agreement.LAWgistics Example: A person took a lease of a fishery which. By mistake he makes an offer in writing of Rs. Thus. there is a mistake as to the identity of the person contracted with. Unilateral mistake When in a contract only one of the parties is mistaken regarding the subject matter or in expressing or understanding the terms or the legal effect of the agreement.000. be done. It is a fundamental rule of law that if one of the parties represents himself to be some person other than he really is. A unilateral mistake is not allowed as a defence in avoiding a contract unless the mistake is brought about by the other party’s fraud or misrepresentation. 40. If a person enters into a contract in the mistaken belief that he is signing a document of a different class and character Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 23 . Impossibility may be – i) ii) Physical impossibility Legal impossibility A contract is void if it provides that something shall be done which cannot. unknown to either party. Mistake as to price of the subject matter. Example: A offers to sell his house to B for an intended sum of Rs.000. 44. as a matter of law. is void on the ground of impossibility.

to whom the contents of a deed had been wrongly read.e. but on the ground that the mind of the signer did not accompany the signature. in contemplation of law never didi sign. In its modern application. where fraud exists. document). the contract is void and not voidable. there is a mistake which would vitiate the contract.. but that was not. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 24 . Thus. where in signing a document the mind of the signer does not go with signature. there is a mistake as to the nature of contract and the contract is void.non est factum( it is not his deed or document) The common law defence of non est factum to actions on specialities in its origin was available where an illiterate person. There is a clear distinction between fraudulent misrepresentation as to the character of the document and fraudulent misrepresentation as to the contents there of. The former is void the later is voidable.different from fraudulent representation as to the contents of the document. in other words he never intended to sign and therefore. He can successfully plead non est factum (it is not his deed.LAWgistics altogether. is missing in this case. executed it under a mistake as to its nature and contents. an old man of poor sight. perhaps. i. In most of the cases in which this defence was pleaded the mistake was induced by fraud. indorsed a bill of exchange thinking it was a guarantee. There was no contract on the ground that the mind of the signer did not accompany the signature. a necessary factor as the transaction is invalid not merely on the ground of fraud.. the doctrine has been extended to cases other than those of illiteracy and to other contracts in writing. The very basis of the contract. (1990) 1 SCC 207 Bismillah v/s Jnaneshwar Prasad Sec19. Example: M. (1990) Supp SCC 216 Dularia Devi v/s Janardhan Singh- Sec17-19 Where a document containing an agreement obtained by fraud and misrepresentation as to the character of the document itself. consent. i. he could say that it was not his deed at all.e.

Sec 20 is concerned with common mistake of fact and not mutual mistake.Fraud. v/s George Joseph Fernandes Sec.Mistake as to fact.it must be a common mistake of both the parties about the same vital fact. A common mistake is made or shared alike by both while mutual mistake is made or entertained by each of the parties towards or with regard to each other. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 25 .Distinction between Common Mistake and Mutual Mistake.: The subject matter of the contract has already perished.A fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. there is no real correspondence of offer and acceptance and the parties are not really consensus ad idem. (1989) 2 SCC 1 ITC Ltd. It is a deception in order to gain by another’s loss.20.LAWgistics (1994) 1 SCC 1 Jagannath S. It is cheating intended to get an advantage. There is thus no agreement at all and the contract is void. A common mistake is their where both parties are mistaken about the same vital fact although both parties are ad idem e.Mistake must also be as to the substance or essential and integral element of the contract.P. The contract in such a case is void.Chengalvaraya Niadu v/s Sec17.g. Where parties make mutual mistake misunderstanding each other and are at cross purposes.

and profit or benefit accruing to one party.e.LAWgistics _________________________________________________________ CONSIDERATION Consideration is one of the essential elements to support a contract. or promises to do or to abstain from doing. he must get ‘something’ in return. suffered or undertaken by the other.“When at the desire of the promisor.) A promises B not to file a suit against him if he pays him Rs. Need for consideration: The reason why the law enforces only those promises which are made for consideration is that gratuitous or voluntary promises are often made rashly and without due deliberation. or some forbearance. 500. something. When a party to an agreement promises to do something. Subject to certain exceptions. 10.000/-. such act or abstinence or promise is called a consideration for the promise. The abstinence of A is the consideration for B’s payment. Here selling of goods by B to C is consideration for A’s promise. detriment. Consideration is a technical term used in the sense of ‘quid pro quo’ (i.. Car is the consideration for B and price is the consideration for A. an agreement made without consideration is ‘nudum pactum’ (a nude contract) and is void. interest. Definition of Consideration: “A valuable consideration in the sense of the law may consist either in some right. (An act of doing something.” Example: A promises to B to guarantee payment of price of the goods which B sells on credit to C. or does or abstains from doing. Example: A agrees to sell his car to B for Rs. This ‘something in return’ is defined as consideration. loss or responsibility given. the promisee or any other person has done or abstained from doing.” The contract act defines consideration as. Legal Rules as to consideration: Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 26 . something in return).

Example: A renders some service to B at latter’s desire. Consideration. this constitutes a good consideration for a promise by the other person. A cannot demand payment for his services. abstinence or forbearance or a return promise.000/. E promises to pay the price after a month. as already explained. present or future. It may be an act. 2.. But the stranger to contract will be able to sue only if he is a party to the contract. It is past consideration. It may move from the promisee or any other person. 5. An act constituting consideration must have been done at the desire or request of the promisor. 3. After a month B promises to compensate A for the services rendered to him. i. This something in return need not necessarily be equal in value to something given. This is future consideration. 4. The law simply provides that a contract Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 27 .in return for which he promises to deliver certain goods to B. D promises to deliver certain goods to E after a week. The money A receives is the present consideration. Under the Indian law. even a stranger. If a person who could sue another for the enforcement of a right agrees not to pursue his claim. (c) Compromise with creditors. means “something in return”. A debtor. may call a meeting of his creditors and request them to accept a lesser amount in satisfaction of their debt. It need not be adequate. financially embarrassed.e. consideration may move from the promisee or any other person. Compromise is a kind of forbearance. (b) Compromise of a disputed claim. the agreement is binding both upon the debtor and the creditors and this amounts to a compromise of the claims of the creditors. (a) Forbearance to sue. This means as long as there is consideration for a promise it is immaterial who has furnished it. If the creditors agree to it. Example: A saves B’s goods from fire without being asked to do so. 5. A consideration may be past.LAWgistics 1. It must move at the desire of the promisor. A receives Rs.

This rule is known as the “doctrine of privity of contract”. It must be real and not illusory. acknowledges or otherwise constitutes himself as an agent of a third party. It implies a mutuality of will and creates a legal bond or tie between the parties to a contract. Partition or other family arrangements. Although consideration need not be adequate. 6. 7. provided it is of some value. the Courts are not concerned as to its adequacy. 2.LAWgistics should be supported by consideration. immoral or opposed to public policy. 500/-. it must be real. A trust or charge. A promise to do what one is already bound to do either by general law or under an existing contract is not a good consideration for a new promise. Marriage settlement. Exceptions: The following are the exceptions to the rule that “a stranger to a contract cannot sue”. Where the promisor by his conduct. A’s promise is physically impossible of performance. Acknowledgement or estoppel. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 28 . It must be something which the promisor is not already bound to do. So long as consideration exists. 1. a binding obligation is thereby incurred by him towards the third party. competent and of some value in the eyes of the law. 3. Example: A promises to put life into B’s dead wife should B pay him Rs. 8. It must not be illegal. A person (called beneficiary) in whose favour a trust or other interest in some specific immovable property has been created can enforce it even though he is not a party to the contract. STRANGER TO CONTRACT It is a general rule of law that only parties to a contract may sue and be sued on that contract. “Privity of contract” means relationship subsisting between the parties who have entered into contractual obligations.

Board v/s Green Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 29 . is enforceable. 5. Example: A finds B’s purse and gives it to him. Charitable subscription. Example: D owes C Rs. 1. 2. There are exceptions to this rule. Completed gift. Promise to pay a time-barred debt: A promise by a debtor to pay a timebarred debt is enforceable provided it is made in writing and is signed by the debtor or by his agent generally or specially authorized in that behalf. a person who has already voluntarily done something for the promisor.e. Love and affection: A written and registered agreement based on natural love and affection between near relatives is enforceable even if it is without consideration. This is a contract. 500/. an agreement made without consideration is void. 3.LAWgistics 4. 6.000/. 7.on account of the debt. even though without consideration. 5. 50/-.but the debt is barred by the Limitation Act. This is a contract. Contracts entered into through an agent. D signs a written promise to pay C Rs. Assignment of a contract.. Covenants running with the land. (1990) 1 SCC 731 Rubber Industry- Bihar State Elec. Agency: No consideration is necessary to create an agency. 6. A contract without consideration is void – Exceptions : The general rule is “ex nudo pacto non oritur action” i. wholly or in part. They are: 1. B promises to give A Rs. Compensation for voluntary service: A promise to compensate. 4.

LAWgistics Sec 10. when it ceases to operate/ exist.e. A contract may be discharged in positive (i.Contract deed once signed. 3. By Subsequent Agreement (Doctrine of Novation). When such obligations come to an end. discharge of contract means ‘termination of contractual relationship between the parties. 4. For instance. Modes of Discharge 1. he will have to leave the college after completion of the course irrespective of his success or failure in the examination. by breach or failure to perform by either or both the parties). without any other consideration other than mere goodwill or natural affection.e. i. DISCHARGE OF CONTRACT In a Contract. A naked pact. even without reading the contents. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 30 . 2. A contract is said to be discharged. 5. By Operation of Law. By Breach of Contract.a voluntary promise. 6. a bare agreement. by performance) or in negative (i.e. becomes binding on the parties-Maxim‘nudum pactum ex quo non orituractio’. the contract is said to be discharged. In other words. the parties have to fulfil their contractual obligations. By Performance of Contractual Obligation. By Impossibility of Performance (Doctrine of Frustration). By lapse of Time. a student’s contract with the college stands discharge on expiry of the term of his course.

With the change of parties and with altered terms and conditions. a. 50. if the parties had fulfilled their respective obligations under the contract. By Subsequent Agreement – ‘Doctrine of Novation’ Sec. For example: ‘A’ offers to sell his house to ‘B’ for Rs. the existing contract stands extinguished / terminated. c. The same parties with the same terms and conditions. The contract or Novation may take place between:a. b. With the creation of a new contract.000/. The new contract in the above cases must be supported by a lawful consideration. d. Later ‘B’ pays the entire amount and ‘A’ hands over the house.and ‘B’ accepts the same. The expression ‘Novation’ means substitution of a new contract in the place of an existing contract. Same parties and same terms and conditions: The parties to the contract may mutually agree to enter into a new contract with the same terms and conditions in order to discharge the Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 31 . The mutual discharge of the old contract may be treated as a consideration for the new contract. Discharge by Performance A contract is said to be discharged. deals with the Doctrine of Novation.62 of the Indian Contract Act. The contract is said to be discharged. 1872. With the change of parties with same/old terms and conditions.LAWgistics 1. The same parties with altered terms and conditions. 2. Here the parties have fulfilled their respective obligations.

before the expiry of the promissory note. but the terms and conditions are the same.LAWgistics existing /old contract. 50. d. gives the creditor some gold as security. Change of parties and change of terms and conditions: A contract between two parties may stand discharged against a new contract entered into by the change of parties with altered terms and conditions.000/. Example: ‘A’ offered to sell his house to ‘B’ for Rs. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 32 . b.payable in two instalments in 6 months. Example: If a promissory note is about to expire on limitation. ‘B’ accepts to purchase the same. the parties may execute a new promissory note. Change of parties with the terms and conditions: A new contract may be entered into with the change of parties under the same terms and conditions of the existing /old contract in order to discharge the old contract. Here. Same parties with altered terms and conditions: The parties may enter into a new contract by changing or altering the terms and conditions of the existing/old contract. Then old contract stands terminated and new contract will come into force. c. the parties are changed. the parties remain unchanged but the terms of the contract are altered from promissory note to mortgage deed. Example: In the above example if the debtor. Later ‘B’ with the consent of ‘A’ and ‘C’ withdraws from the contract and ‘C’ accepts to purchase it by entering into a new agreement with ‘A’.

3. Impossibility of performance renders the contract void. (i) According to Sec. 2. To substitute new contract. If the performance of a contract is impossible. Rules of Novation For Novation to be valid.LAWgistics Example: In the above example. the essential conditions are :1. 30. Thus. The new contract must fulfil the essentials of a valid contract. impossibility of performance takes place under the following circumstances: Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 33 .56 of the Act lays down that “an agreement to do an act impossible itself is void”. impossibility of performance is known as the ‘Doctrine of Frustration’. In English Law. (Sec. it is void. It is based on two maxims.000/-. and (ii) Impossibillium mulla obligatio est It means what is impossible does not create an obligation.56 of the Act. if the parties (‘A’ and ‘B’) agree to discharge the old contract against a new contract of mortgage of the said house between ‘A’ and ‘C’ for Rs. the old contract must exist.Doctrine of Frustration One of the essential elements of a valid contract is ‘possibility of performance’.10 of Indian Contract Act). Here the parties are changed and terms and conditions are also changed. Sec. Lex non cogit and impossibilia It means Law does not recognise what is impossible. Discharge by impossibility of performance.

. Kerell vs. Initial impossibility known to parties. Impossibility existing at the time of agreement. promised to play piano at concert on an occasion. Rabinson vs. But she could not give her performance due to ill health. Example: ‘A’ enters into an agreement with ‘B’ to supply goods in transit. Henry The defendant agreed to hire a flat from plaintiff on 26th and 27th June 1902 for viewing the proposed coronation procession of King EdwardVII. Owing to sudden illness of the King. But ‘A’ could not supply since the goods were destroyed (unknown to both). Example: An agreement to put life into a dead body. Act of God.LAWgistics 1. Initial impossibility unknown to parties. b. a. it becomes impossible due to non happening of certain unforeseen events. the procession was cancelled. etc. 2. In an action against the defendant for rent. a piano player. Example: Natural Calamities. Devison In this case. In an action by the plaintiff. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 34 . it was held not liable. the defendant was held not liable. Impossibility after formation of contract or subsequent impossibility: The performance is possible at one time of entering into a contract. but later. the defendant’s wife. Countries at War.

one party expresses his inability to perform his part before the due date of its performance. CAPACITY TO CONTRACT The parties who enter into a contract must have the capacity to do so. Breach of Contract It may be classified as i. Discharge by Lapse of Time The Limitation Act. etc. (b) Is of sound mind and Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 35 . Anticipatory Breach ii. ‘Capacity’ here means competence of the parties to enter into a valid contract. 5. Present Breach In anticipatory breach. imposes an obligation on the parties in respect of certain contract to perform within a specified period. It takes place either at the time when the performance of the contract falls due or during the performance of the contract. Every person is competent to contract who (a) Is of the age of majority according to the law. 1963. 6. insolvency. An agreement becomes a contract if it is entered into between the parties who are competent to contract. Discharge by Operation of Law A contract may be discharged by operation of Law in case of death. Present breach is simply a breach of contract or actual breach of contract. to which he is subject. unauthorised alteration of terms of the contract.LAWgistics 4.

65 which provides for restitution in case of agreements discovered to be void does not apply to a minor. The second promissory note is void for want of consideration.LAWgistics (c) Is not disqualified from contracting by any law to which he is subject. Sec. In the following two cases. Nothing debars him from becoming a beneficiary. Persons disqualified by any law to which they are subject 1. he cannot be asked to compensate or pay for it. He can be a promisor or a beneficiary. An agreement with or by a minor is void and inoperative ab initio. he attains majority after twenty-one years of age: (1) Where a guardian of a minor’s person or property has been appointed under the Guardians and Wards Ac 1890. Minors 2. His agreement cannot be ratified by him on attaining the age of majority. (1) If he has received any benefit under a void agreement. 5. borrows Rs. or (2) Where the superintendence of a minor’s property is assumed by a Court of Wards. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 36 . Minor’s Agreements: 1. 3. MINORS A minor is a person who has not completed eighteen years of age. he executes another promissory note in settlement of the first note. Persons of unsound mind 3. Consideration which passed under the earlier contract cannot be implied into the contract which the minor enters on attaining majority. 2. Incapacity of a minor to enter into a contract means incapacity to bind himself by a contract. The following persons are incompetent to contract: 1. After attaining majority.000 from L and executes a promissory not in favour of L. Example: M. a minor.

even though the contract is for the supply of necessaries to the minor. He is not liable to refund the loan.68). Even if he has. A contract entered into on his behalf by his parent/ guardian or the manager of his estate can be specifically enforced by or against the minor provided the contract is (a) within the scope of the authority of the parent/guardian/ manager. by misrepresenting his age. and (b) for the benefit of the minor. obtains a loan by mortgaging his property. Not only this. (6)He is liable for ‘necessaries’ supplied or necessary services rendered to him or anyone whom he is legally bound to support. (5)He cannot be adjudged an insolvent. but he may be admitted to the benefits of an already existing partnership with the consent of the other parties. 2. even his mortgaged property cannot be made liable to pay the debt. The claim arises not out of contract but out of what are called quasi-contracts. (8) His parents/ guardian are/ is liable for the contract entered into by him. he cannot be sued either in contract or in tort for fraud because if the injured party were allowed to sue for fraud. induced the other party to contract with him. it is only the property of the minor which is liable for meeting the liability arising out of such contracts. Minor’s liability for necessaries: A minor is liable to pay out of his property for ‘necessaries’ supplied to him or to anyone whom he is legally bound to support (Sec. it would be giving him an indirect means of enforcing the void agreement. Again. (2) He can always plead minority. He is not personally liable.LAWgistics Example: M. PERSONS OF UNSOUND MIND Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 37 . (7) He can be an agent. a minor. (4) He cannot enter into a contract of partnership. (3) There can be no specific performance of the agreements entered into by him as they are void ab initio.

may not make a contract when he is of unsound mind. OTHER PERSONS Alien enemies: An alien is a person who is not a subject of the Republic of India. Contracts with an alien friend. Drunken or intoxicated persons: A drunken or intoxicated person suffers from temporary incapacity to contract. but occasionally of unsound mind. He suffers from intermittent intervals of sanity and insanity. AGENCY Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 38 .. subject to certain restrictions. He does not exhibit understanding of any ordinary matter. 3. Contracts with alien enemy (an alien whose State is at war with the Republic of India). However. Idiots: An idiot is a person who has completely lost his mental powers. may make a contract when he is of sound mind. he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.e.LAWgistics One of the essential conditions of competency of parties to a contract is that they should be of sound mind.” Lunatics: A lunatic is a person who is mentally disturbed due to some mental strain or other personal experience. who is usually of sound mind. is void. A person. like that of a minor. A person. who is usually of unsound mind but occasionally of sound mind. A test of soundness of mind reads as follows: “A person is said to be of sound mind for the purpose of making a contract if. at the time when he makes it. He can enter into contracts during the period when he is of sound mind. persons of unsound mind are liable for necessities supplied to them or to anyone whom they are legally bound to support. An agreement with an idiot. Agreements entered into by persons of unsound mind are void. i. are valid. The position of a drunken or intoxicated person is similar to that of a lunatic. at the time when he is so drunk or intoxicated that he is incapable of forming a rational judgment.

“An ‘Agent’ is a person employed to do any act for another or to represent another in dealings with third person. in dealings with a third person. Extent of Agent’s authority – An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act. Jockey may purchase timber and other materials and hire workmen.LAWgistics In an Agency one person (Principal) employs another person (Agent) to represent him or to act on his behalf. so as to be responsible to his Principal according to the provisions in that behalf herein contained. Who may be an Agent? As between the Principal and the third person. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 39 . For example: Rocky constitutes Jockey. Who may employ Agent? Any person who is of the age of majority according to the law to which he is subject. The person for whom such act is done or who is so represented is called the ‘Principal’. any person may become an Agent. Consideration not necessary – no consideration is necessary to create an Agency. for the purpose of carrying on the business. (Vicarious liability). may employ an Agent. Agent’s authority in an emergency – An agent in an emergency. but no person who is not of the age of majority and of sound mind can become an Agent. has authority to do all such acts for the purpose of protecting his Principal from loss as would be done by a person of ordinary prudence. and who is of sound mind. his Agent to carry on his business of a Ship Builder. in his own case under similar circumstances. The act of the Agent binds the Principal in the same manner in which he would be bound as if he did the act himself. The authority of an Agent may be express or implied.

the person on whose behalf the act is done may either disown the act or ‘ratify’ the same. with direction to send them immediately to Rajesh at Chennai.LAWgistics For example: Ramu consigns provisions to Ravi at Kolkata. CREATION OF AN AGENCY The relationship of principal and agent between the person represented and the person representing has to exist. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 40 . A servant does not ordinarily create legal relation between the employer and third person/s. Distinction between an Agent and a Servant – (1) An agent is employed to bring the principal into legal relation with third person/s or to represent him in dealings with third person/s. An authority is said to be implied when it is to be inferred from the circumstances of the case. (2) An agent is bound to follow all the lawful instructions of the principal but he is not subject to the direct control and supervision of the principal. A servant acts under the direct control and supervision of his employer. To create such a relationship the following aspects are requisite. (4) A principal is liable for the wrongs of his agent done within the scope of his authority. (b) By Ratification – When an act has been done by one person on behalf of another though without his authority or knowledge. A master is liable for the wrongs of the servant if they are committed in the course of his employment. But a servant usually serves only one master. Ravi may sell the provision at Kolkata. if they will not bear the journey to Chennai without spoiling. This creates a legal relationship. (a) By actual authority – Express or implied. (3) An agent may work for several principals at the same time. An authority is said to be expressed when it’s given by words spoken or written.

although without the knowledge or the authority of that person. (c) Duty to render proper accounts – an agent is bound to render proper accounts to his principal on demand. he must make it good to his principal. If the act done on behalf of a person. (b) Duty to show proper care and skill – The agent is supposed to take due care and act with reasonable diligence. This conflict invariably arises when the agent is personally interested in the principal’s transactions. This issues during extraordinary emergencies in which a person who is an agent may out of necessity assume such power and his acts. RIGHTS OF AN AGENT: Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 41 . the law confers an authority on one person to act as an agent for another without any regard to the consent of the principal. the person ratifying the act becomes the principal and the person who has done the act becomes the agent. When the agent does not act as per the conditions. and if any profit accrues. fairly done. he is not liable to his principal in respect of loss or damages which is indirectly or remotely caused.LAWgistics Ratification means according approval to the act by a person on whose behalf the act is done. is ratified. would be binding on the principal. (d) Duty not to make secret profits from the agency – an agent except with the knowledge and consent of his principal. (c) By implication/operation of law – In case of necessity. if any loss is sustained by the principal. he must account for it. However. An agent is bound to conduct the business of his principal according to the directions given by the principal. He is bound to make compensation to his principal in respect of the direct consequences of his negligence. DUTIES OF AN AGENT: (a) Duty to follow principal’s direction. shall not make any profit from the transaction other than what is due to him as remuneration or commission (e) Duty to avoid conflict of interest – an agent must not put himself in a position where his duty and interest conflict.

upon a contract that they shall. DUTIES OF PRINCIPAL: (a) To indemnify the agent against the consequences of all lawful acts. The person who delivers the goods is called the ‘Bailor’. BAILMENT A ‘bailment’ is the delivery of goods by one person to another person for some purpose. be returned or otherwise disposed off according to the directions of the person delivering them. (c) To indemnify the agent for injury caused by the principal’s neglect. RIGHTS OF A PRINCIPAL: (a) To recover damages. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 42 . (d) To pay the agent the commission or other remuneration agreed. The person to whom the goods are delivered is called the ‘Bailee’. Delivery to bailee how made? The delivery to the bailee may be made by doing anything which has the effect of putting the goods in possession of the bailee.LAWgistics An agent may retain out of any sums received on account of the principal. when the purpose is accomplished. (b) To indemnify the agent against the consequences of acts done in good faith. If the owner maintains control over the goods there is no bailment. (b) To obtain an account of secret profits and recover them. all monies due to himself in respect of his remuneration and advances made or expenses incurred by him in the conduct of business.

(d) Right of suit against a wrongdoer. She allowed the locked box to remain in the premises of the gold smith but. or expose the bailee to any risks. kept the key in her possession. (b) To recover compensation from the bailor. RIGHTS OF BAILEE: (a) To recover necessary expenses incurred in bailment. of which the bailor is aware. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 43 . put the same into a box and lock the same. and in such a case the bailor and bailee would have an interest in the mixed goods in proportion to their respective share. If mixture is beyond separation. Persons who have entered into partnership with one another are called individually ‘Partners’ and collectively a ‘Firm’. If the bailor consents the bailee may mix the bailor’s goods. Bailor’s duty to disclose faults in goods bailed – the bailor is bound to disclose to the bailee faults in the goods bailed. (c) To have a lien on the goods bailed. quantity and value as the goods bailed. the bailor is entitled to be compensated by the bailee for the loss of the goods. Duty not to mix bailor’s goods with his own goods – the bailee must not mix the goods of the bailor with his own goods. There was no bailment in this case as she had not handed over the possession of the jewels to the gold smith. PARTNERSHIP Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Care to be taken by bailee – the standard of care is that of a reasonable man would take of his own goods of the same bulk. and which materially interfere with the use of them.LAWgistics For example: A lady took her old jewels to a gold smith for remaking. One night the jewels were stolen. Every evening she used to receive the half made jewels.

DUTIES OF A PARTNER: (a) Not to claim remuneration. Sometimes a person who is not a partner in a firm may. (b) Right to share profits. But he is liable to outsiders for all the debts of the firm. (b) To indemnify the firm for all willful neglect. (e) Right to interest on advances.LAWgistics ESSENTIALS OF A PARTNERSHIP: (a) Association of two or more persons. under Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 44 . (c) Right to interest on capital. (b) Dormant/Silent/Non-working – one who does not take an active part in the conduct of the business of the firm. occupation and profession. (c) Nominal partner – a partner who lends his name to the firm without having any real interest in it. RIGHTS OF A PARTNER: (a) Right to take part in business. (d) Partner by Estoppel or Holding out – a partnership by estoppel is an exceptional case where even in the absence of a contract a person becomes liable as if he were a partner. TYPES OF PARTNERS: (a) Actual or ostensible partner – actually engaged in the conduct of the business of the partnership. (d) To account for profits in competing business. (b) Agreement – the relationship is one of contractual nature (c) Business – a partnership can be formed only for the purpose of carrying on business including trade. (c) Account for personal profits. The Partnership Act does not provide for the compulsory registration of Firms. (d) Sharing of profits – the object of partnership must be to make profits. (d) Right to indemnity.

(e) Partnership at will – where the partnership is at will. (c) The expiry of the term for which the firm was constituted. he was liable for the debts of the firm to those who gave credit to the firm in the bona fide belief that he was a partner. be liable for its debts as if he were a partner. Dissolution of Firms: (a) Dissolution by agreement – a firm may be dissolved with the consent of all the partners. Such a partner is called ‘a partner by estoppel’ or ‘holding out’. “A retired businessman of some repute assumed the honorary presidentship of the business of certain persons who requested him for the same. permanent incapacity. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 45 . REMEDIES FOR BREACH OF CONTRACT A contract gives rise to correlative rights and obligations. breach of agreement.LAWgistics certain circumstances. Requirement to constitute a Partnership: Minimum 2 and maximum 10 in case of banking business and 20 in all other cases. (b) Compulsory dissolution – a firm is dissolved(i) By the adjudication of all the partners or all the partners but one as insolvent. (f) Dissolution by Court – in cases of insanity. the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. Held. misconduct. business working at a loss. A remedy is the means given by law for the enforcement of a right. A right accruing to a party under a contract would be of no value if there were no remedy to enforce that right in a Court of Law in the event of its infringement or breach of contract. (d) The death of a partner. (ii) By happening of any event which makes it unlawful for the business of the firm to be carried on.

When a party treats the contract as rescinded. B is discharged from liability to pay the price. In such a case. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 46 . as if he had not been injured i. the injured party (i. 2. Suit upon quantum meruit 4.e. he is absolved of all his obligations under the contract. the other party may sue to treat the contract as rescinded and refuse further performance. But if a person rightfully rescinds a contract he is entitled to compensation for any damage which he has sustained through non-fulfillment of the contract by the other party. B agrees to pay the price after the receipt of the goods.. so far as money can do it. A does not supply the goods. he makes himself liable to restore any benefits he has received under the contract to the party from whom such benefits were received. Suit for injunction 1. the party who is not in breach) has one or more of the following remedies: 1. Example: A promises B to supply 10 bags of cement on a certain day. Suit for damages 3. The object of awarding damages for the breach of a contract is to put the injured party in the same position.LAWgistics When a contract is broken. DAMAGES Damages are a monetary compensation allowed to the injured party by the Court for the loss or injury suffered by him by the breach of a contract. RESCISSION When a contract is broken by one party.. in the position in which he would have been had there been performance and not breach. Rescission of the contract 2.e. Suit for specific performance of the contract 5.

These damages are known as ordinary damages. Nominal damages.LAWgistics 1. Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs. When a contract has been broken. Where the injured party has not in fact suffered any loss by reason of breach of contract. Hence. are brought to the notice of the other party. 475 per quintal. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 47 . These can be claimed only if the special circumstances which would result in a special loss in case of breach of a contract. Such damages. This means that the damages must be the proximate consequence of the breach of contract. The price of wheat rises to Rs. Damages other than those arising from the breach of a contract may be recovered if such damages may reasonably be supposed to have been in the contemplation of both the parties as the probable result of the breach of the contract. Vindictive or exemplary damages. 25 per quintal. he can recover damages in respect of any loss to his trade reputation by the breach. and dishonour of a cheque by a banker wrongfully when he possesses sufficient funds to the credit of the customer. B can claim damages at the rate of Rs. 500 per quintal and A refuses to sell the wheat. ‘vindictive’ or ‘exemplary’ damages have no place in the law of contract because they are punitive (involving punishment) by nature. the Court may award exemplary damages. and not by way of punishment for wrong inflicted. 2. the damages recoverable by him are nominal. the injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach. cannot be claimed as a matter of right. In case of a banker who wrongfully refuses to honour the customer’s cheque. the price to be paid at the time of delivery. 4. Damages for loss of reputation. 3. Damages in contemplation of the parties – special damages. known as special damages. But in case of breach of a promise to marry. Damages arising naturally – ordinary damages. If the customer happens to be a tradesman. Damages for the breach of a contract are given by way of compensation for loss suffered. 5.

Difficulty of assessment. 7. 9. The general rule in this connection is that the measure of damages is not affected by the motive or the manner of the breach. Liquidated damages and penalty. It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach. The cost of suit for damages is in the discretion of the Court. in addition to damages. 8. a certain specified sum will be payable as damages.LAWgistics 6. Mitigation of damages. Damages agreed upon in advance in case of breach. The aggrieved party is entitled. Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 48 . or if the contract contains any other stipulation by way of a penalty for failure to perform the obligations. to get the cost of getting the decree for damages. He cannot claim to be compensated by the party in default for loss which he ought reasonably to have avoided. Although damages which are incapable of assessment cannot be recovered. a reasonable compensation not exceeding the amount so named. 10. Sometimes parties to a contract stipulate at the time of its formation that on the breach of the contract by either of them. If a sum is named in a contract as the amount to be paid in case of its breach. Damages for inconvenience and discomfort. the aggrieved party is entitled to receive from the party who has broken the contract. Damages can be recovered for physical inconvenience and discomfort. Cost of decree. the fact that they are difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them. The Court must do its best to estimate the loss and a contingency may be taken into account. Such a sum may amount to either ‘liquidated damages’ or a ‘penalty’.

damages are not adequate remedy.. RECTIFICATION OR CANCELLATION When through fraud or a mutual mistake of the parties. by issuing an order. direct the party in breach to carry out his promise according to the terms of the contract. partly performed by one party. (c) When it is probable that the compensation in money cannot be got for the nonperformance of the act agreed to be done. if the Court finds that there has been a Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 49 . 4. where he is doing something which he promised not to do). the Court may. in such cases. restrain him from doing what he promised not to do. The right is founded not on the original contract which is discharged or is void but on an implied promise by the other party to pay for what has been done. In such a case.e. INJUNCTION Where a party is in breach of a negative item of a contract (i. This is a direction by the Court for specific performance of the contract at the suit of the party not in breach. QUANTUM MERUIT The phrase ‘quantum meruit’ means ‘as much as earned’. The Court may. 5. Such an order of the Court is known as an ‘injunction’. A right to sue on a quantum meruit arises where a contract. (b) When there exists no standard for ascertaining the actual damage caused for its non-performance is not an adequate relief. either party may institute a suit to have the instrument rectified. a contract or other instrument does not express their real intention. has become discharged by the breach of the contract by the other party. in the discretion of the Court. Some of the cases in which specific performance of a contract may.LAWgistics 3. SPECIFIC PERFORMANCE In certain cases of breach of a contract. be enforced are as follows: (a) When the act agreed to be done is such that compensation in money for its nonperformance is not an adequate relief.

(1989) 1 SCC Chakraborty 76 Jawaharlal Wadhwa v/s Haripada Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 50 .Agencies Sec 28 and 23.Ltd v/s A.P. and may. agreement to submit to one.Sec72.purpose of prescribing such time limit is to put the other side on notice and not to restrict the statutory period of limitation.how to be construedAgreement limiting time for assertion of rights by laying claim in terms of the agreement but not for enforcement of right in court not void.Agreement excluding court’s jurisdictionAbsolute exclusion void.Agreement in respect of legal proceeding. in its discretion. It is variable with the changing times and the needs of the society.object and nature. FCI v/s New India Assurance company Sec 28. (1994) 3 SCC 324 ltd.Money paid under mistake of law is refundable. (1989) 2 SCC 163 ABC Laminart Pvt.oppose to public policytest to determine ‘object’ and ‘public policy’ vide Halsbury’s laws of England ‘Any agreement which tends to be injurious to the public or against the public good is invalidated on the grounds of public policy. to be determined like any other by the proper application of prior decisions’ The public policy is not static. (1989) 4 SCC 1 Mahabir Kishore v/s State of M. it may ascertain the real intention of the parties. The question whether a particular agreement is contrary to public policy is a question of law. rectify the instrument so as to express that intention. (1991) 3 SC 79 Gurumukh Singh v/s Amar Singh Sec23.P. to the exclusion of others value.Unlawful object of agreement.LAWgistics fraud or mistake.but where more than one court has jurisdiction.

Frustration of Contract. (1993) 4 SCC 181 Deokabai v/s Uttam Sec56. inter alia.LAWgistics Sec 38 and 73. be claimed only by showing his willingness to perform the contract. This doctrine cannot be invoked where question of non performance of mandatory terms of the contract and not of impossibility of performance of the contract is involved.Anticipatory breach of contract by a party to the contractClaims open to the other partySpecific performance of the contract can. ----------------------------------------------------------------------------------------------------- Reproduction or other unauthorized use of this material is prohibited under the Copyright Laws 51 . contract is not discharged merely because it turns out to be difficult to perform or is onerous.what ever the alleged source of frustration.

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