Indian Contract Act 1872 Study Mat

♦
BEi
CA.-Foundation
MERCANTILE LAW
PART-I INDIAN CONTRACT ACT
PROF. BHAVESH RAJANI
NOT FOR SALE
FOR INTERNAL CIRCULATION ONLY

Unit Nature and Types of
1.1 Contracts
Learning
Objectives
After studying this unit, you will be able to

)) Understand the objective and importance )) Understand the rights of the parties
of the Indian Contract Act )) Understand the essential elements of a valid
)) Understand the various terminologies of the contract
Indian Contract Act )) Understand the types of contracts
Introduction to Indian Contract Act
Law related to contracts in India is contained in the Indian Contract Act, 1872, which was passed by
British India and is based on the principles of English Common Law
The Indian Contract Act, 1872 received its assent on 25th April 1872 and came into force on
1st September 1872
This act applies to the whole of India except the State of Jammu and Kashmir
At its formation, it contained 266 sections
Later, in 1930, Sec. 76 to 123 were separated to form the Sale of Goods Act and in 1932, Sec. 239
to 266 were separated to form The Indian Partnership Act
Presently, Sec. 1 to Section. 75 deal with the general principles of contract, whereas Sec. 124 to Sec.
238 deal with bailment, pledge, indemnity, guarantee and agency
The Indian Contract Act does not have a retrospective effect. Retrospective means relating to the
past
Prof. Bhavesh Rajani

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2 Nature and Types of Contracts
Objective and Importance of Indian Contract Act
Contracts have become an indispensable part of our life. Whether we know it or we don’t, we enter into
a contract at every second of our lives. When we purchase vegetables in the morning or go to watch a
movie in the evening, we enter into a contract. When we purchase some goods form market, we enter into
‘The contract of sale of goods”. In the same way, when we leave our vehicle at a workshop for repair,
we enter into ‘The contract of Bailment’ etc.
Considering the frequency with which a contract is entered into, it is ideal that we know about the facts,
features, types, specifications and essential elements of a contract.
Each contract creates some rights and duties upon the contracting parties. The Indian Contract Act deals
with the enforcement of these rights and duties on the contracting parties. The objective of the Contract
Act is to ensure that the rights and obligations arising out of a contract are honoured and that legal rem-
edies are made available to an aggrieved party against the guilty party.
Terminologies
Proposal [Sec. 2(a)]: When one person signifies to another, his willingness to do or to abstain from
doing anything, with a view to obtain the assent of that other to such act or abstinence, he is said
to make a proposal.
Example: Amar offers to sell his cycle to Akbar for ` 1,500. Here, Amar proposes his willingness to
sell the cycle at ` 1,500 with a view to obtain the assent of Akbar.
Promise [Sec. 2(b)]: 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.
Promise = Proposal by one person + Its acceptance by another person
Example: In the above example, when Akbar signifies to Amar, his assent to buy the cycle for ` 1,500,
Akbar is said to make a promise.
Agreement [Sec. 2(e)]: Every promise and set of promises forming the consideration for each other
is an agreement.
Example: In the above example of Amar and Akbar, after acceptance of Amar’s offer to sell the cycle
for `1,500, the offer becomes a promise and is treated as an agreement between Amar and Akbar.
Consideration means something in return. In the above example, the consideration

for Amar is `1,500 and for Akbar is the cycle.

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Unit 1.1 3
Contract [Sec. 2(h)]: An agreement enforceable by law is a contract. According to Pollock, ‘Every
agreement and promise enforceable by law is a contract.’
Contract = An Agreement + Enforceability
Conditions for Enforceability
Enforceability means an agreement which creates some legal obligation. If this agreement is not followed
by any party to contract, he can be sued.
According to Sec. 10, “All agreements are contracts, if they are made by the free consent of the parties,
competent to contract, for a lawful consideration with a lawful object, and not hereby expressly declared
to be void.” This definition clearly states that all agreements are not necessarily contracts. Thus an agree-
ment can turn into a contract if the above guidelines are fulfilled.
Contract in nutshell
For a contract there must be an offer by one person and acceptance by the other person and having
consideration between each other which forms agreement and if this agreement is enforceable by law
it becomes contract. In day to day life, the terms agreement and contract are interchangeable. But, they
have different implications under this Act.
In case of breach of an agreement the aggrieved party cannot file a case in court of law for the loss
suffered
A contract is an agreement between two or more parties that is enforceable by law
In case of breach of an contract the aggrieved party can file a suit in court of law for the loss suffered
All contracts are agreements but all agreements are not contracts.
Example 1: Amar offers to sell certain goods to Akbar for ` 10,000. Akbar accepts the offer. Such an agree-
ment is a contract and if, Amar refuses to sell then Akbar can file a suit or if Akbar refuses to buy, Amar can
file a suit in the court of law for the breach of the contract.
Example 2: Ram offers to pay Rahim a sum of ` 2,000 if Rahim kills Robert. It is not a valid contract since the
object is unlawful. Hence, it is only an agreement but not a contract, as it cannot be enforced in the court of
law. In case of breach either party cannot go to court of law.
General rights of parties
The parties to contract are generally awarded the following rights

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Jus in rem: Jus in Rem means a right against or in respect of a thing. A jus in rem is available against
the world at large. Nobody in the world can disturb him in his right.
Example: Amar is the owner of house. He has the right to have quite possession and enjoyment of
that house against every member of public. This right of Amar is jus in rem.
Jus in personam: Jus in personam means a personal right i.e., right against a person or a party with
whom you have entered into a contract. A jus in personam is available only against a particular person.
Example: Amar owes a certain sum of money to Akbar. Akbar has the right to recover this amount
only from Amar. This right can be exercised only by Akbar and only against Amar. This right of Akbar is a jus
in personam.
A contract creates jus in personam, not jus in rem.
Essential Elements of a Valid Contract
An agreement must have the following essential elements to become a valid contract:
Offer and acceptance: The first step in creating a contract is an offer by one party and its accep-
tance by another. The offer when accepted becomes an agreement. Such offer and acceptance must
be valid. As the definition of contract states that an agreement is the primary criteria for making a
contract. Practically speaking the journey of contract begins with an agreement and the formation of
an agreement finds its root in offer and acceptance.
Mutual consent of parties: To constitute a valid contract there must be consensus ad idem (meeting
of minds).The parties to an agreement must agree upon the same thing and in the same sense and
at the same time.
Example: Amar, who owns two cars, Maruthi 800 and Maruthi Zen, is selling Maruthi 800 to Akbar. Akbar
thinks he is purchasing Maruthi Zen. There is no consensus ad idem and consequently, no contract.
Intention to create legal obligation: The agreement must create a legal obligation, besides offer and
acceptance; both the parties must have an intention to go to the court of law, if the other party does
not meet his promise. Normally, in social agreements there is no intention to go to the court of law
but in commercial agreements it is presumed that there is an intention to go to the court.

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Unit 1.1 5
Mr Balfour was a civil engineer working in Ceylon. Once Mr. and Mrs. Balfour went to England for
Vacation and at the end of vacation Mrs. Balfour got rheumatoid arthritis and was advised to stay in
England on health grounds. Mr. Balfour promised to pay the wife £30 per month until she was able to
join him in Ceylon. Mr. Balfour sent the agreed amount for some time and later the parties separated
and were divorced. Mrs. Balfour filed a case against her husband to recover the promised amount. The
Court held that “these are not contracts becouse the parties did not intend that they shall be attended
by legal consequences.”
[Balfour vs. Balfour, (1919) 2 K.B.571]
There are certain instances wherein the intention of creating legal obligation is ruled out by the parties
by inserting a clause to the same:
There was a agreement between R & co and C & Co by means of which the former was appointed
as the agent of the latter. One clause in the agreement was: “This agreement is not entered into as a
formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts”. Held, there
was no binding contact as there was no intention to create legal relationship
(Rose & Frank Co.Vs Crompton Bros, (1925)A.C.445).
Free consent of parties: If the consent of parties is not free, then no valid contract comes into
existence. The consent is not free when it is obtained by coercion, undue influence, and fraud, mis-
representation of facts and mutual mistake of facts.
Example: Suresh threatens to kill Virat, if he does not sell his bat to him. Virat agrees to sell his bat to Suresh.
In this case Virat’s consent was obtained by coercion (physical force) and therefore, it cannot be regarded
as free. In such cases where the consent of the parties is not free, the contract is voidable at the option of
the party not at fault.
Parties must be competent to contract: Sec. 11 of Indian Contract Act specifies that every person
is competent to contract provided:
(a) He is a major
(b) He is of sound mind
(c) He is not disqualified by law to enter into a contract
Example: Parthiv, a minor borrowed a sum of ` 10,000 from Sachin, a major. Held, Sachin could not recover
the sum lent since it was not a valid contract as Parthiv was not competent to contract.
Lawful object: The object of an agreement must be lawful. It must not be fraudulent, unlawful, im-
moral or opposed to public policy. If an agreement suffers any legal flaw, it shall not be enforceable
by law.

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Example: Amar offers to pay `1,000 to Akbar if Akbar kidnaps Anthony. The agreement is unlawful as the
object is unlawful.
Lawful consideration: The agreement must be supported by consideration. Consideration means

something in return i.e. both the parties must get something in return for the promise. If the prom-
ise is not supported by consideration, it will be a bare promise, and hence not enforceable by law.
Consideration must be lawful, real and not illusory.
Example: Amar sells his house to Akbar for ` 50,000. Akbar’s promise to pay the sum is consideration for
Amar’s promise to sell his house and vice versa.
Not expressly declared void: There are certain agreements which have been declared to be void by the
law of a country, and then such agreement, if entered into, shall not be enforceable by the court even
if the agreement possesses all other essential elements of valid contract. There are agreements which
have expressly been declared void as these agreements are not in public interest such as agreement in
restraint of trade, marriage, legal proceedings etc.
Example: Amar promises to pay `50,000 to Akbar if Akbar does not marry at all. This agreement is void as
marriage is right of every individual. Restrain of marriage is expressly declared void by the law.
Possibility of performance: The agreement must be capable of being performed. If the parties have
agreed on a contract that contains any promise, not possible to be performed in real life, then the
agreement will not be considered as valid. The impossibility makes an agreement void if the parties
are aware of the same or not.
Example: A promises to put life in B’s dead wife if B pays him a sum of `1,00,000. Such agreements are not
enforceable in the court of law as the performance of such act is impossible in nature
Meaning of the agreement must be certain: The meaning of an agreement must be certain or should
be capable of being made certain. If the terms of the agreement are vague, confusing or uncertain, it
shall lead to no binding obligation for the parties.
Example: Amar agrees to sell 5 tons of coconut oil to Akbar at whatever price Akbar may pay. The agree-
ment is void due to uncertainty of price.
Legal formalities A contract may be made by word, spoken or written, but if there is a statutory
requirement that the contract should be in writing, registered or attested, and then such agreement
must be so, otherwise it shall not be enforceable.
Example: An oral agreement for sale of immovable property is unenforceable because the law requires
such agreements to be in writing and registered.

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Unit 1.1 7
Types of Contract
On the basis of On the basis of On the basis On the basis of On the basis of for-
creation validity of nature of performance malities
obligation
Expressed Valid contract Unilateral Executed Formal contracts
contract contract contract àà Contract of
Void contract
Implied/Tacit Bilateral Executory records
Voidable
contract contract contract àà Contracts un-
contract
der seal
Quasi contract
Unenforceable
Simple contract
E - contract Contract
Void Agree-
ment
Illegal Agree-
ment
Express contract: Where the terms of the agreement are expressly agreed upon by the parties in
words either written or spoken, at the time of formation, the contract is said to be an express contract.
Example: Amar said to Akbar, “Will you buy my watch for ` 50?” Akbar replies, “I am ready to buy”. This is an
express contract made orally.
Implied / Tacit contract: Where a proposal or acceptance is made otherwise than in word spoken
or written, promise is said to be implied. These contracts are not created by words, either spoken or
written but created by act or conduct of parties.
Example: Buying a cup of tea in a restaurant, getting into public bus, using a phone booth are some of the
many examples where parties do not signify there offer and acceptance by words spoken or written.
Quasi contracts: These contracts are created neither by words (spoken or written) nor by the conduct
of parties, but created by law. A quasi contract is based on the principle that a person shall not be
allowed to enrich himself at the expense of another.
Example: Amar a trader leaves goods at Akbar’s place. Akbar treats the goods as his own and uses the
goods. Akbar is bound to pay for the goods to Amar as Akbar has used the good to his benefit.
E-contracts: An E-contract is the one, which is entered between the parties via internet. It is one of
the most common ways of contracting in the current scenario. The offer and acceptance of the parties
do not happen in person but over the information highway (internet).
Example: Rohit ordered a law book from an online book store. The book store makes the delivery in four
working days and rohit pays for the same.

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Sec. 2(h) Valid contract :“An agreement enforceable by law is a contract”. An agreement which has
all the essential elements of a contract is known as a valid contract. A valid contract is one which can
be enforced by any of the parties to the contract and the party not at fault can also file a suit in the court
of law.
Example: Amar offers to sell his horse for `1,000 to Akbar. He accepts the offer. It is a valid contract. Here
either of the parties to the contract can enforce the contract.
Sec. 2(i) Voidable contract: “An agreement enforceable by law at the option of one or more parties,
but not at the option of other or others is voidable contract.” A voidable contract is one which can
be set aside, repudiated or avoided at the option of the aggrieved party. Until the contract is set-aside
or repudiated by the aggrieved party, it remains a valid contract.
Example: Amar promises to sell his horse to Akbar for `10 and Amar’s consent was obtained forcefully. The
contract is voidable at the option of Amar. If he fails to avoid, the contract remains valid
Sec 2(j) Void contract “A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable”. In other words a void contract is a contract which was enforceable by law,
when originally created, but due to the happening of some events, it ceases to be enforceable by law
Example: Amar offers to marry Laxmi. Laxmi accepts the offer. Later, Laxmi dies. The contract was valid at
the time of formation but subsequently becomes void on the death of Laxmi
àà Circumstances under which a contract was valid at the time of formation but subsequently
becomes void:
àà Destruction Of subject matter
àà Contract becoming unlawful
àà Death of the parties
àà Parties becoming unsound mind
àà Party becoming Alien enemy
Unenforceable contracts A contract which is good in substance, but due to technical defects cannot
be enforced by law is known as unenforceable contract. If the defect is removed, the contract can
be enforced.
Example: When the law requires that a contract should be in writing, stamped or registered, the contract
cannot be enforced by law if such formalities are not properly observed.
Sec 2(g) Void agreement “An agreement not enforceable by law is said to be void”. A void agree-
ment is in nullity of substance and destitute of any legal effects in the eyes of law. It is void ab initio
i.e. void from the very beginning. Such an agreement does not result in a contract at all.
Example: Ashwin a major extends a loan of ` 10,000 to Raj a minor, Raj fails to pay the loan amount. Ashwin
cannot recover the same as an agreement with the minor is void ab initio.

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Unit 1.1 9
Illegal Agreement The term illegal refers to an act which is in contravention of law. In other words
agreements which are forbidden and punishable by law are called illegal agreements. Making of
such agreements is unacceptable and the law does not recognise such agreements and they are de-
clared void-ab-initio. Moreover any collateral agreement to an illegal agreement is also tainted with
illegality and hence void.
Example: Salman agrees to pay `1,00,000 to Virat If he kills Smith. Such agreements are criminal in nature
and therefore cannot be enforced in the court of law.
Example: Salman takes a loan of ` 1,00,000 from Aryan. Salman agrees to pay ` 1,00,000 to Virat If he kills
Smith. Such agreements are criminal in nature and therefore Salman cannot sue Virat for non-performance
if Virat fails to kill smith. Neither can Aryan demand the repayment of loan from Salman as the primary
transaction between Salman and Virat was illegal and therefore the collateral transaction between Aryan
and Salman also cannot be enforced (If Aryan is not aware regarding the purpose of the transaction he can
recover).
All illegal agreements are void agreements, but all void agreements are not illegal.
Difference between Void Agreement and Illegal Agreement

Void Agreement Illegal Agreement
All void agreements are not necessarily illegal All illegal agreements are void
The benefit received has to be restored to other The money advanced or thing given cannot be
party claimed back
It is not a punishable offence It is Punishable offence
Unilateral contract A unilateral contract is one wherein at the time the contract is entered into there
is an obligation to perform on the part of one party only.
Example: Raj makes payment for rail tickets for his journey from Delhi to Mumbai. He has performed his
promise. It is now for the railways company to perform the promise.
Unilateral contract is a one sided contract where one party (offeror) promises
to do something in the return for an act of the other party (offeree). Before the
act is performed, the promise of the promisor is a mere unilateral offer. When
the act is performed, this unilateral offer and the performed act give rise to a
unilateral contract.
Example: The offeror published a newspaper notice offering a reward for the return of a lost Boy. The
offeree is under no obligation to look for the boy, but if he or she finds the boy and returns to the offeror,
then the offeror is bound to reward the offeree.
Bilateral contract This is a contract in which both the parties have an obligation to perform at the
time of its formation as both have made promises for the future. Bilateral contracts are similar to

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executory contracts and are also known as contracts with executory consideration.
Example: Amar promises to sell his two wheeler for ` 15,000 to Akbar and agrees to deliver the two wheeler
on the receipt of the payment by the end of the month. The contract is bilateral as both the parties have
exchanged a promise to be performed within a stipulated time period in future.
Executed contract: An executed contract is the one in which both the parties have performed their
respective obligations. It is a contract where, in the terms of contract, nothing remains to be fulfilled
by the parties.
Example: Hussain agrees to paint a picture for Amitabh for ` 5,000. When Hussain paints and Amitabh pays
the price, i.e., when both parties perform their obligations, the contract is said to be executed.
Executory contract: An executory contract is one wherein both the parties to the contract, are yet
to perform their obligations.
Example: In the above example, if Hussain has not yet painted the picture and Amitabh has not paid the
price, the contract is executory.
Formal contracts: These include: (a) contracts of record, and (b) contracts under seal. Contracts of
record and contracts under seal are known as formal contracts because their validity depends on the
form in which they are made.
àà Contracts of record: A contract of record is either a judgment of a Court or a recognisance. A
judgment is an obligation imposed by a Court upon one or more persons in favour of other or
others. Strictly speaking, it is not a contract which rests on agreements. It is usually met with in
connection with criminal proceedings.
Example: When a person is arrested, he may be released on a promise to appear in the Court or to be in
good behaviour, subject to money penalty, if this obligation is broken it is a recognisance.
àà Contracts under seal A contract under seal is the one which derives its binding force from its
form alone. It is in writing and is signed, sealed and delivered by the parties. It is also called a
deed or a speciality contract.
The contracts which must be made under seal, include:
àà Contracts made without consideration
àà Contracts made by corporations
àà Gift deeds
Contracts of record derive their binding force from the authority of the Court.
They are, in fact, not real contracts because they lack the essential element of
consensus. They are enforced compulsorily by the Court of law.
Simple contract: A simple contract is the contract that is not formal. It can be made orally or in
writing and must be supported by consideration.

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Unit 1.1 11
A contract does not have a retrospective effect but has a prospective effect
The Indian Contract Act got its assent on 25th April 1872
The Indian Contract Act came into force on 1st September 1872
Promise = Proposal by one person + its acceptance by another person
Contract = An Agreement + Enforceability
A contract creates jus in personam, not jus in rem
All contracts are agreements but all agreements are not contracts
Consensus ad idem refers to meeting of minds
All illegal agreements are void but all void agreements are not necessarily illegal

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Unit
Offer and Acceptance
1.2
Learning
Objectives
After studying this unit, you will be able to:
)) Understand the meaning and definition )) Know about lapse of offer

of Offer and Acceptance
)) Know the essential elements of accep-
)) Understand the essential elements of tance
valid offer
)) Comprehend the communication of offer
)) Know the legal rules relating to offer and acceptance and revocation of offer
and acceptance
)) Understand the types of offer
Proposal or Offer
To form an agreement, there must be at least two elements- one, an offer and the other, acceptance, Thus,
offer is the foundation of any agreement.
The term offer is defined in Sec. 2 (a) of Indian Contract Act, 1872 as:
“When one person signifies to another his willingness, to do or to abstain from doing anything, with
a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.
Example: Amar offers to sell his cycle to Akbar for ` 1,500. Here, Amar proposes his willingness to
sell the cycle at ` 1,500 with a view to obtain the assent of Akbar.
Essential elements of a valid offer
From the above definition, the following are essential elements of a valid offer:

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Unit 1.2 13
Two parties: For a valid offer, there must be two parties. A person cannot make an offer to himself. The parties
to contract are:
àà The person who makes offer is called Offeror or proposer
àà The person to whom offer is made is known as Offeree or proposee
Offer may be positive or negative: The offer may involve doing something or not doing some-
thing. An offer to do something is a positive offer and an offer not to do something is a negative
offer.
Example: Anil proposes Sunil to manufacture 1000 shirts. The proposal is to do something, i.e., to manufac-
ture shirts. This is a positive proposal
Example: Anil a debtor to Sunil proposes to Sunil, “If you do not file a suit against me for defamation for
next three months, I shall give you `500.” Over and above the outstanding amount such proposal is said to
be a proposal to abstain from doing something. This is a negative proposal.
The offer must be made with a view to obtain the assent of the other party: The offer must be
made with an intention to obtain the assent of the other party. The offer made as a prank or joke is
not a valid offer and therefore if accepted, it cannot amount to a valid contract.
Example: If B jokingly offers M to sell his scooter at `10 and M knowing that B is not serious, accepts the
offer, then such acceptance does not hold any value as the offer made jokingly is not valid.
Legal rules regarding valid offer
The offer must have its terms definite and clear: The terms of the offer must be certain, definite
and clear. If the terms of the offer are not certain or definite, it is not a valid offer, as it is not clear
as to what exactly the parties intend to do.
Example: Ram offers to sell to Rahim his gold ring for ` 1, 00,000 or ` 1, 50,000. Here Ram’s offer is not
certain because it is not clear as to which of the prices is to be paid by Rahim.
According to Sec. 29, if the terms of the offer are capable of being made certain,
the offer is not regarded as vague.
Example: Amar who only deals in coconut oil offers to sell to Akbar (a regular customer) 100 tons of oil.
Here, the offer cannot be said uncertain on the grounds that it is not clear what price is to be paid for the oil
because if such an offer is accepted by Akbar, Akbar has to pay reasonable price or according to the custom
of usage of trade.
The offer must be capable of creating a legal relationship: If the offer does not intend to give rise
to legal relationship when accepted it is not a valid offer in the eyes of law. The offer must be such
that when accepted it will result in a valid contract. A mere social invitation cannot be regarded as
an offer because if such an invitation is accepted, will not result in a valid contract. It is generally

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14 Offer and Acceptance
contemplated in commercial dealings that the party making a offer is intending to create a legal
relationship.
Example: Amar invited Akbar to a dinner. Akbar accepted the invitation. This is a social agreement. If Amar
fails to serve dinner to Akbar, Akbar cannot go to the court of law for enforcing the agreement. Similarly, if
Akbar fails to attend the dinner, Amar cannot go to the court of law for enforcing the agreement.
The offer must be communicated to the other party: The offer is completed only when it has been
communicated to the offeree. Until the offer is communicated it cannot be accepted. Thus, an offer
accepted without its knowledge, does not confer any legal rights on the acceptor. This statement can
be understood by a case law Lalman Shukla vs Gauri Datt.
Gauri Datt’s nephew had absconded from his house. He sent his servant, Lalman Shukla to trace his
missing nephew. When the servant had left, Gauri Datt then announced that anybody who found his
missing boy would be given a reward of ` 500. The servant found Gauri Datt’s nephew without know-
ing about the reward. When the servant realised the same, he brought an action against Gauri Datt
to recover the reward. But his action failed. It was held that the servant was not entitled to the reward
because he did not know about the offer when he found the missing boy.
[Lalman Shukla vs. Gauri Datt (1913) All LJ 489]
An offer must be distinguished from an invitation to offer: An invitation to offer is an action invit-
ing other parties to make an offer to form a contract. In the case of an invitation to offer the person
sending out the invitation does not make an offer but only invites the other party to make an offer.
It is a prelude to an offer inviting negotiations or preliminary discussions. Thus such invitations for
offers are therefore not offers in the eyes of law and do not become agreements by their acceptance.
Goods displayed in the shop with the price marked on them, an advertisement for sale of goods by
auction, catalogues of prices are all examples of invitations to offer.
Nickerson was an auctioneer in a suburb of London. He advertised that three would be a public auction
of certain articles on a certain date at a particular time. Harris was interested in some of the articles, and
so, he went from London to the place of auction on the specified date and time. On reaching the place
of auction, he found that the auction was cancelled. So, he filed a suit against Nickerson to recover loss
suffered by him in travelling from London to the place of auction. His suit was dismissed on the ground
that advertisement for auction sale is not an offer, but merely an invitation to offer.
[Harris Vs. Nickerson (1873) L.R. 8 Q .BV.286]

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Unit 1.2 15
Goods are sold in a shop under the ‘self- service’ system. Customers select goods in the shop and take
them to the cashier for payment of the price. The contract, in this case, is made, not when a customer
selects the goods, but when the cashier accepts the offer to buy and receives the price.
[Pharmaceutical Society of Great Britain Vs. Boots Cash Chemists (1953) 1 Q.B 401]
Invitation to offer Offer

The person sending out the invitation does not When one party (the offeror) makes a definite
make an offer but only invites the other party to proposal to another party (the offeree)
make an offer
It expresses initial intention It expresses final willingness
Example: Issue of prospectus by the company Example: Application filled in by prospective ap-
inviting applications plicants to the Company
Examples of invitation to offer

àà Catalogues, price lists and quotations
àà Circular inviting tenders or quotations
àà Railway time – table or guide
àà Bank’s catalogue of charge and interest or bank’s reply to an enquiry regarding the particulars
of charges and interest
àà Prospectus of a company
àà Advertisement inviting applications for employment
An offer must be distinguished from a mere declaration of intention: A declaration by a person

that he intends to do something, gives no legal right of action to another. Such a declaration only
means that an offer will be made or invited in future and not that an offer is made now in the present.
Example: Ram, a broker of Mumbai wrote to Rahim, a merchant of Mumbai stating the terms on which
he is willing to do business. It was held that the letter was a mere statement of intention and not an offer.
A statement of price is not an offer: A mere statement of price or answer to a question cannot be
construed as an offer. Generally parties negotiate and bargain before they enter into a contract and
such a process includes conducting an enquiry. An answer made to such an enquiry is a part of ne-
gotiation and cannot be concluded as the final willingness of the parties.

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One of the parties (Harvey) makes and enquiry to the other party (facey) regarding the price of an
estate as well as the party’s willingness to sell such an estate. The communication took place as fol-
lows- ( Harvey to Facey) “Will you sell us your Bumper Hall Pen? Telegraph lowest cash price? (Facey
to Harvey) “Lowest price of Bumper Hall Pen $ 900”. ( Harvey to Facey) We agree to buy, Bumper Hall
Pen for the of $ 900 asked by you”. Held, there was no concluded contract between Harvey and Facey.
[Harvey Vs Facey (1893) A.C.552]
The first telegram asked two questions. (i) the willingness of the party to sell and
(ii) the lowest price, Facey replied only to the second question and gave his low-
est price, i.e., he supplied mere information and such answer to a question does
not amount to an offer to sell. There could be a contract only if he had accepted
Harvey’s last telegram.
Offer should not contain a term, the non-compliance of which would amount to acceptance:
While making the offer, the offeror cannot say that if the offer is not accepted before a certain date,
it will be presumed to have been accepted. An offeror cannot impose the burden on the offeree to
reply. Acceptance cannot be presumed merely by silence.
Example: Amar writes a letter to Akbar stating, “I offer to sell my horse for ` 1, 00,000. If I do not receive
your reply by the coming Friday, I shall assume that you have accepted the offer.” Akbar doesn’t reply. In this
case, no contract will be created as the law does not permit a party to impose an unnecessary obligation
on the acceptor if he does not want to accept the offer. Moreover, acceptance cannot be presumed from
mere silence.
The offer may contain any number of conditions: The offeror is free to include any terms and
conditions in his offer. The terms and conditions should be communicated to the offeree before or
at the time of making the offer. Any terms and conditions made after the formation of contract, shall
not be binding to the offeree.
Special terms of offer: No doubt, an offeror can attach any special terms and conditions to the offer
he makes. But the special terms and conditions of the offer must be brought to the notice of the of-
feree before he accepts the offer. Further, the special terms and conditions of an offer must be stated
in such a manner that the attention of the offeree is drawn to them.
A purchases a ticket which had on its face written” Dublin to Whitehaven”. On the back of the ticket
there was a term that the carrying company was not liable for losses of any kind. But there was nothing
on the face of the ticket to draw A’s attenction to the terms and conditions on the back of the ticket.
Held, A was not bound by these terms and conditions
[Henderson Vs. Stevenson (1875).L.R2 H.L. App. Cas. 470].

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Unit 1.2 17
A hotel had put a notice in a bed room, exempting the proprietor from liability for loss of client’s goods.
Held, the notice was not effective as it came to the knowledge of the client only when the contract to
take a room had already been entered into at the reception.
[Olley Vs. Marlborough Ltd. (1949) K.B. 532]
Types of Offer
Specific Offer: A specific offer is the one, which is made to a specific person or a group of persons.
It can be accepted only by the person or group of persons to whom it is made.
Example: Ravi asks to Suri, “Will you purchase my house for ` 1, 00,000?” It is a specific offer made by Ravi
to Suri and only Suri can accept this.
General Offer: A general offer is an offer which is made to the public in general and can be accepted
by anyone who fulfils the terms and conditions of the offer.
A Company advertised that a reward of ` 100 would be given to any person who would suffer from
influenza after using the medicine (Smoke balls), made by the Company if used, according to the
printed directions. One lady, Mrs. Carlill, purchased and used the medicine according to the printed
directions of the Company but suffered from influenza. She filed a suit to recover the reward of ` 100.
The court held that there was a contract as she had accepted a general offer by using the medicine in
the prescribed manner and as such she was entitled to recover the reward from the Company.
[Carlill vs. Carbilic Smoke Ball Co. 1893]
When the offer is accepted by the particular person, there is a contract between the offeror and that par-
ticular person. If a large number of persons accept the offer, there are as many contracts as the number
of persons accepting the offer. Where a reward has been offered for giving a specific thing, acceptance
can be made only by the first person who gives the information or finds such thing.
Counter Offer: When an offeree offers to accept the offer of the offeror, subject to some modification
or condition, the offer of the offeree is called counter offer. Counter offer becomes an offer itself and
therefore amounts to rejection of the original offer.
Example: Akash asks Meena, “Will you purchase my car for ` 1, 00,000?” Meena replies, “I will purchase your
car, if you sell it for ` 75,000.” In this case, the offer of Meena is called Counter Offer and it brings an end to
the original offer. In other words the original offer is invalid.

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The counter offer results in a new offer and the original offer comes to an end
and later on such original offer cannot be revived. The counter offer may be ac-
cepted or rejected by the other party (original offeror). If the other party accepts
it, the contract is said to be concluded.
Cross Offer: When two parties make similar offers to each other without knowing the offer made by
the other, and the terms and conditions in both the offers are identical, then the offers are called cross
offer. In this case, no contract will be created as ones offer cannot be construed as acceptance by other.
Example:Pankaj of Bombay offers Suraj of Calcutta, “Will you buy my car for ` 1, 00,000?” by writing a letter.
At the same time, Suraj offers Pankaj, “Will you sell your car to me for ` 1, 00,000?” Neither Pankaj nor Suraj
has knowledge of the other’s offer. The offers of Pankaj and Suraj are called cross offers the contract is not
concluded as neither of the parties has accepted the offer of the other.
Standing Offer: An offer is a standing offer if it is intended to remain open for a specified period and
can be accepted at any time during that period. When an organisation requires large quantities of goods
from time to time, it is usual for the concern to invite tenders, through an advertisement, for the supply
of the goods or services. The tender or offer is called a standing, open or continuing tender or offer.
The acceptance of tender or offer by the party, who has invited the tender, does not result in a binding
contract, unless an actual order is placed. It merely amounts to intimation to the tenderer or offeror
that this tender or offer will remain open during the specified period and that it would be accepted
from time to time by ordering the required quantity. In this case, a binding contract comes into ex-
istence only when an order, in accordance with the terms of the offer, is placed. The acceptance of a
standing offer has the effect that as and when the goods or services are required, an order is placed
with the person who submitted tender and each time a distinct contract is made.
A railway company invited tenders for certain iron articles which it might require over a year. Mr. W’s
tender was accepted. W had to supply goods to the railway company from time to time as per the
orders given by the latter.
[ Great Northen Rail Vs. Witham (1973) L.R.9 C.P.16]
Express Offer: When the offeror expressly communicates the offer, it is said to be an express Offer.
The express communication of the offer may be made by word spoken or written.
Example: Amar offers Akbar, “Will you buy my car for ` 1, 00,000?” by writing a letter. The offer of Amar is
an express offer.
Implied Offer: The offer which could be understood by conduct of parties or circumstances of case
is called an implied offer. For instance, when a bus transport company runs its bus on a particular
route, there is an implied offer by the bus transport company to carry passengers to the specified

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Unit 1.2 19
destination at a certain fare.

Example: Public telephones or weighing machines in public places offer their services for a certain amount.
The offer of these machines is called an implied offer.
Lapse of Offer
An offer should be accepted before it lapses (i.e. comes to an end). An offer may come to an end in any
of the following ways stated in Section 6 of the Indian Contract Act:
By revocation of offer: The offeror has a right to revoke or withdraw his offer any time before com-
munication of acceptance is made by the offeree. If a notice of withdrawal is given by the offeror to
the offeree before it is accepted then the offeree cannot accept the offer thereafter.
By rejection of offer by the offeree: An offer would lapse if it is rejected by the offeree. After the
rejection, it can neither be accepted nor be revived but a fresh offer can always be made. The rejec-
tion of offer may be either expressed or implied.
By expiry of time: If the acceptance to the offer is not given within the stipulated time or, where no
time is stipulated, within a reasonable time, the offer lapses with the expiry of stipulated or reason-
able time as the case may be.
Example: M applied for shares on 8th June. But allotment was made on 22nd November. M refused to
take up the shares. The company sued M. It was held by the court that M was entitled to refuse, as there
was undue delay on the part of the company in accepting the offer. The offer lapsed by the undue delay
in acceptance on part of the company as the time taken for acceptance relating to such contract was
unreasonable.
By change in law: Sometimes, there is a change in law which makes the offer illegal or incapable
of performance. In such a case, the offer comes to an end.
Example: Amit undertook an order from Sumit to transport goods from one state to another state. In the
meanwhile government issued a circular to confiscate certain trucks which included truck of Amit. The
contract cannot be concluded because of the confiscation of truck by government. Therefore Amit cannot
be held liable for non performance.
By the death or insanity of the offeror: Sometimes the offeror dies or turns insane. In such cases;
the offer comes to an end if the fact of his death or insanity comes to the knowledge of the acceptor
before he makes his acceptance. If the offer is accepted in ignorance of the fact of the death or insanity
of the offeror, the acceptance is valid. This will result in a valid contract and legal representatives of
the deceased offeror shall be bound by the contract-(but not in case of contracts of personal nature).
By not accepting the offer, according to prescribed or usual mode: Sometimes, some mode of
acceptance is prescribed in the offer. In such cases, the offeror can revoke the offer if it is not accepted
according to the prescribed mode. The offer should be accepted by the offeree in a mode prescribed

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by the offeror. If the offeree fails to do so then the offeror has a right to reject such acceptance but
in case the offeror fails to reject the acceptance which is not provided in prescribed mode then it is
deemed that he has accepted the same. sec 7(2).
Example: M offered to sell his car to B. The offer was made by a letter and M requested B to send his reply
by telegram. B posted a letter of acceptance instead of sending his reply through telegram. M can reject
B’s acceptance but if M fails to communicate his rejection to B then it is deemed that M has affirmed the
acceptance.
By failure to accept condition precedent by offeree: Sometimes, the offeror requires that some
condition must be fulfilled before the acceptance of the offer. In such cases, the offer lapses, if it is
accepted without fulfilling the condition.
Example: Amar offered to sell his cycle to Akbar for ` 400 subject to the condition that Akbar should pay
an advance of ` 100 before a certain date. Akbar accepted the offer but did not send the advance of ` 100.
In this case, the offer stands lapsed as the advance is not paid.
By counter offer: Sometimes, a counter offer is made by the offeree. In such a case, the original
offer automatically comes to an end as the counter offer amounts to rejection of the original offer.
Example: Amith made an offer to Sumith to sell his car for ` 60,000. Instead of accepting the offer, Sumith
made an offer to buy the car for ` 50,000. Here, Sumith’s offer to buy the car for ` 50,000 is a counter offer
and terminates the original offer made by Amith.
By subsequent impossibility: Prior to acceptance of the offer, if the work to be done becomes il-
legal, physically impossible or the subject matter is destroyed the offer comes to an end. It is also
called supervening imposibility.
Example: A offers to sell his car to B for ` 30,000, but before the offer is accepted by B, A’s car is completely
damaged, the offer lapses by the destruction of the subject-matter of the offer.
Acceptance
The acceptance is the assent given by the offeree to an offer made to him.
As per Sec. 2(b) “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”.
The analysis of this legal definition shows that an acceptance is the consent given to the offer, and a
binding contract between the offeror and offeree comes into existence on the acceptance of offer.
Example: Krishna offers to sell his cycle for ` 1,000 to Sudhama. Sudhama accepts this and agrees to buy
Krishna’s cycle for ` 1,000. In this case, a binding contract comes into existence between Krishna and
Sudhama.

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Unit 1.2 21
WHO CAN ACCEPT?
In case of specific offer: when an offer is made to a specific person then it can be only accepted by
such person and nobody else.
Example: M sold his business to B without giving any notice of sale to his customers. P, a customer of M,
sent an order for goods to M by name. B received the order and sent a letter of acceptance. In a suit, it was
held by the court that there was no contract between B and P, as P never made an offer to B, which B could
accept.
In case of general offer: In case of general offer, a general offer can be accepted by any person or
persons of the public who has the knowledge of the offer.
Example: Mr. V issued a pamphlet offering a reward of `5,000 to anybody who would trace and bring back
his nephew. Mr.S traced the boy and brought him back to Mr.V. Mr.V refused to pay the amount. It was held
that Mr. S who traced the boy, was entitled to the reward, as the pamphlet was an offer made by Mr. V to
the public at large.
Essential elements of valid Acceptance
Acceptance must be made by a person to whom the proposal is made: Acceptance can only be
given by the person to whom the offer is made.
In case of specific offer, the acceptance must be made by the person to whom the offer is made. While
in case of general offer, it may be accepted by any one.
The board of management of a college resolved to appoint D as the Principal. One of the members
of the board, in his individual capacity, informed D of the resolution. But there was no formal com-
munication of the resolution of the board. The board later rescinded the resolution and decided to
appoint B as the principal of the college. D sued the board. Held, there was no authorised or normal
communication of acceptance, and hence, there was no completed contract.
[Powel Vs. Lee , (1908) 24 T.L.R 606]
The acceptance must be communicated to the offeror himself: A valid contract arises only if the
acceptance is communicated to the offeror or his authorised agent. If the acceptance is communicated
to any other person, it will not create any legal relationship. However, if the offer is made by an agent
on behalf of his principal, then the acceptance can be communicated either to the principal or his agent.
The acceptance must be absolute and unqualified: It means the acceptance should be in Toto (i.e.
of all the terms of the offer) and without any condition. Thus, an acceptance with a variation is not

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an acceptance, it is a counter offer and thus the original offer would come to an end.
Acceptance must be made in the mode prescribed: If the offer is not accepted in the prescribed
mode, the offeror may reject the acceptance within reasonable time. However, if the offeror does
not reject the acceptance in reasonable time, then he becomes bound by the acceptance. Sec 7 ( 2)
Example: Amar made an offer to Akbar, indicating that the acceptance is to be given via telegram. Akbar
sends his acceptance by ordinary post. It is a valid acceptance unless Amar insists for acceptance in a pre-
scribed manner. Amar has right to reject the acceptance as it is not made in the prescribed manner.
If the offeror does not prescribe mode of acceptance then the offeree may adopt
any usual and reasonable mode. Usually the mail course is understood as the
most reasonable mode of communication.
The acceptance must be given within the time prescribed or within a reasonable time: Some-
times, the time limit is fixed within which the acceptance is to be given. In such a case, the accep-
tance must be given within the fixed time limit. In case no time limit is prescribed, the acceptance
should be given within a reasonable time. The term ‘reasonable time’ depends upon the facts and
circumstances of each case.
Acceptance may be expressed or implied: An acceptance, which is expressed by words, written

or spoken, is called an expressed acceptance and the acceptance which is expressed by conduct, is
called an implied acceptance.
Example1: If Ravi residing at Jaipur offers to sell his car to Suri residing at Delhi by writing a letter and Suri
accepts the offer by writing a letter, the acceptance is said to be expressed.
Example2: At an auction sale of car, Mahesh is the highest bidder. The auctioneer accepts the bid (i.e. offer)
by striking the hammer on the table. It is an implied acceptance. Here the auctioneer’s conduct of striking
the hammer on the table shows that the auctioneer has accepted the highest bid.
Silence cannot amount to acceptance: As we have already seen, an offer should not contain any
term, the non compliance of which amounts to acceptance. In other words, silence can never amount
to acceptance. Thus, an offeror cannot say that if acceptance is not communicated up to a certain
time, the offer would be considered as accepted.
Example: G offered to supply coal to Suresh and Co. The draft agreement for the supply of coal was sent
by G to the manager of the Suresh & Co for his acceptance. The manager wrote on the draft agreement
“approved” and kept it in a drawer of his table. The approved draft agreement was left in the drawer of the
table itself, and the acceptance was not communicated to G. Held there was no contract, as the acceptance
was not communicated.
The acceptance must be communicated before the lapse of an offer: A valid contract can arise
only when the acceptance is made before the offer has lapsed or been withdrawn. An acceptance
which is made after the withdrawal of the offer is invalid, and does not create any legal relationship.

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Unit 1.2 23
Example: Amar offered, by a letter, to sell his horse to Akbar for ` 2,500. Subsequently, Amar withdrew his
offer by a telegram which was also received by Akbar. After the receipt of this telegram, Akbar accepted the
offer by a letter, and posted the same. In this case, the acceptance is invalid as it was made after the effective
withdrawal of the offer.
Acceptance should be made with a view to fulfil the terms and conditions of the offer : Any
acceptance made jokingly and without intention of fulfilling the terms of the offer then such an ac-
ceptance is not a valid acceptance.
Communication of Offer and Acceptance
An offer and its acceptance have no legal effect unless it is communicated to the other party. The offer and the ac-
ceptance can be communicated by word (spoken or written) or by conduct.
Communication of offer is completed as soon as it comes to the knowledge of the offeree.
A communication of acceptance is complete at different times for the offeror and the offeree.
àà For the offeror, the communication of acceptance is complete when it is put in a course of trans-
mission to him. Thus, the offeror becomes bound by the acceptance as soon as letter of acceptance
is posted by the offeree.
àà For the offeree, the communication of acceptance is complete when it comes to the knowledge
of offeror.
Example: Amar offers to sell his house to Akbar for ` 15, 00,000 by a letter dated 25th December. The letter
reaches Akbar on 27th December. Akbar accepts the offer by a letter posted on 28th December. This letter
of acceptance reaches Amar on 30th December.
The communication of offer is completed on 27th December (letter reaches offeree)
For Amar (offeror), the communication of acceptance is complete when the letter of acceptance is
posted i.e., on 28th December
For Akbar (offeree), the communication or acceptance is complete when the letter of acceptance
is received by Amar and the contents of the letter come to his knowledge. i.e., on 30th December
Revocation of Offer and Acceptance
An offer can be revoked at any time before the communication of acceptance is completed as against
the offeror, but not later.
An acceptance may be revoked at any time, before the communication of acceptance is completed
as against the offeree, but not later.
Example: Amar offers to sell his house to Akbar for ` 15, 00,000 by a letter dated 25th December. The letter
reaches Akbar on 27th December. Akbar accepts the offer by a letter posted on28th December. This letter
of acceptance reaches Amar on 30th December.

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Here, Amar may revoke his proposal at any time before Akbar posts his letter of acceptance i.e.,
before 28th December
An acceptance may be revoked at any time, before the communication of acceptance is completed
as against the offeree, but not later.
If both, the offeree’s letter of acceptance and withdrawal of acceptance reaches

simultaneously, then formation of contract depends on what is read first. If the
contents of letter of acceptance come to the knowledge of the offeror then a valid
contract would be formed. On the other hand if the letter/telegram of revocation is
read first and the contents of the same come to the knowledge of the offeror then
there would not be formation of any contact.
General Rules as to communication of acceptance
The general rules relating to communication of acceptance are the following:
In case of acceptance by post: Where the acceptance is given by post, the communication of the
acceptance is complete as against the proposer, when the letter of the acceptance is posted. Thus,
a mere posting of the letter of the acceptance is sufficient to conclude the contract with respect to
offeror even if the letter is lost in transit.
The letter posted must be properly addressed and stamped.
Acceptance by Telephones, Telex or Fax: If communication of the acceptance is made by telephone,

telex and fax machines, it is completed when the acceptance is received by the offeror. The contract
is concluded as soon as the offeror receives or hears the acceptance.
The offeree must make sure that his acceptance is properly received i.e. heard
and understood by the offeror.
Place of contract:
àà In case of acceptance by post, the place where the letter is posted is the place of contract
àà In case the acceptance is given by telephone, fax, and telex etc., the contract is made at the place
where the acceptance is received by the offeror
Time of contract:
àà In case of acceptance by post, the time of posting the letter of acceptance is the time of contract
as regards to the offeror.
àà In case, the acceptance is given by telephone, fax, and telex etc., the time of contract is the time

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Unit 1.2 25
when the offeror gets the communication of the acceptance
Communication of acceptance in case of agent: When the offer has been made through an agent,
the communication of the acceptance is completed, when the acceptance is given either to the agent
or to the principal. In such a case, if the agent fails to convey the acceptance received from the of-
feree, the principal is still bound by the acceptance.
The person who makes the offer is called Offeror / prposer
The person to whom the offer is made is known as Offeree / proposee
An offer must be distinguished from intention / willingness and invitation to offer
A counter offer puts an end to the original offer
Mental acceptance, failure to answer or silence is not acceptance
Acceptance must be given only to the offeror or his agent
An offer and its acceptance have no legal effect unless they are communicated to the
other party

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Unit
Consideration
1.3
Learning
Objectives

understand:
)) Meaning and definition of consideration

)) Agreements without consideration
)) Essential elements of consideration
)) Exceptions to the general rule- ‘No con-
)) The doctrine of privity of contract sideration no contract’
)) Exceptions to the doctrine of privity of
contract
Meaning of consideration
When a party to an agreement promises to do something, he must get “something in return”. This “some-
thing in return” is defined as consideration. In Latin, consideration means ‘quid pro quo’ i.e. something
in return.
Consideration is what a promisor demands as the price for his promise. In simple terms it is the benefit
received by a party to the contract in return to the promise made by him. A promise made without consid-
eration (except in some cases) is only a gratuitous promise which is not enforceable by law, since there
is no legal obligation formed between the parties and therefore, in such cases one party gets something
from the other without giving anything to the other. Hence an agreement without consideration is void
and not enforceable by law.
Definition
Section 2 (d) of the Contract Act defines consideration as “When at the desire of promisor, the promisee or

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Unit 1.3 27
any other person has done or abstained from doing or does or abstains from doing or promises to do or to
abstain from doing something, such act or abstinence or promise is called consideration for a promise”.
The analysis of this definition shows that consideration is an act (i.e., doing something) or an abstinence
(i.e., abstaining from doing something). It means it is “to do” or “not to do” something.
Example1 : To do
Raj contracts to sell his Car to Kiran for ` 50,000/-. In this case Raj’s promise of giving his car is a considera-
tion for kiran’s promise to pay ` 50,000/- to Raj. Similarly for Kiran’s promise of giving 50,000/- is a consider-
ation for raj’s promise to give his car.
Example1 : Not to do
Amar owes Akbar ` 10,000. Akbar promises to Amar not to file a suit against him for one year on Amar’s
agreeing to pay him ` 500 more. In this case, Amar’s promise to pay ` 500 more is the consideration for
forbearance to file a suit by Akbar and for Akbar’s promise to forbear from filing a suit the consideration is
` 500 by Amar.
Essential elements of consideration
Consideration must move at the desire of the promisor: It is a fundamental rule that the action
or forbearance must be done at the desire of promisor. If it is not done at the desire of the promisor
or done at the desire of a third party, then it will not be a valid consideration. Similarly, acts done
voluntarily or services rendered without any request cannot constitute a valid consideration.
Example: Mahesh sees one person drowning and saves his life. Mahesh cannot demand payment for his
services as it is a voluntary act done by him which the other person never asked him to do so.
Mr X constructed a shop at the desire of the collector of the district. In consideration of this Y a shop-
keeper promised to pay some money as commission on the articles sold in that shop. Later, Y refused
to pay the commission. It was held that the agreement was void for the want of consideration because
X had constructed the shop not at the desire of Y but at the desire of the collector.
[Durga Prasad vs. Baldeo]
Consideration may move from the promisee or any other person on his behalf: As long as
there is consideration for a promise it is immaterial as to who furnishes the same. Thus an act
constituting consideration may be done by the promisee himself or may proceed from third person
also. The judgement that the consideration may move from the promisee or any other person on
his behalf is valid was given in a landmark case law of Chinnaya vs. Ramayya.

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28 Consideration
An old lady made a deed of gift over certain property, to her daughter Ramayya, under the direction
that she should pay her uncle Chinnaya (brother of the old lady), a certain sum of money annually.
On the same day, Ramayya entered into an agreement with Chinnaya to pay him the agreed amount.
Later, Ramayya refused to pay the amount on the plea that no consideration had moved from Chin-
naya to him. Held, Chinnaya was entitled to maintain suit as the consideration had moved from the
old lady to Ramayya.
[Chinnaya vs. Ramayya, (1882) 4 Mad. 137]
Consideration must be real and not illusory:
Consideration is not valid if it is to do an act which is

àà Physically impossible
àà Legally not permissible
àà Uncertain
Example: Amar promises to put life into Akbar’s dead wife and Akbar in turn promises to pay ` 1, 00,000.
This agreement is void because the consideration is physically impossible to perform.
Consideration may be past, present or future:

àà Past Consideration
If the consideration by a party for a present promise was given in the past i.e., before the date of
promise, it is called a past consideration. It is also known as an executed consideration.
Example: Sunil finds Anil’s purse and returns it to Anil. Anil promises to pay ` 100 to Sunil after 5 days. The
consideration provided by Sunil (finding the purse) for Anil’s promise to pay is a past consideration, some-
thing done before Anil makes the promise.
The English Law does not recognise past consideration.
àà Present Consideration
The consideration which moves simultaneously with the promise is called present consideration.
It is in the process of execution. Cash sales are the most common examples of present consideration
as both or one of the parties furnishes consideration at the time of formation of the contract.
Example: Kumar sells the goods and delivers the goods to Gopal and at the same time Gopal pays the price.
àà Future Consideration
The consideration which moves after the formation of contract is called future consideration or ex-
ecutory consideration. In the case of future consideration both the parties promise to perform their
obligation after the formation of the contract..

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Unit 1.3 29
Example: Suresh promises to deliver certain goods to Ramesh at a future date and Ramesh promises to
pay on delivery.
Consideration need not be adequate: The consideration by one of the parties may not be adequate.
The consideration may be adequate, inadequate or grossly inadequate. The adequacy of the consider-
ation is for the parties to decide and the law does not interfere with the same. The only thing required
is that the consideration must be of some value in the eyes of law, however small it may be. Sec 25
exp 2 however states that inadequacy of consideration may be taken into account by the court in
determining the question that the consent of the parties to the contract was free or not.
Example: Amar agrees to sell his house to Akbar for ` 10,000. The house could be sold for about ` 1, 00,000.
Later on, Amar cannot refuse to sell his house to Akbar on the grounds that the consideration is not ade-
quate. However, if Akbar had received Amar’s consent by unfair means, i.e. at knife point etc., then Amar can
refuse to sell the house to Akbar as the consent of Amar is not free.
Consideration must be something which the promisor is not already bound to do: 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, since it adds nothing to the pre-existing legal or contractual
obligation. Likewise, a promise to perform a public duty by a public servant for something in return
is not a consideration.
When a person being already under a legal or contractual duty to do something

undertakes to do something more than he is bound to do under the original
contract, it will be a good consideration for the promise.
Example: Akbar contracted with Anthony, a doctor, to diagnose Akbar’s son for ` 5,000. In addition to this,
Akbar asked Anthony to visit his home once a week to check his son, for which Akbar agreed to pay ` 1,000
extra. The above contract is valid, as the doctor is undertaking something more than he is bound to in the
original contract.
There was a promise by a client to pay the advocate, an additional sum over and above the fee if the
suit was successful. Held, such promise to pay an additional sum was void for the want of consideration.
The advocate was under a pre-existing contractual obligation to render the best of his services (which
includes winning the suit) under the original contract for the fees paid by the client.
[Ramachandra Chintamani vs. Kalu Raju (1877) 2 Bom 302]
Consideration must not be illegal:
The consideration to a promise must not be unlawful or opposed to public policy. The consideration to
an agreement is unlawful, if:
àà It is forbidden by law
àà It defeats the provisions of law

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30 Consideration
àà It is fraudulent
àà It involves injury of a person or property
àà It is immoral or opposed to public policy
Example: Raju told Ramesh that he would pay him ` 10,000, if he murders Anthony. Such agreements
cannot be enforced in the court of law as the consideration is illegal.
The Doctrine of privity of contract
Meaning of privity of contract: The doctrine of privity of a contract means that a contract is a pri-
vate relationship between the parties to the agreement and no other person can acquire the rights or
liabilities under it. A contract is an agreement between two or more parties that creates an obligation
to do or not to do something. A contract cannot confer rights or impose obligation on any person
except the parties to it. Hence, only party to a contract can sue or be sued for the enforcement of
the contractual obligations and a person who is not a party to a contract cannot sue or be sued. This
establishes the rule “Stranger to a contract cannot sue”.
A stranger to a contract means the person who is not a party to the contract. The stranger to a contract
is known as a third party. A stranger to a contract cannot sue except in few cases.
Mr. S bought tyres from the Dunlop Rubber Co. and sold them to Mr. D, a sub- dealer, Who agreed with
Mr. S not to sell these tyres below Dunlop’s list price and to pay the Dunlop Co., $5 as damages on every
tyre Mr. D undersold. Mr. D sold two tyres at less than the list price and thereupon the Dunlop Co. Sued
him for the breach. Held, Dunlop Co. could not maintain the suit as it was a stranger to the contract
[Dunlop Pneumatic Tyre Co.Ltd. Vs Selfridge & Co.Ltd. (1915) A.C.847].
Stranger to a consideration: If a consideration moves from promisee or any other person on his
behalf it will be a valid consideration (Ref.: Chinnaya vs. Ramayya). The person who does not pro-
vide consideration, even though he may or may not be a party to contract, such person is known as
stranger to consideration and gets right to sue with respect to his rights arising from the contract.
Hence a stranger to a consideration can sue but a stranger to a contract cannot sue.
Under English Law stranger to consideration cannot sue.
Exceptions to the doctrine of privity of contract
The rule that a stranger to a contract cannot sue, is subject to the following exceptions:
In case of beneficiary of a trust: A trust is always created for the benefit of some person called as
the beneficiary. The beneficiary can file a suit to enforce his right even though he is not a party to

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Unit 1.3 31
the contract.
Example: Kalu transferred a certain property to Balu under the trust, to be held by him for the benefit of
Ramu. If Balu refuses to give benefit to Ramu, then Ramu can enforce the agreement even though he is not
a party to the contract.
A husband who was separated from his wife executed a separation deed by which he promised to pay
to the trustees, all the expenses for the maintenance of his wife. Held, the agreement created a trust in
favor of his wife and wife could claim such amount though not a party to the contract.
[Gandy vs. Gandy (1884)]
Mr. A had a son Mr. X and Mr. B had a daughter Mis. Y. A agreed with B that in consideration of the
marriage of Y with X, he (A) would pay to Y, his daughter- in – law, an allowance of ` 500 a month in
perpetuity. Later on Y claimed ` 500 from A which A refused to pay. Held, Y, although not a party to the
agreement between A and B, was clearly entitled to recover the arrears of the allowance
[Khwaja Mohd.Khan Vs. Hussani Begum ,(1910) 32 All 410]
In case of family settlement: When certain arrangements are made for the marriage or maintenance
of a particular member of the family then such person for whose benefit the provision is made may
enforce the contract.
Family or marriage settlements should be in writing.
Two brothers, on partition of joint property, agreed to invest a certain sum of money, in equal shares,
for the maintenance of their mother. Later the brothers decided not to part away with such funds. Held,
mother was entitled to recover from her sons such amount that was invested by the sons.
[Shuppu Ammal vs. Subramaniyam, (1910)]
In case of acknowledgment of liability :When the promisor, by his conduct, acknowledges or himself
acts as an agent of a third party, a binding obligation is thereby incurred by him towards the third party.
Example: Amar receives some money from Akbar to be paid to Anthony. Amar admits of this receipt to
Anthony. Anthony can recover the amount from Amar, who shall be regarded as the agent of Akbar.
In case of assignment of a contract :Assignment refers to the transferring the rights in a contract to
a third person. When a contract is assigned in favor of someone, the assignee can enforce the contract,
even if he is not a party to the contract.

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32 Consideration
Example: The assignee of an insurance policy of a deceased person, Endorsee of bill of exchange can
enforce the contract though he is not a party to the contract.
A contract requiring use of personal skills (singing, dancing etc) cannot be as-
signed.
For bringing a legally enforceable contract between the parties, consideration is one of the most essential
elements. Sec. 25 of The Indian Contract Act states that “An agreement made without consideration is
void”. The Latin maxim, “Ex Nudo Pacto Non Oritur Action” means an agreement without consideration
is void. In simple terms, ‘No consideration No contract’
X promised Y, the secretary of a Mosque Committee, to subscribe a sum of `500 for rebuilding a
mosque, but he failed to pay the promised subscription. Y filed a suit against A for the recovery of the
promised subscription. It was held by the court that there was no consideration either in the sense of
any benefit or advantage to the promisor X, or detriment or loss to the promisee, Y, and so, the agree-
ment was void and unenforceable.
[Abdul Aziz Vs.Mauzam Ali]
A mere promise for charity is void because it is without consideration. But if a person promises to
contribute for charity and on his faith, the promisee undertakes liability then the contract is valid to the
extent of the subscription so promised.
Kumar promised a trust to donate a sum of ` 5,000 for the construction of a temple. The trust of the
temple, on the faith of Kumar’s promise entered into a construction contract with Super builders for
the construction of the temple. Later, Kumar refused to pay the amount. Held, Kumar was liable to pay
to the extent of detriment incurred by the promisee subject to the maximum amount promised as the
trust had incurred a liability on his faith.
[Kedarnath vs. Gauri Mohamed]
Exceptions to the general rule no consideration no contract
Following are the exceptional circumstances provided in Sec.25, under which the agreement is valid and
enforceable even if it’s made without a consideration.
Sec 25(1) Natural love and affection: An agreement in writing which is registered and is based
on natural love and affection between parties in close relation to each other is valid and enforceable
even if there is no consideration. The following conditions must be satisfied for the application of
this exception:

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Unit 1.3 33
àà The agreement must be in writing and registered

àà The agreement must be based on natural love and affection
àà The agreement must be between the parties who are in near relation to each other
Example: A father by a registered document promised to pay his daughter ` 100 per month as her pocket
money. This agreement is valid.
Mere nearness of relation by itself does not necessarily imply natural love and
affection.
A Hindu husband by a registered document, after referring to quarrels and disagreements between
himself and his wife, promised to pay his wife ` 1,000 p.m. for her maintenance. It was held that this
agreement was void because there was no natural love and affection.
[Rajlakhi Devi vs. Bhoot Nath Mukherjee]
Sec 25(2) Compensation for past voluntary services
A promise to compensate wholly or in part, a person who has already voluntarily done something for
the promisor, is enforceable, even though it is without consideration. In simple words, a promise to pay
for a past voluntary service is binding. In order to pay for past voluntary services, the following factors
must exist:
àà The service should be rendered voluntarily
àà The service must have been rendered for the promisor
àà The promisor must be in existence at the time when the services were rendered
àà The promisor must have intended to compensate the promisee
àà The services rendered should be lawful
Example: Sunil finds Anil’s purse and gives it to him. Anil promises to give ` 500 to Sunil. This is a valid
contract even though the consideration did not move at the desire of Anil, the promisor. Thus it can be
enforced in the court of law and Sunil can recover the amount promised from Anil.
Sec 25(3) Promise to pay time-barred debt: Time barred debt refers to an amount which has re-
mained unclaimed beyond a time period specified by the law of limitation.
A promise to pay a time-barred debt is enforceable if such a promise is in writing and duly signed
by the promisor or his authorized agent. The following conditions must be satisfied for the applica-
tion of this exception:
àà The promise to pay must be definite and expressed
àà The promise must be in writing

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34 Consideration
àà The promise must be signed by the promisor or his authorized agent

àà The debt must be time-barred i.e., the limitation period for the recovery of the debt must have
expired
A promissory note executed by a window in her personal capacity (Not as an agent of her husband)
in payment of the time-barred debt taken by her husband cannot be brought within this exception.
Moreover, the wife of a person cannot be considerd as the authorised agent.
(Pestonji Vs. Bai Maherbai)
Similarly, a promise by a Hindu son to pay the time-barred debt of his deceased
father does not come within this exception.
A debt is barred by limitation if it remains unpaid or unclaimed for a period of

three years in case of moveable property and twelve years in case of immovable
property from the date it becomes due. Such a debt becomes legally irrecoverable.
Completed gift :‘Completed gift’ means a gift actually handed over. The gifts actually made by a
donor and accepted by the donee are valid even without consideration. Thus, a completed gift needs
no consideration.
Example: On Gopal’s birthday, Ganesh gives him a gold chain as a birthday gift. In this case, Ganesh cannot
demand back the chain on the ground that there was no consideration. In case of immoveable property the
gift should be signed and registered in order to constitute a completed gift.
Contract of agency: No consideration is required for creation of contract of agency. The fact that the
principal has agreed to be represented by the agent is sufficient ground for the principal to support
the contract of agency. According to Sec. 185 of Indian Contract Act, no consideration is required
to create the contract of agency.

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Unit 1.3 35
Consideration means ‘quid pro quo’ i.e. something in return
Consideration means a reasonable, equivalent or any other valuable benefit passed on

by the promisor to the promisee
The English Law does not recognise past consideration
A stranger to a consideration can sue but a stranger to a contract cannot sue
An agreement made without consideration is void
Mere nearness of relation by itself does not necessarily imply natural love and affection
A debt is time barred by limitation, if it remains unpaid or unclaimed for a period of

three years.
Contract requiring personal skills cannot be assigned

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Unit
Capacity to Contract
1.4
Learning
Objectives
By end of this unit you will be familiar with

)) Person of unsound mind
)) The meaning of capacity
)) Person disqualified by law
)) Minor and effects of agreement with minor
Introduction
The ‘capacity to contract’ means the competence (i.e. legal ability) of the parties to enter into a valid
contract. According to Sec.10, competency of a party is one of the essential elements of a valid contract.
Thus parties having contracting capacity would make the contract valid and therefore such a contract
would be enforceable in the court of law.
The term ‘capacity to contract’ is defined in Sec. 11 of the Indian Contract Act as under:
“Every person is competent, to contract who is of the age of the majority according to the law to which
he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which
he is subject”.
The analysis of this section reveals that a person who is a major, is of sound mind and is not disqualified
from contracting by the law is competent to enter into a valid contract.

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37 Capacity to Contracts
In other words the following persons are regarded as incompetent to enter into a valid contract:
(a) Minor
(b) People with unsound mind-
(i) Lunatics (ii) Idiots (iii) Drunkards
(c) Persons disqualified by law-
(i) Alien enemies (ii) Foreign sovereigns (iii) Convicts (iv) Insolvent (v) Corporations
Minor
The term ‘minor’ is explained in Sec. 3 of the Indian Majority Act, 1875, which reads as under: “A minor
is a person who has not completed eighteen years of age”.
In case where guardian is appointed to the property or person of the minor by the court or When minor’s
property has passed under the Court of wards, then minor will attain majority on completion of 21 years
of age.
Effects of an agreement entered into with a minor
The law relating to agreements with minors and the effects thereof may be discussed under the follow-
ing heads:
Agreements with a minor are absolutely void (void-ab-initio): An agreement entered into with a
minor is void ab initio, i.e., void from the very beginning. It is absolutely null and void and destitute
of any legal effects. Hence, there is no room for a legal consequence. It can be further stated that
any contract entered into with a minor is not a contract at all, it is rather an agreement which is not
enforceable by law and hence it can be categorized as void agreement and such agreements do not
enjoy any legal effect.
The view that the minor’s agreement is absolutely void was provided by Privy Council in a landmark
judgment in 1903 in the case of Mohiri Bibi vs. Dharmodas Ghosh.
Dharmodas Ghosh, a minor, entered into a contract for borrowing a sum of ` 20,000 out of which the
lender paid the minor a sum of ` 8,000. The minor executed mortgage of property in favour of the
lender. Subsequently, the minor sued for setting aside the mortgage. The Privy Council decided that
Sec.10 and 11 of the Indian Contract Act make the minor’s contract void. The mortgagee prayed for
the refund of ` 8,000 by the minor. The Privy Council further held that as a minor’s agreement is void,
thus any money advanced to a minor cannot be recovered.
[Mohiri Bibi vs. Dharmodas Ghosh]

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Unit 1.4 38
A minor can be a beneficiary or a promisee
An agreement for the benefit of a minor is enforceable by the minor. If a minor is a beneficiary in an
agreement, he can enforce such an agreement at his option but not at the option of the other party.
Thus a minor is capable of becoming a promisee or endorsee but not a promisor or endorser.
Example: Amar, a minor, agreed to purchase a second-hand cycle for ` 1,000 from Akbar, a major. He paid
` 200 as advance and agreed to pay the balance on the next day and collect the cycle. When Amar came
with the money the next day, Akbar told him that he had changed his mind and offered to return the
advance. Akbar cannot avoid the contract, though Amar may, if he wants to.
A minor can plead for his minority (no estoppel)
Rule of Estopple refers to the fact that a person is not allowed to deny the fact that he once projected
to the other by words spoken or written or by his conduct. The rule of estopple does not apply to a
minor. When a minor fraudulently enters into a contract representing that he is a major, he is allowed
to plead his minority as defense and he cannot be estopped (i.e. prevented) from doing so.
Example: Amar, a minor, fraudulently represents himself to be a major, induces Akbar to lend him ` 5,000.
Later Amar refused to repay and Akbar sued for recovery of the money. Amar pleaded that he was a minor
and was allowed to do so. The contract therefore was held void and Amar was not liable to repay the amount.
A minor is not allowed by law to cheat others and he cannot take undue advantage by
representing himself falsely. Thus the Specific Relief Act provides that the court may
direct the minor to restore the money or property to the other party if such money or
property can be traced.
Example: In the above example, if the minor, Amar, has spent ` 3,000 and holds ` 2,000, then the court may
direct the minor to repay the traced money i.e. ` 2,000 to Akbar, the money lender.
Ratification not possible
Ratification means affirming or accepting the acts done. Ratification relates back to the date of making
of an agreement. Ratification can only be done for the acts which were valid at the time of formation
and also at the time of ratification. A minor on attaining the majority cannot ratify the agreement
made by him during his minority, as agreement with minor is altogether void.
Raju a minor borrowed ` 10,000 from Rancho a major and executed a promissory note in favor of
Rancho. Raju on attaining majority, gave a promissory note in satisfaction of one executed by him
for the money borrowed when he was a minor. It was held that the claim under the promissory
note (either new or old) could not be enforced.
[Indran Ramaswamy vs. Anthaoppa]

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If the services were rendered to the minor at his request during his minority and the same
are continued at his request after majority, he can be held liable to pay for the services
rendered both during his minority and majority.
Liability of minor in torts: Tort means a harmful action punishable by law (civil wrong). A minor
may be held liable in tort. Minors are liable for negligence causing injury or damage to a property
that does not belong to them.
If minor does and act outside the scope of the contract and such act leads to injury to the
other party then he can be held liable for tort.
Saurav a minor hired a horse promising not to jump it. He lent the horse to his friend who used the
horse against the instructions and this led to the death of the horse. The minor was held liable on tort.
[Burnard vs.Higgins]
But if in the course of doing what minor is entitled to do under the contract, even if he is
found guilty of negligence, the minor cannot be made liable on tort.
Gaurav a minor hired a horse for riding. The horse was injured due to over-riding. The minor could not
be held liable since the injury resulted from negligence, in the course of what he was entitled to do
under the contract. Since he was not liable on the contract itself, he could not be held liable in tort too.
[Jennings vs. Randall]
The minor cannot be a partner: The partnership of partners results from their agreement. A minor
being incompetent to enter into a contract cannot be a partner in the firm. However, he may be ad-
mitted only to the benefits of the firm with the consent of all other partners [Sec. 30 (1) of the Indian
Partnership Act, 1932].
A minor is liable to a third party only to a extent of his interest in the firm.
The minor can be an agent: An agent is merely a connecting link between his principal and a third
person. As per Sec. 184 of Indian Contract Act any person can become an agent and therefore a minor
can be appointed as an agent. However, the principal cannot hold the minor agent personally liable
for any act performed by him.
The minor cannot be insolvent: A person becomes insolvent if his debts exceed his assets. A minor
cannot be declared as an insolvent. This is so because all agreements with a minor are absolutely void.

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Unit 1.4 40
Moreover, the minor is not personally liable for any debt incurred during the period of his minority
and therefore he cannot be adjudged insolvent.
No liability of guardians for the acts of a minor: The guardian or parents of a minor is not liable
for the acts of the minor, even if the contract is for the supply of necessaries to the minor. However,
if a minor acts as an agent of the guardian or parents, the guardian can be held liable for the acts of
the minor.
Liability of a minor for the acts of the guardian: A guardian may enter into an agreement on behalf
of a minor and it will be valid and binding on the minor provided
àà The guardian is authorised to do so
àà The agreement must be for the benefit of the minor
The guardian cannot sell immovable property of the minor without the Court’s permission.
Minor as a shareholder: In order to become a shareholder a minor requires contractual capacity and
hence under ordinary circumstances a minor cannot become a shareholder in a company. A minor can
be the transferee of fully paid up shares. A minor can become a shareholder in a Company through his
guardian who will act as his trustee for the purpose. In the Company’s register, the guardian’s name
(not the minor’s name) shall be recorded. A minor cannot be a member of the Company because he
cannot buy / sell the shares of the Company.
Position of minor in case of agreements jointly entered by him with a major: If an agreement is
made jointly by a minor and major with a third party, the minor will not be liable under the contract,
but the major will be liable for the same.
No specific performance order: A specific performance order is the order granted by the Court
against the defaulting party of a contract to perform the promise as per the terms and conditions of
the contract. As a minor cannot be a promisor, he cannot be forced to perform a promise because an
agreement with a minor is void.
Minor’s liability for necessaries
àà As per Sec. 68, in any contract for supply of necessaries to an minor or his dependent, neither
the minor nor his guardian is personally liable
àà The minor’s estate is liable for the price of the necessaries supplied to him or to any other person
lawfully dependent on him
àà If a minor has no personal property, then no recovery is possible
àà The term necessaries include articles required to maintain a particular person in the state, degree
and status in life which he is currently enjoying
àà In India, food, clothing, shelter, medical treatment, training, pursuing court case, education,
marriage of a female and others which are reasonably necessary to a minor have been held to be

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necessaries. Minor is not personally liable but the property of minor can be made liable in case
of necessaries supplied to him
Conditions for recovery
àà The material supplied to a minor must be apt to the life of the minor. It must be according to his
status. Necessity differs from person to person. For example, a car can be necessary for a rich
person, but is a luxury for poor person
àà The minor should not be in adequate supply of the same. If the minor already has sufficient sup-
ply of necessaries, any further supply will not be considered as a necessity
A Kumar a minor bought 11 fancy coats from Amar. Kumar had adequate supply of the same. Held,
11 fancy coats at any point time do not constitute neccessaries and it was also stated that the amount
cannot be claimed as he was in adequate supply of the same.
Nash VS Inman
Neccessaries does not include any luxury items.
Persons of unsound mind
According to Sec. 12 of the Indian Contract Act, “A person is said to be of sound mind for the purpose
of making a contract, if at the time when he makes it, is capable-
To understand the terms of the contract
To form a rational judgment as to its effect upon his interests”
Thus, if a person is not capable of both, he is said to suffer from unsoundness of mind. Such type of
people can be categorised as:
Idiots: An idiot is a person, who is of unsound mind by birth. His incapacity to be rational is perma-
nent and therefore a contract with an idiot is void-ab-initio.
Any agreement entered into by an idiot will be void and he is not liable thereon.
Lunatics: A lunatic person is one who is mentally disturbed due to some mental strain or other
personal experiences. In this case, the unsoundness is not permanent. He can enter into a contract
during lucid intervals i.e., during the period when he is of sound mind.
A lunatic person cannot enter into a contract while he is of unsound mind and any agree-
ment if entered, the lunatic will not be held liable. But, when a lunatic is of sound mind i.e.
during lucid intervals, he can enter into a contract and can be held liable for such contracts.

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Unit 1.4 42
Drunkard: A drunkard is a person who is under the influence of alcohol or intoxicating substances.
When he is drunk, he cannot understand the contract, therefore, cannot enter into a contract. Any
agreement entered thereon will be void.
If a drunkard is capable of understanding the terms of contract, he can enter into a

contract. Therefore, he will be liable for such contracts.
Position of contract with people of unsound mind
The position of a contract with people of unsound mind is similar to that of contracts with a minor. Thus,
the position of a contract with a person with unsound mind is as follows:
He may enforce the contract for his benefit
His estates are liable for the necessaries supplied to him and his dependents
Persons disqualified by law
Alien enemy: A person who is not an Indian citizen is called an alien. An alien enemy is a person
whose country is at war with the Republic of India. A contract with an alien enemy is void, but a
contract with an alien friend is valid. A contract entered with an alien friend during peace, will be
rendered void on the outbreak of a war with that country. In certain cases (if chances of ending the
war is within a short period), a contract made before the outbreak of the war may be suspended
during the course of the war and shall be performed after the war is over. However, the government
can put restrictions on the performance of such contracts if it considers it necessary, on the basis of
national interest.
Foreign sovereigns and diplomats: Foreign sovereigns and diplomats have some special privileges
and generally cannot be sued unless they, themselves surrender under the jurisdiction of our Court
of law. They can enter into contracts and enforce those contracts in our Courts, but an Indian citizen
has to obtain a prior sanction of the Central Government, in order to sue them in our Court of law.
Convicts: A convicted person, during the period of imprisonment, cannot enter into a contract. After
the imprisonment is over, he becomes capable of entering into a contract. Sometimes, he is granted
a ticket of leave termed as period of parole. During this period of leave, he can enter into a contract.
Insolvent: An insolvent is a person whose debts are more than his assets. When a person is declared
as an insolvent, his property will vest with the Official Receiver or Official Assignee appointed by
the Court. The Official Receiver/Assignee can sell the assets and distribute the sale proceeds among
the creditors of the insolvent. The insolvent is disqualified from entering into a contract until he is
discharged by the court. Once he is discharged from the liabilities, he can enter into a valid contract.
Corporations: A Corporation is an artificial person created by law. It has a separate legal existence.
It can have a property in its own name, but it has no physical existence. Hence, it cannot enter into
certain contracts such as contracts of personal nature. The contractual capacity of the Company and

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the Statutory Corporation is summarised as under:

à In case of a Company its contractual capacity is determined by the ‘Object Clause’ of its
Memorandum of Association
à In case of a Statutory Corporation- its contractual capacity is determined by the statute creating it
Any act done in excess of the power given is ultra vires (i.e. beyond power), hence void.
As Corporations are artificial persons, they cannot enter into the contracts of personal
nature. Example : Contract of marriage
The term ‘capacity to contract’ means the competence (i.e. capability) of the parties to enter
into a valid contract
The term ‘minor’ is explained in Sec. 3 of the Indian Majority Act, 1875
A minor is a person who has not completed eighteen years of age
Necessaries do not include items of comfort or luxury
A minor is liable for his acts of tort
The position of a contract with a person of unsound mind is similar to that of a contract with
a minor
A partly performed contract with an alien enemy (now) can be put to an end by the court
The guardian cannot sell an immovable property of a minor without the Court’s permission
A minor cannot appoint an agent because only a person competent to contract can appoint
an agent
A minor is liable to a third party only to the extent of his interest in the firm
A Statutory Corporation cannot enter into a contract of personal nature

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Unit
Free Consent
1.5
Learning
Objectives
)) Understand the definition and meaning of )) Make out the difference between coercion
consent and free consent and undue influence
)) Understand the meaning of coercion and )) Know the meaning and essential elements
its legal rules of fraud
)) Understand the meaning of coercion and )) Understand the meaning and essential ele-
its legal rules ments of misrepresentation
)) Comprehend the meaning of undue influ- )) Learn the meaning and types of mistake
ence and its legal rules
Definition and meaning of consent
The term ‘consent’ is defined in Sec. 13 of the Indian Contract Act, as under:
“Two or more persons are said to consent when they agree upon the same thing in the same sense.”
The analysis of this section shows that ‘consent’ means that the parties should have meeting of minds,
i.e., the parties must understand the subject matter of the contract in the same sense. For the creation of
a contract, there must be consensus ad idem (meeting of minds). Consent is an important and a basic
element in the formation of contract.
Example: A agree with B to sell his car for `50,000. A had 2 cars namely car X and car Y. A was talking about
car X and B believed that the contract was regarding car Y. here there is no consensus between the parties
and the contract is void due to mutual mistake of fact.

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45 Free Consent
Definition and meaning of free consent
Mere existence of consent would not be enough to make an agreement enforceable. It is also necessary
that the consent should be devoid of any force or pressure. Free consent is one of the essential elements
of valid contract. Parties to a contract may agree upon the same thing in the same sense, and along with
the same; consent received must be free from any compulsion or pressure. Lack of free consent would
render the contract voidable at the option of the party not at fault.
According to Sec.14 of Indian Contract Act, consent is said to be free, when it is not caused by
Coercion
Undue influence
Fraud
Misrepresentation
Mistake
Difference between consent and free consent
Consent Free Consent

In case of lack of Consent there no “meeting of In case of lack of free consent, there is consent
minds” but it not free
In case of lack of consent the contract is absolutely In case of lack of free consent the contract is void-
void able at the option of the aggrieved party
In case of no consent the party does not acquire In case of no free consent the party has better title
any right on the property and if such property is over the property unless the contract is rescinded
passed to third party then even the third party does by the aggrieved party. A party can also pass a
not have a better title. better title to the third party before the contract is
rescinded by the aggrieved party.
Coercion
Meaning
It simply means forcing a person to enter into a contract by adopting unfair means. The basic idea
of ‘coercion’ is that a person may be forced to make an agreement by the use of fear of some kind
of physical harm or loss.
Example: An agreement obtained at gun point.
According to Sec. 15 (a), consent to a contract is said to be caused by coercion when it is obtained by-

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Unit 1.5 46
Committing any act which is forbidden by the Indian Penal Code

Threatening to commit any act which is forbidden by the Indian Penal Code
Unlawful detaining of any property of the other
Threatening to unlawfully detain any property of the other With a view to obtain the assent of the
other party to the contract
Essential elements of coercion
The analysis of the above definition reveals the following essential elements of a valid coercion:
Committing or threatening to commit any act forbidden by the IPC: For getting the consent for
a contract, if any person actually commits, or threatens to commit any act which is forbidden by the
IPC, then the consent so obtained is said to be a consent obtained by coercion.
Threat to shoot, murder, threat to cause hurt, rape, theft, attempt to commit suicide are a few examples
of acts forbidden by the Indian Penal Code.
It is immaterial whether the IPC is in force or not in the place where coercion is committed.
Example: X, on board an English ship on the high seas, threatens Y and forces him to enter into an agree-
ment by an act amounting to criminal intimidation under the Indian Penal Code. Y failed to fulfill his part of
the obligation. X sued Y for breach of contract at Calcutta. In this case, the agreement between X and Y had
been brought about by coercion. Although the Indian Penal Code 1860 was not in force in the place where
coercion was employed.
Example: X beats Y and compels him to sell his car for ` 50,000. Here, Y’s consent has been obtained by coer-
cion because beating someone is an offence under the Indian Penal Code.
Unlawful detaining or threatening to detain any property of the other: Where any person unlaw-
fully detains, or threatens to detain any property (movable or immovable) to the prejudice of any
person for the purpose of getting the consent of a party to a contract, such an act amounts to coercion
and the contract is voidable at the option of the party not at fault.
An agent refused to hand over the books of accounts of a business to the new agent unless the prin-
cipal released him from all liabilities. The principal had to give a release deed as demanded. Held, the
release deed was given under coercion and was voidable at the option of the principal.
[Muthia vs. Muthu Karuppa, (1927)]
Coercion may move from any person and can be directed towards any person: The act of coer-
cion may be directed towards any person i.e., it may be directed against the other contracting party,

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47 Free Consent
or his relatives and friends.

Example: X threatened to shoot Y’s son if Y did not sign a promissory note for ` 20,000 in favor of X. Y signed
the promissory note under the threat. Here, Y’s consent is obtained by coercion. The promissory note is
voidable. In this case, the threat amounting to coercion is directed against a person who is not a party to
the contract.
There is no rule that the act of coercion must always proceed from a contracting party. An act of
coercion committed by a third party on behalf of a contracting party would also amount to coer-
cion and would render the contract voidable at the option of the party not at fault.
Example: X hired Y to kidnap Z’s sons in order to threaten Z to enter in to a contract. This is also a case of
coercion.
Coercion may be by way of threat to commit suicide: A ‘suicide’ and a ‘threat to commit suicide’
are not punishable but an attempt to commit suicide is punishable under the Indian Penal Code. A
threat to commit suicide may amount to coercion if the relations between the two persons are close
enough. Threat to commit suicide amounts to coercion was given by a Madras High Court in a case
law between Chikham Amiraju vs. Seshamma.
A person, by giving a threat of suicide, induced his wife and son to execute a release deed in favour
of his brother in respect of certain properties which they claimed as their own. The son executed a
release deed under the threat. It was held that the threat of suicide amounted to coercion, and the
release deed was therefore voidable.
[Chikham Amiraju vs. Seshamma]
Inducing the other party: The intention behind applying coercion is to induce the other party into
a contract. The party applying coercion does so in order to receive the consent of the other party by
application of force or such other means which are forbidden by Indian penal code.
Threats not amounting to coercion
àà Threat to sue: Threat to prosecute a person or file a suit against the person is not coercion. Ap-
proaching a Court and seeking appropriate remedy by filing a suit is the fundamental right of
every person.
àà Statutory compulsions: If anything is done at the insistence of the order of the Court, it is not
coercion.
àà Threat to strike: A threat by the employees to go on a strike in support of their demands is not
regarded as coercion. This is because; the threat to strike is not an offence under the IPC. It is a
right given under the Industrial Disputes Act.
àà Detaining property under mortgage: Detention of property under a mortgage contract, until

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Unit 1.5 48
the payment of the loan is made, does not amount to coercion.
Effects of coercion
When coercion is employed, a contract becomes voidable at the option of the aggrieved party, and any
benefit received by either party under the contract must be restored back. If the aggrieved party has suf-
fered any loss, he can recover the loss from the defaulting party.
Burden of proof
The burden of proving that the consent was induced by coercion lies on the party who wants to avoid the
contract. In other words, it is for the aggrieved party to prove that his consent was not free.
Duress vs. Coercion
The English law uses the term ‘‘duress’’ as an equivalent for term ‘‘coercion’’ used under the Indian
contract act. However, the two are different in the following ways:
Duress does not include detaining of property or threat to detain property
Duress can be employed only by a party to the contract or his agent
Undue influence
Definition: The term ‘undue influence’ means the unfair use of one’s superior position in order to obtain
the consent of a person who is in a weaker position. It can be understood as applying moral pressure to
gain the consent of the other party. It is defined in Sec. 16(1) of the Indian Contract Act, as under:
“A contract is said to be induced by ‘undue influence’, where the relation subsisting between the
parties are such that one of the parties-
Is in the position to dominate the will of the other and
Uses that position to obtain an unfair advantage over the other”
A lady, who was ill, gifted all her property worth ` 1,00,000 to P, who was attending on her. The lady
disputed the gift deed as soon as she recovered from illness. P filed a suit for retaining the possession
of the gifted property. P’s suit for the possession of the property was set aside by the court on the
ground of undue influence.
[Sundar Kuamri Vs. Kishore]
The dominant party must have obtained an unfair advantage over the weaker party: If the

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49 Free Consent
dominant party uses his superior position and obtains an unfair advantage over the weaker party,
undue influence is said to be employed.
Example: Raj had advanced money to his son, Kumar, during his minority. Upon Kumar’s attaining majority
Raj executed a bond from Kumar for a greater amount than the sum due, in respect of the advance. Here,
Raj has employed undue influence.
Presumption of undue influence Sec. 16(2)
In certain cases, the existence of undue influence shall be presumed by law. These are the cases where
in there is all possibility that one party has used its superior position in order to gain an unfair advantage
over the other by gaining such weaker party’s consent to the contract. The ground for presuming such
domination of will is due to the relation subsisting between the parties which provide an indication that
the party enjoying superior position used its position to gain an unfair advantage over the other and
moreover the dominant party can further influence the weaker party and hinder his pursuit of justice.
Thus in such cases when the weaker party raises the question of undue influence, the dominant party
has to justify the transaction and prove that there was no use of undue influence. The following are the
circumstances when undue influence shall be presumed in favor of the weaker person and the burden of
proof shall shift to the stronger person.
Following are the circumstances which indicate the presumption of undue influence:
One party is presumed to be in a position to dominate the will of the other
In the following circumstances, a person is deemed to be in a position to dominate the will of the other.
àà Where one holds real or apparent authority (direct or indirect control) over the other, such a
relation exists. For example, relationship between a parent and a child, a master and a servant,
income tax officer and an assesse.
Example: A sold his cycle to his servant, B, for ` 1,600. Subsequently, B refused to take the cycle on the
ground that the cycle was overvalued. Here, A being the master, holds a real authority over B and is in a
position to dominate his (B’s) will. In such cases, there is presumption to domination of will. This contract of
sale is, therefore, voidable at the option of B.
àà Where one party stands in fiduciary relation: (relation of trust and confidence).
Example: Between a guardian and a child, a guru and a disciple, a trustee and a beneficiary, a doctor and
a patient.

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Unit 1.5 50
A devotee gifted her property to her spiritual guru to secure benefits to her soul in the next world. A
relationship between spiritual guru and disciple is a fiduciary one and thus raises a ground for presump-
tion of domination of will. It was held that the spiritual guru was in a position to dominate the will of
devotee and used his superior position to gain an unfair advantage over the other.
[Mannu Singh vs. Umadat Pandey]
Where a person’s mental capacity is temporarily or permanently affected by reason of old age,
illness, or mental distress.
Example: Between a medical attendant and his patient.
A, an illiterate old man of about 90 years, physically ill and mentally in distress, was not in a position
to look after his daily affairs and manage his cultivation. His nearest relative, B, looked after his daily
needs and managed his cultivation. Under the influence of B, A executed a gift deed of his properties.
The court held that A was in distress by reasons of old age and physical and mental illness and B was
in a position to dominate his will. And thus, the gift deed was voidable.
[Sher Singh Vs. Pirthi Singh.A.I.R (1975) All 259].
Some relationships where there is presumption to domination of will
àà Father and son

àà Guardian and ward
àà Doctor and patient
àà Trustee and beneficiary
àà Income tax officer and assessee
àà Pardanashin women and other contracting party
Some relationships where there is no presumption to domination of will-
àà Husband and wife

àà Creditor and debtor
àà Landlord and tenant
Rebutting (disproving) the presumption
Such presumption is established by law as a party who is in position to dominate the will of the other

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51 Free Consent
party would also be in a position to curb or adversely affect the plea raised by the weaker party. It also
provides an opportunity to the dominant party to rebut the presumption, but if the presumption is not
rebutted then such a presumption would prevail. The above presumptions can be rebutted by a party
(dominating party) seeking to set the contract aside then such a party must prove that
àà The dominating party has made full disclosure of all the facts to the weaker party
àà The weaker party has understood the terms of the contract and its effect
àà The weaker party was in receipt of competent independent advice before entering into the contract
àà The transaction was not unconscionable (unreasonable)
Other cases of undue influence
Pardanashin woman A woman who observes complete seclusion (i.e. who does not come in con-
tact with people other than her family members) is called a pardanashin woman. If a pardanashin
women raises the plea of domination of will then a contract with a pardanashin woman is presumed to
have been induced by undue influence. The contract is voidable at the option of such a woman. This
special protection is provided by law only to protect them from being cheated by dishonest people.
The other party has to prove that undue influence was not exercised by proving that-
àà The terms of the contract were explained to her fully and clearly
àà She was in receipt of independent competent advice
àà She understood the terms of the contract completely and its effect on her interests
àà The terms of the contract were equitable
Unconscionable transactions: Unfair or unreasonable bargains belong to the category of ‘uncon-

scionable transactions’. These are such transactions where between two contracting parties; one is in
a dominant position and makes an exorbitant profit of the other’s distress. Unconscionable bargains
mostly take place in money lending transactions where moneylenders charge high rates of interest
from needy borrowers. The presumption of undue influence on the ground of high rate of interest is
raised only when the following two things are proved:
àà That the money lender was in a position to dominate the will of the borrower and
àà That the bargain is unreasonable i.e., rate of interest is excessive without any valid reason
Example: A, being in debt to B, the money lender of his village, contracts a fresh loan on terms which
appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence.
In case if undue influence is proved then the court would set aside the original bond and issue a new bond
with terms and conditions which are reasonable and binding upon both the parties .

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Unit 1.5 52
A Hindu window borrowed ` 10,000 from a money lender at an interest of 100 per cent per annum
for the purpose of enabling her to establish her right to maintenance. Here, as the terms (i.e., the
rate of interest) are unconscionable, there is the presumption of undue influence. So, in a suit for the
avoidance of the contract on the ground of undue influence and It is for the money lender to rebut the
presumption as to undue influence, i.e., prove that there was no undue influence.
[Rannee Annapurni Vs. Swaminatha)
Burden of proof in case of undue influence
The burden of proof in case of undue influence can be studied under the following two heads
In case of presumption of domination of will- There are certain cases were the law presumes domina-
tion of will by one party over the other, in such cases the dominant party can rebut such presumption.
The burden of proof lies on the dominating party and the dominating party has to prove
àà That there is no strong relationship between the parties
àà That he had disclosed all material facts
àà That he had given enough time and opportunity to the other party to receive competent and
independent advice
àà The transaction was not unconscionable
In all other cases- The law however does not presume undue influence in all transactions and hence
in transactions were there is no presumption of domination of will then the other party (aggrieved
party) has to prove the application of undue influence.
The burden of proof lies on the aggrieved party and the aggrieved party has to prove that
àà The relationship between the parties was such that the other party was in a position to dominate
the will
àà The other party actually used his influence to obtain an unfair advantage
àà The transaction was unconscionable. i.e. the transaction helped the dominant party to secure an
unfair advantage at the detriment of the other
Effects of undue influence
The effect of transactions entered into due to application of undue influence are covered in sec 19A
àà When consent to an agreement is caused by undue influence, the contract is voidable at the op-
tion of the aggrieved party
àà Contract may be cancelled by the Court or the court may form a new contract with revised terms

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53 Free Consent
and conditions
Example : A, a moneylender, advances ` 10,000 to B, an agriculturist, and by undue influence, induces B to
execute a bond for ` 20,000 with interest at 6 per cent per month. The court may set the bond aside ordering
B to repay ` 10,000 with such interest as may seem just.
Difference between coercion and undue influence
Coercion Undue Influence

It is defined in Sec. 15 of Indian Contract Act It is defined in Sec. 16 of Indian Contract Act
It involves physical pressure It involves moral pressure
Parties to a contract may or may not be related to Parties to a contact are related to each other under
each other some sort of relationship
It can be exercised even by a stranger to the con- It can be exercised only by a party to a contract
tract and not by a stranger
It has to be proved by the aggrieved party alleging It may be presumed by the law under certain
it in. It is not presumed by the law circumstances. The party against whom such pre-
sumption lies must disprove it
It involves doing or threating to do an illegal act It means inducing a person to enter into an agree-
ment by moral or mental threat.
In case of coercion not only the agreement is void- Undue influence does not involve criminal breach
able but also involves criminal breach of law and of law. There is no penal action on the party but it
thus the party may be punished. only makes the agreement voidable at the option
of the aggrieved party.
Fraud
Intentional or willful misrepresentation of a material fact essential to the contract is called as

“fraud”. A wrong representation of facts would amount to fraud if there is an intention to deceive the
other party. According to Sec. 17 of the Contract Act, “fraud” means and includes the following acts:
The suggestion as to a fact, which is not true, by one who does not believe it to be true-
A false statement amounts to fraud if the wrong representation is made by a person purposefully with
the intention of deceiving the other party into the contract.
If such wrong representation is made unintentionally by the party then it would not amount to
fraud it would rather be termed as misrepresentation.
Example : A sold a car to B representing it to be new and in working condition. Later on B found that the car
is an old one with defects that renders it unuseful for the very purpose for which it is purchased. Such state-
ment by A would amount to fraud as it was done with an intention to deceive an induce B into the contract.

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Unit 1.5 54
The active concealment of a fact by one having knowledge or belief of the fact: Active conceal-
ment refers to a purposeful supersession of facts by a person in order to deceive the other party and
gain his consent.
Example: A sold to B a statue made out of pieces of stones joined together. A knows this fact. He had very
carefully connected the joints with architectural technique to give an impression that it is made out of a
single stone. A is guilty of active concealment (fraud).
Active concealment is when the party takes positive steps to prevent the information
from reaching the other party
Example: A furniture dealer covers the cracks in the furniture and paints it in such a way that the cracks
cannot be discovered easily, his act amounts to fraud.
A promise made without any intention of performing it: A proposal when accepted becomes a
promise. Analysis of definitions of offer, acceptance and promise states that a party making a promise
does so with an intention of performing it. Therefore when a party makes a promise purposefully with
the intention of not performing his part of the promise then he is said to have procured the consent
of the other party by means of fraud.
Example: Mr. A without having any intent (i.e., intention) to regard the marriage as a real marriage, goes
through the marriage ceremony, such an act amounts to fraud as the party willfully induced the other to
enter into a contract without the intention of fulfilling the terms himself.
Any other act built to deceive: If an act of the party cannot be attributed to the above given pa-
rameters then it would still amount to fraud if such an act leads to deceiving the other party to his
detriment. To sum it up it can be stated that any act which leads to deceiving the other party into the
contract amounts to fraud.
Example: A husband was under heavy debt and in order to pay them, secured from his wife a no objection
certificate (NOC) regarding his wife’s property. His wife had four pieces of land. Husband represented that
he requires NOC for one such piece of land but fraudulently procured for all the four pieces of land later the
wife came to know about the same and wanted to cancel the NOC. She was allowed to do so.
Any such act or omission specially declared by the law to be fraudulent: There are certain acts
and omissions that law specifically considers as fraudulent on the ground that such acts or omissions
cannot happen in normal course of dealings and if they do then it would amount to fraud. Thus non
compliance to certain mandatory rules would amount to fraud. For example Section 55 of the transfer
of property Act, omission on the part of the seller to disclose to the buyer all material defects in the
immovable property amounts to fraud.

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55 Free Consent
Essentials elements of fraud
The fraudulent act must be committed with an intention to deceive: An act which constitutes
fraud must be committed by a party to a contract with the intention to deceive the other party and
induce him to enter into the contract. Mere bluffing like ‘this product is the best in the market’ is not
fraud. Such statements of puffery would not amount to fraud. Statements of opinion are not fraud as
they are suggestion of a party from his stand point and are a mere opinion on subject matter.
Example: A, intending to deceive B, falsely represented that 1000 shirts was manufactured daily in his fac-
tory and thereby induced B to buy the factory. In fact, the production was 600 shirts per day. The contract is
voidable at the option of B as his consent is obtained by fraud.
The fraudulent representation or statement must have been made with the knowledge of its
falsity: When a party makes false statement/representation with knowledge of its falsity it amounts to
fraud. Such purposeful attempt to deceive the other party with false statement/representation though
having the knowledge of truth would be considered as an act of fraud. A person making a false state-
ment/representation is not guilty of fraud if he honestly believes in its truthfulness.
A company issued a prospectus giving false information about the unbound wealth of Neveda. A
shareholder who had taken shares based on the prospectus wanted to avoid the contract. Held, he
could do so as the false representation in the prospectus amounted to fraud.
[Reese River Smith mining Co. vs. Smith, (1869)]
The fraudulent act must have been committed by a party to the contract: The fraud must have
been committed only by a party to the contract or his authorised agent. A fraud committed by a
stranger (i.e. by a person who is not a party to the contract), does not affect the validity of the contract.
X was induced to buy shares in a Company, on account of a false statement made by Y. Y was neither
a director nor a representative of the Company, but was a mere stranger. X wanted to set the contract
aside on the ground of fraud. It was held that he could not set the contract aside because the false
statement was not made by the Company or its authorised agents.
[Smith vs. Chadwick ]
The fraudulent act must have actually deceived the other party: The party, induced by fraud must
have relied upon the fraudulent statement or act and must have been actually deceived. If one party
has committed an act to deceive the other party but the other party has not been actually deceived,
it will not amount to fraud.

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Unit 1.5 56
T brought a gun from H. The gun was defective but H had plugged it with a cap. T did not examine
the gun, but when he used it, it burst. Held, As the cap had not deceived T it didn’t amount to fraud.
[Horsefull Vs. Thomas (1862) 1 H. & C.90]
The representation must relate to material facts: The statement by a person must be an assertion
of a fact and not of an opinion, statement of expression or intention. The false representation should
be in respect to a fact essential to the contract. A declaration of intention or a mere expression of
opinion will not amount to fraud.
Example: X says to Y that his horse is worth ` 5,000. Y buys the horse. Later on, Y comes to know that X has
purchased the horse only for ` 2,500. Y cannot set the contract aside because the statement was made by a
mere expression of opinion and cannot be taken as fraud.
Stating the value or worth of a commodity is a mere statement of opinion and does not
constitute fraud. Only a wrong representation of material facts would amount to fraud.
Sufferance of loss- it is understood as a rule that there is no fraud without damages. Occurrence of
loss by the party not at fault is essential to claim damages under fraud. If the party not at fault suffers
no loss then there is no ground for action for fraud.
Silence as fraud
General rule: According to Sec. 17, “Mere silence as to facts likely to affect the willingness of a
person to enter into a contract is not fraud.”
A person is not obliged to disclose the faults of goods he is going to sell. The buyer should satisfy him-
self before purchasing the goods regarding the quality or fitness of the things. Thus it for the buyer to
do what is necessary in order to find out and ensure that the goods fit his purpose. Silence as to material
facts does not constitute the act of fraud.
Example: A and B, being traders, enter into a contract. A has private information of a change in prices which
would affect B’s willingness to proceed with the contract. A is not bound to inform B.
Example: A candidate for the LLB examination, who was short of attendance, did not mention the fact in
his examination form. The university authorities did not properly scrutinize to discover the truth. Held, there
was no fraud by the candidate.
Exceptions to the general rule
The general rule that silence does not amount to fraud has the following exceptions. In the following

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57 Free Consent
circumstances, silence is considered as fraud:
When there is a duty to speak, keeping silence is fraud
Duty to speak arises in the following circumstances

àà Where parties stand in fiduciary relationship
Example: Ram sells his old car, which he knew to have a defective engine, to his son Shyam. Ram said noth-
ing to Shyam about the defects in the car’s engine. This amounts to fraud as the relation between the father
and the son makes it the father’s duty to tell his son about the condition of the car’s engine.
àà Where a contract is of ubberimae fidei (contract of utmost faith)
In some contracts, all material facts should be disclosed compulsorily, whether it is asked by the party
or not. This kind of a contract, where all material information should be provided, is known as a con-
tract of ubberimae fidei. In such contract any non disclosure of material facts would amount to fraud.
Examples of contract of ubberimae fidei
àà Contract of insurance - Insurance contracts are founded upon the principle of utmost good faith.
The proposer (person applying for insurance), therefore, is under a duty to disclose all the facts
known or ought to be known to him, which are likely to affect the acceptance of the proposal.
àà Contracts for sale of immovable property - Under Sec. 55 of transfer of Property Act In con-
tracts of immoveable property, the seller is under a duty to disclose to the buyer to disclose all the
materials facts. All materials facts with regard to defect or limitation in the title of the property
and any charge or pledge in favor of the third party should be disclosed to the buyer.
àà Contracts of marriage - Every party in a marriage contract is under a duty to disclose all the
material facts. For example in case of Haji Ahmed vs. Abdul Gani one of the parties to the con-
tract did not disclosed the fact of the medical disorder suffered by her. Such non- disclosure in
contracts of marriage amounts to fraud as contracts of marriage are ubberimae fidei
àà Contract of partnership - Partners to a partnership firm share a relation of mutual agency and
the relationship of agency is a fiduciary relation. Hence all partners have a duty to consult and
inform the other partners and they must be faithful to one another. Thus a partner making secret
profits have to give it back to the firm as per the rules of agency because such act of making
secret profit would constitute deceit.
àà Where silence is equivalent to speech: Sometimes, silence is equivalent to speech. In such cases,
the silence of a person amounts to fraud where a person keeps silent, knowing that his silence is
going to be deceptive, he is guilty of fraud.
Example: X a buyer, saw the horse of Y, a seller. X’s first impression was that the horse was sound. He asked
Y ”If you do not deny I will consider the horse sound”. Y kept silent. This is a fraud, because Y’s silence is
equivalent to speech.
Half truth: Silence may amount to fraud when a person discloses only half-truth. Half-truth is worse
than a blatant lie. Partially truthful disclosures may easily deceive the other party.

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Unit 1.5 58
Example: Prospectus of a Company disclosing only average dividend declared by the Company in the last
5 years instead of projecting an actual picture of declining dividends over that period is a glaring example
of half-truth amounting to fraud.
Effects of fraud
Under Sec. 19, the effect of fraud is that it makes the contract voidable at the option of the party whose
consent was obtained by fraud. Such party may rescind (put an end to) the contract or affirm (accept)
the contract.
The aggrieved party can exercise his option either to rescind the contract or
to affirm it, only once
In addition to the right to rescind the contract
The aggrieved party can also claim damages from the other party
Remedies available on account of fraud
The aggrieved party, i.e., the party whose consent was obtained by fraud has the following two remedies
(or rights)
àà He may rescind (i.e., revoke or put an end to) the contract
àà He may expressly or impliedly affirm (i.e., accept) the contract
àà He may claim damages
àà He may file a suit for specific performance and insist on being restored to a position if the false
statement made was true
Circumstances where a contract cannot be avoided under fraud

àà The party has entered into a contract in ignorance of fraud
àà The party has expressly or impliedly affirmed the contract
àà The party after having the knowledge of the fraud takes a benefit under the contract
àà Where the parties cannot be restored into their original position
àà Where a third party acquires a right in the property for consideration in good faith
Misrepresentation
Meaning
The term ‘misrepresentation’ means a false representation of a fact made innocently or non-disclosure

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59 Free Consent
of a material fact by the party without any intention to mislead the other party.
When a wrong representation is made by a party honestly believing that the representation made by him
is true then such false representation would amount to misrepresentation.
A company’s prospectus contained a representation that the company had been authorized by a
special Act of parliament to run trams by steam or mechanical power (currently pulled by horses). The
authority to use steam engine was, however, subject to the approval of the Board of Trade. This fact
was not mentioned in the prospectus. The Board of trade refused to provide consent and the share
holders sued the directors. It was held by the court that the directors were not guilty of fraud as direc-
tor’s representation was not with an intention to deceive the share holders.
[Derry vs. Peek (1889) 14 App. Cas 337]
The above case is a landmark judgment differentiating fraud from misrepresentation.

From this judgment it is understood that when a representation made is wrong but the
party making such representation genuinely belies it will be true then such wrongrepresen-
tation would amount to misrepresentation and not fraud as the intent of deceit is missing.
Acts which constitute misrepresentation
As per Sec. 18, any act amounts to misrepresentation if it falls in any of the following three categories:
Positive unwarranted statement: A statement made without any reasonable basis, is an unwarranted
statement. When a person makes a positive statement of a fact without any trustworthy source of
information and believes that statement to be true, the act amounts to misrepresentation.
Example: A believed his horse to be sound although he had no sufficient ground for his belief. A, while
selling his horse to B, stated the horse to be sound. On the basis of this statement, B bought the horse. Later
on, B found the horse to be unsound. In this case, the positive statement made by A is a misrepresentation.
Breach of duty : When a person commits a breach of duty which gives him an advantage by mislead-
ing another to his disadvantage, he is making a misrepresentation. This clause covers all those cases
where the person making the statement has a duty to disclose all material facts which he knows, but
he fails to disclose it, innocently. Such cases of non disclosure of material facts though innocently
are termed as instances of “constructive fraud”.
Example: In case of Bonnerman vs. White there was contract of sale of wheat grown on 200 acres of land.
The seller made an innocent representation that no sulphur had been used in the cultivation of wheat. But
sulphur had been actually used in 5 out of 200 acres of land on which the wheat was cultivated. The buyer

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Unit 1.5 60
would not have purchased the wheat, if he had known that sulphur had been used in the cultivation of
wheat. It was held that there was misrepresentation.
Example: A, before signing a contract with B of the sale of his business, correctly started that the monthly
sales of his business were ` 50,000. But the negotiations for sale lasted for Seven months. During the period
of negotiations, the monthly sales declined to ` 5,000. A unintentionally, kept quiet (i.e., did not disclose
this fact to B). It was held there was breach of duty, and hence, misrepresentation.
Inducement of mistake about the subject matter: When a person induces the other person, how-
ever innocently, to make a mistake regarding the subject matter of the agreement, he has committed
a misrepresentation. When such misrepresentation goes to the substance of the subject matter then
the contract is voidable at the option of the other party.
Example: Sonu says to Monu, an intending purchaser of his building, that his building is in perfect condi-
tion. He did not know that the foundation of his building is very weak. Monu believing the statement of
Sonu purchased the building. In this case Sonu is guilty of misrepresentation.
Essentials elements and legal rules for misrepresentation
The misrepresentation must be of material facts: It is an important and essential element of mis-
representation that the false statement must be of material facts. A mere expression of one’s opinion
generally made by businessman about the subject matter is not a statement of fact.
X agreed to purchase certain pieces of land for the purpose of sheep farming from Y. However, X had
agreed to purchase the land relying upon Y’s statement that he estimated that the land would carry
2000 sheep. But neither Y nor X checked it before buying. Later it was found that only 1000 sheep’s
were accommodated on that particular land and X wanted to set the contract aside on the ground of
misrepresentation that the capacity of the land was significantly lesser than that stated by Y. It was held
that Y’s statement was merely an opinion which according to him was true. Therefore, the contract was
not set aside.
[Smith vs. Land & Housing Corpn. (1884) Ch. D.7]
The misrepresentation must be false, but the person making it honestly must believe it to be
true: The person making the false representation must honestly believe it to be true. Though the
representation is false but the person making it believes it to be true even though he may not have a
ground to substantiate his belief.
Example: X believed the engine of his motor cycle to be in an excellent condition. At the time of sale of
this motor cycle, X without getting it checked in a workshop, told Y that the motor cycle was in an excellent
condition. Based on this statement, Y bought the motor cycle, whose engine proved to be defective. Here,
X’s statement is misrepresentation as the statement turned out to be false.

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61 Free Consent
The misrepresentation must have been addressed by one party to the party misled: The false
statement which amounts to misrepresentation must have been addressed by a party to the contract
to the party who is misled by it. If it is not addressed to the party who is misled, then it is not mis-
representation and the contract is not voidable. Misrepresentation made to a third person does not
award a chance to the party to the contract to avoid such a contract.
The promoters of a Company were sued by X who had purchased certain shares on the faith of a false
statement contained in a prospectus issued by them. X was not a person to whom the shares had been
allotted on the first allotment of the Company. He had merely purchased the shares from the first al-
lottee. It was held that the prospectus was addressed to the first applicants for shares. It could not be
supposed to extend to anyone other than the first applicants.
[Peek vs. Gurney (1873) LR 6 HL 377]
Induce the other party: the idea behind making innocent false representation is to induce the other
party and receive his consent to the contract. Though the party does not intend to deceive the other
with such a false representation of facts.
Actually acted: a misrepresentation is said to have been made only when a party to whom it is made
actually is induced into the contract on the basis of such a false representation. In other words the
representation must have been instrumental in influencing the other party into the contract. If a party
is not affected by the representation made and such has not influenced his decision then he cannot
rescind the contract.
Change of circumstances: Sometimes, a representation may be true when it is made, but due to
change of circumstances, it may become untrue before the contract is concluded. In such cases, it is
the duty of the person who made the earlier statement to communicate the change of circumstances
to the other party. If he fails to do so, then the other party can set the contract aside on the ground
of misrepresentation.
Example: X, a medical practitioner, wanted to sell his medical practice to Y. X stated to Y that his practice was
worth ` 20,000 per annum and he had a sufficient number of patients on his panel. This fact was true when
X represented it to Y. The negotiations lasted for five months, and then the contract was signed. During this
period, X became ill and could not attend to his practice. This resulted in a serious loss of patients. These
facts were not disclosed to Y. The court emphasised that the change of circumstances should have been
brought to the notice of the purchaser. Held, Y was entitled to set the contract aside.
Remedies available on account of misrepresentation
The aggrieved party, i.e., the party whose consent was obtained by misrepresentation has the following
two remedies (or rights)

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Unit 1.5 62
àà He may rescind (i.e., revoke or put an end to) the contract

àà He may affirm (i.e., accept) the contract
Incase of misrepresentation, the aggrieved party cannot claim the damages from the
other party
Circumstances where a contract is not voidable on grounds of misrepresentation
If the party could discover the truth with ordinary diligence then the contract is not avoidable
at the option of the aggrieved party:
Example: Y believed that the glue sold by him is fit for industrial use. X contracted to purchase glue from Y
and X was allowed the opportunity to open the drums and examine the glue. X opted not to do the same.
Later on after the delivery of goods to X’s warehouse he discovered that the glue did not fit his purpose and
thus he wanted to rescind the contract. Here X cannot rescind the contract as the truth was discoverable
by ordinary diligence.
The party has entered into a contract in ignorance of misrepresentation:

Example: A bought shares in a Company on the faith of a prospectus that contained an untrue statement
as to the directorship of B. A had never heard of B and hence such a statement was immaterial from his view
point. A claimed damages on the ground that fraud was committed. His claim for damage was dismissed
on the ground that there was no fraud.
By lapse of time: After the misrepresentation is discovered by the aggrieved party, the contract must
be rescinded within a reasonable time. But if the contract is not rescinded within the reasonable time,
then the right to rescind is lost. The ‘reasonable time’ is an important factor which depends upon the
facts and circumstances of each case.
By affirmation: Sometimes, after becoming aware of the right to rescind, the aggrieved party af-
firms the contract. In such cases, he loses the right to rescind the contract. The affirmation may be
expressed or implied.
When a third party acquires right in the subject matter: Sometimes, a third party may acquire
the right in the subject matter of the contract, in good faith, without any knowledge of misrepresen-
tation between the other two parties and the third party pays the due consideration for acquiring the
rights. If such third party sells or pawns the article, in such cases, the aggrieved party loses the right
to rescind the contract.
No restoration: Where the parties cannot be restored to their original position.
Where the subject matter of the contract has been destroyed or consumed, the contract
must be rescinded in total. A part of the contract cannot be rescinded.

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63 Free Consent
Fraud vs. Misrepresentation
Fraud differs from misrepresentation in the following respects
Fraud Misrepresentation
A wrong representation is made willfully A wrong representation is made innocently,
The intention is to deceive the other party The intention is not to deceive the other party
The person making the wrong statement does not The person making the wrong statement believes
believe it to be true it to be true
The aggrieved party can claim damages The aggrieved party cannot claim damages
When a party to a contract commits fraud/misrepresentation, but the other party is not
misled by such fraud or misrepresentation, the contract shall not be voidable.
Mistake
The term ‘mistake’ means an incorrect belief about something. It is, in fact, an erroneous (incorrect) belief
which leads one party to misunderstand the other. It generally takes place where the concerned parties are
not fully aware of the terms of the agreement, and they take the terms in different sense. Hence, there is
no consent at all because the two parties do not understand the same thing in same sense.
Types of mistakes
From the subject point of view, the following mistakes are important.
Mistake of Law
The mistake of Law may be of two types namely,

àà Mistake of Indian Law
àà Mistake of foreign Law
Mistake of Fact
The mistake of fact may be of two types namely,
àà Bilateral mistake
àà Unilateral mistake
Mistake of Law
When one or both the parties to an agreement are under an erroneous understanding of the relevant law.
Then agreement shall be said to be caused by mistake of Law. This mistake may either be mistake of

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Unit 1.5 64
Indian Law or mistake of foreign Law.
Mistake of Indian Law: Everybody is expected to know the law of the country where he lives,
particularly, the laws which are relevant for his activities. The Latin maxim stands thus ‘Ignorantia
juris non excusat’ which means ignorance of law is no excuse. In other words, a party cannot get
exemption from the act done in ignorance of law. A contract is not voidable because it was caused
by a mistake as to any law in force in India.
Example: X and Y entered into a contract on this erroneous belief that a particular debt was not barred by
the Limitation Act. The contract cannot be avoided on the ground of mistake because both are expected to
know the law of the land.
Mistake as to the foreign Law
Mistake as to the foreign Law (law of some other country) is treated as a mistake of fact as a person
cannot be expected to know law of a foreign country. Hence, a contract becomes void on the ground
of mistake of foreign law.
Mistake of Fact
When parties to the contract are under an erroneous belief regarding a fact which is essential to the
subject matter of the contract then they are said to be under mistake of fact. The mistake of fact can
be further studied under different heads as follows
Bilateral mistake Sec. 20
The term ‘bilateral mistake’ means that both the parties to the agreement are under a mistake. The
case of bilateral mistake is an instance of lack of “consent”, thus in case of bilateral mistake there
is no consensus ad idem. According to Sec. 20, “Where both the parties to an agreement are under
a mistake as to a matter of fact essential to the agreement, the agreement is void.”
A mistake shall be termed as bilateral if it satisfies the following two conditions:

àà The mistake must be mutual i.e. of both the parties to the contract.
àà The mistake must relate to a matter of fact essential to the agreement
Types of bilateral mistake
An agreement is void where there is a bilateral mistake as to the subject matter. A bilateral mistake as to
the subject matter includes the following:
Mistake as to the existence of subject matter: Sometimes, the subject matter of the agreement
would have ceased to exist before the agreement was made and both the parties may not be aware
of this fact. In such cases, the agreement is void.

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65 Free Consent
Example: A agrees to buy a certain horse from B. It turns out that the horse was dead at the time of bargain,
though neither party were aware of the fact. The agreement is void because there is a bilateral mistake of
fact as to the existence of the subject matter.
Mistake as to the title of subject matter: Sometimes the buyer is already the owner of a property
which the seller wants to sell to him. But the concerned parties are not aware of the fact. It happens
when both the parties are mistaken about this fact. In such cases, the agreement is void as there is a
mistake about the title of the subject matter.
X agreed to take a lease of fishery from Y. The fishery already belonged to X. But both X and Y were not
aware of this fact. In this case, there was a mistake as to the title of the parties to the subject – matter
of the agreement, and the agreement was declared void.
[Cooper vs. Phibbs. (1867) L.R.2H.L 149]
Mistake as to the quantity of the subject matter: If both the parties are working under a mistake
as to the quantity of the subject matter, the agreement is void.
X who inspected fifty rifles in Y’s shop inquired from him the price of the rifles. Later, he wired Y, “Send
three rifles”. By mistake of the telegraph clerk the message transmitted to Y was “Send the rifles”. Y sent
fifty rifles. Held, there was no contract. But X has to pay for the rifles if he retains the three rifles that he
intended to purchase on the basis of an implied contract.
[Henkel vs. Pope. (1807) L.R.6 Ex. 7]
Mistake as to the price of the subject matter: Where there is a mutual mistake as to the price of
the subject matter, the agreement is void.
Example: A has agreed to buy a car from B, based on his letter in which he said the price was ` 7,500 instead
of ` 75,000 due to a typing error. The agreement is void because there is a mistake as to the price of subject
matter.
Mistake as to the identity of the subject matter: It usually happens when one party intends to deal
in one thing and the other party intends to deal in another.
W agreed to buy from X a cargo of cotton “to arrive ex-peerless from Mangalore”. There were two ships
of that name (peerless) sailing from Mangalore. One sailing in October and the other in December.
W meant the former ship but X meant the latter. Held, there was a mutual or a bilateral mistake and
there was no contract.
[Raffles Vs. Wichelhaus ( 1864) 2H and C 906]

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Unit 1.5 66
Mistake about the possibility of performance: The fact of possibility of performance is an essential
fact. If an agreement is impossible to perform, but the fact of impossibility is unknown to both the
parties, the agreement is void. The impossibility may either be physical or legal.
A contract for the hiring of a room for witnessing the coronation procession of Prince X was held to be
void. Because, the coronation was already canceled due to illness of the Price X, this fact was unknown
to both the parties of the contract
[Griffith Vs. Brymer(1903) 19 T.L.R434]
Unilateral mistake
It is the mistake in which only one of the parties to an agreement is at mistake about the facts which
are essential to the agreement. Generally, a unilateral mistake does not render the agreement void i.e.,
it does not affect the validity of the agreement. Where the agreement is otherwise valid, the mistake of
only one of the parties cannot affect its validity.
Example: X sells rice to Y by showing a sample. Y thought that the rice is Basmati and purchased it. But the
rice was local. It is a mistake of fact by Y and he is bound by the contract.
Exceptions
However, there are certain cases in which a unilateral mistake renders an agreement void. These are the
cases in which a unilateral mistake has the effect of defeating the true consent of the parties and may be
discussed as under:
Mistake about the identity of the parties to an agreement: The identity of parties entering into an
agreement is not necessarily essential to the contract. In certain cases the identity of the parties to the
contract is essential and hence a unilateral mistake as to identity of the party in such circumstances
renders a contract void. The mistake about the identity occurs when one of the parties represents
himself to be some person, other than who he really is.
One Blenkarn, knowing that Blenkarn & Co. was a reputed customer of Lindsay & Co., placed an order
with Lindsay & Co. by imitating the signatures of Blenkarn. The goods were then sold to Cundy, an
innocent buyer. A suit was filed by Lindsay & Co. against Cundy for the recovery of goods. It was held
that there was no contract between Lindsay & Co. and Blenkarn as Lindsay & Co. never intended to
contract with Blenkarn and as such, Cundy did not get a good title and hence he must return the goods
or make payment for the goods.
[Cundy vs. Lindsay & Co.]

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67 Free Consent
A man, called X , entered a jewller’s shop and selected some Diamond ring. Later he wrote a cheque of
` 5,000 saying that he was sir GB and gave the latter’s address. The jeweler accepted the cheque from
X in good faith believing that the person was Sir GB. X later pledged the Diamond ring with a pawn-
broker. The jeweler alleged that there was never any contract between him and X. Held; the jewller
had contracted to sell and deliver the Diamond ring to the person who came to his shop even though
he believed he was Sir GB.
[Phillips vs. Brooks. (1919) 2K.B. 243]
The jeweler intended to contract with a person who came to his shop irrespective of the
identity of such person. The intention of the jewller was very clear regarding the person
he was contracting with. The fact that such person being Sir GB came to his knowledge
later and therefore there was no mistake as regards to identity of the person and hence it
was not void under the provisions of unilateral mistake. The only recourse for the jewller
is to file the case under fraud against Mr. X.
Mistake about the nature of transaction: There can be unilateral mistake regarding the very nature
of transaction to be entered into in such cases the contract would be void. While executing a deed, a
person may not understand the nature of the transaction that he is entering into. A person may sign
a gift deed thinking that it is only a power of attorney. This may happen because of a fraud by the
other person or because of the absence of sufficient caution by the signing person owing to a state
of health or old age.
Effects of mistake
The effects of mistake are as follows
In case of bilateral mistake The agreement is void

In case of unilateral mistake The agreement is valid
In case of unilateral mistake as to identity of a The agreement is void
person contracted with and the identity of person
being of material importance
In case of unilateral mistake as to nature of contract The agreement is void
In case of mistake as to Indian law The agreement is valid
In case of mistake as to foreign law The agreement is void

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Unit 1.5 68
For the creation of a contract, there must be consensus ad idem
Free consent is an essential element of a valid contract
It is immaterial whether the IPC is in force or not in the place where coercion is committed
The act of coercion may be directed towards any person
The English law uses the term ‘duress’ for coercion
Intentional or wilful misrepresentation of a material fact essential to the contract is called

as ‘fraud’
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is
not fraud
In case of fraud, in addition to the right to rescind the contract, the aggrieved party can also
claim damages from the other party
The term ‘misrepresentation’ means a false representation of a fact made innocently or non
disclosure of a material fact without any intention to deceive the other party
In case of misrepresentation, the aggrieved party cannot claim damages from the other party
Where a party to contract commits fraud/misrepresentation, but the other party is not misled
by such fraud /misrepresentation, the contract shall not be voidable
‘Mistake’ may be defined as an incorrect belief about something

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Unit
Legality of an object
1.6
Learning
Objectives
)) Understand the legality of object and )) Understand the meaning of void agree-
consideration ments, illegal agreements and uncertain
agreements
)) Know various circumstances where the
object or consideration becomes illegal
)) Learn the agreements opposed to public

policy
Introduction
As per Sec 10 legality of the object and consideration is an important requirement for a valid contract.
Every agreement of which the object or consideration is unlawful is void. The term ‘Object’ means the
purpose and ‘consideration’ means something in return. An agreement is valid only if both, object and
consideration are valid.
According to Sec. 23 of Indian Contract Act, consideration or object of an agreement is unlawful under
the following circumstances
If the object or the consideration is forbidden by law: If the object or the consideration of an
agreement is doing of an act forbidden by the law, the agreement is void. An act or an undertaking
is forbidden by law, when it is punishable by the criminal law of the country or when it is prohibited
by a special legislation derived from the legislature.

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70 Legality of an object
Example: Amar, a Hindu is already married and his wife is alive. He entered into a marriage agreement with
Laxmi, another lady. This is a void agreement because second marriage is forbidden by, the Hindu Law. In
this case, the object of the marriage is unlawful.
Example: X promises Y to drop a prosecution which he has instituted against Y for robbery, and Y promises
to restore the value of the things taken. X files a suit against Y for robbery and Y pleads that there was an
agreement not to do the same. The agreement is void as its object is unlawful.
If it is of such a nature that, if permitted, it would defeat the provisions of any law: If the con-
sideration or the object of an agreement is of such a nature that it would defeat the provisions of any
statutory law, the agreement is void. These types of agreement may not directly violate any law, but
if permitted defeats the provision of any law of the country.
Mr A gave a loan to B of ` 50,000. They agreed that A can collect the amount from B at any point of
time in future and B wouldn’t raise the plea of limitation. Such an agreement is void on the ground
that it contravenes the provisions of law of limitations.
[Rama Murthy Vs. Gopayya.(1971) 40 Mad. 701].
A leased a flat to R at a rent of `1500 a year. With the object of deceiving the municipal author-
ity, agreements were entered into, one purporting to lease the flat at ` 650 a year and the other
for services in connection with the flat at `850 a year. A sued R for the recovery of an instalment of
` 850. Held, the agreement being void A could not recover and R was entitled to remain in possession
of the flat for the remainder of the term of the lease. It was held so as the intension was to save tax by
manipulating the rent amount to save tax which was against the provisions laid by the law.
[Alexander vs. Rayson (1936) 1 K.B.169]
If it is fraudulent: An agreement with an object to defraud the other person is void as fraud is
considered as civil wrong, which is punishable under provisions of law.
Example: Kapoor and Sharma entered into an agreement to divide the gains equally, earned by them by
defrauding others. The agreement between Kapoor and Sharma is void due to the unlawful object.
If it involves or implies injury to the person or property of another: If the object of an agreement
is to cause injury to the person or property or reputation of a person, it is void. Injury means harm
or damage. Injury does not only imply physical injury but also includes injury to the reputation of
the other.
Example: Amar promises to pay ` 5,000 to Akbar if he sets Anthony’s house on fire. It involves damage to
the property of Anthony. Hence it is also unlawful and void.

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Unit 1.6 71
B borrowed ` 1000 from L and executed a bond promising to work for L without pay for a period of
two years. In case of default. B had to pay interest at 8% per month and the principal sum at once. Held,
the contract was void as it involved injury to the person of B
[Ram Saroop vs. Bansi Mandar (1915) 42 Cal.742]
If the agreement is immoral or opposed to public policy: An agreement, in which the consider-
ation or the object is immoral, is void. The word immoral has a wide meaning and includes anything
which is corrupt or dishonest. The concept of immorality is been dealt by the court according to the
time, place and society’s traditions about morality. The term Public policy refers to the acceptable
societal standards and thus a contract which has a tendency to injure public interest or public welfare
is against public policy.
Example: An agreement between husband and wife for future separation is immoral as they are married
to live together.
A married woman was given money to enable her to obtain divorce from her husband and then, marry
the lender. Held, the agreement was immoral and the lender could not recover the money.
[Baivijli vs. Nansa Nagar, (1885) Bom 152]
Example: A let a Flat to B, a woman whom he knew to be a prostitute. Held, the agreement was unlawful
and A cannot recover any sum as B’s object was to use the flat for immoral purpose and furtherance of her
trade.
Agreements opposed to public policy
An agreement which is against the welfare of the general public or tends to promote corruption or injustice
is said to be against public policy. As per Sec. 23 agreement opposed to public policy are void. The term
public policy is not coded by law and therefore what constitutes injury to public interest or welfare would
depend upon the times and the climes. The courts use extreme reserve in holding a contract as against
public policy and does so only when the contract is incontestable and on any view inimical to public
interest. The doctrine is only invoked when harm to the public is clear and is incontestable. The doctrine
of public policy is a branch of common law and is governed by judicial precedents. The principles are
crystallised under different heads in order to lend consistency and solidarity to the legal procedure. The
following agreements are declared opposed to public policy
Agreement for trading with an alien enemy: At the time of war between two countries, citizens
of those countries become alien enemy to each other. An agreement made with an alien enemy is
opposed to public policy, so it is unlawful. The contract which had been entered into before the

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outbreak of the war is perfectly legal and enforceable but in the event of war taking place between
the countries to which the parties belong would either lead to the contract being suspended till war
continuous (if not against public policy) or such contracts would be dissolved and deemed void (if
against public policy).
Agreement of stifling prosecution: Stifling prosecution means to drop any legal prosecution against
any person. It is a fundamental principle that one who has committed a crime must be punished.
An agreement which protects the person from being prosecuted in consideration of money is void.
Therefore, an agreement for stifling prosecution is void.
Example: Kumar promises to drop a prosecution which he has instituted against Kiran for robbery and
Kiran promises to restore the stolen property. The agreement is void.
Example: An agreement which provides that a suit should not be brought for the breach of any terms
of the agreement within a time period prescribed by law of limitation is void. The party not at fault is not
expected to wait until the period of limitation expires
Contracts in the nature of champerty and maintenance:

àà Maintenance implies financing of suits by third parties who have no legal interest in the suit.
Further, financing may be for prosecution or defence. The reason for considering maintenance
agreements to be void is that, if allowed such would lead to contemptuous litigation. It is to say
that a third party would undertake to support the other for the sole purpose of harassing the party
on which the suit is filed.
Example: A provides assistance to B of ` 10,000 in order to allow B to file a suit on C. A has no interest in
such litigation but his purpose to cost trouble to C. These are known as maintenance agreements and in the
above case A cannot recover such a amount from B.
àà Champerty implies an agreement, whereby one party is to assist another to bring an action for
recovering the money or the property and is to share the proceeds of the action. The reason for
considering Champerty agreements to be void is that, if allowed such would lead to speculative
litigation. Such litigations if allowed would become a source of profit making transactions out
of legal trial, which is unacceptable.
Example: A files a suit against B for obtaining the ownership of a house. C promises to advance ` 5,000 to A
for meeting the cost of litigation. And A promises to share the gains of litigation. Agreements of these kinds
are equally unlawful and void whether the assistance to be provided is monetary or professional in nature.
Under the English Law, both these agreements are void.
Under Indian law: The fairness of the transaction must be weighed as a whole. If the reward from
the transaction is out of all proportion to the actual expenses incurred, then such agreement would
be unreasonable. Under Indian law, the agreements of maintenance and champerty should satisfy
following conditions for it to be valid:

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Unit 1.6 73
àà The suit was reasonable

àà The suit was filed with a bona fide object of assisting the other party in making claim which is
believed to be just.
àà If the parties agree on payment of a reasonable amount or have a fair share of profit
Agreement for the sale of public offices and titles: It is also known as trafficking of public office.
An agreement of trafficking (i.e. to buy, sell or procurement) of public office or title is against the
public policy. Hence, such an agreement is unlawful and void. Following are the agreements against
public policy, since they are the sale of public offices:
An agreement to provide money to a Member of Parliament or Minister to influence his opinion or
judgment
àà An agreement intended to induce a public officer to act corruptly
àà An agreement to procure a public title like ‘Bharat Ratna’ or ‘Padma Vibhushan’ for a reward
àà An agreement for procuring votes in an election for a consideration
àà An agreement to sell a seat in a medical or an engineering college (except payment seat)
Mr P paid a sum of `20,000 to K who agreed to obtain a seat for P’s son in a Government medical
College. On K’s failure to get the seat . P filed a suit for the refund of `20,000. Held, the agreement was
against public policy
[N.V.P Pandian Vs. M.M.Roy , A.I.R (1979) Mad.42]
Agreement in restraint of marriage: As per sec 26, any agreement in restraint of marriage of any
person other than a minor is void. This is because; the law regards marriage as the right of every indi-
vidual. Restraint may be complete or partial. The agreement which prevents a person from marrying a
particular person is a partial restraint and an agreement not to marry any person is a complete restraint.
In India, any restraint of marriage whether total (absolute) or partial is opposed

to public policy and hence void. In the English Law, however, only an absolute
restraint is void.
Example: A promised to marry B only and none else, and , in default to pay `5000, But he (ie., A) married C.
B filed a suit. Her suit was dismissed on the ground that the agreement was in restraint of marriage, and so,
void. Therefore neither B can recover the amount nor she can force A to marry her.
Agreement in restraint of parental rights: The father and the mother are the natural guardians
of a minor child. This right of guardianship cannot be bartered away by any agreement. Thus, an
agreement which is inconsistent with the duties arising out of such guardianship is void as being
opposed to public policy.

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Example: Amar for a sum of ` 25,000 agreed to place his daughter at the disposal of Akbar to be married
as he likes. The agreement is void as it interferes with Amar’s parental duty to select a husband in the best
interest of the girl.
A father having two minor sons agreed to transfer their guardianship in favour of Mrs. Annie Besant
and also agreed not to revoke the transfer. Subsequently, he filed a suit for the recovery of the boys
and a declaration that he was the rightful guardian. The Court held that he had the right to revoke his
authority and get back the children.
[Giddu Narayanish vs. Mrs. Annie Besant. (1915) 38 Mad. P.C]
Marriage brokerage contract : A marriage brokerage contract is one in which, in consideration of

marriage, one or the other of the parties to it, or their parents or third parties receive a certain sum of
money. Accordingly, dowry is a marriage brokerage and hence unlawful and void. It may be noted
that this does not cover the business of marriage bureaus because they actually act as information
bureaus and do not guarantee that the marriage shall take place.
Example: Amar promised Akbar to procure a wife for him. And Akbar agreed to pay a certain sum of money
to Amar for the procurement of the wife. In this case, the agreement is void as it is opposed to public policy.
Agreement to create interest opposed to duty: An agreement to do something which is against

any professional duty is void.
Example: If a doctor enters into an agreement that he will not treat a patient, it is void. In the same way if a
police man asks for consideration of money for the purpose of undertaking interrogation, which he is duty
bound to do, is void.
Agreement interfering with the Course of justice: Use of improper influence of any kind on the
judge or officer of justice is unlawful and hence void. Hence an agreement which interferes with
the outcome of a court case in any manner whatsoever is deemed void and thus has no legal effect.
Example: X entered into an agreement with Y, the judge of a High Court to deliver a judgement in Y’s
favour. The agreement is void.
Agreement in restraint of personal liberty: Every person has the right of personal freedom to
speech, expression and behavior. If any agreement takes away the freedom of a person, then such an
agreement is against the public policy and is void.
A debtor agreed with his money lender that he would not, without the lender’s consent, leave his
job or borrow money, or dispose his property, or change his residence. Held, the agreement was void
because such agreement impinge upon the personal rights of an individual.
[Horwood vs. Millar’s Timber &Trading Co., (1917) 1 KB 305]

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Unit 1.6 75
The term ‘void agreement’ is defined in Sec. 2 (g) of the Indian Contract Act, which reads as under:
An agreement not enforceable by law is said to be void.” A void agreement does not create any legal
rights and obligations. It is void ab initio (i.e. void from the very beginning) and without any legal effect.
The Courts will enforce only those agreements which fulfil the conditions of enforceability as laid down
in Sec.10 of The Indian Contract Act.
àà Agreements which have been expressly declared as void by the Indian Contract Act are:-
àà Agreements made by incompetent parties [Sec. 11]
àà Agreements made under a mutual mistake of facts [Sec. 20]
àà Agreements with unlawful consideration or object [Sec. 23]
àà Agreements made without consideration [Sec. 25]
àà Agreements in restraint of marriage [Sec. 26]
àà Agreements in restraint of trade [Sec. 27]
àà Agreements in restraint of legal proceedings [Sec. 28]
àà Agreements whose meaning is uncertain [Sec. 29]
àà Agreements by the way of wager [Sec. 30]
àà Agreements contingent on the happening of an impossible event [Sec. 36]
àà Agreements to do impossible acts [Sec. 56]
Majority of agreements have already been discussed, while the others are discussed here as under:-
Agreements in restraint of trade: Every person has the right to carry on any trade, profession, oc-
cupation or business activity so far as it is lawful. An agreement which restrains from doing a lawful
profession, trade or business of any kind is void to that extent.
Exceptions
Sale of goodwill: A seller of goodwill of a business may be restrained from carrying on a similar
business within the specified local limits so long as the buyer or his assignee carries on a similar
business provided it is regarded reasonable by the Court.
Example: C, a seller of imitation jewellery in Mumbai. Sells his business to D and promises that, for a period
of two years, he will not deal (i) in imitation jewellery in Maharashtra.(ii) In real jewellery in Maharashtra
and (iii) in real or imitation jewellery in certain other states.. In a suit, only the first portion has been held
lawful. The other portions have been held void, as the restraint is unreasonable in point of place and nature
of business.
Thus from the above case it can be understood that an agreement of sale of goodwill is valid if the fol-
lowing conditions are met.
àà It should for specified local limits

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àà It should be regarding similar business

àà The restraint is valid so long as the buyer deriving the goodwill operates a like business
àà The limits imposed should be reasonable taking into account the nature of business
Partners agreement: A seller of goodwill of a business may be restrained from carrying on a similar
business within the specified local limits so long as the buyer or his assignee carries on a similar
business provided it is regarded reasonable by the Court.
àà Sec 11 of Indian Partnership Act 1932 states – The partners may mutually agree that a continuing
partner shall not carry on any business other than that of the firm, while he is a partner of the firm.
àà Sec 36(2) of Indian Partnership Act 1932 states - An outgoing partner may agree with his partners
not to carry on a business similar to that of the firm’s within a specified period or limits
àà Sec 54 of Indian Partnership Act 1932 states - Partners may, upon or in anticipation of dissolution
of the firm, may make an agreement that some or all of them will not carry on a business similar
to that of the firm within a specified period or reasonable local limits
àà Sec 55(3) of Indian Partnership Act 1932 states - Any partner may, on the sale of goodwill of the
firm, make an agreement with the buyer that such a partner will not carry on any business similar
to that of the firm within a specified period or limits
Such agreements in restraint of trade are valid if the limitations with regard to
time and place are reasonable.
Restraint in trade combinations: Trade combination which have been formed to regulate the business
or to fix the price is valid. An agreement between the manufacturers and traders not to sell the goods
below a certain price, to pool profits and to divide business profits in certain proportion is perfectly
valid. If the agreement is an attempt to create monopolies, it is void as it is opposed to public policy.
A An agreement between ice manufacturers not to sell ice below a stated price and to divide the
profits in a certain proportion is not void.
[Frazer & Co. vs. Bombay Ice Co. (1940) 29, Bom. 107]
Service agreements: The service agreement may restrain the employees from working elsewhere
during the period of employment is not void. Any agreement which prohibits a person not to engage
anywhere else, after he has left the employment is not valid. The restriction imposed by the employer
must be reasonable. The reasonableness of the restriction depends upon the facts and circumstances
of each case.

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Unit 1.6 77
Amar was appointed in a Company for a period of 2 years. One of the conditions of that agreement
was that during this period, he shall not serve anywhere else even if he left his service earlier. It was
held that the agreement was not void. Amar was accordingly restrained from serving anywhere else
during the period of the agreement.
[Niranjan Shankar vs. Century Spinning & Mfg. Co. AIR 1967 SC 1098]
Illegal agreements
Illegal agreements are prohibited since the performance, formation, or object of such agreement is against
the law. Illegal agreements are those agreements which are:
Void ab-initio, i.e. void from the very beginning and
Punishable by the criminal law of the country or by any special legislation/regulation
Effects of illegal object and consideration
Illegal agreements are prohibited since the performance, formation, or object of such agreement is against
the law. Illegal agreements have the following effects:
An illegal agreement is void ab initio i.e. not enforceable by law
A collateral transaction to illegal agreement is illegal, therefore void
Example: Amar borrows ` 20,000 from Akbar to buy a revolver to shoot Anthony. Since the object of the
transaction is illegal, Akbar cannot recover this amount if he has given a loan knowing that Amar is taking
it to purchase a revolver. If Akbar is able to prove that he did not had a notice of the intention of amar then
Akbar can lawfully can claim the amount.
When the illegality is the result of coercion or fraud of the other party, the Court
can compel the guilty to return the money or property obtained by way of coercion
/ fraud.
Partly legal and partly illegal agreements
Sec 24 – agreement to do acts unlawful in part: when an agreement constitutes of promises to do

certain acts lawful as well as unlawful in nature then the whole of the agreement would be void if
the lawful part is not separable from the unlawful one.
Example: Amar promises to manage Akbar’s farm where there is cultivation of rice and unlawful cultivation
of opium. Akbar promises to pay Amar a salary of ` 10,000 per month. The whole agreement is void as the
legal part cannot be separated from the illegal one.

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Sec 57 Reciprocal promises - legal and illegal
Where parties make reciprocal promises to each other, firstly, to do certain things which are legal, and
secondly, to do certain other things which are illegal, the first set of promise is a contract and the second
is void.
Example: Suresh and Ramesh agree that Suresh shall sell a house to Ramesh for ` 10,000 but if Ramesh
uses it for gambling, he shall pay ` 50,000. The first set of reciprocal promise is legal and hence valid and
enforceable and on the other hand the send set of reciprocal promise is unenforceable and hence void.
Sec 58 Alternate promises – legal and illegal
When parties make alternate promises of, firstly doing certain things which are legal and secondly to do
certain things which are illegal, then the legal part would be enforceable and form a valid contract and
illegal part would be void.
Example: A contracts with B to supply him with 10 kgs of rice or 5 gm of cocaine for `1000 paid by B. Over
here the contract of supply 10 kgs of rice is legal and hence will form a valid contract. The supply of cocaine
for ` 1000 is an illegal alternate promise is illegal and hence void.
Every illegal agreement is unlawful, but every unlawful agreement is not neces-
sarily illegal.
If the legal promise can be separated from the illegal one, then the legal promise
can be enforced. In such a case, the illegal part will be void ab initio
When the legal promise cannot be separated from the illegal one, the whole of
it would be void ab initio
When there is a single consideration for one or more unlawful objects, the agree-
ment is void ab initio
Sec 29 Uncertain agreements
Agreements, the meaning of which is not certain, or capable of being made certain, are void.
Example: Amar agrees to purchase a horse from Akbar for ` 20,000. He also agreed to pay ` 1,000 more,
if the horse proved lucky. It was held that the agreement was void. It was observed that the court had no
machinery to determine what luck (bad or good) the horse had brought to the buyer.
Example: X, Who is a dealer in coconut oil only. Agrees to sell to Y “100 tons of oil”. The nature of X’s trade
affords an indication of the meaning of the words, and X has entered, into a contract for the sale oil 100
tons of coconut oil.

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Unit 1.6 79
Example: X agree to sell to B “ 100 quintals of rice at a price to be fixed by Z”. As the price is capable of being
made certain, there is no uncertainty here to make a agreement void.
Example: Z company agreed with A that, on the expiration of A’s existing contract, it would favourably con-
sider the renewal of the contract. In a suit, it was held that no obligation was created to renew the contract
for want of certainty.
Sec 30 Wagering agreements
It is an agreement under which money or money’s worth is payable by one person to another on the hap-
pening or non-happening of a future uncertain event. Agreements by way of wager are void. A wager
is a game of chance in which winning or losing wholly depends on a specified uncertain event. It is an
agreement of betting. Wagering agreements are considered illegal in the states of Maharashtra and Gujarat
but are considered void in the rest of the country
Example: X promises to Y to pay him ` 1000 if Indian Team beats Pakistan Team, in Consideration of which
Y promises to pay ` 1000 to X, If Pakistan Team beats Indian Team. This agreement is a wagering agreement
Example: X and Y bet regarding the height of Cahrminar in Hyderabad. It is a wagering agreement, if none
of them knew its height. Even though it is not an uncertain event.
Two Swimmers agreed to enter into a Swimming Contest on the condition that the party failing to
appear on the day fixed was to forfeit `1000 and the winner was to be rewarded ` 2000 out of the sale
proceeds of ticket. Held, the agreement was not one of wagering
[Babasaheb Vs. Rajaram A.I.R(1931) Bom. 264].
Essential elements of a wagering agreement
There should be a promise to pay money or money’s worth: If the agreement between the parties
is without a promise to pay money or money’s worth, it is not wagering. There must be an intention
to play a gamble on part of both the parties.
The promise must depend on the happening or non happening of an event: The performance
must depend upon the determination of an uncertain event. An event, on which the performance is
dependent, could be related to the past or the future and should not be known to any parties.
Mutual chances of gain or loss: There must be chances of winning or losing for both the parties. If
a party can win and not loose or loose and cannot win then it is not a wagering agreement.
Neither party should have any control over the event: Neither party should have control over the
event or any interest in the event other than the sum or stake he will lose or gain.

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Transactions regarded as wager
An agreement, or a share market transaction, to settle the difference between the contract price and
the market price of certain goods or shares on a specified day, is a wagering transaction
Commercial transactions, if the intention is not to deliver the goods but only to pay the difference
in price.
A bet on a horse race carrying a price of less than ` 500 to the winner of horse race is a wagering
agreement though horse race is permitted by some local laws.
A lottery is a game of chance. So, an agreement to buy a ticket for a lottery is a wagering agreement,
even though it is authorised by some State Government Sec 294 A of Indian Penal Code 1860 makes
selling of lottery punishable crime which may attract imprisonment or fine. The backing of lottery by
State Government relives the person from being punished under Sec 294 A but it does not override the
Sec 30 of Indian Contract Act 1872 and the lottery so conducted would remain wager and hence void.
A cross – word puzzle which depend upon correspondence of the competitor’s solution with a previ-
ously prepared solution kept with the editor of a newspaper is lottery, and so, is a wagering transaction.
[Coles Vs. Odham’s Press]
Games of chance such as betting or gambling are agreements which are by the way of wager.
Transactions not regarded as wager
The transactions for sale and purchase of stocks and shares or for sale and delivery of goods, with a
clear intention to give and take delivery are not wagers. But if the intention of the parties is to settle
the price difference, it is a wager and hence void
Prize competitions which are a game of skill are valid
An agreement to contribute a sum of ` 500 or above to the winner of a horse race is a valid agreement
Contracts of insurance
Games of skill which requires the participant to exercise significant amount of knowledge and pru-
dence are not regarded as wager.
Chit Fund
Example: Adarsh is the owner of a house. He insures his house against loss by fire with SS & Co., an insur-
ance company. According to the terms of the insurance policy, Adarsh has to pay ` 100 per annum as the
premium. In case the house is destroyed by fire, the insurance company will pay the actual amount of loss
suffered by him. This is not a wagering agreement, as Adarsh has interest in his own house which he wants

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Unit 1.6 81
to protect by insuring it. Moreover, on the happening of the event (i.e. fire) Adarsh will not gain anything.
He will merely be indemnified for the loss suffered by him on the happening of the event. It is a contract of
insurance, and is valid.
Effects of wagering agreements
Void: The agreement by way of wager is void. Thus a winner in a wager cannot recover the stake
money from the other party to agreement. Moreover, the money deposited with the third person
(custodian) to enable him to pay to the winner cannot be recovered by the winner, but the depositor
can recover from the stake holder if it has not been paid to the winner.
Collateral agreements are valid: The wagering agreements are void but not illegal (except in states
of Gujarat and Maharashtra). Thus the transaction collateral to the main transaction is not void.
Money lent for the purpose of gambling or repaying a gambling debt can be re-
covered even though lent with the knowledge of its purpose except in States of
Maharashtra and Gujarat
Example: A took a loan from B of `1, 00,000. A entered into a wagering agreement with C which was based
on the outcome of the cricket match. A lost the bet and paid the money to C. B can recover the money from
A as collateral agreements to an wagering agreement are valid and enforceable.
If the above transition took place in states of Maharashtra and Gujarat then B
would have no recourse against A.
Contingent Contract
According to the Indian Contract Act, a contract may be absolute or contingent. An absolute contract
would be the one, the performance of which is certain or absolute in itself and is not dependent on hap-
pening or non happening of any probable event. In this type of contract, the promisor binds himself to
perform under any event. Whereas a contingent contract is a contract, wherein the performance of the
contract depends upon some uncertain event which may or may not occur.
As per Sec. 31 of Indian Contract Act a “contingent contract” is a contract to do or not to do something,
if some event, collateral to such contract, does or does not happen. The performance of a contingent
contract becomes due only upon the happening or non happening of some future uncertain event. In
simple terms, it is a conditional contract.
Example: On 1st January, Ashwin agrees with Ramesh that if he gets a new car by 13th January, he will sell
his old car to him for ` 40,000. It is a contingent contract as the performance of Ashwin’s promise depends
upon his getting a new car. If he gets the car, he shall perform the contract, otherwise not.

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Essential conditions for a valid contingent contract
It must satisfy all the essential conditions of a valid contract
The performance of the contingent contract depends upon the happening or non-happening of some
future event and the liability to perform a promise in the case of a contingent contract depends upon
such events
The contingent contract must be based upon an uncertain event. If the event is certain to take place,
then it is not a contingent contract
The event must be collateral to the contract and it should not form consideration or a part of consid-
eration to the contract.
A collateral event means an event which is not an internal part of the contract
but is attached to the contract.
Example: A promises to pay ` 10,000 if B finds a house for A on rent. Such a contract is not a contingent
contract as the event of finding the house itself is the consideration for the payment to be made.
Example: X promises to give the project of building his house to Y subject the approval of his civil engineer.
Such contract is contingent in nature as the approval of the civil engineer is a collateral event to the trans-
action between X and Y, as it does not form consideration or part of consideration.
Rules regarding contingent contracts
Sec. 32 Enforcement of contracts contingent on happening of an event: A contingent contract which

is to do or not to do anything if an uncertain future event happens cannot be enforced by law unless
and until that event has happened. If the event becomes impossible, such a contract becomes void.
Example: Om makes a contract with Jai to sell a horse to Jai at a specified price, if Jagadish, to Whom the
horse has been offered, refuses to buy the horse. The contract cannot be enforced by law unless and until
Jagadish refuses to buy the horse.
Sec. 33 Enforcement of contracts contingent on non happening of an event: Contingent contracts

to do or not to do anything if an uncertain future event does not happen can be enforced when the
happening of such event becomes impossible, and not before that.
Example: A agrees to pay B a sum of money if a certain ship does not return. The contract can be enforced
when the ship sinks.
Sec. 35(1) Contract contingent on the happening of an event within a fixed time: A contingent
contract which is dependent on the happening of an future uncertain event becomes void if the event
does not happen within the expiry of the fixed time, or before the time fixed, the event becomes

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Unit 1.6 83
impossible.
Example: X insures his factory by getting a fire insurance from XYZ & Co. for a period of 1 year. Such con-
tract can be enforced if the factory gets destroyed by fire within a period of 1 year. If there is no occurrence
of fire within a period of 1 year then the contract becomes un enforceable.
Sec. 35(2) Contract contingent on the non happening of an event within a fixed time: A contingent
contract which is dependent on the non happening of an future uncertain event become enforceable
if such an event on which the contract is contingent does not happen within a fixed time or before
the fixed time, the happening of such event becomes impossible.
Example: A promised to pay a sum of ` 10,000 to B, if a certain ship does not return within a year. The con-
tract may be enforced if the ship does not return within a year, or is shrunk or burnt within a year.
Sec. 34 Contracts contingent which is dependent on the future conduct of a third person: This is
a situation where the contingency is the conduct of a third person and the performance of the contract
depends on the way the third person behaves. If a contingent contract is dependent on the way in
which a person will act at an unspecified time, the event shall be considered to become impossible
when such person does anything which renders it impossible.
Sec. 36 Contingency of impossible events: The contingent contract dependent upon the happening
of an impossible event is void and cannot be enforced. The contract is void because it can never be
enforced as the impossible event on which the contingent contract is dependent will never happen.
The agreement is void, whether the impossibility of the event is known or not to
the parties to the agreement at the time when it is made.
Example: Raj agrees to pay Ratan ` 1,000 if two straight lines enclose a space. The agreement is void.
Wagering agreement Contingent contract

It always consists reciprocal promises It may or may not contain reciprocal promises
It is void It is valid
It is purely a game of chance and the parties have There is an interest of the parties in the occurrence
no other interest in the subject matter of the event
The future event is the only deciding factor The future event is only a collateral determining
factor

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Every agreement of whose object or consideration is unlawful is void
An agreement which is against the welfare of the general public is said to be against
public policy
Under the English law, agreements of maintenance and champerty are void
In India, any restraint of marriage whether total (absolute) or partial is opposed to public
policy and hence void
An agreement not enforceable by law is said to be void
Illegal contracts are prohibited since the performance, formation, or object of the agree-
ment is against the law
Every illegal agreement is unlawful, but every unlawful agreement is not necessarily illegal

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Unit Performance of
1.7 Contract
Learning
Objectives
)) Learn the meaning and types of perfor- )) Understand the meaning and rules re-
mance garding joint promise
)) Understand various essentials of valid )) Know the time and place of performance
tender
)) Comprehend reciprocal promise
)) Know persons who can perform and
)) Learn appropriation of payment
demand the performance of the contract
)) Know assignment of contract
Meaning of performance
‘Performance of contract’ means fulfillment of the obligations by the parties. The parties who make the
contract must fulfill their obligations according to the terms laid down in the contract. Performance of
contract is one of the methods to discharge a contract. After the contract is discharged the parties do not
have any further rights and liabilities against each other.
According to Sec. 37 “the parties to a contract must either perform or offer to perform, their respective
promises unless such performance is dispensed with or excused under the provisions of contract Act, or
of any other law”.
Types of performance
From the analysis of Sec 37 it is revealed that the Performance may be of two types’ namely actual
performance and attempted performance.

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86 Performance of Contract
Actual performance: An actual performance of a contract means performing all the promises and
fulfilling all the liabilities by the parties to the contract. The actual performance discharges the con-
tract and also discharges the parties. It is also known as “natural method of discharge of contract.”
Example: Sohan agrees to sell his car to Mohan for ` 2,00,000. Sohan delivers the car and Mohan makes the
payment. It is an actual performance.
Attempted performance (tender): Sometimes, the party who is bound to perform a promise under
a contract makes an offer of performance to the promisee at a proper time and place, but is unable
to do so because the other party does not accept the performance. Offer of performance made by the
promisor is termed as attempted performance and such attempted performance discharges the party
from his obligation to the contract.
Example: Ajay agrees to sell his car to Vijay for ` 2, 00,000. Ajay offers to deliver the car, but Vijay does not
accept it.
Mr A agreed to sell ten tons of linseed oil to B to be delivered “By March end”: Delivery was tendered
at 8:30 p.m. on March 31, a Saturday. The defendant refused to accept the goods owing to lateness of
the hour. Held, though it was late, the defendant could still take delivery before midnight as per the
understanding the parties had under the contract.
[Startup Vs. Macdonald, (1843) 6 Man G.523]
If there is a valid tender, it discharges the party not at fault.
Essentials of a valid tender
A tender must have the following essentials to be valid

It must be unconditional: Sec 38(1) the tender of performance should be unconditional. Uncondi-
tional refers to, not attaching or changing any terms to the contract. The promisor should perform
the promise as per the terms of the contract as decided between the parties to the contract. If the
promisor offers to perform as per the terms of the contract, it is known as an unconditional tender.
Example: Manju purchased shares of ABC & company by paying allotment money. Manju was ready to
pay for first call and final call money, if the company was ready to issue debentures to her at par. Such is a
conditional tender.
It must be made at a proper time and place: Sec 38(2) provides that the tender of performance
should be made at an appropriate time i.e. at a stipulated time as per the agreement or during business
hours. A tender after business hours or after the due date will not be valid tender.

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Unit 1.7 87
Example: Raj offers to deliver the goods contracted to Mohan at 1 A.M. It is not a valid tender since it is not
during the business hours.
It must be for the entire obligation: There must be performance of the entire obligation and not of
a part of the whole obligation. Offer to do part performance of the contract does not amount to valid
tender. However, a minor deviation from the terms of a contract may not render the tender as invalid.
Example: X entered into contract with Y for sale of 100 bags of wheat and delivery of the same was to be
done on 14th February. X tendered only 50 bags on the date of performance. Such part delivery does not
amount to a valid tender.
It must be in legal tender money: In case of tender of money the exact amount should be tendered,
moreover it should be Legal tender money. Therefore in case of tender of money which is not le-
gal tender (e.g. old coins not in circulation) or foreign currency does not constitute valid tender of
money. The tender of money, in the form of foreign currency is not a valid tender unless it is agreed
between the parties.
The promisee must be given reasonable opportunity to inspect the goods: As per sec 38(3) the
promisee has a right to examine, verify and check the goods offered. The promisor must give a
reasonable opportunity to the promisee to verify and examine the goods. If promisee is disallowed
of such an opportunity then he has a right to reject anything so promised to be delivered as such
disallowance of opportunity do not constitute a valid tender of performance.
It must be made to the promisee or his authorised agent: Performance must be made to the promisee
or his duly authorised agent. Thus a tender of performance made to a stranger does not constitute a
valid offer of performance. In case of several joint promisees, a tender made to one of them has the
same legal consequences. A tender of performance can be made to any of the several joint promisees
but the actual performance has to be made to all of them.
Contractual capacity: The person making a tender of performance should possess contractual
capacity. Therefore a person who does not have contractual capacity cannot make a valid tender of
performance.
Types of tender and effects there on
Tender of goods and services: When a promisor offers to deliver the goods or service to the promisee
and the promisee refuses to take the delivery, it is said to be tender of goods or services,
Effect: If promisee does not accept a valid tender of goods and services, it has the following effects:
àà The promisor is discharged from his obligation under the contract.
àà The promisor need not offer the goods or services again.
àà The promisor may sue promisee for non-performance
Tender of money: When the promisor offers to pay the amount and the promisee refuses to accept

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the same it is called valid tender of money.
Effect: If the promisee does not accept the valid tender of money, it has the following effects:
àà The promisor will not be liable for any interest from the date of the valid tender of money.
àà However the promisor is not discharged from his obligation under the contract to pay the amount
but he can claim reasonable expenses for the inconvenience caused due to such rejection.
Effect of refusal of performance
When the promisor refuses or disables himself from performing his promise in its entirety, the promisee
has the following two options
He may put an end to the contract, or
He can continue the contract by giving his consent either by words or conduct, in its continuance.
Example: Arun, a singer, enters into a contract with Varun, the manager of a theatre, to sing at his theater
for two nights in every week during the next two months, and Varun agrees to pay him ` 1000 for each
night’s performance, on the 6th night, Arun willingly absents himself from the theatre and came back to
perform on 7th night. In this case Varun has an option to put an end to contract because of default on 6th
night, or allow Arun to continue the contract from 7th night by giving his consent.
Once the promisor gives the consent in continuation of contract then he cannot
put an end to it. However he can claim compensation for the damages sustained
for non-performance.
Persons who can perform the contract
The following are the persons who must perform the contract
The promisor: Generally, the contract shall be performed by the promisor himself. When the contract
is of a personal nature, only the promisor can perform it and cannot be assigned to someone else.
Example: John promises to paint a picture of Joker. John must perform this promise personally, because
painting pictures involves application of personal skill.
A contract which involves personal skill comes to an end with the death of the
promisor.
The agent: In case of impersonal contracts, the promisor can perform his obligations through an
agent also. The actions of the agent shall be binding upon the principal.
The legal representative: On death of promisor, the contract which does not involve any personal

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Unit 1.7 89
skill may be performed by the legal representative of the promisor. Legal representative is only liable
to perform in case of transaction of impersonal nature and such liability extends only to the extent
of property inherited. The legal representative cannot be made personally liable to honor such debts.
Example: Lucky promises to deliver goods to Ramu on a certain day, on the payment of ` 10,000. Lucky
dies before that day. Lucky’s representatives are bound to deliver the goods to Ramu and Ramu is bound to
pay ` 10,000 to Lucky’s representatives.
The liability of the legal heir is limited to the value of the property left by the
deceased person.
Example:If a successor inherits liabilities worth ` 40,000 and assets worth only ` 25,000, then this amount
of ` 25,000 shall be used to pay off the creditors proportionately. The successor will not be liable for the
remaining ` 15,000.
A third person: The promisee may accept the performance of a contract from a third person, who
may not be the agent of the promisor. According to Sec. 41, when a promisee accepts the performance
of the promise from a third person, he cannot enforce it against the promisor later.
Example: Ram, who has to recover `15,000 from Rahim, accepts ` 11,000 from a third person, Robert, in full
satisfaction of his claim on Rahim. This payment is a discharge of the whole claim. Ram cannot enforce this
contract against Rahim anymore.
Person who can demand performance of the contract
A contract’s performance may be demanded by any one of the following:
The promisee: The promisee is primarily the person who can demand the performance of the prom-
ise, according to the terms of the contract, irrespective of the fact that the promise is to benefit the
promisee or any other person.
Example: Amar promises Akbar to pay ` 1,000 to Anthony. Amar does not pay the sum to Anthony. Here
Anthony cannot bind Amar for the payment. It is only Akbar (promisee) who can demand the performance
and not Anthony.
The agent: An agent of the promisee can demand performance of the contract on behalf of the promise
under certain circumstances. The right to claim performance by an agent depends on his authority.
The instances when the agent can demand performance of the contract on behalf of his principal are
mentioned in the Indian Contract Act under the rules of agency.
The legal representative: In case of death of the promisee before the performance of an impersonal
contract, the contractual rights may pass to the legal representative and such a person may demand
the performance of the contract.
Third person: In certain cases even third person can demand performance of the promise. Such is

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generally seen in cases where the beneficiary claims the performance of the promise.
Example: In case of contracts of insurance the legal assignee of the deceased person can claim from the
insurance company.
Joint promises
A joint promise is one where more than one person has become a party to the agreement on either side,
i.e. as promisors or as promisees. So, there may be joint promisors or joint promisees or both in a joint
promise.
Example: Ram, Rahim and Robert may jointly purchase goods from Roshan on credit. The three persons
shall be joint promisors to pay to Roshan.
Devolution of joint liabilities
A Devolution means passing over from one person to another. When two or more persons have made
a joint promise, then, unless a contrary intention appears by the contract, all such persons, during their
lives, and after the death of any of them, their representatives jointly with the survivor or survivors, and
after the death of the last survivor, the representatives of all jointly, must fulfill the promise.
Example: Gopal, Rampal and Kumarpal jointly take a loan from King Khan. In case if Gopal dies then his
legal representative, along with the survivors, Rampal and Kumarpal must perform the promise. Further in
case of death of all of them, the legal representatives of all of them jointly need to perform the promise.
Rules regarding the performance of joint promises are as follows
Jointly perform liability: Sec 42 states, when two or more persons have jointly entered into a
contract with one or more persons then all joint promisors need to perform their promise together.
Example: Ramesh , Suresn and Mahesh Owe `30,000 to Dinesh. All the three need to jointly perform their
obligation.
Joint and several liabilities of joint promisors: In case all the joint promisors do not perform their
obligation voluntarily then sec 43 would come into operation. As per Sec 43(para1) The liability of
joint promisors towards the promisee is joint and several. In the absence of an express agreement
to the contrary, the promisee may compel anyone or more of such joint promisors to perform the
whole of the promise.
Example: Ramesh , Suresn and Mahesh Owe `30,000 to Dinesh. All the three need to jointly perform their
obligation. In case all the three do not voluntarily discharge their obligation then Dinesh can compel any
one of them to discharge the whole obligation. Dinesh Compels Mahesh to pay `30,000 to him.

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Unit 1.7 91
‘Several’ liability of a joint promisor means a liability which can be separated

from the joint liability and becomes an individual liability. Hence if all of the
promisors do not perform the promise then the promisee can compel any one
or more of promisors so as to make liability several.
Joint promisors’ right to claim contribution: Sec 43(para2) states that If one of the joint promi-
sors has actually performed whole of the obligation to the promisee, then such joint promisor would
be entitled to recover a contribution from the other joint promisors towards the total liability. The
contribution shall be equal or in the agreed ratio.
Example: Ramesh, Suresh and Mahesh took a joint loan from Dinesh for ` 30,000. They decide to share the
loan amount in the ratio 5:3:2. Dinesh recovers the total amount from Mahesh. After this payment, Mahesh
is entitled to demand contribution from Ramesh and Suresh in accordance with the ratio that they had
agreed upon. So, Ramesh has to pay` 15,000 and Suresh, ` 9,000 to Mahesh.
Joint promisors’ duty to share loss from default in contribution: Sec 43(para3) states that when A
joint promisor fails to make his contribution as required by the previous rule. In such a case, the other
joint promisors will have to share this loss equally even if there was a ratio to divide the main liability.
Example: Ramesh, Suresh and Mahesh took a joint loan from Dinesh for ` 30,000 and decided to share
equally. Ramesh is unable to pay anything and Mahesh is compelled to pay the whole sum. Mahesh is
entitled to receive ` 15,000 from Suresh. This amount includes ` 10,000 as normal contribution plus equal
share of sum under default i.e., ` 5,000.
Effect of release of one joint promisor: Sec 44 states that a release of one of the joint promisors by
the promisee, does not discharge the other joint promisors. It only releases such discharged promi-
sor of his liability towards the promisee, but such discharge by the promisee does not release the
discharged joint promisor from his liability to the other joint promisors.
Example: Ramesh, Suresh and Mahesh took a joint loan from Dinesh for `30,000 and decided to share
equally. Dinesh releases Ramesh from his liability and sues Mahesh and Suresh for payment. Here, neither
Mahesh nor Suresh is released from their liability to Dinesh. Also Ramesh is liable to Mahesh and Suresh for
contribution. Thus Mahesh and Suresh can claim `5,000 each from Ramesh.
However, under English law, the liability of joint promisors is only joint and not
“joint and several” and therefore, the release of one of the joint promisors shall
relieve all the other promisors of their liability.
Devolution of joint rights
When a person has made a promise to two or more persons jointly, the rule is called the devolution of
joint rights. The rules regarding devolution of joint rights are contained in Sec. 45 of the Indian Contract

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Act which is as under:

All the promisees must jointly claim the performance
If any of them die, their legal representatives must jointly along with the surviving joint promisors,
must claim the performance
On the death of all the joint promisees, the legal representatives of all of them must jointly claim
the performance
Example: Ram, in consideration of ` 5,000 lent to him by Rahim and Robert, promises to repay them that
sum with interest on a specified day. Rahim dies. The right to claim the performance rests with Rahim’s rep-
resentative jointly with Robert during Robert’s life and after the death of Robert, the legal representatives
of Rahim and Robert jointly.
The right to claim performance is “joint and not several” i.e. all the promisees
can claim the performance of the contract jointly.
If the promisor discharges the whole of his obligation to one of the joint promisee then he is not released
of his liability towards the other joint promisees. In other words the promisor needs to perform his promise
to all the promisees jointly.
Time, place and manner of performance
Performance of contract involves certain important terms regarding the time, place and manner of per-
formance of the contract. The parties need to abide by such terms as specified in the contract. The law
lays down certain provisions regarding the same as follows-
Time of performance
Following are the rules regarding the time of performance of the contract:
Performance within a reasonable time (Sec. 46): When the Contract specifies or mentions that a
promisor is to perform his promise without an application by the promisee and no time for perfor-
mance is specified, then the obligation must be performed within a reasonable time.
“What is reasonable time?” is a question of fact. It depends upon the circumstances of the case, the
usage of trade and the intention of the parties at the time of entering into the contract.
‘Application’ here means a request from the party concerned.
Example: Supply of order for books by a bookseller to the publisher given in July should be performed

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Unit 1.7 93
within 4-5 days, it being the time for the demand of books. The publisher needs to perform the promise
within a reasonable time.
Specified time for performance (Sec. 47): When a promise is to be performed at a certain time and
the promisor undertakes to perform it without an application by the promisee. Under Sec. 47, it has
been provided that “in such a case, the promisor may perform the promise at any time during the
usual hours of business on such day and at the place at which the promise ought to be performed.”
Example: Suraj promised to deliver 10 scooters at Pankaj’s godown on April 1. On that day, Suraj brought
the scooters but after 10:00 p.m. The delivery was not taken as the godown was closed. Here it was held that
Suraj has performed his promise beyond usual working hours.
Performance on a certain day (Sec. 48): When a promise is to be performed on a certain day, the
promisor undertakes to perform it after the application by the promisee to that effect. In such a case,
it is the duty of the promisee to apply for performance at a proper place and within the usual hours
of business. Proper time and place will depend upon the circumstances of the case.
Example: Naveen entered into a contract with prashanth for sale of 100 bags of cotton. The delivery of cot-
ton was to be made on 15th February. Naveen agreed to do so only after a request from Prashanth. In such
case the promisee (Prashanth) must apply.
Place of performance
Promise when no place is fixed (Sec. 49): When a promise is to be performed without an application
by the promisee, and no place is fixed for the performance of promise, it is the duty of the promisor
to apply to the promisee to appoint a reasonable place for the performance of the promise and to
perform the promise at such place
Example: A cycle Company, Khan & Co., undertakes to deliver 100 cycles to Gopal on a fixed day without
a request by the promisee. Khan & Co. should ask Gopal to appoint a reasonable place for the delivery of
cycles and must deliver the cycles to Gopal at that place.
Time of performance
Performance of promise in a manner prescribed by the promisee (Sec. 50): As per Sec. 50, “The
performance of any promise may be made in any manner or at any time, which the promisee pre-
scribes.” Thus the promisor needs to perform his promise as sanctioned or prescribed by the promisee.
Example: Gopal owes Teertha ` 10,000. Teertha accepts Gopal’s car valuing ` 6,000 in reduction of the
debt. The delivery of the car will amount to a part payment of the debt.
Example: Sunil Owes `1,00,000 to Anil. Anil prescribed that Sunil should make an account transfer of the
amount to his bank account. Sunil does the same and hence is discharged.

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If the promisor performs the promise in contravention of the instruction of the

promisee then he is not discharged of his liability towards the promisee. Thus
when a promisor makes a payment to the agent of the promise, who is not autho-
rized to receive payment then such payment would not discharge the promisor.
Time as the essence of contract
If time of performance has been specified and there is a delay in the performance by the promisor, the
promisee shall be entitled to certain rights as laid down in Sec. 55. These rights shall depend upon whether
or not time was of the essence of the contract, i.e. a crucial factor in the contract. The idea of time being
the essence of the contract means that the timely performance of the obligations was considered essential
by the parties to fulfill the object of the contract.
The phrase ‘time as the essence of the contract’ means that the time is an essential element, and the
concerned parties must perform their respective promises within the specified time.
Cases where time is considered to be the essence of the contract
In the following cases, time is usually considered to be the essence of the contract:
When the parties have expressly agreed to treat the time as the essence of the contract
When the non-performance at the specified time operates as an injury to the other party
When the nature and necessity of the contract requires the performance of the contract within the
specified time
In case of mercantile contracts, the time fixed for the delivery of goods is con-
sidered to be the essence of a contract and not the time fixed for the payment of
the price. Transactions regarding the purchase and sale of shares also generally
consider time as the essence of the contract.
Mercantile transactions as well as transactions involving purchase and sale of shares are inherently volatile
in nature and witness sporadic change in price and therefore a delay in delivery of the same would put
the party not at fault in a position more hazardous and thus time is generally considered to be the essence
of the contract in such transactions.
Effects of failure to perform within the stipulated time
When time is the essence of a contract

àà The contract is voidable at the option of the promisee

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Unit 1.7 95
àà If the promisee accepts the performance beyond the specified time, he cannot claim compensation
for non-performance unless he had given a notice for compensation at the time of acceptance
When time is not the essence of a contract
The contract is not voidable

The promisee is entitled to claim compensation for any loss suffered by him due to delayed perfor-
mance.
Reciprocal promises
According Sec 2(f) Promises which form the consideration or a part of the consideration for each other
In case of reciprocal promises, each party to the contract is a promisor as well

are called reciprocal promises. In other words, it is a promise in exchange for a promise.
as a promisee.
Example: Deepthi and Deepak promised to marry each other. These are reciprocal promises. In this case,
Deepthi’s promise is the consideration for Deepak’s promise and vice versa.
Types of reciprocal promises
Order of performance of reciprocal promises: According to Sec 52, “where the order in which
reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed
in that order; and where the order is not expressly fixed by the contract, they shall be performed in
the order in which the nature of the transaction requires”
Example: Pavan and Gagan contracted that Pavan shall construct a house for Gagan at a fixed price. In this
case, the nature of the contract requires that Pavan’s promise to construct the house must be performed
before Gagan’s promise to pay for it. Thus, Pavan must first construct the house, only then can he claim the
price from Gagan.
Conditional and dependent: In conditional and dependent reciprocal promises, the performance of
the promise by one party depends upon the prior performance of the promise by the other party. If the
party who is bound to perform his promise first, fails to perform it, then he cannot claim performance
from the other party. Moreover, the defaulting party becomes liable to pay the compensation to the other
party for the loss suffered by the other on account of the non-performance of the contract [Sec. 54].
Example: Lucky hired Ali’s ship for taking and conveying certain goods from Calcutta to Mauritius. Lucky
agreed to provide the goods at the Calcutta port, and Ali agreed to convey them to Mauritius after receiving
the freight. Lucky did not provide the goods for the ship. In this case, Lucky cannot claim the performance

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of Ali’s promise. He must compensate Ali for the loss, which Ali sustained due to the non-performance of
the contract.
Mutual and concurrent: Mutual and concurrent promises are to be performed simultaneously. Thus,
the promisor is not bound to perform his promise unless the promisee is ready and willing to perform
his part of promise [Sec. 51]. In other words, the mutual and concurrent reciprocal promises must be
performed simultaneously i.e. at the same time.
Example: All cash sales are examples of simultaneous or concurrent promises, as the delivery of goods and
the payment of price take place simultaneously.
Effects of preventing the performance of reciprocal promises (Sec. 53)
Sometimes, one party to a reciprocal promise prevents the other party from performing his promise. In
such cases, the contract becomes voidable at the option of the party who is so prevented. Moreover the
party so prevented may also recover compensation from the other party for any loss suffered due to non
performance of the contract..
Example: Sumit and Shahid contract that Shahid shall execute repair work of his house, for ` 10,000.
Shahid is ready and willing to execute the work accordingly, but Sumit does not direct as to which part of
the house requires repairs. As Sumit is duty bound to direct Shaid in order to conduct the work. The contract
is voidable at the option of Shahid and if he rescinds the contract then he is discharged from performing
his part of obligation to the contract. He is furthermore entitled to recover compensation for any loss or
inconvenience caused to him arising out of the contract.
Appropriation of Payment
Appropriation of payment means an adjustment and application of the money to a given transaction.
When there are several debts outstanding from one person to another and certain payment is made by
the debtor, and such payment is insufficient to satisfy the whole debt, the order in which the debts are
satisfied is known as appropriation of payment.
The Indian Contract Act has laid down the following rules regarding the appropriation of a payment
made by a debtor to the creditor:
Debtor’s express instruction to be followed: Each debtor, who owes several debts to the creditor,
has a right to instruct his creditor to which particular debt, the payment is to be appropriated or ad-
justed. Therefore, when the debtor expressly states that the payment is to be applied to the discharge
of a particular debt, the payment must be applied accordingly. The creditor has to follow the debtor’s
express instruction in this respect (Sec. 59).
Example: Nilesh owes Shahid three distinct debts of `20,000, ` 30,000 and ` 50,000. Nilesh sends ` 50,000
and instructs Shahid that the payment should be appropriated against the first two debts (` 20,000 & `
30,000). He is bound to appropriate the payment against the first two debts only.

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Unit 1.7 97
Debtor’s implied intention to be followed: Sometimes, the debtor makes a payment to his creditor
without any expressed instructions as to which particular debt the payment is to be appropriated. In
such a case, the creditor must appropriate the payment towards the debt to which, under the implying
circumstances, the debtor intended to do. (Sec. 59).
Example: Fakirchand owes Amirchand, among other debts, an amount of ` 567. There is no similar amount
pending from Fakirchand to Amirchand. Fakirchand sends a cheque of ` 567. His implied intention is to
clear that particular debt. Such appropriation should be done by the creditor.
Appropriation by the creditor: If the debtor does not give any direct or indirect indication about
appropriation, the creditor gets a chance to apply the payment at his discretion. He may appropriate
the received amount towards any of the lawful debts including a time barred debt. But, he cannot
apply the payment to unlawful or disputed claims (Sec. 60).
Appropriation by law: When the debtor does not signifies either expressly or impliedly nor the
creditor appropriates payment according to his discretion then Sec 61 would apply. Sec 61 lays down
the method of appropriation of payment as per law. Sometimes neither the debtor nor the creditor
makes any appropriation of the payment. In such a case, the payment by the debtor should be ap-
propriated towards the debts in order of time, i.e. in the order in which they were created, including
a time barred debt. This principle always applies in the context of a running loan account with a
bank or any other creditor.
When there is more than one debt pertaining to a certain date then the payment shall be applied in
discharge of each proportionately.
Appropriation between principal and interest: If a debt includes the principal amount and also
the interest due on it and the amount is insufficient to cover the interest as well as the principal then
the ordinary rule would be that the money paid should be appropriated first towards the interest and
then the residue if any towards the principal amount.
Assignment of contracts
The term ‘assignment’ means ‘transfer’. Assignment of contracts would mean the transfer of rights and
liabilities under a contract by a party to another person. Thus, in the case of an assignment, the original
party or parties to the contract drop out and the others take his / their place.
Assignment takes place either, by the act of parties or by operation of Law
Assignment of rights and liabilities by act of the parties are subject to the following rules
In case if the contractual rights / obligation involve personal skill or ability, then such rights or ob-
ligations cannot be assigned.
In all other cases rights and obligations can be assigned subject to all equities between the original
parties

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Assignment of rights and liabilities by operation of Law are subject to the following rules
In case of death of the parties the rights and obligations (other than those of Personal nature) of the
deceased party pass on to his legal representatives.
In case of insolvency of any party the rights and obligations (other than those of personal nature) of
the insolvent party pass on to the Official Receiver or Assignee appointed by court
Example: Arun promises to marry Priya. Here, neither Arun can assign his obligation nor Priya can assign
her right because the contract is of personal nature.
Example: Ram owes Rahim ` 10,000 and Robert owes Ram ` 10,000. Here Ram cannot compel Rahim to
recover the amount from Robert. However, he can transfer his liability to Robert with the consent of Rahim
and Robert. Rahim can also transfer his right to a third party to recover the amount from Ram.
Succession
Under succession, both benefits and burden attached to the contract devolve upon the legal heir. A son
succeeding his father’s estate shall be liable to meet the debts and liability of his father to the extent of
the property inherited.
Distinction between succession and assignment
Under succession, both benefits and burden attached to the contract devolve upon the legal heir. A son
succeeding his father’s estate shall be liable to meet the debts and liability of his father to the extent of
the property inherited
Basis of distinction Succession Assignment

The transfer of rights and liabili- The transfer of rights by a person
ties of a deceased person to his to another person is called as as-
1. Meaning
legal representative is called as signment
succession
All the rights and liabilities of a Rights as well as liabilities can
2. What can be transferred? person are transferred be assigned subject to mutual un-
derstanding between all of them
It takes place on the death of a It takes place during the life of
3. Time when it takes place
Person a person
Notice of succession is not re- Notice of assignment is required
4. Notice
quired to be given to any person to be given to the creditor

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Unit 1.7 99
It does not require any written It requires execution of assign-

5. Written document
Document ment deed
6. Voluntary Act It is not a voluntary act It is a voluntary act of the parties
The performance of a contract means fulfilment of the obligations by the parties
If there is a valid tender, it discharges the party who is not at fault
Legal tender money means currency notes or coins currently in circulation
A contract which involves personal skill comes to an end with the death of the promisor
The liability of a legal heir is limited to the value of the property left by the deceased person
Devolution means passing over from one person to another
Promises which form the consideration or a part of the consideration for each other are
called reciprocal promises
Appropriation of payment means adjustment of the money concerned
The term ‘assignment’ means ‘transfer’

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Unit
Discharge of Contract
1.8
Learning
Objectives
)) Understand the meaning of discharge )) Understand the meaning and types of

breach of contracts
)) Know the various modes of discharge
)) Learn the grounds and exceptions of supe

vening impossibility
Meaning of discharge of a contract
Discharge of a contract means termination of the contractual relations between the parties to a contract.
A contract is said to be discharged when the rights and obligations of the parties under the contract come
to an end.
Modes of discharge of a contract
A contract may be discharged in any of the following ways:

By performance
By impossibility of performance
By operation of law
By mutual agreement
By lapse of time

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Unit 1.8 101
By breach
Discharge by performance
When the parties to a contract fulfill their obligations arising out of the contract within the time and in
the manner prescribed, the contract is said to be discharged by performance. If only one party performs
his obligation, he alone is discharged, though he gets the right of action against the other party who is
guilty of breach.
Performance may be of two types: actual performance and attempted performance.

Actual performance: Actual performance is when each party fulfils his obligations exactly in the
same manner in which it was intended in the contract. This brings the contract to an end. After this,
no claim would remain of one party against another.
Example: A contracts with B to buy 100 bags of sugar for a sum of ` 50,000 and delivery to made on 2nd
August. The price is to be paid on delivery. On 2nd of August B delivers 100 bags of sugar and A pays the
price.
By attempted performance or tender: When one of the parties to the contract has done what he
was bound to do under the contract at proper time and place but the other party does not accepts the
performance. A contract is said to be discharged by attempted performance, when the promisor has
made an offer of performance (i.e. a valid tender) to the promisee but it has not been accepted by the
promisee. The offer of performance has the same effect as the performance and the promisor stands
discharged of his obligation.
Example: Ram offers to sell his computer to Lakshman for ` 15000 and Lakshman agrees to purchase the
same and the delivery of the computer is to made on 2nd June. In this case when ram is ready to deliver the
computer on 2nd June but Lakshman does not accept the delivery then it is called attempted performance
and it discharges Ram from his obligation.
Discharge by impossibility of performance
Sometimes, the performance of a contract is impossible. In such a case, the contract is discharged. This
is based on the principle that the Law does not recognize what is impossible. The impossibility of per-
formance may be of two types, namely
Initial impossibility or pre-contractual impossibility: Sec 56(1) Initial impossibility or pre-

contractual impossibility exists at the time of making a contract. The initial impossibility may be:
àà Known impossibility: It means one or both the parties have knowledge that a promise to perform
is impossible even though they enter into an agreement.
Example: Arjun agrees with Rampal to bring a dead man to life. It is known to the parties at the time of
making the agreement that the performance is impossible. The agreement is void-ab-initio.

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102 Discharge of Contract
àà Unknown impossibility: It means both the parties genuinely believe that the performance of a
promise is possible, but in reality it is impossible to perform. It can also be said that, there is a
bilateral mistake of parties.
Example: Ravi agrees to sell certain goods to Varma, which were supposed to be on their way from Goa to
Chennai in a certain ship. Unknown to both the parties, the ship had already sunk in the deep sea, and the
goods ceased to exist at the time of contract. The contract becomes void when the impossibility of perfor-
mance is discovered.
Supervening impossibility: Sec 56(2) an impossibility which arises subsequent to the formation of
the contract shall make the contract void. Such an impossibility is called supervening impossibility.
It is also termed as the doctrine of frustration. A contract becomes void on account of the subsequent
impossibility only if the following conditions are satisfied:
àà The act should have become impossible after the formation of the contract
àà The impossibility should have been caused by a reason of some event which was beyond the
control of the promisor
àà The impossibility must not be the result of some act or negligence of the promisor himself
Examples of supervening impossibility/ Doctrine of Frustration
A contract is discharged by supervening impossibility in the following cases:
Destruction of subject matter: Sometimes the very contract of the subject matter gets destroyed.
The contract is discharged if the subject matter of the contract is destroyed after the formation of the
contract without any fault of either party.
If the destruction of the subject matter is due to the fault of any party, he is liable
for the damage caused to the other party.
Example: Amar agreed to sell his crop of wheat. The entire crop was destroyed by fire though there was no
fault of the party. The contract was discharged.
Example: A music hall was let out for some musical performance on a certain date. But before the date
fixed for the musical performance e, the music hall was destroyed by fire. The music hall was an essential to
the subject matter of the contract, the destruction of the music hall brings an end to the contract and the
owner is not liable.
Death or personal incapacity: The contract is discharged on the death or incapacity or illness of a
person if the performance of a contract depends on his personal skill or ability.

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Unit 1.8 103
R agreed to sing on a specified day. R fell seriously ill and could not perform on that day. The contract
was discharged.
[Robinson Vs. Davison,(1871) L.R. 6 Ex 269]
Declaration of war: The pending contracts at the time of declaration of a war are either suspended or
declared as void. Generally, the contract at the time of declaration of a war is void, when the contract
is against public interest or national interest.
Example: Sonu contracts to take in cargo for Monu at a foreign port. Sonu’s Government later on declares
war against the country in which the port is situated. The contract becomes void when the war is declared.
If the war has broken out in some parts of the world not involving the two coun-
tries of contracting parties, it will not affect the contract even if the performance
has become difficult because of disruption of traffic routes.
Change of Law: Sometimes when the contract is entered into is completely fine and enforceable
but due to subsequent change in law the contract is rendered impossible. The contract is discharged
if the performance of the contract becomes impossible or unlawful due to change in the Law after
the formation of the contract.
Example: A contract between two persons for sale of forest trees was held to have become void when the
government banned cutting of trees in the forest.
Prakash agreed to sell his land to Gupta. After the formation of the contract, the Government issued
a notification and acquired the land. The contract was discharged because if such contract is allowed
it would be contravening the law and hence would become unlawful and void. Therefore the contract
comes to an end with the change in law as it makes impossible for the parties to fulfill their obligations.
[Shyam Sunder vs. Durga]
Failure of ultimate purpose: A contract may have been made with one particular purpose known to
both the parties. An event frustrates the purpose even before the contract is performed. The contract
shall become void.
Example: Ram and Sita contract to marry each other. Before the time fixed for the marriage, Ram goes mad.
The contract becomes void.

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Hari hired a room from Haran for viewing the coronation process of King Edward VII. The procession
was cancelled because of King’s illness. It was held that Hari was not liable to pay the room rent because
the procession which formed the basis of the contract did not occur.
[Krell vs. Henry]
Effect of supervening impossibility
The supervening impossibility would render the contract void and Sec 65 would be applicable.
The contract becomes void as none of the parties is left with any contractual obligations to perform
Before the emergence of impossibility, if a person has done something or given some benefit under
the contract, he will be entitled to receive the benefit back
Exceptions to impossibility of performance
Impossibility of performance is, as a rule, not an excuse from performance. It means that when a person
has promised to do something, he must perform his promise unless the performance becomes absolutely
impossible. A contract is not discharged by the supervening impossibility in the following cases:
Difficulty of performance: A contract is not discharged simply on the ground that its performance
has become difficult. Difficulty is not impossibility. A party is bound to perform it even though with
more effort or hardship.
Example: Pradeep agreed to supply coal within a specified time to Rajesh. He failed to supply on time
because of the Government’s restriction on the transport of coal from collieries. Here, Pradeep will not be
discharged because the coal was available in the open market from where Pradeep could have obtained it.
X sold a certain quantity of Finland timber to Y to be supplied between July and September. Before
any timber was supplied, war broke out in the month of August and transport was disorganized so
that X could not bring any timber from Finland. Held, the difficulty in getting the timber from Finland
did not discharge X from performance.
[Blackburn Bobbin Co. Vs. Allen & Sons.(1918)1 K.B. 540]
Commercial impossibility: A person may find that because of some unexpected events, his contract
with another person, if performed, would cause losses to him. A contract is not discharged simply
on the ground of commercial impossibility, i.e. when the contract becomes commercially unviable
or unprofitable.

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Unit 1.8 105
Example: Mahesh, a furniture manufacturer agreed to supply certain furniture to Bhupati at an agreed
rate. Later on, there was a sharp increase in the rates of timber and rates of wages. Since, it was no longer
profitable to supply at the agreed rate, Mahesh did not supply. He will not be discharged on the ground of
commercial impossibility.
Default of a third party: If a promisor could not perform the promise because of default of a third
party, he cannot make an excuse and claim that it is impossible to perform the promise. The third
party’s fault or conduct has nothing to do with the contract. The contract is not discharged because
of a third party’s default.
Example: Kishore, a cycle distributor enters into a contract with Ravi to supply 100 bicycles. The bicycle
manufacturer, Kumar did not manufacture bicycles due to which kishore is unable to procure the bicycle
and therefore couldn’t honor his obligation to the contract. Kishore is liable to pay the damages caused to
Ravi because of non-performance of the contract.
Strikes, lockouts and civil disturbances : A contract is not discharged on the grounds of strikes,
lockouts and civil disturbance unless otherwise agreed by the parties to the contract.
Amitabh agreed to supply to Abhishek, certain goods to be imported from Algeria. The goods could
not be imported due to riots in that country. It was held that this was no excuse for non-performance
of the contract.
[Jacobs vs. Credit Lyonnais]
Failure of one of the objects of the contract: Sometimes the parties enter into a contract intending
to fulfill more than one object. The failure of one of the objects does not discharge the entire con-
tract as one of the objects can still be fulfilled. But, if all the objects of the contract fail, the contract
becomes discharged.
Adarsh agreed to let a boat to Ravi to view the naval review at the coronation of the king and to
cruise round the fleet. Due to the illness of the king, the navel review was cancelled but the fleet was
assembled and the boat could have been used to cruise round the fleet. It was held that the contract
was not discharged since it was the failure of one of the objects.
[H.B. Steam Boat Company vs. Hutton]
Self induced impossibility: If the performance of the contract becomes impossible due to the act
of omission of a party, it is called as self induced impossibility. In such cases, the contract is not
discharged.
Example: A promisor is not discharged from his liability if he is arrested or prosecuted.

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Discharge by operation of Law
Death: The contract that requires application of personal skill cannot be performed by the agent of
the promisor or his legal representatives is discharged on the death of the promisor.
Any benefit received before the performance will be returned by the legal rep-
resentative of the deceased person.
Example: a contract to sing or paint come to an end with the death of the promisor as it involves use of
personal skill and ability.
Insolvency: When a person’s debt exceeds his assets then he may be adjudged insolvent. Thus in
certain cases, the person is declared insolvent by the Court of Law and all the assets of the insolvent
person are taken over by the official assignee appointed by the court. In such cases, the insolvent is
discharged from all the liabilities on all the contracts entered into by him, up to the date of insolvency.
The contractual liabilities which were created before insolvency shall be taken
over by the Official Assignee and satisfied out of the assets available in the pro-
portion of debts outstanding.
Unauthorized material alteration: Sometimes, a contract is contained in a written document, and

if a party unilaterally makes significant changes in the body of the deed without the consent of the
other party, this will be called an unauthorized material alteration in the contract. In such a case,
effect of alteration would be the same as that of cancellation of the document. Thus, a unilateral
material alteration by one party discharges the other party from the performance of their respective
obligations under the contract.
Example: Dravid contracted to sell his plot of 500 sq. yards to Kumble for ` 10, 00,000. The sale deed which
was in possession of Dravid was executed. Before the registration of the sale deed, Dravid altered the deed
and made it a deed for the sale of 300 sq. yards plot for ` 10, 00,000. In this case, the contract is discharged
and Kumble is not bound to purchase the plot.
If the alteration is minor or clerical in nature, the contract remains unaffected.
Merger: Sometimes two persons may, after having made a contract, make another contract which
confers to the other party superior rights. In such cases, the inferior rights merge into the superior
rights. On merger, the inferior rights vanish and are not required to be enforced.
Example: Stephan gave a land on lease to Fleming. Subsequently, Fleming bought the land which he holds
under the lease. In this case, Fleming becomes the owner of the property and his rights as a lessee merge
into his rights as the owner. Thus, his rights as a lessee merge and are not to be enforced.

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Unit 1.8 107
When Rights and Liability are vested in the same party: If Rights and liabilities under the con-
tracted in the same party then the other parties to the contract are discharged. In other words the same
person becomes the promisor as well as the promisee.
Discharge by mutual agreement
Just as a contract is formed by an agreement between two parties, similarly it can be brought to an end by
another agreement between the same parties even before its performance. A contract can be discharged
by a mutual agreement in any of the following ways:
Novation: It means substitution of the original contract by a new one. It takes place when an existing
contract is substituted by a new one, either between the same parties or between the new ones. When
the parties to the new contract are same then the new contract must have terms which are substantially
different to the old one. Discharge of the old contract, is regarded to be the consideration of the new
contract. It is essential for novation that there must be a mutual consent of all the concerned parties.
Rules regarding novation are as follows:
Novation must be done before the expiry of the time of performance of the original contract
It is possible only by mutual consent of the parties and cannot be done unilaterally
The new contract replacing the old one must be capable of legal enforcement
It must substitute the present contract (An agreement to substitute a contract in future will not be
novation)
As a result of novation, the old contract is totally discharged and the law does not entertain any
action based upon the terms of the old contract
Example: X owes Y ` 20,000.He enters into an agreement with Y and Gives Y a mortgage of his (i.e., X’s)
estate for `10,000 in place of the debt ` 20,000, Here the old contract is extinguished and a new contract
comes into existence. Here we are able to witness that the new contract is substantially different from the
old one in form and obligation.
Example: Amar has to pay ` 1,000 to Akbar, while Akbar has to pay the same amount to Anthony. All the
three mutually agree and decide that Anthony will henceforth accept Amar as his debtor and hence Akbar
is discharged of his liability towards Anthony. Akbar is furthermore not liable to Amar.
Rescission: It means cancellation of one or more terms of the contract. The parties to the contract
may decide that they will cancel their contract without bringing a new contract in its place. This is
discharge by rescission. When some of the terms of the contract are cancelled then the other terms
are still operative and enforceable. When whole of the contract is cancelled it discharges both the
parties to the contract and there is no obligation outstanding.
It may take place in any of the following ways:

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àà With the mutual consent of the parties

àà By a party whose consent was not freely obtained (voidable contract)
àà One party may rescind the contract, if there is a breach of contract by another party, the party
rescinding the contract must restore the benefit received from the other party
Example1: Anil agrees to supply 50 tons of wheat to Sunil. Before the supply is made, Anil and Sunil agree
that no wheat needs to be supplied. The contract is rescinded by mutual consent.
Example2: A contracts with B to supply 50 bags of coco beans but A fails to supply 50bags of coco beans
on the decided date. Here B can rescind the contract on failure of performance by A.
Alteration: An alteration means a change in one or more terms of the contract with the mutual consent
of the parties. The alteration discharges the original contract and creates a new contract. However, the
parties of the new contract remain the same. The old terms and conditions are not to be preformed
while the new terms and conditions must be performed.
Example: Younis agreed to supply 50 bags of rice at the rate of ` 100 per bag to Khan. The delivery was to
be made in five equal installments, the first supply was to commence from 1st June. Subsequently, Younis
and Khan entered into an agreement that the delivery would be made in two equal installments and the
price would be ` 105 per bag. In this case, the old contract is discharged and the parties become bound by
the contract with changed terms.
Remission: The term ‘remission’ may be defined as the acceptance of a lesser obligation where
more is due.
It takes place when the promisee

àà Dispenses with a part or whole of the performance of a promise
àà Extends the time for the performance by the promisor
àà Accepts a lesser sum
àà Accepts any other consideration, other than agreed in the contract
A promise to give concession to the promisor in whatever form is binding on the

promisee even if it is without consideration.
Example: Ganesh owes ` 5,000 to Gopal. Gopal mutually along with Ganesh agrees that he will receive
only ` 2,000 in full satisfaction of the whole debt. The promise of concession to Ganesh is binding on Gopal
although there is no consideration for it.
Waiver: Waiver may be defined as the intentional abandonment (i.e., giving up) of the rights by one
party who is entitled to claim performance of the contract. On waiver, the other party is discharged
from the performance of his liabilities under the contract.

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Unit 1.8 109
Example: A took a loan of ` 1, 00,000 from XYZ & Bank. The amount to be paid was in installments of ` 5,
000 each. Due to prompt payment by A, XYZ & Bank waived off the last installment voluntarily. A need not
pay the last installment of ` 5,000 and neither can XYZ & Bank claim it.
No consideration is necessary for waiver.
Discharge by lapse of time
A contract must be performed within the stipulated time or reasonable time. Non performance of the
contract within a reasonable time or stipulated time would lead to discharge of the contract depending
on whether or not time is the essence of the contract
If time is the essence of the contract, then the performance must take place within the stipulated time.
A delay will make the contract voidable at the option of the other party.
If time is not the essence of the contract then such a contract is not discharged even if the obligations
are not performed on time.
A contract is discharged, if it is not performed within the period of limitation. i.e., the period specified
by the Law of Limitation Act. The Limitation Act lays down different limitation periods for different
kinds of contracts.
Example: The period of limitation for recovering a moveable property is 3 years and is 12 years for the
recovery of immovable property.
If the contractual rights are not enforced within the specified limitation period,
the court will not enforce the contract.
Breach of a contract
‘Breach of a contract’ means the failure of a party to perform his obligations. The party who fails to
perform his obligations is said to have committed a breach of contract. A breach of a contract discharges
the aggrieved party from performing his obligations. Breach of a contract is of the following two types:
Actual breach of contract: It occurs when, on the due date of performance or during the course of
performance, a party refuses or fails to perform his obligations. The actual breach may be expressed
or implied. Thus, the actual breach of contract may be discussed under the following two heads:
àà On due date of performance: If any party to a contract refuses or fails to perform his part of
the contract at the time fixed for performance, it is called an actual breach of contract on the due
date of performance. In such cases, the other party is discharged from the performance of his
obligations, and can hold the guilty party liable for the breach of contract.

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Example:Amar agreed to sell his car to Akbar on 14th June. But on 14th June, Amar refused to sell the car
to Akbar. On Amar’s refusal to sell the car, there occurred a breach of the contract, and Akbar can hold Amar
liable for the breach of the contract.
àà During the course of performance
If any party has performed a part of the contract and then refuses or fails to perform the remaining part
of the contract, it is called an actual breach of contract during the course of performance
Sometimes, one party, no doubt, performs his obligations but not strictly according to the contract. It is
also an actual breach of contract. This type of breach of contract occurs when the party performing the
contract commits a breach of the essential conditions to the contract
However, the breach of non-essential terms does not discharge the contract. It
only entitles the aggrieved party to claim damages from the defaulting party.
Example: Robin, a shoe manufacturer, contracted to supply 500 pairs of shoes to Uttapa, a dealer in shoes,
at a certain price. The shoes were to be delivered in instalments. After the supply of 200 pairs of shoes,
Uttapa told Robin that no more shoes are required. In this case, the breach of contract was committed dur-
ing the course of performance of the contract.
Consequences of actual breach of contract
If time is the essence of the contract

àà The contract is voidable at the option of the aggrieved party
àà The aggrieved party can claim the compensation for the loss on non performance
àà The aggrieved party cannot reject the transaction when he accepts delayed performance
If time is not the essence of the contract

The contract is not voidable
The aggrieved party can claim compensation for any loss caused delayed performance
Anticipatory breach of contract
It occurs when, prior to the due date of performance, the promisor absolutely refuses or disables
himself from the performance of his obligations Sec 39. In other words, it is a declaration by one
party, of his intention not to perform his obligations under the contract. Thus, an anticipatory breach
is the premature destruction of the contract, i.e. the repudiation of the contract before the due date
of performance.
Example: Amar contracted to supply to Akbar 100 pieces of spark plugs on 2nd December 2009. But before
the due date of performance (i.e., 2nd December), Amar informed Akbar that he is not going to supply the
spark plugs at all. On Amar’s refusal to supply the goods, the anticipatory breach of the contract occurs and
Akbar put an end to the contract.

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Unit 1.8 111
Example: X contracts to sell his car to Y on 15th March 2014. But before that date, he sells his car to Z. This
is also a case of anticipatory breach of contract. Here, the anticipatory breach of contract is implied from
the conduct of X. this is a case wherein the party has disabled himself from fulfilling the obligation to the
contract by his own act.
Consequences of Anticipatory breach
In case of anticipatory breach, the aggrieved party has the following options:
He can rescind the contract and claim damages for the breach of the contract without waiting until
the due date for performance
He may treat the contract as operative and wait till the due date for performance and claim damages
if the promise still remains unperformed
If the aggrieved party treats the contract as operative and waits till the due date for performance, the
consequences will be as follows:
The promisor may perform his promise on or before the due date of performance and the promisee
will be bound to accept the performance
The promisor may take advantage of the discharge by supervening impossibility arising between
the date of anticipatory breach and the due date of the performance and in such case, the promisee
shall lose his right to sue for damages
Example: Suresh, a farmer, agreed to sell his entire crop of wheat to Ramesh at ` 8,000 per ton, to be deliv-
ered on 20th October. On 1st October, Suresh informed Ramesh that he was not going to supply the goods.
Ramesh decided not to rescind the contract on 1st October and to wait till 20th October. On 18th October,
the entire crop was destroyed by fire without the fault of either party. Since the contract had become void
on the ground of impossibility of performance, Ramesh had lost his right to sue Suresh for damages.

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Discharge of a contract means termination of the contractual relations between the

parties
Tender refers to an attempted performance
Novation means substitution of new contract for the original one
Discharge by rescission means termination of a contract
Remission’ may be defined as the acceptance of a lesser sum of money where more is due
A promise to give concession to the promisor in whatever form, is binding on the pro
isee even if it is without consideration
No consideration is necessary for waiver
If the contractual rights are not enforced within the specified limitation period, the court
will not enforce the contract
The contractual liabilities which were created before insolvency shall be taken over by
the Official Assignee and satisfied out of the assets available
If the alteration is of minor or clerical nature, the contract remains unaffected
A ‘breach of contract’ means the failure of a party to perform his obligations

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Unit Remedies for Breach
1.9 of Contract
Learning
Objectives
)) Understand the meaning and types of )) Know the suit for quantum meruit
remedy
)) Be aware of suit for specific performance
)) Know the meaning of rescission of
)) Learn the exception to specific perfor-
contract
mance
)) Know the meaning of the suit for dam-
)) Understand the suit for injunction
ages
)) Know what earnest money and security
)) Learn the types of damages
deposit is
)) Understand the rules regarding award
of damages

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Unit 1.9 114
Meaning of Remedy
A remedy is the course of action available to an aggrieved party (i.e. the party not at fault) for the en-
forcement of his right under a contract. The party committing a breach of contract is called the ‘guilty’
or ‘defaulting’ party and the other party is called the ‘injured’’ or ‘aggrieved’ party.
Example: Bhushan entered into a contract with Shyam for supply of 500 pen at rupees 5 per pen. On the
date of performance, Bhushan attempted to deliver the goods, but Shyam did not accept the goods. In this
case, Shyam is the guilty party or defaulting party and Bhushan is the injured or aggrieved party.
In case of breach of contract, the aggrieved party would have one or more, but not all, of the follow-
ing remedies against the guilty party. These remedies will be enforced through the Court, if there is no
resolution of the conflict between the parties themselves. The remedies are:
Rescission of a contract
Suit for damages
Suit for quantum meriut
Suit for specific performance
Suit for injunction
Meaning of Rescission
Rescission means a right not to perform the obligation or cancel the contract. When there is a breach of
contract by one party, aggrieved party may rescind the contract and need not perform his part of obliga-
tion. It will have following effects:
The aggrieved party need not perform his obligation, if he does not want to take any legal action
against the guilty party
The aggrieved can claim compensation for loss
The aggrieved party is liable to restore benefit received under the contract, if any
Example: Sunny contracts to supply 100 kg of tea leaves to Ravi for ` 8,000 on 15th April. If Sunny does
not supply the tea leaves on the appointed day, Ravi need not pay the price. Ravi may treat the contract as
rescinded and need not perform his obligation. He may also file a ‘suit for rescission’ and claim damages.
In certain circumstances the court may order to rescind the contract on the ap-
plication from the aggrieved party. The court may also rescind the contract if the
contract is voidable and the aggrieved party applies to the court for rescission
or in cases where the contract is unlawful.

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115 Remedies for Breach of Contract
Suit for damages
The word ‘damages’ means monetary compensation for the loss suffered. Whenever a breach of contract
takes place, the remedy for ‘damages’ is the one that is applied by the aggrieved party as a consequence
of breach of contract. A breach of contract may put the aggrieved party to some disadvantage or incon-
venience or may cause a loss to him. The Court would direct the guilty party to accept responsibility for
any such loss of the aggrieved party and compensate him adequately.
Types of damages
On the basis of the provisions of Sec. 73 of the Indian Contract Act and the court judgments, the aggrieved
party would be entitled to one of the following types of damages, depending upon the circumstances of
the case:
General or ordinary damages: Ordinary damages are those which naturally arise in the course of
things from such breach of contract. These damages can be recovered if the following conditions
are fulfilled:
àà The aggrieved party must have suffered a loss by breach of contract and
àà The damages must be a proximate (i.e. direct) consequence of the breach of contract and not an
indirect or remote consequence
àà Generally, these damages are measured on the basis of the difference between the contract price
and the market price on the date of breach
Example: Ram agrees to sell 100 bags of cotton at ` 1000 per bag to Mohan. On the day of delivery, Mohan
refuses to buy the cotton. The price of cotton on such date is ` 900 per bag. Mohan, being a guilty party,
has to compensate Ram for the difference in price between contract price and price on date of breach i.e.
` 100 per bag *100 bags = ` 10,000.
No damages can be claimed for indirect losses

In case the same type of goods are not available in market, then the price of
nearest and available substitute will be taken into account.
In case if no market is exists at such a place then the prices existing in the
nearest market place are taken into account to calculate damages.
If the goods are custom made the cost of the goods are taken into account
for calculating damages.
Special damages: Under ordinary circumstances any damages which arise as an indirect consequence
of non performance of obligation by a party to the contract are not awarded by the court. These kinds of
damages are known as special damages and they appear due to some special or unusual circumstances.
Some important rules to be taken into account for the purpose of claiming special damages are:-

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Unit 1.9 116
àà These damages are recoverable only if the special circumstances were in the knowledge of the
parties at the time of making the contract, or if these special circumstances were brought to the
notice of the defaulting party at or before entering into contract.
àà If the special circumstances were within the contemplation of the parties then the party at fault
would be liable for special damages
àà If the defaulting party had no knowledge of the special circumstances, he will not be liable for
special damages.
Hadley delivered a machine to Baxendale, the operator of a common carrier to be conveyed to Had-
ley’s mill without delay. Hadlley also informed Baxendale that his mill had stopped functioning, which
was in need of the machine. Baxendale unreasonably delayed the delivery of the machine, and as a
consequence Hadley lost a profitable contract with the Government. In this case, Hadley is entitled
to receive from Baxendale, by way of compensation, the average amount of profit which would have
been made by running the mill during the period of delay. But he cannot recover the loss sustained
due to the loss of the Government contract, as Hadley’s contract with the Government was not brought
to the notice of Baxendale.
[Hadley vs. Baxendale]
X a dealer in cattle food sent samples of cattle food by train for exhibition in an agricultural show at
new castle. This purpose was made known to the railway company by stating on the consignment
note “must be at new castle, Monday certain”. The goods reached the destination after the exhibition
was over. It was held by the court that, as the special circumstances were brought to the notice of the
railway company, it must be construed that special damages were in the knowledge of both the par-
ties at the time of entering into the contract. As such, X was entitled to receive special damages from
the railway company.
[Simpson Vs. London and North Western Railway Co]
B bought some copra cake from M. B sold it to S and S further sold it to various cattle farmers. The
farmers used it for the purpose of feeding cattle. As copra cake was poisonous the cattle’s died. Farm-
ers made claim on S and S further claimed from B. B claimed compensation from M for all the costs
he had to pay to S. It was held that M has to pay to B all the compensation because it was within the
contemplation of the parties that the copra cake would be used for the purpose of feeding cattle as
such was the nature and use of commodity.
[Pinnock Bros. Vs Lewis & Peat Ltd. (1923) 1 K.B 690]

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Exemplary or vindictive damages: Sometimes, the courts also award damages for mental or emo-
tional suffering caused by the breach. Such damages are called exemplary or vindictive damages.
These may be taken as an exception to the general principle that damages are not penal but compen-
satory in nature. Therefore these kinds of damages are penal in nature as the damage caused to the
aggrieved party cannot be ascertained.
In the following cases, mental suffering and pain of the aggrieved party has been taken into account
to award exemplary or vindictive damages:
àà Breach of contract to marry: In such cases the extent of injury to the party’s feelings is difficult
to ascertain thus the court on some reasonable grounds compute and award compensation to the
other party.
àà Unjustified dishonor of a cheque: When there are sufficient funds to the credit of customers, but
still the banker dishonor’s the cheque, the customer can claim for damages. In this case, the rule
of ascertaining damages will differ according to the status of party. The general rule stands “more
the amount of cheque dishonored lesser would be damages and lesser the amount of cheque
dishonored more would be the damages”
Nominal damages: These are damages for namesake only. If the breach of contract does not cause
any loss to the aggrieved party, no damages need to be awarded to him. These are neither awarded by
way of compensation to the aggrieved party nor by way of punishment to the guilty party. However,
in order to record the fact of breach by the guilty party, the court may award nominal or token dam-
ages. The amount offered in case of nominal damages are very less, it can be as less as one rupee.
Example: In a contract of sale of goods, if the contract price and the market price is the same at the date of
breach of contract, then the aggrieved party is entitled only to nominal damages.
Damages for inconvenience and discomfort: If a party has suffered physical inconvenience and
discomfort due to the breach of contract, that party can recover the damages for such inconvenience
and discomfort, subject to the inconvenience being caused due to a direct cause of breach.
X a passenger was asked by a railway company to get down at a place (Not intended as per the con-
tract) where he could not get conveyance to go to his destination. So, X had to walk several miles to
reach his destination. Further, as a result of the delay, he could not keep up a business appointment.
In a suit filed by X in the court he was entitled to recover damages for personal inconvenience, but not
for failure to keep up a business appointment, as this was a remote consequence and was not within
the contemplation of the parties.
[Hamlin Vs. G.N. Railway Co.,]

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Unit 1.9 118
Hobbs, with his wife and children, took a ticket for a midnight train, to be transported to a particular
place where he lived. They were, however, transported to a wrong place and they had to walk several
miles home on a drizzling night. Held, Hobbs could recover the sum of `50 to compensate him for
inconvenience. No claim can be made for the medical expenses of his wife who caught cold, as this
consequence was too remote and neither could it be expected from the parties to contemplate such
a distant damage.
[Hobbs Vs. London & S.W.Rail Co. (1875) L.R. 10 Q.B 111].
Liquidated damages and penalty: To avoid the difficulty of assessing the damages, parties gener-
ally fix in advance, the amount of damages that would be payable in case of breach of contract. This
amount may be called liquidated damages or penalty.
Liquidated damages are a fair and reasonable estimate of loss which a party may suffer due to the
breach of contract.
On the other hand, a penalty is an unfair and unreasonable estimate of loss which is fixed with the
intention of coercing or compelling the other party to perform the contract. The terms ‘liquidated
damages’ and ‘penalty’ are essentially British terms and the distinction in their meaning is relevant
under the English law only. In India, no such distinction is made. In India, in every case of stipula-
tion of the amount of damages in the contract, the court will work out the amount of loss suffered
by the aggrieved party and award a reasonable amount as damages subject to the maximum of the
stipulated amount as the court allows only a reasonable compensation (Sec 74).
Example: S agrees to pay `1,000 to D on 5th January. It was agreed between the parties that if S fails to do
so then he has to pay `2,000. The extra `1,000 is in the way of penalty and would not be awarded by the
court. Rather the court would award reasonable compensation to D.
Enhanced rate of interest
A stipulation for increased interest from the date of default may not be a stipulation by way of penalty
if the terms of contract are reasonable. A contract between a debtor and his creditor may state that if the
debtor does not pay back to the creditor in time, he would be liable to pay a higher amount of interest to
the creditor. This higher amount of interest may be worked out in any one of the many possible ways.
A mere higher rate of interest, or compound interest in place of simple interest,
Higher amount of interest from the date of default
Higher amount of interest from the date of loan itself or a combination of any of these.
The stipulation of higher interest in case of default from the date of bond shall be seen as a penalty.
Hence, only a reasonable enhancement shall be allowed by Court of Law.

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Example: X gives loan to Y `1,00,000. At an interest of 24% per annum with a provision that if Y makes the
payment punctually at the end of the year then X would accept the lower interest rate i.e., 18% per annum,
such charging of interest on the failure to make the payment on the due date does not amount to penalty.
It should be rather understood as a relief provided by the creditor to the debtor for timely payment.
Damages for breach of warranty: Warranty is a stipulation which is collateral to the contract and
a breach of warranty would entitle the aggrieved party to claim damages. In case there is a breach of
warranty, the buyer is entitled to claim all the losses directly caused by the breach.
X sold a tin of disinfectant to Y. X knew that the tin was to be opened with special care. Otherwise,
it might prove dangerous. He did not warn Y. When Y opened the tin, his eyes were injured by the
disinfectant. It was held that X was liable, as he had failed to warn Y of the possible danger. Here there
was a breach of warranty on part of X as it was his duty to reveal the dangerous nature of goods to a
buyer who is ignorant of the same.
[Clarke Vs. Army and Nevy CO –Operative Society Ltd.]
Rules regarding award of damages
The following rules will guide the courts in measuring damages for the aggrieved party:
Purpose is compensation, not penalty: The fundamental purpose of awarding damages is to com-
pensate the aggrieved party for the loss suffered and not to punish the guilty party for causing breach.
Breach of contract is not a crime to attract punishment.
Limited damages: The damages are always a limited amount awarded to the aggrieved party to com-
pensate it for the loss caused by the non-performance of the contract. Expectations of the aggrieved
party from the contract which have remained unfulfilled shall not be taken into account.
Damages only for attributed losses: Damages are awarded for the losses which can be attributed
to the breach. Court will not take into account all fallout of the breach which may only be remotely
and indirectly related to the breach.
Mitigation of losses: The aggrieved party is expected to make sincere efforts to mitigate or minimize
the losses that are resulting out of the breach of the contract. The aggrieved party cannot be careless
about the happenings after the breach of the contract. Any losses which could have been avoided
would not be compensated.

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Unit 1.9 120
Amar contracted with Akbar to take a shop on rent from him. Amar gave one month’s rent in advance.
Akbar could not give possession of the shop to Amar. Amar chose not to do any business for eight
months though there were other shops available nearby. He wanted compensation for the loss suf-
fered during the eight months. He was allowed only a return of his money paid as advance rent as he
had not tried to mitigate losses.
[Neki vs. Pirbhu]
Cost of suit: The breach of contract by a party forces the other to initiate legal action against the
guilty party. This necessarily entails expenditure. This cost of suit can be recovered from the guilty
party only at the discretion of the court. The court may award cost of suit to the aggrieved party if
this is necessary in the interest of justice.
Quantum meruit
The term ‘quantum meruit’ means ‘as much as merited’ or ‘as much as earned’. In other words, it means
payment in proportion to the amount of work done. At times in case of a divisible work a party has per-
formed a part of the work and the rest of the work is not performed due to a breach by the other party
or due to impossibility of performance, then the party who has completed such part work is entitled to
receive remuneration for the same.
The claim for quantum meruit arises

when a person has done some work under the contract and the other party repudiates the contract or
The contract cannot be performed due to impossibility or illegality
Cases in which the claim of quantum meruit arises
The various cases in which the claim of quantum meruit arises are discussed below:
In case of void agreement, or contract that becomes void [Sec. 65]: When an agreement is dis-
covered to be void, or when a contract becomes void, any person who has received any advantage
under such an agreement or a contract is bound to restore it, or to make compensation for it, to the
person from whom he received it.
Example: : X was appointed as a managing director in a company under a written contract on certain remu-
neration. After few months of his appointment, the contract (of appointment) was found void because the
directors, who made the appointment, were not empowered to appoint him. X had acted innocently and
had rendered his services without the knowledge of the directors’ lack of capacity to appoint him. He filed
a suit of the remuneration specified in the agreement on basis of quantum meruit. It was held by the court
that X can recover reasonable compensation for the services rendered by him on the basis of quantum
meruit.

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In case of the contract being prevented by the act of the other party: If a party does not com-
plete the contract or prevents the other party from completing the contract, the aggrieved party can
sue based on quantum meruit. When the a contract is divisible and the party at fault has enjoyed the
benefit for the work done by the party not at fault then the party not at fault can claim reasonable
composition on the basis of quantum meruit.
Sudhanshu, an owner of a magazine engaged Yash to write a book to be published as a series in his
magazine. After a few series were published, the publication of the magazine was stopped. It was held
that Yash could claim payment on a quantum meruit for the part already published.
[based on Planche vs. Calburn]
Example: Sunil appoint Anil to sing at his hotel on weekends (Saturday & Sunday) for next 10 weeks. On
the 6th week Sunil informs Anil that his services are required no more due to change in policy by the hotel
authorities. Anil can clam reasonable compensation for the services rendered by him.
When a person does something for the other without the intention of doing it gratuitously: When
a person provides certain services to the other or deliver something without an intention to do so gra-
tuitously and the other person enjoys the benefit of such act then the other person should restore such
benefit to the person who provided such services or goods as per Sec 70 of Indian Contract Act 1872
Example: X leaves certain goods at Y’s house. Y treats the goods as his own and uses them. Y needs to com-
pensate X for the goods used by him.
When the contract is not Divisible: If the contract is divisible then the party not at fault can claim
compensation but in cases where the contract is not divisible the party cannot claim quantum meruit.
There are certain contracts where the performance of a part of the work is not contemplated by either
parties and hence the performance of whole of obligation becomes necessary.
S undertook to build two houses and a stable for H for `1,00,000. After having done the work to the
value of `50,000 S abandoned the contract. H, afterwards, completed the work himself. Held, S could
not recover the value of the part he had completed because the payment was to be made only on
the completion of the entire work. Therefore S cannot claim on the basis of quantum meriut as the
contract is not divisible.
[Sumpter Vs. Hedges]
When an indivisible work is wholly but badly performed: In case a contract is completely per-
formed, but the performance is poor, then the other party can make a deduction of the bad work.

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Unit 1.9 122
Avni agreed to decorate Neha’s flat for a lump sum of ` 20,000. Avni did the complete work but Neha
complained of faulty workmanship. It cost Neha another ` 3,000 to remedy the defect. It was held that
Neha could recover only ` 17,000 from Neha.
[Hoenig vs. Issacs (1952)]
Suit for specific performance
Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances,
an aggrieved party may file a suit for specific performance i.e., for a decree by the court directing the
defendant to actually perform the promise that he has made. This cannot be demanded as matter of right
by the party as specific performance order is provided at courts discretion.
The Court may allow specific performance in the following situations

If there is no standard for ascertaining the actual damage, i.e. wherein the compensation cannot be
ascertained for non-performance
If there is no exact substitute or alternative to the subject matter of the contract
It is usually granted in contracts connected with land, buildings, rare articles and unique goods hav-
ing some special value to the party
Granting suit for specific performance is at the sole discretion of the court and the party cannot
demand it as a matter of right
In all these contracts, monetary compensation is not an adequate relief because

the injured party will not be able to get an exact substitute in the market.
Example: Kapil agreed to sell an old painting to Ajay for ` 50,000. Subsequently, Kapil refused to sell the
painting. Since there were no exact substitute for the old painting, Ajay may file a suit against Kapil for the
specific performance of the contract.
Exceptions
In the following cases, the Court will not grant specific performance
Where a monetary compensation is an adequate remedy
Where a contract is of personal nature e.g. contract to sing, dance
Where the promisor is a minor
Where the contract was made by a Company and is beyond its power

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Suit for injunction
Suit for injunction refers to, requesting the Court to issue a stay order against the party at fault. Injunction
means an order of the Court which prohibits a person to do a particular act. When a party to a contract
does something which he promised not to do, the court may issue an order prohibiting him from doing
so. This cannot be demanded as matter of right by the party as injunction order is provided at courts
discretion. It is a preventive relief for the party not at fault. It is generally granted by the court when
Damages would be inadequate remedy for party not at fault
A party has promised not to do something but commits a breach
Suresh agreed to sing only at Raj’s theatre during the contract period. During the contract period,
Suresh made a new contract with Kumar to sing at another theatre and refused to perform the contract
with Raj. In this case Suresh could be restrained by injunction from singing for Kumar.
[based on Lumley Vs. Wangner]
Ginder agreed to buy the whole of the electric energy required for his house from Metropolitan Electric
Supply Co. This was contemplated as a promise not to buy electricity from any other company. He was,
therefore restrained by an injunction order from buying electricity from any other company. The suit
of injunction was allowed as damages would not be a suitable way of arriving at justice.
[based on Metropolitan Electric Supply Vs. Ginder]
Earnest money and Security deposit
In some cases, under a contract, one party is required to deposit some security with the other party so
as to ensure his seriousness to perform the contract. The security may either be in the form of security
deposit or earnest money.
Earnest money is a part of the purchase price and is paid when the contract is entered into. After the
contract is completed, it is adjusted towards the purchase price. If the party paying the earnest money
fails to perform the contract, the other party can cancel the contract and retain the earnest money. It is
forfeited when the contract is broken by the fault of the promisor.
Security deposit is to ensure the performance of the contract. After the contract is completed, the security
deposit is not adjusted towards the purchase price. If the party fails to perform the contract, it cannot be
forfeited as its forfeiture will amount to a penalty. It is kept as a security, so as to ensure his seriousness
to perform the contract.

Law_1.9.indd 206 6/16/2014 4:26:43 PM
Unit 1.9 124
The party committing the breach of contract is called the ‘guilty’ or ‘defaulting’ party
Rescission means a right not to perform the obligation
Damages means monetary compensation for the loss suffered
Damages = Contract price - Market price of goods on date of breach
No damages can be claimed for indirect losses
The special damages are due to some special or unusual circumstances
Damages for mental or emotional suffering are called exemplary or vindictive damages
Nominal damages are damages for the namesake only
The terms ‘liquidated damages’ and ‘penalty’ is essentially British terms and the distinction
in their meaning is relevant under the English law only. In India, no such distinction is made
The term ‘quantum meruit’ means ‘as much as merited’ or ‘as much as earned
Suit for injunction means demanding the Court’s stay order
Earnest money is a part of the purchase price whereas security deposit is not a part of
purchase price

Law_1.9.indd 207 6/16/2014 4:26:43 PM
Unit Quasi
1.10 Contract
0

 Learn what is quasi contracts
 Circumstances in which quasi
contracts may arise
 Effects of Quasi contracts
Quasi contracts
As per the Indian contract act there are “some obligations resembling those created by contract”. Such
kinds of contracts are termed as quasi contracts. Quasi contract is a contract created by law without any
enforceable agreement, which is based on the principle of equity. It is based upon the maxim of ‘nemo
debet locu plat ex liene justilia’ i.e., no one should be allowed to enrich himself at the expense of the
other. It is known as contract imposed by law.
Features
• A quasi contract is not a real contract.

• It is not based on express or implied intentions of the parties.
• It is not based upon the offer and acceptance rule.
• It lacks one of the essentials of a valid contract i.e. consent of the parties.
• It does not arise from any formal agreement but is imposed by law.
• The right under it is available against specific person(s) and not against the world
• A suit for its breach may be filed in the same way as in case of a general contract.

126
6
Note: In English law, quasi contracts are also known as constructive contracts.
Example: Shiva pays some money to Ganesh by mistake. It is actually due to Parvathi. Ganesh must
refund the money to Shiva.
Circumstances or types of quasi contracts (Sec. 68 to Sec. 72)
Sec 68 Supply of necessaries to a person incompetent to contract (including persons dependent

on him)
If a person, incapable of entering into a contract, or anyone who he is legally bound to support, is
supplied by another person with necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the property of such an incapable person.
Example: B a minor is supplied with necessaries by A. The property of the minor is liable for the
purpose of payment to A.
Example: Suresh supplies to Ramesh, a lunatic, with necessaries suitable to his condition in life.
Suresh is entitled to be reimbursed from Ramesh’s property such amount for the necessaries supplied
by him.
Conditions for making the claim
Conditions for making the claim
• Only the property of the incompetent person is liable
• Such incompetent person cannot be made liable personally.
• The person supplying the necessaries should have not done. It gratuitously.
• The incompetent person should not have adequate supply of the same.
• The things supplied should constitute necessaries.
Sec 69 Reimbursement of a person paying money due by another, in payment of which he is

interested.
A person, who is interested in the payment of money which another, is bound by law to pay, and who
therefore pays it, is entitled to be reimbursed by the other.
Example: Ashok holds land in Orissa on a lease granted by Ragav, the zamindar. The revenue is
payable by Ragav to the Government being in arrear, his land is advertised for sale by the
Government.

127
Under the revenue law, the consequence of such a sale will be the termination of Ashok’s lease. So
Ashok, who wants to prevent the sale, pays the dues to the Government. Ragav is bound to make the
reimbursement to Ashok for the amount so paid.
Example: X, a sub- tenant, pays the arrears of rent due by Y, the actual tenant, to the landlord Z in
order to save the tenancy from being forfeited. In this case, X is entitled to recover the payment so
made from Y.
Example: A and B were fined jointly Rs. 500 for selling banned drugs. A alone paid the amount of
fine, In this case, A cannot claim contribution from B later, in order to make the claim under Sec 69
the person making the payment should not be legally bond to pay the amount.
Conditions for the recovery of payment

• The person making the payment must be interested in paying the amount
• The person making the payment must not be legally bound to pay the amount
• The other person on whose behalf the payment has been made must be legally bound to make the
payment
• The payment must not be made to self-i.e. it must be made to some third party
Sec 70 Obligation of a person enjoying the benefit of a non-gratuitous act

The term Non-gratuitous act means the act which is done without an intention to claim the reward.
Where a person lawfully does anything for another person, or delivers anything to him, not intending to
do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make
compensation to the former in respect of, the thing so done or goods so delivered.
Example: Raj saves Karan’s property from fire. Karan is liable to pay Raj.
Note: If the circumstances show that Raj intended to act gratuitously and saved the property, then Raj is
not entitled to compensation from Karan.
Essential rules
• The thing delivered or act done must be lawful
• The act must have been done without an intention to do so gratuitously
• The other party for whom the act is done must have enjoyed the benefit
Example: A number of villages were drawing irrigation water from a tank. Some of the villages were
under direct state tenancy, and others were under zamindars. The tank whose water was used for
irrigation of several villages was repaired by the Government; the government conducted certain repairs
to the tank for its preservation and had no intention to do so gratuitously for the zamindars. The
zamindars enjoyed the benefit thereof. Held, they were liable to contribute as the villages enjoyed the
benefit of the act done by the government non- gratuitously

128
6
[Damodar Muraliar vs. Secretary of State for India (1894)18 Mad 88].
Sec – 71 Finder of goods
The term ‘finder of lost goods’ is used to define a person who finds the goods belonging to some other
person and takes it in his possession.
A person who finds goods belonging to another and takes them into his custody is subject to the same
responsibilities of having the possession of the property under bailment and cannot use it for his own
purpose.
Example: F picked a diamond ring lying on the floor of S’s show room. He handed it over to S. S
advertised in the newspapers to find out the true owner. No one appears to claim it for quite some weeks
in spite of the wide advertisements in the newspapers. F claims the diamond from S who refuses to return
the diamond to F who is entitled to retain the diamond against the whole world except the true owner. F
is entitled to retain the ring if he is willing to pay the necessary expenditure on advertisement that was
incurred by S.
[Hollins vs. Fowler]
Duties of the finder of lost goods
The finder's duty is that of a bailee:

• To take reasonable care of the goods
• To search the true owner of the goods
• Not to make personal use of the goods
• To return the goods to the true owner
Rights of the finder of the lost goods
• To keep possession of the goods.
• To recover all reasonable expenses from the true owner.
• To recover reward, if any announced by the true owner.
• Till the true owner of lost goods is found the finder of the lost goods has a right on the goods against
the whole world (jus in rem) apart from the true owner.
• Where the owner cannot be found with reasonable diligence
• Where the owner is found out, but refuses to pay lawful charges
The finder may sell the goods under following circumstances
• When the thing is perishable i.e., it is in danger of perishing or of losing the greater part of its value,
or
• When the lawful charges of the finder, in respect of the thing found, amount to two-thirds or more of
the value of the goods found.

129
• Where the true owner of the goods cannot be found with reasonable diligence.
• Where the true owner of the goods is found out, but refuses to pay lawful charges
Sec 72 Liability of a person to whom money is paid or a thing is delivered by mistake or under
coercion
A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay
or return it.
Example: John and Philips jointly owe `100 to Anthony. Both of them pay `100/- each to Anthony
without each other’s knowledge. Now Anthony is bound to repay the extra amount received from them.
Example: The railway company refuses to deliver certain goods to X except upon the payment of an
illegal change for carriage over and above the legal charges. X pays the sum charged in order to obtain
the delivery of the goods. Here, X is entitled to recover the excess illegal charge paid under coercion.
Example: An insurance company paid the amount on policy under the mistake that the goods had been
destroyed by a peril insured against. The goods in fact had been sold. Held, the money could be
recovered by the insurance company
[Norwich etc., Society Ltd. vs. Price (W.H.) Ltd (1934) A.C.455.].
Note: The scope of Sec 72 is much larger than Sec 20 and it covers mistake of fact as well as mistake of
law. In other words if money is paid or if anything delivered whether under mistake of fact or mistake of
law it needs to be restored to the other. Furthermore Sec 72 has a scope larger than Sec 15 and covers
coercion in a broader sense.

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♦

PROF. BHAVESH RAJANI

NOT FOR SALE

FOR INTERNAL CIRCULATION ONLY

After studying this unit, you will be able to

Introduction to Indian Contract Act

Prof. Bhavesh Rajani

Objective and Importance of Indian Contract Act

Promise = Proposal by one person + Its acceptance by another person

Consideration means something in return. In the above example, the consideration

Prof. Bhavesh Rajani

Contract = An Agreement + Enforceability

Conditions for Enforceability

 A contract is an agreement between two or more parties that is enforceable by law

General rights of parties

The parties to contract are generally awarded the following rights

Prof. Bhavesh Rajani

A contract creates jus in personam, not jus in rem.

Essential Elements of a Valid Contract

Prof. Bhavesh Rajani

[Balfour vs. Balfour, (1919) 2 K.B.571]

(Rose & Frank Co.Vs Crompton Bros, (1925)A.C.445).

Prof. Bhavesh Rajani

 Lawful consideration: The agreement must be supported by consideration. Consideration means

Prof. Bhavesh Rajani

Prof. Bhavesh Rajani

Prof. Bhavesh Rajani

Difference between Void Agreement and Illegal Agreement

Prof. Bhavesh Rajani

Prof. Bhavesh Rajani

 Promise = Proposal by one person + its acceptance by another person

 Contract = An Agreement + Enforceability

 A contract creates jus in personam, not jus in rem

 Consensus ad idem refers to meeting of minds

Prof. Bhavesh Rajani

After studying this unit, you will be able to:

)) Understand the meaning and definition )) Know about lapse of offer

Essential elements of a valid offer

Prof. Bhavesh Rajani

Legal rules regarding valid offer

Prof. Bhavesh Rajani

[Lalman Shukla vs. Gauri Datt (1913) All LJ 489]

[Harris Vs. Nickerson (1873) L.R. 8 Q .BV.286]

Prof. Bhavesh Rajani

Invitation to offer Offer

Examples of invitation to offer

 An offer must be distinguished from a mere declaration of intention: A declaration by a person

Prof. Bhavesh Rajani

[Harvey Vs Facey (1893) A.C.552]

[Henderson Vs. Stevenson (1875).L.R2 H.L. App. Cas. 470].

Prof. Bhavesh Rajani

[Olley Vs. Marlborough Ltd. (1949) K.B. 532]

[Carlill vs. Carbilic Smoke Ball Co. 1893]

Prof. Bhavesh Rajani

[ Great Northen Rail Vs. Witham (1973) L.R.9 C.P.16]

Prof. Bhavesh Rajani

destination at a certain fare.

Prof. Bhavesh Rajani

Prof. Bhavesh Rajani

WHO CAN ACCEPT?

Essential elements of valid Acceptance

[Powel Vs. Lee , (1908) 24 T.L.R 606]

Prof. Bhavesh Rajani

 Acceptance may be expressed or implied: An acceptance, which is expressed by words, written

A contract is an agreement between two or more parties that is enforceable by law

Lawful consideration: The agreement must be supported by consideration. Consideration means

Promise = Proposal by one person + its acceptance by another person

Contract = An Agreement + Enforceability

A contract creates jus in personam, not jus in rem

Consensus ad idem refers to meeting of minds

An offer must be distinguished from a mere declaration of intention: A declaration by a person

Acceptance may be expressed or implied: An acceptance, which is expressed by words, written

Acceptance by Telephones, Telex or Fax: If communication of the acceptance is made by telephone,

The person who makes the offer is called Offeror / prposer

The person to whom the offer is made is known as Offeree / proposee

An offer must be distinguished from intention / willingness and invitation to offer

A counter offer puts an end to the original offer

Mental acceptance, failure to answer or silence is not acceptance

Acceptance must be given only to the offeror or his agent

Consideration must be real and not illusory:

Consideration may be past, present or future:

Consideration must not be illegal:

Consideration means ‘quid pro quo’ i.e. something in return

Consideration means a reasonable, equivalent or any other valuable benefit passed on

The English Law does not recognise past consideration

A stranger to a consideration can sue but a stranger to a contract cannot sue

An agreement made without consideration is void

A debt is time barred by limitation, if it remains unpaid or unclaimed for a period of

Contract requiring personal skills cannot be assigned