LLB 202 Law of Contract-I

LAW OF CONTRACT-I B.A./B.B.A. LL.
B - II Semester
Course Contents & Reading Material

B.A./B.B.A. LL.B. (Hon.) II Semester
Paper Code: LLB 202 2018-19
Law of Contract -I
(General Principles)
(Course Content developed and the Cases Selected by)
Dr. Girjesh Shukla

Dr. Ruchi Sapahia
Dr. Alok Kumar
Navditya Tanwar
Dr. Ruchi Gupta
&
Mr. Vineet Kumar
Sharma
(Research Scholar)
Himachal Pradesh National Law University Shimla, P.O. Shakrah, Sub-Tehsil
Dhami District Shimla, Himachal Pradesh-171011
Ph. 0177-2779802, 0177-2779803, Fax: 0177-2779802
Website:http://hpnlu.ac.in
for private circulation only
For private circulation only HPNLU Shimla Page No.1

LAW OF CONTRACT-I B.A./B.B.A. LL.B - II Semester
HIMACHAL PRADESH NATIONAL LAW UNIVERSITY, SHIMLA
SEMESTER- II
B.A./B.B.A. LL.B. (Hons.) PAPER CODE: LLB 201
COURSE TITLE: CONTRACT-I CREDITS-04

(General Principles)
Module I
Introduction
(Total Lecture-16)
1.1 Contract: Meaning, Definitions and Types.
1.2 Essentials of a Valid Contract: Agreement and Intention to create Legal Relations
1.3 Proposal and Acceptance: Definition, Essentials, Communication and Revocation
1.4 Capacity to Contract: Minority, Insanity and Disqualification by Law.
1.5 Liability for Necessaries Supplied to A Minor/Person of Unsound mind.
Module II
Free Consent (SS. 13 – 22)
(Total Lecture-19)
2.1 Consent and Free Consent: Definition, Effect of Coercion, Undue Influence,
Fraud, Misrepresentation and Mistake
2.2 Consideration: Meaning, Definition, Essentials, Types, Exceptions to Consideration
2.3 Doctrine of Privity of Contract and its Exceptions, Legality of Object and Consideration
2.4 Agreements Expressly Declared to be Void: Agreement Without Consideration,
Agreement with Unlawful Object and Consideration, Agreement in Restraint of Marriage,
Agreement in Restraint of Trade, Agreement in Restraint of Legal Proceedings, Uncertain
Agreements, Agreements by Way of Wager.
2.5 Contingent Contracts
Module III
Discharge of Contract and Quasi Contract
(Total Lecture-15)
3.1 Discharge of Contract: Meaning and Modes

3.2 Doctrine of Frustration
3.3 Quasi-Contracts
3.4 Breach of Contract: Meaning, Types and Remedies
3.5 Damages for Breach of Contract: Meaning, Types and Measure Of Damages

Module IV
SPECIFIC RELIEF ACT, 1963
(Total Lecture-15)
4.1 Recovering Possession of Property

4.2 Specific Performance of Contract
4.3 Rectification, Rescission and Cancellation of Contract
4.4 Declaratory Decrees
4.5 Injunctions
Prescribed Legislations:
• The Indian Contract Act, 1872

• Specific Relief Act, 1963
• Indian Majority Act, 1875.
Prescribed Books:
1. Bangia, R.K., Law of Contract.

2. Beatson, J., Anson’s, Law of Contract.
3. Furmston, M., Law of Contract: Cheshire, Fifoot and Furmston.
4. Kesava Rao, V., Contracts I: Cases and Materials.
5. Mckendrick, Ewan, Contract Law: Text Cases and Materials.
6. Mitchell, Charless, Landmark Cases in the Law of Contract.
7. Moitra, A.C., Law of Contract and Specific Relief.
8. Monahan, Geaff, Essential Contract Law.
9. Mulcahy, Linda, Contract Law in Perspective.
10. Pathak, H.S., Mulla, On Indian Contract Law.
11. Pollock and Mulla, The Indian Contract and Specific Relief Acts. Vols.-I and II.
12. Rao, R.S., Lectures on Contract-I.
13. Saharay, H.K., The Indian Contract Act – 1872.
14. Singh, Avtar, Contracts and Specific Relief.
15. Stone, Richard, Modern Law of Contract.

Law of Contract I (Part I) Index
S. No. Topic Details Page No.

1 Introduction: The Purpose of Contract law 1
2 Theories of Contract Law and Enforcing Promissory Morality: 15
Comments on Charles Fried
3 Contractual Freedom, Contractual Justice, and Contract Law (Theory) 31
4 Contracts without Consent: Exploring a New Basis for Contractual 45
Liability
5 Offer and Acceptance in Modern Contract Law: A Needless Concept 89
6 The Modern Law of Contract 125

Bayles: Introduction: The Purposes of Contract Law
INTRODUCTION: THE PURPOSES OF

CONTRACT LAW
MICHAEL D. BAYLES*
In recent years, interest in the theory of contract law has in-

creased. Many articles and several recent books have developed
philosophical or jurisprudential perspectives on contract law.1 This
introduction aims to place the major views in perspective by con-
sidering what theories might try to do and briefly outlining the ma-
jor approaches to the central questions of contract law. The theories
cannot be developed in detail.
THE FUNCTIONS OF CONTRACT THEORY
Gerald Fridman begins his paper in this symposium by sug-

gesting that lawyers and philosophers may have different purposes
in examining contract law. Philosophers, he suggests, are often con-
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cerned to examine the language of lawyers about contracts or the
ethical and other reasons for recognizing and enforcing contracts,
IM
while lawyers are concerned to determine whether a legally binding
arrangement has been made. Fridman is correct to note that
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theories of contract law can be developed for different purposes, and

he is perhaps correct about the usual emphases of philosophers and
lawyers. However, it is better to note the different functions a
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theory of contract law can have without identifying these functions

with one or another group of theorists.
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At least three distinct functions can be served by a theory of

contract (or other part of) law: prediction, explanation, or justifica-
tion. Most theories seek to serve all these functions but differ in the
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relative emphasis they place on them. Fridman implicitly ascribes

the function of prediction to lawyers -to determine whether a legal-
ly enforceable arrangement has been made. Doing this primarily in-
volves predicting what courts would do were they confronted with
the arrangement. Lawyers, however, usually want to do more than
predict what courts will do; they want to be able to draft ar-
rangements and make presentations that will persuade courts to en-
* Director, Westminster Institute; and Professor of Philosophy, University

of Western Ontario.
1. Among the books are the following: P. ATIYAH, PROMISES, MORALS, AND
LAW (1981); C. FRIED, CONTRACT AS PROMISE (1981); I. MACNEIL, THE NEW SOCIAL CON-
TRACT (1980).
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force them. Consequently, a predictive function is often best fulfilled

by stating the theory in the terminology courts use. Due to the doc-
trine of precedent, judges usually at least state their decisions in
terminology of previous cases. Unless one is a total cynic about
judicial behavior, one can reasonably expect to influence their deci-
sions by arguments framed in that terminology. Consequently, if the
primary function of a theory is predictive (and persuasive), it is like-
ly to be stated in standard legal terminology, drawing heavily on
the reasons and language of appellate court opinions.
A second function of contract theory is to explain. Explaining is
not the same as predicting. The view that explanations and predic-
tions are symmetrical has largely been abandoned in philosophy of
science. It is even more obvious that they are not the same in law.
While the doctrine of freedom of contract might have been a good
basis for explaining court decisions in the early twentieth century, it
would have been a poor basis for predicting future developments of
contract law.
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Explanations can occur on at least two different levels. At the
first level, a theory might seek to increase understanding of how
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various court decisions fit together and how the law develops. Ex-
planations of this sort may be closely tied to the type of prediction
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discussed above. By classifying cases under various legal doctrines,

one can see how they fit together and predict how new cases will be
decided. However, insofar as explanations are based on past cases,
they might not be reliable guides to future decisions. Judges change
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their minds, new judges with different views are appointed, and the
law develops. Nonetheless, the doctrine of precedent works to
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preserve the same general rationale and pattern of decisions, so one

can often perceive developing trends and extrapolate them into the
future.
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Explanation can also be sought at a second level-that of under-

standing the role of contracts and contract law in society. While ex-
planations of the first level are likely to stick closely to the prin-
ciples enunciated by courts, explanations at this second level are
much less likely to do so. Instead, they are apt to draw on economic,
sociological, and historical perspectives. The terminology is likely to
be that of the social sciences. The explanations are likely to be by
causes rather than by reasons as on the first level. If one can iden-
tify underlying causes and trends, then predictions can be made.
However, because the explanations are by causes rather than
reasons, explanations of this second level are less likely than those
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of the first level to provide practicing lawyers persuasive arguments

to use in court.
A third function of contract theory is justification. The aim is
to justify contract decisions, doctrines, and principles. Because ex-
planations of human conduct often indicate its significance for in-
dividuals and society, justification can be closely tied to explanation.
Nonetheless, to explain is not to justify, so justification will often in-
volve indicating that elements of contract law are not the best and
should be revised or reformed. Some theorists assume that the bulk
of contract law must be justified; that any theory that implied the
bulk of contract law is unjustified must be mistaken. This approach
corresponds to a common approach to ethical theory in which the
aim is to formulate general principles that will account for and
systematize strongly held moral beliefs, such as that torture, lying,
and breaking promises are wrong. Here is not the place to discuss
the appropriateness of this method, but one should realize that with
it justification will only result in incremental revision. Radical
reform cannot be developed.
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Although the functions of prediction, explanation, and justifica-
IM
tion are often related to one another and most theories seek to
fulfill all three, they are not identical and can lead in opposite direc-
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tions. An explanation of a doctrine may indicate that it is simply not

justified. Moreover, explanation and prediction do not necessarily go
together. Consequently, one must determine which function is
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predominant in a theory one examines or constructs. Often, strong

disagreement between theories or their proponents stems from
unrecognized differences in emphasis on functions.
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THE QUESTIONS AND TRADITIONAL ANSWERS

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In a contract action, the plaintiff needs to show that there was

a contract imposing a duty to the plaintiff on the defendant, that the
defendant breached that duty, and that a particular legal response
(usually the payment of damages) is appropriate. Traditional con-
tract law had (and to some extent still has) several doctrines sur-
rounding each of these elements that often made it hard for plain-
tiffs to prove their cases. It is useful to briefly note them. Proving
the existence of a contract was (and is) often difficult. First, there
had to be an offer specifying all the major terms and acceptance of
that precise offer. If a business sent an offer on its printed form to
purchase 1000 widgets from another firm, which accepted the offer
on its printed form, a contract might not have existed. The accept-
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ance form would probably not have the identical conditions as the
original offer form. Second, the existence of a contract required con-
sideration -something provided in exchange for the promise. Stand-
ardly this might be paying money or a promise to do something in
return. Later the law came to also recognize detrimental reliance,
for example, taking a lost dog to its owner in response to an adver-
tisement offering to pay a reward for the dog's return.
Once a plaintiff establishes that a contract exists, the plaintiff
still has to prove that under the contract the defendant owed a duty
to him or her. Historically, courts were strongly inclined to restrict
duties to those expressly stated in the contract. The parol evidence
rule rarely permitted verbal evidence of promises not included in a
written document. Moreover, the doctrine of privity restricted
duties to the other parties to the contract. If a person bought an
item for another person to use, the seller had no duty to the second
person because that person was not a party to the contract. Over
time the courts have relaxed these stringent rules, often implying
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promises in contracts and making exceptions to the parol evidence
and privity rules.
IM
Generally, showing that the defendant breached the duty has
not been a major focus of court cases. It is often clear that the
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defendant did or did not do something, for example, complete con-

struction of a barn. The issue is most likely to be disputed when the
defendant's duty requires conduct meeting some standard, for exam-
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ple, supplying merchandise that is fit for normal use or building a

house that meets construction standards.
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Finally, the plaintiff must show that a certain legal response is

appropriate. The general principle is that contract damages should
place a plaintiff in the position he or she would have been in had the
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defendant performed as specified in the contract. The plaintiff is

supposed to receive his or her "expectation interest" - what the
plaintiff expected to make from the deal. Three important rules
have limited these damages. First, the plaintiff is required to miti-
gate damages by trying to secure substitute performance. Second,
damages are also limited to those the defendant should have fore-
seen as likely to result from his or her breach. Third, penal damages
are not awarded; the purpose of damages is simply to compensate
the plaintiff.
Courts do not generally award specific performance. By trial
time the performance would often not be of benefit to the plaintiff;
indeed, the rule requiring .plaintiffs to mitigate damages increases
the likelihood of this being so. In a few cases, courts will order
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specific performance, usually when something unique is involved,

such as the transfer of land or of a unique art object.
The traditional rules of contract law yielded haish results in
many situations. The difficulties of the parol evidence and privity
rules were mentioned above. Perhaps the most difficult aspect, and
one not yet fully resolved, stems from the concept of contractual
duties. If no contract exists, then no duty exists and contract law is
necessarily silent. For example, if because of mutual mistake no con-
tract exists, then a plaintiff has no contractual recourse no matter
how much he or she may have expended. The courts did and do in
fact usually provide remedies, but conceptually they are not con-
sidered to be in contract. On the other hand, if a contractual duty
does exist, then the defendant is liable for full contractual damages.
Today, however, courts often manage to provide lesser damages (the
plaintiff's reliance interest) if full damagesi would be inappropriate.
RECENT' THEORIES
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Although recent theories of contract law differ in the extent to
which they retain or coincide with traditional contract law, on the
IM
whole they find the extant contract law acceptable. The following
discussion emphasizes their conception of the purpose of contract
SH
behavior and law and briefly indicates some of' their implications for
answers to the three central questions: When does a contract exist
and impose a duty? What constitutes breach of a contract? What
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legal remedy is appropriate?
Agreement and Promise

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One type of recent contract theory takes agreement or promise

as the central element. This type of theory has a long history and
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many variations which cannot be considered here. The paper by

Gerald Fridman in this syposium sketches an agreement theory. The
primary purpose of contract law, he contends, is to enforce the
agreement of the parties. For there to be a contract, substantial
agreement must exist and the parties must have freely intended to
be legally bound. In interpreting contracts, courts are primarily try-
ing to carry out the intent of the parties. A breach occurs when one
party foils the intentions of the other party. The breaching party
can then be held to pay damages for consequences of the breach
that were foreseeable at the time the agreement was made. In
short, throughout, the purpose of contract law is to carry out the in-
tentions of the contractors, including the payment of damages in
case of failure to perform.
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A similar yet distinct view advanced by Charles Fried holds

that the purpose of contract law is to enforce promises. In making a
contract, one .invokes the practice or convention of promising, which
provides a way of getting others to trust one to perform in the
future. Once one has done so, it is wrong not to fulfill one's promise
for the reasons Kant gave, namely, it violates trust and exhibits
disrespect for the other person.' On this view, if things go awry and
no contract is made, then the promise principle does not provide a
basis for relief. Instead, other principles apply, such as the principle
of benefit which requires compensating others for non-gift benefits
received from them.' In general, expectation damages are ap-
propriate for breach of contract, because they provide the benefits
the plaintiff was promised.
Pill Ardal in his paper in this symposium presents an argu-
ment that, if correct, undermines Fried's account. Ardal contends
that no prima facie obligation to keep promises exists (thus under-
cutting the moral basis of Fried's promise principle). Promises are
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symbolic acts involving a commitment to the realization of what is
promised. As such, nothing inherent in them supports their being
kept. Whether promises should be kept depends on their content
IM
and the interests of the promisor and promisee. Moreover, implicit
promises, a favorite way for judges to achieve fair decisions, are not
SH
really promises at all. Ardal illustrates the implications of his view

by considering an actual case.
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The differences between Fridman's agreement and Fried's prom-

ise theories are subtle. As Fridman notes, on his view all contracts
involve promises, but not all promises imply contracts. Fried would
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agree. The central difference between them appears to concern what

makes contracts binding. On Fridman's view, it is the agreement (in-
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tention) of the parties to be legally bound. On Fried's view, promises

are morally binding and courts enforce some but not all of them to
maintain trust in society and the freedom of individuals to deter-
mine the major aspects of their lives.
The theories of Fridman and Fried are both close to traditional
contract law doctrines. That is, the terminology and statements are
close to those found in judicial opinions. Moreover, they both em-
phasize the freedom of people to make arrangements as they desire.
Indeed, Fried greatly emphasizes the importance of contract law in
enabling individuals to maximize their freedom by making specific
2. C. FRIED, supra note 1, at 17.

3. Id. at 25.
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arrangements for the future. Both views also confront the dif-
ficulties of traditional contract law when no contract is found to ex-
ist. Fried refers such problems to other parts of the law, such as
restitution.
In this respect, both views appear unable to explain much of
the law surrounding contracts. The inability to explain these mat-
ters within the framework of contract theory might not bother
Fried, for he does not appear to seek to explain as much as to
justify contract law. He claims to show that the promise principle is
the moral basis of contract law.' Although he also hopes to explain
contract law, he wants to explain it on a moral basis. Although Frid-
man appears to take prediction as primary, he is more concerned
with explanation than Fried is. Indeed, he might plausibly contend
that one advantage of his view over the promise view is that it can
explain more of contract law.
Economic Analysis
LA
In contrast to the agreement and promise theories, the economic
theory of contract law primarily emphasizes the explanatory func-
IM
tion of theory. Moreover, the aim is to explain contract law at the
second level. It is not strongly argued that the language of judicial
SH
opinions explicitly conforms to the theory, although it is often urged

that judicial language is not incompatible with it. Like the agree-
ment and promise theories, however, the economic theory takes the
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freedom to contract to be important. The freedom is not important

for the sake of the autonomy or freedom of individuals, but because
free exchange between individuals tends to maximize value. Value is
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determined by the free preferences of individuals, so if two persons

voluntarily arrange an exchange, say, money for goods, then both in-
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dividuals' preferences will be satisfied; both will get something more

valuable to them; and value will be maximized.
Thus, according to the economic theory the primary purpose of
contract law (indeed, all law) is to maximize value. The test for rules
of contractual liability is whether they "will create incentives for
value-maximizing conduct in the future.15 Thus, the requirement of
consideration for a contract is explained on the ground that without
it no exchange occurs (so value cannot be increased) or the courts
have no way of determining whether the transaction would max-
4. Id. at 1.
5. R. POSNER, ECONOMIC ANALYSIS OF LAW 68 (1977).
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imize value.6 The defenses of fraud and duress can also be explained
as rebutting the presumption that the exchange would maximize
value.' Finally, most of the traditional rules of damages can be ex-
plained as maximizing value.8 The plaintiff should receive expecta-
tion damages so that the defendant breaches only when he or she
can make enough from an alternative arrangement to compensate
the plaintiff. No penal damages are imposed because that would
discourage a person from breaching a contract when more value
could be realized by breach and compensation. Similarly, a plaintiff
should have a duty to mitigate damages, for otherwise resources
will be wasted, that is, not used to maximize value.
One would expect an economic theory to explain much of con-
tract law, for it is predominantly the law of the market. It has
become popular to challenge the economic theory as a justification
of contract and other law. Obviously, even if it does provide a good
second level explanation of contract law, this need not amount to a
justification of contract law. In particular, value maximization need
LA
not be one's only or even main concern. One might also be concerned
with equality of distribution. The expression "value maximization"
obscures an important point, namely, that the primary value in ques-
IM
tion is wealth. Other values are included only insofar as they are
part of the preferences of the parties to the exchange. And a
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preference for equality by a poor party to a projected exchange is

not likely to be reflected in the resulting bargain, say, in a lower
price. Consequently, while economic theory might fulfill the function
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of second level explanation reasonably well, it is not likely to fulfill

the function of justification well.
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A promise theory and an economic theory might differ with

respect to penal damages. If the purpose of contract law is to en-
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force promises, then it might be plausible to invoke penal damages

to encourage people to fulfill their promises. Fried does not discuss
penal damages, but he does support expectation damages when they
exceed reliance costs as taking persons and their assumptions of
obligations seriously.9 Penal damages might also be imposed, it
seems, to encourage trust and make people take their assumptions
of obligations seriously. However, while an economic theory sup-
ports expectation damages, it would never support penal damages,
because they would prevent value maximization.
6. Id. at 69-70.
7. Id. at 79-80.
8. Id. at 88-93.
9. C. FRIED, supra note 1, at 20-1.
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Relational Analysis
According to relational theory, economic analysis best applies
to a form of contract that is becoming less important in modern
society. Contracts occur along a spectrum of relations between peo-
ple, varying from quick, one time transactions between strangers at
one end (the purchase of gasoline at a distant independent station)
to indefinitely continuing relationships at the other (employment or
marriage). Although all contracts involve some more complex set of
relationships between the parties and contracts fall on a continuum,
frequently relational theorists speak of two contrasting types-dis-
crete transactions and relational contracts. Different goals are in-
volved in these two types of contracts and they involve different
norms. The elements of exchange and choice keep contract distinct
from tort law, which also deals with the relationships between peo-
ple.10
Ian Macneil has set out the different norms which he claims are
involved in these two types of contracts." Discrete transactions are
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governed by a norm calling for planning and bringing the future into
the present on the basis of consent. One might say that the discrete
IM
norm promotes abstractness; that is, it ignores the identities of the
parties and tries to eliminate temporal differences. In contrast, the
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relational norms promote concreteness by emphasizing role integrity

(which partly defines the parties), preservation of the relation
(rather than viewing it as a one time matter), harmonization or elim-
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ination of conflicts in the relation, and consideration of "supra-

contract" norms (noncontract norms that apply to the relationship).
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Elsewhere Macneil analyzes the values involved in the norms

for these types of contracts."2 He contends that relational analysis is
value neutral in the sense that different societies will instantiate the
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norms in their own social contexts. Thus, relational analysis does

not necessarily imply a commitment to liberalism. Instead, the
norms are ones that must generally be involved if exchange rela-
tions are to occur. Not each norm must be fully realized in each con-
tract, but in general practice these norms must be followed.
It thus becomes clear that relational analysis, like economic
analysis, emphasizes second level explanation. The norms are not
10. . MACNEIL, supra note 1, at 50.

11. Id. at 59-70.
12. Macneil, Values in Contract- Internal and External, 78 Nw. U.L. REV.
- (1983).
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capable of justifying contract law, because they are descriptive.

Although Macneil claims that the norms not only describe the way
people behave "but the way they ought to behave," at best they
describe how people think they ought to behave. 3 The norms are
hypothetical; if one wants to preserve relations, then one ought to
behave in such and such a manner. The norms describe "the
behavior that does occur in relations, must occur if relations are to
continue, and hence ought to occur so long as their continuance is
valued."" If one wants to end a relationship (employment, marriage),
then one need not be concerned to conform to the norms.
The relational theory is more of a framework for legal analysis
than a theory for a specific legal system. As. B. J. Reiter notes in
his paper in this symposium, it is like an engine waiting to be
powered. One must add the particular social relations of a society
before one can draw any particular conclusions. As such, relational
theory can explain exchange relations in any society. This is another
reason why it is incapable of providing justifications.
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In his paper in this symposium, Philip Mullock tries to provide
an alternative perspective on the same phenomena the relational
IM
theory addresses. He wants to look at relations from the point of
view of participants in them, which he calls a hermeneutical ap-
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proach. Mullock develops the concepts of conventional action and

conventions to explain exchange relations. Conventional action is
more inclusive than promising, so by implication Mullock also re-
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jects promise theories of contract law. Obligations can arise from

conventional actions without promises, although the obligations are
not as strong or inclusive as those arising from promises. Although
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Mullock does not develop the point in great detail, he notes that his
theory provides a basis for contractual damages that do not go to
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the full extent of expectation damages.
Reasonable Expectations
Another recent theory of contract law contends that "the fun-
damental purpose of contract law is the protection and promotion of
expectations reasonably created by contract."' 5 Because two parties
are involved, only those expectations of which the other party was
or should have been aware are to be protected.' On such a theory,
13. I. MACNEIL, supra note 1, at 38.

14. Id. at 64; see also id. at 59.
15. Reiter & Swan, Contracts and the Protection of Reasonable Expectations,
in STUDIES IN CONTRACT LAW 6 (B. Reiter & J. Swan eds. 1980).
16. Id. at 7.
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the existence of a contract itself may become a secondary considera-

tion, for the primary one will be to protect and promote reasonable
expectations arising out of relations. (Thus, the theory is closely con-
nected to the relational theory.) The existence of a traditional con-
tract is only one factor to consider in deciding to impose liability,
and then only because it affects reasonable reliance and expecta-
tions. A person should be held liable when that person should
realize that another might reasonably rely to his or her detriment or
entertain reasonable expectations on the basis of the first person's
conduct. 7 Thus, tort and contract law tend to merge. Traditional
contracts only establish or acknowledge relations from which
reasonable reliance and expectations arise.
In his paper in this symposium, Reiter explores the significance
of a requirement of good faith for contract theory. He argues that
an adequate theory will be two-tiered, that is, have some very
general principles at one level and more specific principles at a
lower level. Contracts derive their binding force or moral justifica-
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tion from community views. Moreover, contract law cannot be sharp-
ly separated from other areas of law. Reiter then explores the im-
portance of these and other points for Fried's view of contract as
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promise.
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The crux of a reasonable expectations theory is how one deter-

mines what expectations and reliance are reasonable. Cases often in-
volve differing expectations of the parties, and courts must decide
which set to enforce. Thus, one needs a method to determine which
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expectations are reasonable or justified. 8 The usual approach, which

Reiter adopts, is to look to express commitments in contracts, clear
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implications from the wording of the contract, or the general prac-

tice in such activities. Although contractors can mutually recognize
almost any obligations by their contractual promises, in the final
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analysis even the expectations and reliance arising from them de-
pend on accepted norms requiring the fulfillment of promises. Conse-
quently, the ultimate standards for reasonable expectations and
reliance are accepted community norms.
The question then arises whether such a theory can have a
justificatory function. Particular legal decisions and doctrines can be
justified by reference to the agreement of the parties to the con-
tract and accepted social norms (including holding people to the ar-
17. Reiter, Contracts, Torts, Relations and Reliance in STUDIES IN CONTRACT

LAW 242 (B. Reiter & J. Swan eds. 1980).
18. P. ATIYAH, supra note 1, at 67-8.
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rangements they accept). However, can one justify the accepted

social norms? Obviously, any such justification is apt to be complex.
One is apt to have a form of positivism, namely, the function of law
is to provide fair and just enforcement of certain social norms,
whatever they might be, in order to promote a smoothly functioning
society (or whatever). This type of justification differs significantly
from Fried's argument for the promise principle, for Fried claims
that the promise principle is justified for any society.
Another potential difficulty for the reasonable expectations
theory is that expectations and reliance appear to point to different
contract damages. In a classic paper, Lon Fuller and William Perdue
-argued that reliance can be the basis for justifying damages yet ex-
pectation be the basis for determining the amount of damages.'9
Essentially, in contracting with one party a person relies on that
person and forgoes opportunities to contract with others. In the
final paper in this symposium, Richard Bronaugh examines the
possible import of lost opportunities for contract damages. In par-
LA
ticular, he criticizes the Fuller and Perdue argument. One cannot,
Bronaugh argues, rely on a promise by the other party in contract
formation, for no promise exists until the offer has been accepted.
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Thus, one cannot rely on a promise in accepting the offer.
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CONCLUSION
What, if anything, hinges on these different theories. As the

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discussion of the functions of theory sought to indicate, they will

agree about the solution to many contract cases. If P orders 1000
widgets from D but D ships only 500, then P is entitled to expecta-
PN
tion damages. This result ensues whether one argues on the basis of
agreement, promise, economic value maximization, relational theory,
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or reasonable expectations. Similarly, they all imply that if D enters

a contract under duress, D need not perform. The core and clear
cases of contract law will likely remain untouched no matter which
of these theories one adopts.
This does not mean that the theories imply the same solutions
in all cases. Significant differences arise in borderline cases. For ex-
ample, they might not provide the same solution to a case of mutual
mistake as in Sherwood v. Walker.'° In that case, Walker sold Sher-
wood a presumably barren cow, but the cow turned out to be fertile
19. Fuller & Perdue, The Reliance Interest in Contract, 46 YALE L.J. 52
(1936).
20. 66 Mich. 568, 33 N.W. 919 (1887).
19831 PERSPECTIVES ON CONTRACT
and worth much more than the contract price. Walker thereupon
refused to deliver the cow to Sherwood. Fried considers mutual mis-
take to vitiate the contract." An economic analysis, however, would
be concerned to allocate the risks that the cow is fertile so as to
maximize value; the seller should probably assume the risk of a bar-
ren cow being fertile because the seller is in a better position to
know.' A reasonable expectations approach would probably come to
the same conclusion for essentially the same reasons.'
In other cases, the economic and reasonable expectations
theories might differ. For example, the economic theory would imply
warranties only if the seller could most cheaply detect and provide
for the eventuality. However, community expectations might not be
the most efficient; that is, the community might well expect a party
to assume liability even if that party is not in the best position to do
so efficiently. To the extent a reasonable expectations theory
evaluates reasonableness by community standards and they are not
the most efficient, it will differ from the economic theory. At this
LA
point it is tempting for a reasonable: expectations theorist to argue
that community expectations are not reasonable. If one makes that
IM
argument, then it is not accepted community norms that ultimately
count, but some notion of reasonableness that is independent of com-
SH
munity norms'. This will greatly change the type of justification such
a theory can provide for contract law. It then becomes less culturally
relative and more of the sort Fried attempts to provide.
LU
At this point, one must return to the functions of a contract

theory. The crucial question is what one wants a theory for. Until
PN
one becomes clear what one wants a theory to do, arguments for
and against one or the other are often confused and misplaced. For
example, if one wants a theory to provide a moral justification of
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contract law, then criticisms that Fried's promise theory does not
comprehend as much of contract behavior as does Macneil's rela-
tional theory are simply misplaced. Similarly, if one wants a theory
to explain the role of contract behavior in society, arguments that
Macneil's relational theory does not provide an adequate justifica-
tion are irrelevant. Many theorists hope to provide a theory that
fulfills all three functions, but there is no a priori reason to believe
this is possible. Indeed, unless one assumes that the law is always as
good as possible, it is a priori implausible that a theory that pro-
21. C. FRIED, supra note 1, at 59.

22. R. POSNER, supra note 5, at 73-4.
23. Swan, The Allocation of Risk in the Analysis of Mistake and Frustration,
in STUDIES IN CONTRACT LAW 201-04 (B. Reiter & J. Swan eds. 1980).
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vides an adequate explanation will also provide a satisfactory

justification.
Does this mean that several theories can be correct? Yes, it
does, but "correct" is relative to purposes - a correct prediction, a
correct explanation, or a correct justification. Nor can one clearly
argue that one function has precedence over the others. Unless it is
justified, the law is an ass. But any justification that ignores how
the law functions in society at both the general level and as perceived
by participants in the legal system (judges and lawyers) will be ir-
relevant to society and merely an ass of another color. Thus, an ade-
quate justificatory theory must rest upon an adequate explanatory
one. But if one wants to promote the well-being of citizens, one will
need a justificatory theory to know that one is doing good, not
harm. In this sense, and this sense only, the justificatory function of
legal theory is primary.
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04_RODL_BP (DO NOT DELETE) 8/5/2013 12:25 AM
CONTRACTUAL FREEDOM,
CONTRACTUAL JUSTICE, AND
CONTRACT LAW (THEORY)
FLORIAN RÖDL*
I
INTRODUCTION
The current symposium, “The Public Dimension of Contract,” has been
gathered under the promising subheading of “legal theories in dialogue.” It thus
might be useful to begin with a few remarks about my general approach to the
“theory of private law,” which informs the questions and answers provided in
this article. The theoretical project to which the article is committed is neither
sociological, cultural, nor economic. It is philosophical. As a philosophical
project, its first aim is to understand, in the sense of hermeneutical
understanding. Generally speaking, such hermeneutical understanding has its
focus on concepts with which we are dealing every day in an unproblematic
LA 1
way, but which become puzzling if we try to make them explicit. Time is the
famous example of such an apparently unproblematic concept; truth and justice
are others. Contract is a concept of the same sort. One eminent task of the
IM
theory of private law is to illuminate this concept, to help us understand what a

contract is and why contract law is therefore the way it is. The focus of such a
SH
project of illumination is certainly not on this or that particular contract rule or

2
on this or that area of contracting; its focus is on the basic structure of contract.
In short, this article is directed at better understanding the basic structure of
contract law.
LU
Of course, there are not only other projects in private law theory—for
example sociological, cultural, and economics projects—but also alternative
PN
3
philosophical projects, most notably projects of critique or deconstruction.
However, these projects presuppose an understanding of what is submitted to
H
Copyright © 2013 by Florian Rödl.

This article is also available at http://lcp.law.duke.edu/.
* Research Group Director, Cluster of Excellence “The Formation of Normative Orders,”
Johann Wolfgang Goethe-Universität, Frankfurt am Main.
1. See LUDWIG WITTGENSTEIN, PHILOSOPHICAL INVESTIGATIONS 46–47 (P.M.S. Hacker &
Joachim Schulte eds. & trans., 4th ed. 2009). For the particular case of jurisprudence, see Michael
Oakeshott, The Concept of a Philosophical Jurisprudence, 3 POLITICA 203, 346 (1938).
2. Or “form,” as Ernest Weinrib says. See ERNEST WEINRIB, THE IDEA OF PRIVATE LAW 25
(1995).
3. For critical projects, see EVGENY B. PASHUKANIS, THE GENERAL THEORY OF LAW AND
MARXISM (Barbara Einhorn trans., 2001) and MAX HORKHEIMER & THEODOR W. ADORNO,
DIALECTIC OF ENLIGHTENMENT (Edmund Jephcott trans., 2007). For deconstructive projects, see
Jacques Derrida, Force de Loi: “Fondement Mystique de l’Autorité,” 11 CARDOZO L. REV. 920 (1990).

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58 OF CONTRACT-I B.A./B.B.A. LL.B [Vol.
LAW AND CONTEMPORARY PROBLEMS - II Semester
76:57
critique or deconstruction. Any philosophical theory, including critical or

deconstructivist theories, must start (and actually does, though sometimes
implicitly) first and foremost with an understanding of contract law—with an
idea of what a contract is and why contract law is therefore the way it is.
It might be helpful to present a contrasting example to the philosophical
approach taken here. Law and economics provides such an example. Law and
economics scholars usually seem to claim that they are able to explain the basic
4
structure of private law in general and of contract law in particular. One
eminent puzzle for contract law theory in general is why contract law, all over
the world, usually gives expectation remedies—either specific performance or
expectation damages—instead of reliance damages in case of breach of
5
contract. Hence a theory which claims to illuminate basic features of contract
law must solve this puzzle.
The law and economics approach is well known for its “efficient breach” of
6
contract theory. The theory says that remedies for breach of contract must be
designed in a way to make sure that contracts are only breached if breach is
efficient. And this is meant to explain the award of expectation damages, as
reliance damages would allow for inefficient breach. Only expectation damages
secure that the promisor will breach only for a better bargain, that is, to vend an
item for a higher price. Only a better bargain makes the promisor still better off,
LA
even though he pays expectation damages to the promisee. The award of
reliance damages, in contrast, would invite breach for bargains which are not
better but worse, in particular in the case of a promise not relied upon. The
IM
problem with this account is that it is over-inclusive. The account based on

“efficient breach” is over-inclusive because it explains too much. Let us take it
SH
for granted that it would explain expectation remedies. But the same argument
would hold that conversion should be treated just the same way as breach of
7
contract. If the original promisor happens to find a better bargain, but after the
execution of the contract including transfer of property, he may convert and
LU
keep the surplus from the better bargain, if he repays the original purchasing
price. The problem is, however, that the law does not comply. In the case of
PN
breach, the breaching party is allowed to keep the gain that exceeds expectation
damages; in conversion, the converting party has to confer the whole bargain to
the former proprietor.
H
If law and economics cannot explain this difference, it has not explained
expectation remedies. And given that law and economics is unable to explain
expectation damages, it is doubtful that it will be able to provide insight into
4. See, e.g., Richard A. Posner, Some Uses and Abuses of Economics in Law, 46 U. CHI. L. REV.
281 (1979); Charles J. Goetz & Robert E. Scott, Enforcing Promises: An Examination of the Basis of
Contract, 89 YALE L.J. 1261 (1980).
5. L. L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages, 46 YALE L.J.
52, 57–66 (1936).
6. For an authoritative statement, see RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 151
(8th ed. 2011).
7. See Daniel Friedmann, The Efficient Breach Fallacy, 18 J. LEGAL STUD. 1, 4–6 (1989).

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59
any other element of the basic structure of contract law. Therefore, for the
purpose of a theory of private law as a hermeneutical enterprise, law and
economics is not a very promising candidate.
Against this methodological background, it is the aim of this article to
illuminate, in the sense just described, the relation between contractual freedom
and contractual justice. The claim is, in a nutshell, that contract law requires
that contractual freedom be exercised in line with the rule of contractual justice.
Conceptual restriction of contractual freedom was and still is also the aim of
other approaches to contract law, which may be labelled “social” or “mixed.”
Section II will briefly explain why these approaches fail as hermeneutical
projects. Section III, then, will show that contract law does not confer boundless
freedom to enter into any contract. Instead, each and every contract is, by law,
subject to the rule of contractual justice, which includes the idea of a fair price.
Usually, scholars are puzzled to hear about the idea of a fair price and wonder
how it can be determined. For this reason, section IV explains why the law
takes the competitive market price to be fair: it is an instance of common usage
that is also more generally a source to determine what is required by
contractual justice.
II
LA
LIBERAL, SOCIAL, AND MIXED UNDERSTANDINGS OF CONTRACT LAW
The social approach to understanding contract law was motivated by the
IM
ever-growing body of contract rules that placed limits on the freedom of

8
contracting, mostly to prevent a stronger party from exploiting a weaker party.
From the social approach’s perspective, the traditional liberal approach had
SH
proved incapable of coping conceptually with these developments. It had

proven incapable of integrating them into its illumination of the basic structure
of contract law. The liberal approach combines individual autonomy and
LU
corrective justice as the two general principles of contract law which illuminate
its structure and its basic rules. The eminent example is still Charles Fried’s
9 10
Contract as Promise from 1981. To characterize the idea in a nutshell,
PN
contracting means exercising one’s freedom, and the law, generally made to
enable and to protect human freedom, makes such exercises effective. That is
why contractual autonomy is at the core of this understanding of contract law.
H
Moreover, if contracts are concluded, legal consequences of delayed

performance, mal-performance, or nonperformance are governed by the
principle of corrective justice. This means, generally speaking, a party who
8. See FRANZ WIEACKER, PRIVATRECHTSGESCHICHTE DER NEUZEIT UNTER BESONDERER

BERÜCKSICHTIGUNG DER DEUTSCHEN ENTWICKLUNG 539–43 (2d ed. 1967). For a detailed account in
German law, see Claus-Wilhelm Canaris, Wandlungen des Schuldvertragsrechts—Tendenzen zu seiner
“Materialisierung,” 200 ARCHIV FÜR DIE CIVILISTISCHE PRAXIS 273 (2000). See also PATRICK S.
ATIYAH, THE RISE AND FALL OF FREEDOM OF CONTRACT 729–64 (1979).
9. See CHARLES FRIED, CONTRACT AS PROMISE (1981).
10. See id. at 7–13.

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76:57
wrongs the other party has to compensate the loss resulting from the wrong.
This general principle is, of course, elaborated in a manifold of rules for
different types of contracts and different types of wrongs.
Originally, scholars attempted to articulate the counter position of the social
justice approach as a full alternative. The most prominent attempt was made by
11
Anthony Kronman in 1980. He argued that contract law is one viable tool to
achieve distributive justice, just as tax law is. However, Kronman’s attempt
failed very early in the logic of his argument, mainly because he did not manage
12
to articulate an idea of distributive justice at all. Instead, Kronman’s yardstick
is wealth, though not in the sense of general welfare, but in the sense of each
13
and every individual’s wealth. In the upshot, Kronman’s shortcomings are
14
similar to those of law and economics.
Today, the social justice approach presents itself usually not as a full
15
alternative, but as a complementary correction of the liberal approach.
Although it is accepted as indispensable for some features of contract law, the
liberal approach, with its two principles, is considered too narrow to cover all
relevant parts of contract law. It is also criticized as too narrow from a
normative point of view, as it is interested only in the formal freedom of
property owners and contractors, not in the substantive freedom of human
beings, which depends in large part on notions of distributive justice in judicial
LA
holdings.
The social approach today thus leads to a picture where contract law rules
IM
cannot be illuminated from a single perspective, either liberal or social. Instead,

contract law rules can only be understood as emanating from a concurring
influence of both approaches. It is a version of a mixed approach to contract
SH
law. Most contract law theorists today subscribe to some version of a mixed
16
approach.
Usually, mixed approaches claim that most rules of contract law are to be
LU
understood as being derived from concurring and logically independent

principles. However, it seems very much unlikely that the law-generative
PN
11. See Anthony T. Kronman, Contract Law and Distributive Justice, 89 YALE L.J. 472 (1980). For
a recent defense, see Daphne Lewinsohn-Zamir, In Defense of Redistribution Through Private Law, 91
MINN. L. REV. 326 (2006).
H
12. The argument is from Tugendhat and was directed to Rawls. See ERNST TUGENDHAT,
VORLESUNGEN ÜBER ETHIK 385 (1993).
13. See Kronman, supra note 12, at 481–91.
14. For a detailed criticism, see Peter Benson, Abstract Right and the Possibility of a
Nondistributive Conception of Contract: Hegel and Contemporary Contract Theory, 10 CARDOZO L.
REV. 1077, 1119–47 (1989).
15. Thomas Wilhelmsson, Questions for a Critical Contract Law—And a Contradictory Answer:
Contract as Social Cooperation, in PERSPECTIVES OF CRITICAL CONTRACT LAW 9, 30–34 (Thomas
Wilhelmsson ed., 1993); BRIGITTA LURGER, GRUNDFRAGEN DER VEREINHEITLICHUNG DES
VERTRAGSRECHTS IN DER EUROPÄISCHEN UNION 457–69 (2002).
16. Eminent examples are Richard Craswell, Contract Law, Default Rules, and the Philosophy of
Promising, 88 MICH. L. REV. 489 (1989); Melvin Eisenberg, The Theory of Contracts, in THE THEORY
OF CONTRACT LAW 206 (Peter Benson ed., 2001); and WILLIAM LUCY, PHILOSOPHY OF PRIVATE
LAW (2007).

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No.OF CONTRACT-I
61
cooperation of different principles can be depicted other than by invoking an

17
idea of juridical balancing, or, in the language of Critical Legal Studies, an idea
18
of contestation. If it is indeed true, as is supposed here, that there is functional
equivalence of balancing and contestation, then a mixed approach cannot be a
viable version of, but rather an alternative to, the enterprise of understanding
the basic structure of contract law. It is the alternative to which we must indeed
turn if—but only if—the attempt to understand the basic structure of contract
law definitely fails.
As discussed above, one motive for the elaboration of the social (and
mixed) approach was and still is the ever-growing body of restrictions on
contractual freedom, made for the most part in order to protect a weaker party
from unfair contracts. Therefore, if an attempt at understanding is to avoid the
idea of balancing and contestation, it must reconcile the idea of contractual
freedom and contractual justice in a way that, on the one hand, represents a
coherent understanding of the basic structure of contract law and, on the other
hand, illuminates contract law in its modern version.
III
CONTRACTUAL JUSTICE AND CONTRACTUAL FREEDOM
LA
A. Three Options
There are three conceptual ways to reconcile contractual freedom and
19 20
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justice. The first option, which has been the view of Werner Flume, a German
scholar of highest authority in private law, can be called the procedural
understanding of contractual freedom. According to the procedural
SH
understanding, the concept of fairness does not apply to the substance of a

contract. It can only apply to the procedure of contracting. Whatever the
outcome of a fair procedure of contract formation, we will not be able to judge
21
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the contract upon the substantive fairness of its terms. The fair procedure of
contract formation is then represented as contractual freedom, that is, the
freedom to choose the other party, the subject matter, the consideration due,
PN
and the other terms of a contract. As a procedural principle of justice in

H
17. See, e.g., Eisenberg, supra note 16, 243–44. For the alternative attempt of a “ranking” of
values, see LUCY, supra note 16, at 382–87, 401–03.
18. See generally DUNCAN KENNEDY, A Left Phenomenological Alternative to the Hart/Kelsen
Theory of Legal Interpretation, in LEGAL REASONING: COLLECTED ESSAYS 153 (Gianni Vattimo &
Santiago Zabala eds., 2008); Duncan Kennedy, Form and Substance in Private Law Adjudication, 89
HARV. L. REV. 1685 (1976); Roberto Mangabeira Unger, The Critical Legal Studies Movement, 96
HARV. L. REV. 561, 625–33 (1983).
19. See Hugh Collins, Distributive Justice Through Contracts, 45 CURRENT LEGAL PROBS. 49, 58–
63 (1992).
20. See WERNER FLUME, ALLGEMEINER TEIL DES BÜRGERLICHEN RECHTS: ZWEITER BAND:
DAS RECHTSGESCHÄFT (4th ed. 1992).
21. Id. at 8; see also Richard A. Epstein, Unconscionability: A Critical Reappraisal, 18 J.L. &
ECON. 293 (1975) (taking a similar position as Flume).

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contract formation, contractual freedom includes not only voluntariness of each

22
party’s consent, but also, arguably, equal bargaining power.
The second option might be called the instrumental understanding of
contractual freedom. According to this view, which is held by Karl Larenz, a
German scholar of similar high standing as Flume, contractual freedom is an
23
exceptionally reliable tool for reaching fair terms in contractual exchange.
Also in this version, contractual freedom includes the idea of equal bargaining
24
power. In contrast to the procedural understanding, the instrumental
understanding does not deny the conceptual possibility that the substance of a
contract can be judged with regard to its fairness. However, the law refrains
from correcting the substantive unfairness of a contract if the favorable
procedural conditions—that is, contractual freedom including equal bargaining
25
power—are met.
The alternative to both of these options is that contractual freedom only
allows for the conclusion of fair contracts. Contractual freedom does not cover
unfair contracts. There is no tension between the two concepts of contractual
freedom and contractual justice because contractual freedom can only be
exercised in voluntary agreements with fair terms. Unfair contracts cannot be
claimed valid by appealing to contractual freedom.
26
This alternative has been developed by James Gordley on Aristotelian
27
LA
grounds and by Peter Benson on Hegelian grounds. However, their
philosophical arguments will not be explored here. Instead this article will ask
IM
which of the three conceptual options best reflects the law of contracts. The
argument presented here will be developed with reference to German
jurisdiction, while complementary references to the common law will be given
SH
in the annotations.
B. Contractual Justice in Contract Law

LU
First, the rule of contractual justice regarding auxiliary terms will be

discussed, followed by its role regarding the more difficult issue of the just price.
Terminologically, however, it should be noted at this point that, in what follows,
PN
“fairness” is taken to express nothing different from “justice.”

H
22. FLUME, supra note 20, at 10. Epstein, however, rejects this defense. See Epstein, supra note 21,
at 297.
23. See KARL LARENZ, LEHRBUCH DES SCHULDRECHTS: BAND I: ALLGEMEINER TEIL 76–79
(1987). The same position is reported by Stephen A. Smith, In Defence of Substantive Fairness, 112
L.Q. REV. 138, 156 (1996). Though not fully explicit, Spencer Thal seems to adopt a similar view. See
Spencer Nathan Thal, The Inequality of Bargaining Power Doctrine: The Problem of Defining
Contractual Unfairness, 8 OXFORD J. LEGAL STUD. 17 (1988).
24. LARENZ, supra note 23, at 78; KARL LARENZ, ALLGEMEINER TEIL DES DEUTSCHEN
BÜRGERLICHEN RECHTS 46 (7th ed. 1989).
25. LARENZ, supra note 23, at 79; LARENZ, supra note 24, at 46.
26. See James Gordley, Equality in Exchange, 69 CALIF. L. REV. 1587 (1981).
27. See Peter Benson, The Unity of Contract Law, in THE THEORY OF CONTRACT LAW 118 (Peter
Benson ed., 2001).

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No.OF CONTRACT-I
63
1. Auxiliary Terms
What, then, is the conceptual relation between the fairness of auxiliary
terms and contractual freedom as it is represented by the law?
Two cases must be differentiated. The first case is the filling of gaps in
contracts. The aspect of gap filling refers to the situation where the parties have
agreed on some issues, including the main performance, but have not dealt with
problems that may occur during performance, for example, delayed
performance, impossibility, or other ways of breach. As we all know, contract
law provides default rules to fill in the gaps that have been left by the parties’
28
agreement. This is true no matter if the parties are of equal bargaining power.
Default rules apply if the parties have not agreed on relevant rules. They are
29
articulated by the courts or by the legislature. The question with regard to
contractual fairness and contractual freedom is, then, as follows: How are these
default rules to be understood? More precisely, what is the normative idea that
guides the articulation of default rules?
There is one old answer that tried to link the operation of setting default
rules with contractual freedom. Savigny suggested that the court or the
legislature try to determine a hypothetical agreement on the respective issues by
30
the contracting parties. The problem is that this answer does not actually help
to reveal what is guiding the making of default rules because one does not know
LA
what the parties would have agreed on ex post, and the parties’ views on the
matter will diverge. Nor does it help to refer to what reasonable and honest
31
IM
parties would agree on if they were acting in place of the actual parties. What
do the rules to which reasonable and honest parties would typically agree
actually look like? To get some guidance out of the formula, one has to push it
SH
further: rules to be hypothetically agreed upon by reasonable and honest parties

must achieve a fair balance of the typical interests involved. This is a much
better answer. A shorter version reads: default rules provide for fair terms of
32
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contract. Of course, it is not wrong to suggest that reasonable and honest

parties would hypothetically agree to fair terms of contract. But it is wrong to
think that this additional comment would help to determine the content of the
PN
H
28. See KARL LARENZ & MANFRED WOLF, ALLGEMEINER TEIL DES BÜRGERLICHEN RECHTS
69 (9th ed. 2004); see also Craswell, supra note 16.
29. In the terminology of the German system, legislative rules are “dispositives Gesetzesrecht,” and
the courts’ rules are generated by “ergänzende Vertragsauslegung.” The function is the same.
30. FRIEDRICH CARL V. SAVIGNY, SYSTEM DES HEUTIGEN RÖMISCHEN RECHTS: ERSTER BAND
57–58 (1840); see also BERNHARD WINDSCHEID & THEODOR KIPP, LEHRBUCH DES
PANDEKTENRECHTS 450 (Theodor Kipp ed., 9th ed. 1906). The locus classicus in common law is Globe
Ref. Co. v. Landa Cotton Oil Co., 190 U.S. 540 (1903). See also Todd D. Rakoff, The Implied Terms of
Contracts: Of ‘Default Rules’ and ‘Situation Sense,’ in GOOD FAITH AND FAULT IN CONTRACT LAW
191, 192 (Jack Beatson & Daniel Friedmann eds., 1997).
31. See LARENZ, supra note 23, at 79.
32. See also RESTATEMENT (SECOND) OF CONTRACTS § 204 cmt. d (1981) (“But where there is in
fact no agreement, the court should supply a term which comports with community standards of
fairness and policy rather than analyze a hypothetical model of the bargaining process.”).

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33
fair terms. As a matter of fact, it does not contribute anything to the
understanding of what courts or legislators try to achieve in setting default
rules, besides perhaps emphasizing that the idea of fairness in question is
exclusively focused on the bipolar relationship between the two parties to the
contract.
It is important to repeat that default rules apply also to gaps that have been
left in contracts by parties of equal bargaining power. This implies that the law
presupposes and applies the idea of fairness to contracts concluded among
equals. This is exactly what the procedural understanding of contractual
34
freedom must deny as being conceptually impossible. It can therefore be
noted, already at this point, that the procedural understanding of contractual
justice does not reflect the law regarding auxiliary terms.
The second case to be differentiated is one where no question arises
between the parties due to a gap in the contract, but nevertheless a dispute
arises about the contractual rights and obligations. If the instrumental
understanding of contractual freedom were true and the law placed full
confidence in contractual freedom to generate fair terms when that freedom is
exercised between equals, then the law should enforce completed contracts
among equals as they stand. But this is not the case. The law does submit the
35
terms of contract to the standard of substantive fairness. In German law, the
LA
idea of substantive fairness is represented in section 242 of the Bürgerliches
36
Gesetzbuch (BGB). The terminology is slightly different—the rule says “Treu
37
und Glauben” instead of substantive fairness—but this makes no difference in
IM
substance. BGB section 242 submits each and every contract to a substantive
control of the fairness of its auxiliary terms. The common will of the parties, as
SH
given under the objective test, is corrected if the content is found to be unfair.
This applies also to cases where the parties are of equal bargaining power.
LU
33. In the same vein, see LORENZ KÄHLER, BEGRIFF UND RECHTFERTIGUNG ABDINGBAREN
PN
RECHTS 116 (2012). The opposite view is held by Larenz’s academic follower Claus-Wilhelm Canaris.
See Canaris, supra note 8, at 285.
34. In Flume’s account, default rules are a result of completive interpretation (ergänzende
Auslegung), a way of interpretation that is, he emphasizes, “normative.” See FLUME, supra note 20, at
H
321–23. But he does not explain the guiding idea for this normativity.
35. For an overview in English, see Reinhard Zimmermann & Simon Whittaker, Good Faith in
European Contract Law: Surveying the Legal Landscape, in GOOD FAITH IN EUROPEAN CONTRACT
LAW 7, 18. (Reinhard Zimmermann & Simon Whittaker eds., 2000) and Werner F. Ebke & Bettina M.
Steinhauer, The Doctrine of Good Faith in German Contract Law, in GOOD FAITH AND FAULT IN
CONTRACT LAW 171–90 (Jack Beatson & Daniel Friedmann eds., 1995). The concept of good faith, as
expressed in RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981), seems narrower, because its focus
is on performance and enforcement of a contract. However, similar results are reached by other
complementary doctrines. See Robert S. Summers, The Conceptualisation of Good Faith in American
Contract Law: A General Account, in GOOD FAITH IN EUROPEAN CONTRACT LAW 118 (Reinhard
Zimmermann & Simon Whittaker eds., 2000).
36. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], Aug. 18, 1896, BUNDESGESETZBLATT
[BGBL.] 134, § 242 (Ger.).
37. “Good faith” in English.

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Of course, such a statement about the functioning of BGB section 242 is

only rarely found in the German literature. This literature is, instead,
38
preoccupied with grouping apparently singular cases, hardly without taking
them for instantiations of the general rule of contractual justice or fairness.
However, this is the idea that indeed unites the singular cases as applications of
the requirement of “Treu und Glauben.” Why, for example, although not
specified in the contract, does delivery at three o’clock in the morning not count
as contractual performance? The reason is that it would not be fair.
Certainly, one could contend that this line of argument might prove that all
cases subject to correction under BGB section 242 are united under the idea of
contractual fairness, but that it does not prove that all cases of contractual
unfairness are covered by BGB section 242. But this contention implies that it
would be possible to articulate a dividing line between cases of contractual
unfairness that are subject to BGB section 242 and cases that are not subject to
it. This articulation would then represent the actual uniting idea of BGB section
242. But such a dividing line does not exist. In consequence, to claim that not all
cases of contractual injustice are subject to BGB section 242 is unfounded. This
remains true even if such a claim could be proven to reflect the practice of the
courts.
As a result, it can be stated that, indeed, each and every term of contract is,
LA
via the requirement of good faith (or similar doctrines), submitted to the rule of
contractual justice. This is true also among parties with equal bargaining
powers. Hence, the law does not actually place full confidence in the contractual
IM
deliberations between equal partners to generate fair terms. It must be

concluded, thus, that the instrumental understanding of contractual freedom
SH
does not reflect the law either, at least with regard to auxiliary terms.
The alternative, saying that contractual freedom only allows the concluding
of fair contracts, is fully coherent with the law as it stands: in cases of
LU
uncompleted contracts, the law helps with providing fair terms; in the case of
completed contracts regarding a certain dispute between the parties, the law
corrects unfair terms.
PN
2. Fair Price
Turning to the issue of a fair price, the question is, again, which of the three
H
conceptual options to understand the conceptual relation of contractual

freedom and contractual fairness best reflects the law as it is.
The shortcoming of the procedural understanding, which denies a
conceptual applicability of fairness to the agreement on the price, is rather
obvious. Contract law actually presupposes an idea of fair price. It is present not
39
in the doctrine of consideration, but in a separate doctrine in general contract
38. For representative literature, see STAUDINGER, KOMMENTAR ZUM BÜRGERLICHEN

GESETZBUCH § 242, ¶¶ 211–320, 403–1187 (2009).
39. See RESTATEMENT (SECOND) OF CONTRACTS, § 79 (1981).

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40
law—the doctrine of unconscionability. BGB section 138, paragraph two says
that “a legal transaction is void by which a person, by exploiting the
predicament, inexperience, lack of sound judgement or considerable weakness
of will of another, causes himself or a third party, in exchange for an act of
performance, to be promised or granted pecuniary advantages which are clearly
41
disproportionate to the performance.” Hence, for each and every contract, the
provision asks whether promise and consideration are clearly disproportionate.
Given that the regular form of consideration is money, a disproportionate
consideration is nothing different from an unfair price. Hence, the conceptual
applicability of the doctrine is not restricted to contracts concluded by unequal
42
parties. From this we must infer that the law represents the concept of a fair
price as applicable to each and every contract, including contracts among
equals. We must, therefore, note that the procedural understanding that denies
even such conceptual application does not reflect the law, not only with regard
to auxiliary terms but with regard to the price as well.
But what about the instrumental understanding of contractual freedom:
does it not reflect unconscionability? As can be inferred from BGB section 138,
paragraph two, an unfair price will induce correcting effects by the law only if
further conditions are met (and to ease the presentation, they can be lumped
together in the general concept of unequal bargaining power). According to the
LA
view committed to the instrumentalist understanding of contractual freedom,
equal bargaining power is the precondition to the functioning of contractual
43
freedom with regard to the fairness of exchange. Hence, if the procedural
IM
condition is not met, fairness must be imposed on the parties. But if the
procedural condition is met, then the law, although it might find a price unfair,
SH
refrains from imposing a fair price. This view seems perfectly in line with the
doctrine of unconscionability as expressed in BGB section 138, paragraph two,
as, under that section, the law indeed judges the fairness of the price, but
refrains from correction, if bargaining power is equal.
LU
The problem with this view is that, although it seems to reflect exactly the
operation of the law, it has difficulties selling this operation as coherent. The
PN
puzzling consequence of this view is that the law enforces a contract even
though it is aware that it is unfair. And it does so only because the procedural
condition of equal bargaining power is met. To explain such operation,
H
contractual freedom, if exercised among equals, has to be given additional

significance. The significance must come from something other than its
instrumental role in contractual fairness. General observations regarding what
40. See RESTATEMENT (SECOND) OF CONTRACTS, § 208 (1981).

[BGBL.] 134, § 138, para. 2 (Ger.).
42. For an elaboration of the argument, see Smith, supra note 23, at 142–44. See also JAMES
GORDLEY, FOUNDATIONS OF PRIVATE LAW: PROPERTY, TORT, CONTRACT, UNJUST ENRICHMENT
366 (2007).
43. For a representative statement, see CLAUS-WILHELM CANARIS, DIE BEDEUTUNG DER
IUSTITIA DISTRIBUTIVA IM DEUTSCHEN VERTRAGSRECHT 51 (1997).

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contractual freedom amounts to—efficiency or individual autonomy (or any

other policy)—will not suffice at this point because the explanatory task is
exactly this: Why should the law accept an unfair price among equals? If it
accepts unfair prices among equals to support efficiency or autonomy (or any
other policy), then why does this (or any other) policy not also trump in the
case of unequal parties? If the answer is that such is a requirement of fairness,
then why does the requirement of fairness not play out among equals? In other
words, to restrict the law’s requirement of a fair price to the case of unequal
parties makes incomprehensible the reason why contractual fairness was
allowed to enter the conceptual stage at all. The instrumental understanding’s
answer to the problem of the fair price, which restricts the application of the
concept to cases of unequal parties, undermines its own premise that there is
conceptual room for the idea of fairness also regarding the price.
A similar conceptual dilemma arises in view of the different treatment of
price and terms: unfair terms among equals are to be corrected, but an unfair
price is not. Why should the law, among equals, accept an unfair price but not
unfair terms? Whatever reason is given to support acceptance of an unfair
price—efficiency, autonomy, and so on—could also apply to unfair terms. This
is even truer, given that terms and price are complementary, in the sense that a
price that is higher or lower than the fair price may allow for terms that are
LA
more unfavorable than fair terms.
Of course, this kind of conceptual dilemma can be solved by invoking the
framework of conflicting considerations, values, or interests—efficiency and
IM
freedom on the one hand, fairness on the other—that need balancing. And this
balancing might come out this or that way at this or that point in the doctrine of
SH
contract law. However, as was stated in the introduction of this article, such a
solution is not valuable in a project of understanding contract law because it
represents abandoning understanding.
LU
The alternative that proposes a harmonious unity of contractual freedom

and contractual fairness is in a much better position. According to the
alternative, the additional condition of equal bargaining power in cases of
PN
unconscionability will help to sort out whether the relevant contract is indeed a
44
full contract of exchange or whether it is in parts a contract of gift. The gift
part is the part of, for example, an amount of money given for consideration
H
that exceeds the fair price. “Collector’s price” and “special price for a friend”
are the eminent examples. It is inferred from the absence of impaired
bargaining power that the amount exceeding the fair price is a gift. Admittedly,
German law is not fully in line with this argument. The sum that exceeds the fair
price is usually not treated as a gift, as this would require further conditions to
45
be binding before performance. Instead, the exceeding sum is treated as an
44. The argument that the law’s distinction between contract and gift requires the idea of equal
value has been developed by Peter Benson. See Benson, supra note 27.
[BGBL.] 740, § 518, para. 1 (Ger.).

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76:57
inseparable part of the contract. But in contrast to the shortcomings of the two
other conceptions discussed, this seems a misfit of only minor importance. In
the upshot, it turns out to be true that the law submits each and every contract
of exchange to the standard of a fair price.
As an intermediate conclusion, it can be stated that, firstly, the procedural
understanding of contractual freedom is not able to reflect any relevant aspect
of contract law. Secondly, the instrumentalist procedural understanding does
only slightly better. It does not reflect the law regarding fair terms. It seems to
fit for the fair price, but this apparent success leads it into a conceptual dilemma
in that it either loses the idea of justice or results in a position of non-
understanding. The alternative proposal, in contrast, best reflects contract law,
and it does not raise further difficult conceptual questions. This is why the
alternative version seems worthy of being explored further.
IV
CONTRACTUAL FAIRNESS, COMMON USAGE, AND MARKET PRICE
This section will shed more light on the idea of contractual fairness,
including the idea of a fair price, namely, how the idea operates in contract law.
In order to articulate the requirements of contractual fairness, German law
sometimes, on relevant points, refers to common usage (Verkehrssitte). In
LA
46
German contract law, this is the case in BGB sections 157 and 242. To
determine what is required by “Treu und Glauben” the law resorts to common
IM
usage. Why is this?

Common usage represents what parties typically agree on. The similarity to
the standard answer to the question of how default rules are to be determined is
SH
evident. But it is an empirical standard, not a normative one. This

notwithstanding, common usage serves to articulate default rules more precisely
or to fill in gaps which are left by default rules; these two purposes are
LU
functionally equivalent. For a court, common usage is a way to find out what
terms would be fair, instead of determining them by its own judgment.
Common usage is one of the law’s sources of knowledge about contractual
PN
47
fairness. But why does the law view common usage as a reliable source?
48
This is the point where deliberative theory must be introduced. Common
usage is the result of a multiplicity of transactions. In each transaction, the
H
parties argue about fair terms. Either they deliberate and give reasons why this
or that term is fair or unfair, or they do not deliberate but decline to agree
unless one party offers terms which are considered fair by the other. When will
deliberation lead to fair results? Deliberative theory claims that this requires an
49
ideal speech situation. Though the argument would require further
46. See also RESTATEMENT (SECOND) OF CONTRACTS §§ 219–22 (1981).

47. See PAUL OERTMANN, RECHTSORDNUNG UND VERKEHRSSITTE 369–86 (1914).
48. For a deliberative theory of contract, see Bertram Lomfeld, Contract as Deliberation, 76 LAW
& CONTEMP. PROBS., no. 2, 2013 at 1.
49. See Jürgen Habermas, Wahrheitstheorien (1972), in VORSTUDIEN UND ERGÄNZUNGEN ZUR

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elaboration, for which this paper leaves no space, it is suggested that the ideal
speech situation for determining fair terms of contractual exchange is the
condition where the parties have equal bargaining power, which is the case in
an ordinary competitive market. So it is assumed, in the upshot, that in a
competitive market parties will usually agree on fair terms. This is why the law
can legitimately refer to common usage to determine what terms would be fair.
It is important to note the difference between the law’s deferral to common
usage and the instrumentalist procedural understanding of contractual freedom.
The latter accepts each and every result agreed on by parties with equal
bargaining power. In contrast to this, common usage refers not to the single
case, but to the usual case. This implies that parties, in a single case, may err
about the fairness of terms and will be corrected by the law, even though they
were in a good position to generate fair terms due to their equal bargaining
power. The usual case is the normative standard for the single case.
This understanding of common usage can also help to explain why the fair
50
price is represented as the competitive market price. It was argued above that
common usage is one important source for the law’s knowledge about fair
terms. The next step seems evident: The market price is the usual price, the
price which results from common usage, from a multiplicity of deliberations
about the fair price. However, there is an explanatory gap. In the argument
LA
above, it is presupposed that judges, legislators, and even private parties can
argue about the fairness of terms. One has an idea about the kind of arguments
that can be given in such deliberation. What kinds of arguments can be used to
IM
discover the fair price? What argument could be made that a certain commodity
should be exchanged for x euros rather than for 2x euros?
SH
Concurring approaches have suggested either that there is actually no

51
reasonable argument available, or that the argument is eventually based on
52
need, scarcity, and costs. The alternative answer is that parties’ deliberations
LU
circle around the idea of the value of the good. And the conceptual framework
set up by the law presupposes that value functions as an objective standard.
Value is not established, but rather it is discovered by the contracting parties.
PN
Imagine the case of a new commodity for which no market price exists yet. In
this case, the parties will determine the value by inquiring into the purchasing
power that it represents. The objective value of the commodity is represented
H
by the price that will be paid for it in a different transaction involving another
party (and so on). So even in the first transaction of a new commodity, the
parties try to anticipate the purchasing power that the good will command in
similar transactions. With this, the parties try to anticipate the market price.
And a given competitive market price is just the outcome of a multiplicity of
such anticipations; it is a multiplicity of judgments about the value of a
THEORIE DES KOMMUNIKATIVEN HANDELNS 127 (Jürgen Habermas ed., 1st ed. 1984).
50. For concurring approaches, see Benson, supra note 27, and Gordley, supra note 26.
51. See Benson, supra note 27, at 189.
52. See Gordley, supra note 26, at 1605.

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commodity. Given that a competitive market price exists, it represents common

usage. Common usage provides the relevant standard of contractual fairness
also with regard to the price. The competitive market price is an instantiation of
common usage.
V
CONCLUSION
The conclusion shall be restricted to three remarks on the functions served
by the hermeneutical view of contract law presented in this paper. First, it helps
to understand the basic structure of contract law. Second, it can help to
understand where case-by-case and ex post control of contractual fairness by
courts is not sufficient, and where instead general and ex ante guidance by the
legislature is needed. The eminent examples are the areas of essentially
distorted markets, as in the case of human labor, housing space, foodstuffs,
energy, loans of money, et cetera. The markets for these “fictitious
53
commodities” are essentially distorted in the sense that even competition law
cannot impose a competitive structure on them. Third, it helps us to reveal
where the basic structure of contract law cannot apply at all, as in the case of
surrogate parenting or organ transplantation.
A final word should be said explicitly to the “public dimension of contract,”
LA
the subject of this symposium: Contract law realizes a basic structure of
morality. Liberals claim that this structure reflects and enables human freedom.
IM
The argument above shows, in turn, that it reflects human equality, the equality
of human beings (and yet being human certainly implies being free). This
fundamental foundation in equality is the one and only “public dimension” of
SH
contract law’s basic structure. At the very end, one puzzling question remains:
Why has this idea been so unattractive for authors who have tried to develop an
alternative to the liberal understanding of contract law?
LU
PN
H
53. The term and the theory of “fictitious commodities” were developed by Karl Polanyi in KARL
POLANYI, THE GREAT TRANSFORMATION: THE POLITICAL AND ECONOMIC ORIGINS OF OUR TIME
(1944).

ESSAY
CONTRACTS WITHOUT CONSENT:

EXPLORING A NEW BASIS FOR CONTRACTUAL LIABILITY
†
OMRI BEN-SHAHAR
This Essay explores an alternative to one of the pillars of contract law, that
obligations arise only when there is “mutual assent”—when the parties reach con-
sensus over the terms of the transaction. It explores a principle of “no-retraction,”
under which each party is obligated to terms it manifested and can retract only
with some liability. In contrast to the all-or-nothing nature of the mutual assent
regime, where preliminary forms of consent are either full-blown contracts or create
no obligation, under the no-retraction regime, obligations emerge gradually, as the
positions of the negotiating parties draw closer. Further, the no-retraction liability
regime can be coupled with different damage measures to advance various social
LA
goals, including optimal reliance. The theory is applied to areas of contract for-
mation that have produced inconsistent jurisprudence, such as precontractual li-
ability and misunderstandings, and resolves them in a simple and unified fash-
ion. Finally, the analysis provides a fresh understanding of the obligation to
IM
negotiate in good faith and explores a new criterion for gap-filling in incomplete
contracts.
SH
INTRODUCTION
One of the pillars of the law of contract formation is the principle

of mutual assent. According to this principle, a contract forms only
LU
when the positions of the two parties meet. When the parties represent
PN
†
Professor of Law and Economics, University of Michigan Law School. Contact at
omri@umich.edu. This Essay originates from many discussions with Lucian Bebchuk.
H
I benefited from helpful suggestions by Barry Adler, Ian Ayres, Allan Farnsworth, Alon
Harel, Christine Jolls, Roy Kreitner, Kristin Madison, Robert Mikos, Ariel Porat, Alan
Schwartz, Brian Simpson, James J. White, and faculty workshop participants at Harvard
Law School, University of Michigan, Tel-Aviv University, University of Southern Cali-
fornia, Yale Law School, and the Contract Panel at the 12th Annual Meeting of the
American Law and Economics Association (held at Harvard University, May 2002).
Finally, I am grateful to the Interdisciplinary Center in Israel for hosting me during the
period in which this Essay was written. Financial assistance from the John M. Olin
Center for Law and Economics at the University of Michigan Law School is thankfully
acknowledged.
(1829)

1830 UNIVERSITY OF PENNSYLVANIA LAW REVIEW [Vol. 152: 1829
different conceptions of the terms under which they intend to deal,

no contractual liability arises, and both are free to walk away.
Mutual assent has many implications for contract law theory and
doctrine. Importantly, it sets the boundary between the precontrac-
tual and the contractual stages. Prior to attaining a consensus, while
an agreement is still being negotiated, no liability arises between the
parties. At some point in time, the positions of the parties (or, more
correctly, their outward manifestations) meet, and full expectation li-
ability emerges. Liability, in other words, does not accumulate con-
tinuously. Rather, it rises abruptly as soon as the “qualitative” assent
test is satisfied.
This principle also implies that a contract cannot exist when the
parties remain silent over some important elements of the deal. True,
statutory and judicial gap-fillers have eroded this traditional common
law approach. Nevertheless, in important areas of the transaction, an
LA
absence of affirmative assent to terms still implies a non-contract.
Many of the rules characterizing the legal consequences of the
communications at the contract formation stage are also corollaries of
IM
the mutual assent principle. For example, a communication is an of-
fer—such that it can be accepted unilaterally—only if it is definite; a
response to an offer that does not manifest assent—that changes some
SH
of the terms—is deemed a rejection and terminates the power of the
offeree to unilaterally conclude a deal; and an offer is revocable at any
time prior to its affirmative acceptance.
This Essay suggests that the consensus principle embodied in the
LU
mutual assent doctrine might not be a desirable instrument to ad-

vance the goals of potential transactors. It argues that limiting con-
tractual liability to cases in which a consensus was manifested fails to
PN
reflect the different “tones” of the “understandings” and commit-

ments that parties may express throughout the negotiations. As a re-
sult of this failure, the basis for contractual liability, in some situations,
H
may be too narrow to induce optimal reliance by the parties.

As an alternative to the consensus-or-nothing structure, this Essay
explores a no-retraction principle. The basic insight is the following:
A party who manifests a willingness to enter into a contract at given
terms should not be able to freely retract from her manifestation. The oppos-
ing party, even if he did not manifest assent, and unless he rejected
the terms, acquires an option to bind his counterpart to her represen-
tation or charge her with some liability in case she retracts.
In contrast to the mutual assent approach, the no-retraction prin-
ciple developed here suggests that when two parties attach different,

2004] CONTRACTS WITHOUT CONSENT 1831
but equally plausible, meanings to their agreed-upon contractual obli-

gation, the absence of consensus would not negate any liability. In-
stead, under the no-retraction principle, each party should have a
right to enforce a contractual obligation according to the meaning intended by
the other. Further, even when the parties have not reached a full-blown
agreement or an understanding over terms, as in the case where both
parties make serious, but nonconforming, precontractual representa-
tions of the proposed terms, the legal consequence should not be mu-
tual rejection accompanied by the freedom to walk away. Rather, the
representations of the parties give rise to bilateral options: each party
can bind (with the magnitude of liability to be specified below) the
other to the terms that party proposed. If the proposal is incomplete
and gaps need to be filled, they will be filled with terms most favorable
(within reason) to the proposing party. Thus, while a party is unable
to retract, it is only from a deal that includes terms she proposed,
LA
supplemented by terms most favorable to her. I will argue that the en-
forced-against party has no reasonable grounds to reject a deal con-
taining such terms.
IM
Another way to conceptualize this idea is to view liability as a
process of continuous convergence. Initially, when the consensus is
“thin”—when the two parties differ on many terms of the deal—the
SH
option that each party acquires (to enter a deal that is very different
from what she proposes and very favorable to the other party) is of
minimal burden to the other party. As negotiations move forward and
consensus grows, the option that each party acquires becomes more
LU
valuable. It is an option to enforce a deal that includes all the terms

agreed upon, supplemented with the terms proposed by the other
party. Finally, when the two parties reach a full agreement, i.e., mu-
PN
tual assent, the value of this option is identical to the value of the con-
tract. Thus, in effect, the greater the “fraction” of a contract the par-
ties have, the greater the “fraction” of contract liability the plaintiff
can enforce.
H
The no-retraction principle provides a new underpinning for Lon

1
Fuller’s famous notion of “an ascending scale of enforceability.”
1
Letter from Lon L. Fuller to Karl N. Llewellyn, Professor of Law, Columbia Uni-
versity (Dec. 8, 1938), excerpted in ROBERT S. SUMMERS & ROBERT A. HILLMAN, CON-
TRACT AND RELATED OBLIGATION: THEORY, DOCTRINE, AND PRACTICE 41 (4th ed.
2001). This idea was introduced in L. L. Fuller & William R. Perdue, Jr., The Reliance
Interest in Contract Damages (pt. 2), 46 YALE L.J. 373, 420 (1937) (objecting to the “all-or-
nothing attitude” of contract law and urging for a more balanced legal approach that
recognizes varying degrees of enforceability).

Fuller argued that weaker measures of damages—restitution and reli-

ance damages—should be available when the grounds for enforce-
ment are weaker. Liability for retraction satisfies Fuller’s ascending
scale notion, since it correlates the magnitude of liability with the de-
gree of consensus. It differs, however, in important ways from Fuller’s
scale, which was limited to three discrete steps of damages and which
lacked a criterion for when “enforceability” should be weaker. Liabil-
ity under the no-retraction regime is continuous, with the continuity
achieved not by switching among damage measures, but by affecting
the terms of the deal that the plaintiff can enforce. It provides an op-
erative measure for scaling enforcement that tracks the degree of con-
sensus: the closer the parties’ positions have come, the more severe
the liability consequence.
The no-retraction principle may seem a strange basis for liability
in a system that is so fundamentally attached to the consensus/
LA
agreement principle. Precisely because it seems sufficiently strange to
contract scholars and practitioners, such an alternative perspective is
not commonly recognized. But the conception of contractual liability
IM
arising from a one-sided promise, rather than a two-sided consensus, is
not so foreign to historians of the common law. Prior to the nine-
teenth-century emergence of the consensus ad idem theory of contract,
SH
liability was implemented through the action of assumpsit—the wrong
of breaching a promissory obligation created by one party. It is only in
more recent times that contractual liability merged with the notion of
2
consensus.
LU
Further, the divorce of obligation from consensus/unanimity and

its grounding instead on a principle of “rejectability”—on whether it is
3
reasonable to reject a bargain—is a familiar idea in moral philosophy.
PN
It is recognized that the notion of consensus as the moral justification

for obligation is narrower than the notion of what is unreasonable to
4
reject. Accordingly, the no-retraction principle provides a specific
H
2
See A. W. B. Simpson, Innovation in Nineteenth Century Contract Law, 91 L.Q. REV.
247, 257-58 (1975) (explaining that the notion of consensus was assimilated into the
common law by nineteenth-century treatise writers); see also Philip A. Hamburger, The
Development of the Nineteenth-Century Consensus Theory of Contract, 7 L. & HIST. REV. 241
(1989) (exploring the gradual evolution of consensus notions in common law since
medieval times).
3
See, e.g., T. M. Scanlon, Contractualism and Utilitarianism, in UTILITARIANISM AND
BEYOND 103, 110-12 (Amartya Sen & Bernard Williams eds., 1982) (describing contrac-
tualism as an alternative to utilitarianism that focuses on the reasonableness of rejec-
tion, rather than on the reasonableness of acceptance).
4
Id. at 117.

conception of non-rejectability. It is also consistent with extra-legal

“no-going-back” norms in negotiations, which, for example, infor-
mally sanction a party who responds to the other party’s concessions
5
by toughening, rather than softening, her own proposals. In this Es-
say, I will not explore in any depth these historical, philosophical, or
sociological aspects. They are mentioned here in passing to suggest
that the consensus principle of contract formation—being such a
fundamental part of our modern legal and economic heritage—is not
the only sensible basis for liability and to propose that an alternative
6
no-retraction basis is at least possible.
In fact, if one looks carefully enough, it is easy to find numerous
instances within existing doctrine in which contractual liability is
founded not on consent, but on a variant of the no-retraction ap-
proach. For example, there are circumstances in which offerors can-
not retract their offers either because they chose to make “firm offers”
LA
or because the law imposes an irrevocability principle. Here, offerors
are legally bound even before acceptance.7 Similarly, where the
agreement leaves a term to be further negotiated, courts might forbid
IM
a party to reject a proposal made by the other party that is very favor-
8
able to the rejecting party. In rationalizing these and related “inter-
mediate liability” doctrines, the courts explicitly invoked the justifica-
SH
tions underlying the no-retraction principle. Accordingly, the no-
retraction regime can be viewed not as a doctrinal innovation, but
rather, as a unifying principle. Recognizing such a principle would
accord greater consistency in the application of existing precontractual
LU
5
See , e . g . , FRED CHARLES IKLÉ, HOW NATIONS NEGOTIATE 22-23 (1976) (observ-
PN
ing that in international negotiations, it is “improper . . . to revert to a harder position

from a more conciliatory one”).
6
This exploration of an alternative basis for liability is different than the explora-
tion initiated by scholars like Professor P. S. Atiyah, who examine the case for reliance-
H
based liability. See P. S. ATIYAH, THE RISE AND FALL OF FREEDOM OF CONTRACT 1-7
(1979) (introducing the argument in favor of reliance-based liability). The approach
developed in this Essay is different in that it maintains the promise, rather than harm or
benefit, as the basis of liability, but does not require consent.
7
See, e.g., Drennan v. Star Paving Co., 333 P.2d 757, 759-60 (Cal. 1958) (stating
that a subcontractor could not revoke its bid even prior to acceptance by the general
contractor, if the general contractor relied upon that bid).
8
See 1 J.M. PERILLO, CORBIN ON CONTRACTS § 4.3, at 577-79 (rev. ed. 1993) (sur-
veying cases in which indefiniteness was cured by terms that are maximally favorable to
the defendant (the retracting party)); Omri Ben-Shahar, “Agreeing to Disagree”: Filling
Gaps in Deliberately Incomplete Contracts, 2004 WIS. L. REV. (forthcoming) (manuscript at
33-40, on file with author) (outlining several existing doctrines that fill contractual
gaps with terms most favorable to the defendant).

liability doctrines and may resolve many other problematic features of

the mutual assent doctrine.
To illustrate a doctrinal implication of the proposed approach,
consider the situation of a misunderstanding, often regarded as the
pedagogical benchmark of the consensus principle. Under the doc-
trine of mutual assent, where the two parties assign different, but
equally plausible, meanings to a basic provision of the contract, and
where neither party has reason to know of the other’s intent, no meet-
9
ing of the minds—and thus no contractual liability—can be found.
Where, for instance, the buyer of a cotton shipload intended it to ar-
rive on a ship named Peerless that sails in October, and the seller in-
tended it to arrive on a different Peerless ship that sails in December,
10
no contract had been formed between the parties. Under the no-
retraction approach, in contrast, each party would have the option of
enforcing the contract, albeit in line with the meaning intended by
LA
the other party. For example, if market conditions changed after an
agreement was reached and one of the parties attempted to retract
opportunistically, the retracting party could be forced to perform the
IM
deal as she intended it.
Another important situation in which the no-retraction regime
applies is that of preliminary agreements. Currently, drawing the line
SH
between precontractual understandings that are not enforceable and
contractual agreements that are implicates one of the most confusing
doctrines in contract law. While this line is important to draw—it is
the difference between “all” or “nothing” liability—in practice, it is
LU
also very difficult to draw in a consistent manner, leading to a confus-

11
ing and unpredictable jurisprudence. Under the no-retraction ap-
proach, no line needs to be drawn. When parties reach an agreement
PN
in principle over some fundamental terms but plan to further negoti-

ate, each party acquires the option to bind the other to a deal that in-
cludes the terms agreed upon, supplemented by proposals made by
the other party and terms most favorable to that party. In other
H
words, each party can enforce a full agreement that is at least as
9
RESTATEMENT (SECOND) OF CONTRACTS § 20(1) (1981).
10
Raffles v. Wichelhaus, 159 Eng. Rep. 375, 375 (Ex. 1864).
11
See E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair
Dealing and Failed Negotiations, 87 COLUM. L. REV. 217, 259-60 (1987) (“It would be dif-
ficult to find a less predictable area of contract law.”); K. N. Llewellyn, On Our Case-Law
of Contract: Offer and Acceptance (pt. 1), 48 YALE L.J. 1, 13-14 (1938) (lamenting that
rules governing preliminary agreements “are utterly devoid of . . . meaning” when ap-
plied to the facts).

profitable to the other party as it had plausibly hoped for when enter-
ing the preliminary agreement.
Part II of this Essay will explore these and additional implica-
tions of the no-retraction principle. It will offer a fresh look at the
requirement of “definiteness” and examine the implications of the
no-retraction regime for the doctrines of offer and acceptance and for
the duty to negotiate in good faith. This inquiry will also yield an al-
ternative approach to gap-filling in incomplete contracts, a potential
contribution to the theory of default rules.
Before proceeding, however, it is worth emphasizing what this Es-
say is not about. It is not about the debate between objective and sub-
jective theories of assent. The no-retraction idea is a substitute for the
mutual assent approach, whether taken as an objective idea (conver-
gence of “manifestations”) or as a subjective principle (meeting of the
minds). The no-retraction principle replaces the element of consen-
LA
sus, the notion that the “positions” of the parties ought to meet. It can
therefore be equally relevant to either the objective or subjective ap-
proaches, as both embody this notion. Further, this Essay is not about
IM
contract law being subsumed by tort principles. True, no-retraction
liability can resemble tort liability; it results from a unilateral action
not much different than, say, liability for misrepresentation. However,
SH
it is nonetheless the will of a party—a “promise”—that ignites liability.
The obligation is voluntary and promise-based, yet decoupled: A con-
tract can be two, potentially different, bargains, with each party “responsi-
ble” for one.
LU
Some of the ideas developed in this Essay have been studied pre-
viously. For example, the concept of attaching liability to relied-upon
precontractual representations was carefully developed in recent lit-
PN
12
erature and has appeared in earlier legal writings on the precontrac-
13
tual duty of good faith. In addition, as mentioned above, the idea of
H
12
See, e.g., Lucian Arye Bebchuk & Omri Ben-Shahar, Precontractual Reliance, 30 J.
LEGAL STUD. 423, 431-43 (2001) (analyzing how alternative liability schemes promote
optimal levels of precontractual reliance); Richard Craswell, Offer, Acceptance, and Effi-
cient Reliance, 48 STAN. L. REV. 481, 507-43 (1996) (exploring efficient reliance as an
implicit economic rationale underlying courts’ decisions in contract formation cases);
Avery Katz, When Should an Offer Stick? The Economics of Promissory Estoppel in Preliminary
Negotiations, 105 YALE L.J. 1249, 1270-77 (1996) (examining the effects of promissory
estoppel on the incentives of negotiating parties).
13
See, e.g., Charles L. Knapp, Enforcing the Contract to Bargain, 44 N.Y.U. L. REV.
673, 684-86 (1969) (arguing that a party to a negotiation should be held liable for
withdrawing from a partial agreement when the negotiations have given rise to a mu-
tual commitment to bargain in good faith to complete a contract).

a “sliding scale of enforceability” originates from Fuller. This Essay

builds on those earlier ideas to develop a general view, uniform across
various areas of contracting, of the gradual ascent of liability—of “con-
tracts without consent.” And while many of the doctrinal implications
of the no-retraction principle have also been explored previously,
these applications have not been viewed before through the general
lens developed in this Essay, as representing this “contracts without
consent” pattern.
The analysis is divided into two Parts: Part I examines the abstract
properties of a principle of no-retraction; Part II applies that principle
and briefly explores some doctrinal implications of a no-retraction
regime.
I. THE NO -RETRACTION PRINCIPLE: THEORY
LA
A. The All-or-Nothing Nature of Contractual Liability
One of the most fundamental features of contractual liability is its

emergence in an all-or-nothing fashion. This legal dichotomy is strik-
IM
ing because the positions of the parties, who contemplate a deal and
negotiate its terms at arms length, converge in a gradual, rather than
SH
abrupt, fashion. The process of overcoming differences in initial bar-
gaining positions and eventually achieving consensus is normally a
continuous one. During the course of dealmaking, different compo-
nents of an agreement are typically negotiated sequentially and re-
LU
solved in piecemeal fashion. Nevertheless, while the parties’ mani-

fested will to be bound exhibits this gradual ascent, the legal conse-
quences attached to it have a discontinuous structure.
Initially, when the parties’ positions are far apart and their will to
PN
be bound is weak, there are no legal consequences arising from the

negotiations. As the positions of the parties grow somewhat closer
and their will to be bound increases, the legal consequences remain
H
null. Eventually, however, there comes a point in the negotiation

process at which the positions of the parties are sufficiently close—
when their will to be bound is sufficiently strong—that the legal conse-
quences shift abruptly to full contractual (that is, expectation) liabil-
ity. While the difference in the legal consequences is qualitative—no
liability versus full liability—the threshold at which the consequences
change is not always qualitatively distinguishable. The difficulty lies in
the fact that the doctrine of mutual assent only measures whether suf-
ficient proximity between the parties’ positions has been achieved. It
is possible that the threshold of mutual assent may be crossed even

though some issues are left up in the air, so long as the accumulation
of the agreed-upon issues is sufficient to set off a presumption of full
agreement.
Due to the vagueness of this threshold, courts have been inconsis-
tent in their attempts to draw the line between the no-liability precon-
14
tractual stage and the full-liability contract. Cases with similar facts,
in which the degree of the understanding between the parties was
comparable, have been decided differently. Opportunistic retractions
from relied-upon understandings have at times been permitted,
whereas harmless retractions that occurred immediately after “hand-
15
shake deals” sometimes have led to heavy damages. This unpredict-
ability of the law also has adverse ex ante effects. First, parties might
need to specify explicitly the legal consequences to be attached to
each negotiation stage, thus increasing transaction costs. Second, and
more importantly, the unpredictable dichotomous legal regime makes
LA
it more difficult for the parties to ascertain the degree of confidence
with which they should go ahead and rely on representations made by
their negotiating or contracting partners.
IM
Nevertheless, all-or-nothing mechanisms are often hailed for the
certainty that they provide. This line of reasoning argues that if liabil-
ity arises only after a qualitative test is satisfied in full, the parties will
SH
be able to recognize the incidence of liability with greater precision.
But while the advantage of certainty is surely associated with specific
consent rituals, such as the handshake, the wedding ceremony, or the
notary seal, it is hardly apparent in instances where the qualitative
LU
test is substantive in nature, lacking any ritual. In contract law, the
14
PN
Commentators have complained about the resulting inconsistency of case out-

comes. See Gerald B. Buechler, Jr., The Recognition of Preliminary Agreements in Negotiated
Corporate Acquisitions: An Empirical Analysis of the Disagreement Process, 22 CREIGHTON L.
REV. 573, 574 (1989) (“[T]he decisions in this area . . . continue to appear both con-
fusing and inconsistent to the point where it is said to be virtually impossible to predict
H
the outcome in a particular case.”); Harvey L. Temkin, When Does the “Fat Lady” Sing?:
An Analysis of “Agreements in Principle” in Corporate Acquisitions, 55 FORDHAM L. REV. 125,
130 & n.23 (1986) (noting how decisions in this area have been inconsistent and how
this lack of clearly defined rules has led to uncertainty among negotiators); sources
cited supra note 11 (summarizing this area of the law as confusing and unpredictable).
15
Compare Cont’l Labs., Inc. v. Scott Paper Co., 759 F. Supp. 538, 539, 542 (S.D.
Iowa 1990) (finding no liability where parties reached an oral agreement that resolved,
after many rounds of negotiations, most principal issues and where retraction occurred
after one party announced that it “was no longer interested in the venture”), with Tex-
aco, Inc. v. Pennzoil Co., 729 S.W.2d 768, 859-66 (Tex. App. 1987) (holding a party
liable for lost profits and punitive damages notwithstanding the fact that the parties’
agreement in principle had resulted from only a brief round of negotiations and the
defendant’s retraction occurred almost immediately thereafter).

qualitative test of consent—being a standard, not a bright-line rule—

does not increase certainty, as it may be satisfied independently of any
evident ritual.
B. The No-Retraction Principle
Under the no-retraction regime, a party who manifests a willing-

ness to enter into a contract with some given terms should not be able
to retract freely from her representation. The opposing party, even
prior to expressing assent, and unless he affirmatively rejected the
terms, acquires an option to bind his counterpart to her representa-
tion, and a violation of this option would lead to some liability. Thus,
the triggering event that creates liability is not the convergence of two
wills, as is the case under standard assent doctrine, but rather, the
manifestation of only one will. Once an individual manifests her in-
tent to deal under some terms, she makes a unilateral commitment
LA
not to retract from a deal conforming to these terms.
This principle can apply at different stages of the interaction. At
an advanced stage of the transaction, when a full-blown agreement is
IM
reached but the parties dispute its proper interpretation, neither party
can retract from her own intended interpretation; namely, each may
SH
be bound to their own interpretation if the other party so chooses.
Earlier in the negotiations process, when an understanding emerges
over some components of the transaction, neither party can retract
16
from the terms of the preliminary understanding. Finally, even at
LU
early stages of the negotiations, as soon as a party manifests an intent

to be bound to some terms, she (alone) cannot freely retract from
these terms.
PN
H
16
A similar approach to precontractual understandings is suggested by Allan
Farnsworth. See Farnsworth, supra note 11, at 280-81 (explaining that reneging on
terms is unfair dealing and should constitute a breach of the duty to bargain in good
faith). Variants of this approach were applied in several famous cases. See Itek Corp. v.
Chi. Aerial Indus., 248 A.2d 625, 629 (Del. 1968) (stating that an informal letter of in-
tent to merge obligated parties to make a good faith attempt to reach a formal con-
tract of merger); Grouse v. Group Health Plan, Inc., 306 N.W.2d 114, 116 (Minn.
1981) (finding liability where the defendant health clinic revoked its offer of at-will
employment only after plaintiff quit his job and declined other employment in reli-
ance on the clinic’s offer); Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267, 275 (Wis.
1965) (imposing damages for breach of a promise that never materialized into a con-
tract, based on a reliance/promissory estoppel theory).

1. A Comparison of the No-Retraction and

the Mutual Assent Principles
More methodically, the no-retraction approach differs from stan-

dard assent doctrine in several fundamental respects:
a. No Consensus
A party can be bound in the absence of a consensus over terms. A
party is bound to the terms she represented, irrespective of whether
the other party represented identical terms or any terms at all. Liabil-
ity under this approach, like tort liability, results from a unilateral
wrongful action of a party—in this case, retraction from a representa-
tion.
Put differently, the no-retraction principle “decouples” the legal
conception of intent-to-be-bound. Under standard doctrine, either
LA
both parties have an intent to be bound, or neither has, as the intent
to be bound is inferred from the fit between the parties’ positions,
namely, the “thickness” of the consensus. Therefore, the fewer terms
17
IM
included in the understanding, the less likely courts are to recognize
the existence of an intent to be bound. Under the no-retraction ap-
proach, in contrast, each party’s intent can be inferred separately, and
SH
each may intend to be bound to a separate set of terms that favors
herself. Consensus is the point at which the “two intents” converge,
but the intents may exist prior to, and independently of, convergence.
Under this approach, it is not consensus that creates liability, but
LU
rather, each individual’s separate manifestation of intent (and, in-

deed, it is possible for only one party to be bound). It should be
noted that this is not a dramatic departure from existing grounds of
PN
obligation. For example, when courts supplement contracts with

standard gap-fillers, these additional terms are binding, not because
the parties consented to them (they never did), but because they pro-
18
vide a rational basis for contractual obligation. It is this same ra-
H
tional basis that is invoked by the no-retraction approach, applied to

each party separately. It might be rational for each party to accept a
different set of terms, and it is these terms that the law would prohibit
her from rejecting.
17
U.C.C. § 2-204 official cmt. (2003) (“The more terms the parties leave open, the
less likely it is that they have intended to conclude a binding agreement . . . .”).
18
See Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and
Disclosure Rules in Contract Law, 12 HARV. J.L. & PUB. POL’Y 639, 707-09 (1989) (ground-
ing default rule theories on rationality, rather than on the consent fiction).

b. Asymmetry
A prominent feature of assent-based liability is the fact that the
terms each party can enforce are identical. If, say, a contractual term
(or a gap-filler) specified a price, p, both parties can enforce only that
price. Under the no-retraction principle, in contrast, each party
might have the option to enforce a different set of terms. If the seller
proposed a price, pS , and the buyer proposed a price, pB (with pS > pB ),
each party may enforce a transaction with a different price: the buyer
may enforce a deal that includes the seller’s proposed price, pS , and
vice versa. Thus, this regime has a built-in asymmetry. Each party can
be forced to transact under one set of terms (her own proposal) but,
at the same time, can force the other to transact under another set of
19
terms (the opponent’s proposal). This asymmetry is consistent with
the notion that each individual, having proposed a different bargain,
should be confronted with a different restriction on what she may rea-
LA
sonably reject. Specifically, while each individual may reject the terms
that the other proposed, there is less of a reason to allow each indi-
20
vidual to reject the terms that she herself represented as acceptable.
c. Biased Supplementation of Missing Terms

IM
SH
When a party makes an incomplete representation, in the sense
that it is silent about some elements of the deal, and if the other party
acquires an option, the option must specify how these missing ele-
ments should be supplemented. The standard gap-filling approach
LU
in contract enforcement utilizes “reasonable” or “majoritarian”

21 22
terms; more sophisticated approaches utilize contra proferentem or
PN
19
Note that the asymmetry is only with respect to the content of the gap-fillers. In
H
other respects, the parties are in symmetric relations because both hold, and both are
subject to, an option to deal.
20
It is beyond the scope of this Essay to inquire into the philosophical underpin-
nings of the non-rejectability of an individual’s own representations. For a discussion
of the “will theory” origins of the binding force of promises, see JAMES GORDLEY, THE
PHILOSOPHICAL ORIGINS OF MODERN CONTRACT DOCTRINE 161-237 (1991). More
generally, for the moral basis of this principle of obligation, see Scanlon, supra note 3.
21
See, e.g., E. ALLAN FARNSWORTH, CONTRACTS, § 3.28, at 211-12 (3d ed. 1999)
(noting examples of courts inserting reasonable terms for price and time of perform-
ance).
22
See 5 MARGARET N. KNIFFIN, CORBIN ON CONTRACTS, § 24.27, at 282-83 ( Joseph
M. Perillo ed., rev. ed. 1998) (interpreting ambiguous contract terms to “adopt the
meaning that is less favorable in its legal effect to the party who chose the words”).

“information-forcing” defaults.23 In principle, similar gap-filling tech-

niques could apply under the no-retraction regime; however, this
would pose several problems. First, it is not unreasonable to reject
majoritarian terms, even if they are reasonable. That is, there may be
a “region” of reasonable terms such that a party’s insistence on terms
that are in the favorable end of this region and her refusal to be obli-
gated to the midrange or average term is not unreasonable. Second,
with standard gap-fillers, the emergence of liability would cease to be
gradual. Liability resulting from a preliminary understanding will by
and large resemble the liability under a fully specified agreement.
With standard gap-fillers, the set of terms in both instances will, on
average, be the same. The burden of the no-retraction regime under
the standard gap-filling approach will be high: As soon as a party
makes a preliminary representation, it can be bound to the “average”
contract.
LA
Accordingly, the no-retraction regime would be appealing if the
missing terms were supplemented by terms most favorable (within the
set of reasonable terms) to the enforced-against party. We can think
24
IM
of such gap-fillers as “pro-defendant.” This “biased” supplementa-
tion in favor of the defendant satisfies two objectives. First, as will be
shown, it has sufficient “teeth” to protect the other party against op-
SH
portunistic retractions, and thus, it provides optimal reliance incen-
tives. Second, it effectively guarantees that the final agreement to be
enforced is no worse than what the party who made the proposal or
entered the partial understanding could have intended. This is the
LU
only agreement of which it can confidently be said that this party

manifested her “constructive” intent to be bound. She may have
pragmatically hoped for something less favorable, but in the absence
PN
of an affirmative statement, the only terms that we can safely impose

on her without bending her will are her most favorable terms. These
25
are terms that she has no reasonable or rational grounds to reject.
As courts intuitively recognize, if one party concedes the terms
H
that are most favorable to the other party in order to overcome the
23
See, e.g., Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Eco-
nomic Theory of Default Rules, 99 YALE L.J. 87, 91-118 (1989) (identifying situations in
which efficiency-minded courts should fill gaps in a way that is clearly unfavorable to
one or both of the parties).
24
Another way to conceptualize this gap-filling approach is pro-proferentem (“in fa-
vor of the drafter” of the proposal), as distinguished from the contra proferentem doc-
trine (“against the drafter”).
25
See Coleman et al., supra note 18, at 648-49 (asserting that the absence of a con-
sent-based justification does not diminish the rationality-based justification).

indefiniteness of an agreement, “there is no longer any way the provi-

26
sion[s] may be construed to [the other party’s] detriment.” Conse-
quently, resisting the enforcement of such an agreement is unreason-
able, being inconsistent with the party’s prior representations.
d. Opting Out of the No-Retraction Regime

The no-retraction regime attaches more costly consequences to
early communications between the parties. In a sense, the “freedom
from contract” is weakened. As a result, parties that place great value
on this freedom can choose to opt out of the liability consequences
and opt into the consensus regime. The no-retraction regime is
merely a default: Techniques like revocable offers, non-binding pro-
posals, and letters of intent, which are already common in light of ex-
isting forms of precontractual liability, could be used to reserve the
right of free retraction.
LA
2. Implications of the Key Features of a No-Retraction Approach
IM
Several implications of the above properties should be noted.
First, while contractual liability under the mutual assent framework is
created abruptly, liability under the no-retraction principle accumu-
SH
lates in a continuous fashion. This liability is still triggered by a dis-
crete event: a serious unilateral representation of terms by a party.
However, in terms of relations between the representations of the two
parties, the effective burden of this type of liability increases gradually.
LU
Initially, before much consensus is achieved, the option granted to the

opposing party imposes only a small burden on the proposer. As the
negotiation moves along and the proposals made by each party be-
PN
come less one-sided—and thus begin to represent an emerging com-

promise—the burden of the no-retraction principle grows. That is,
the value of the option granted to the opposing party increases.
When the proposals made by the parties converge, the burden they
H
impose equals familiar contractual liability. At this stage, the grounds

27
for liability can shift from no-retraction to consent.
A second, related implication is that parties would have the ability
to create obligations that will eventually depend on the identity of the
26
Busching v. Griffin, 542 So. 2d 860, 864 (Miss. 1989).
27
The idea that the basis for liability can shift over time, as the parties introduce
new elements into their relationship, is a central theme in Atiyah’s view of contractual
liability. See ATIYAH, supra note 6, at 3-4 (describing the process by which “the ground
for imposing [] liability shifts”).

party seeking enforcement. When parties are unable to agree on how

to resolve some issues, they will often leave the terms open or am-
biguous in order to avoid a negotiation breakdown. Under standard
28
contract law, this practice might render the contract unenforceable.
The no-retraction principle’s use of decoupled supplementation pro-
vides a different solution to this problem. Where the missing provi-
sions’ content depends on the identity of the party against whom en-
forcement is sought, the law would guarantee that the issues at
stalemate will not provide any basis for unilateral retraction from the
rest of the deal.
A further implication worth noting involves certain polar situa-
tions. At one extreme, the parties’ proposals completely overlap. In
this case of consensus, the no-retraction approach does not change
any of the familiar legal consequences associated with assent-based
contractual liability: Both parties are obligated to an identical set of
LA
terms. At the other extreme, the parties have made no proposals at
all, never having entered into negotiations. The logic underlying the
no-retraction approach, which dictates that missing terms in the pro-
IM
posal be supplemented by the terms most favorable to the party
against whom enforcement is sought, can be stretched to provide a
basis for obligation even in the absence of proposals, and even prior
SH
to any negotiations. Each party can be given an option to force a
transaction on the counterparty based on the terms offered by that
counterparty (of which there are none) and supplemented by terms
most favorable to the counterparty (constituting the entire deal).
LU
This polar case represents a transformation of all property rules into

liability rules: Endowments can now be taken non-consensually, albeit
priced in a way so favorable to the endowment holder that it elimi-
PN
nates, at least from the holder’s economic perspective, any cost of

such a move.
This last observation explains why liability for retraction ought to
be restricted to proposals that are sufficiently rich in detail, or serious.
H
This familiar constraint is regularly applied under the mutual assent

regime, whereby contracts are supplemented by gap-fillers only to
the extent that the terms over which there is consensus provide a
sufficient basis to infer intent to be bound. Likewise, under the
no-retraction regime, a party will be bound to her unilateral represen-
tation—which can also be supplemented by her most favorable
28
1 PERILLO, supra note 8, § 2.8, at 134 (“[A] ‘contract to make a contract’ is not a
contract at all.”).

terms—if the representation provides enough detail to infer that

party’s intent to contract under its terms. The mutual assent regime
restrains its supplementation methodology in order to protect the
voluntary nature of contracts and to preserve the domain of property
rules; the same restraint can be employed by the no-retraction regime.
Recall: the no-retraction principle is a substitute only to the con-
sensus element of the mutual assent regime. Otherwise, it incorpo-
rates all the remaining “checks and balances.”
C. The Measure of Damages
The no-retraction principle is a basis for liability, not a damage

measure. It replaces the consensus principle as a basis for contractual
liability, and consequently, it determines when liability arises, but not
its magnitude. The principle of no-retraction can therefore be cou-
pled with various measures of damages, depending on the underlying
LA
objective that the remedy seeks to promote. The magnitude of opti-
mal damages, then, would depend on context and the underlying so-
cial objective.
IM
There are various social objectives that can justify different meas-
ures of damages. Take, for example, the economic perspective. One
SH
goal of damages is the prevention of opportunistic breach and the
promotion of efficient investment in the relationship. This goal is
29
generally consistent with the expectation measure of damages. Ac-
cordingly, the no-retraction liability will be coupled with expectation
LU
damages in circumstances in which expectation damages are desir-

able. If a party has already performed a contract and seeks to enforce
it upon a retracting, opportunistic opponent, expectation damages
would apply.
PN
It is important to note that whenever the no-retraction principle

provides a basis for liability that would otherwise not exist under
the mutual assent principle, this basis for liability does affect the quan-
H
tity of expectation damages. The plaintiff can only enforce the terms
as intended by the defendant. The expectation remedy is thus calcu-
lated according to the value of the deal to the enforcing party, using
the terms offered by the retracting party (which, recall, are supple-
mented in a manner most favorable to the retracting party). As a re-
sult, this is a less generous measure of damages than the standard one
29
See ROBERT COOTER & THOMAS ULEN, LAW AND ECONOMICS 190 (3d ed. 2000)
(illustrating how “perfect expectation damages create incentives for efficient perform-
ance and breach” and “elicit efficient commitment from the promissor to perform”).

applied in contractual breach. Likewise, with respect to specific per-

formance, the plaintiff can only enforce the deal intended by the de-
30
fendant.
There are, however, other contexts in which economic goals would
be promoted if the no-retraction liability were coupled with the more
modest reliance measure of damages. For example, in situations in
which parties have not completed the negotiations but merely have
reached some preliminary understandings, the social goal is to induce
them to make efficient reliance and choice-of-partner decisions in
light of the potential for holdup. In such cases, the optimal remedy
for retracting from the understandings and the proposal would be re-
31
liance damages.
In general, any applicable damage measure under the standard
mutual assent basis for liability could apply under the no-retraction
basis for liability as well. The no-retraction principle provides an al-
LA
ternative occasion for the apportionment of these damages, not an al-
ternative measure. Thus, all the familiar standards for quantifying a
measure of damages, such as foreseeability and certainty, continue to
apply to damages under the no-retraction approach.
D. Implementation IM
SH
The no-retraction regime supplements deals with terms most fa-
vorable to the retracting party. Unlike majoritarian terms, which can
be constructed based on evidence regarding market practices, “most
LU
favorable” terms require courts to be able to generate two sets of pro-

visions, depending on the party seeking enforcement. Is the task of
identifying such terms too burdensome for courts to accomplish?
PN
It is important to recall that difficulties in application were a

perceived feature of another “intermediate” precontractual liability
standard, namely, the duty to negotiate in good faith. Indeed, one
critic labeled good faith as “an amorphous concept, manifested in
H
endlessly variable settings and forms, . . . [that] does not identify a
30
For example, in Ontario Downs, Inc. v. Lauppe, 13 Cal. Rptr. 782 (Ct. App. 1961),
the parties agreed in principle over the sale of 16 acres of land for $50,000, but in-
tended to negotiate where, within the seller’s 450-acre lot, the 16-acre tract lay. Id. at
784. The court determined that if the buyer had no contractual right to select the
tract location, it could only enforce a deal that included a tract designated by the
seller. Id. at 787.
31
This argument is developed rigorously in Bebchuk & Ben-Shahar, supra note
12, and it is illustrated with simple numerical examples in Part I.E, infra.

32
manageable body of law for analytic inquiry.” Despite these difficul-
ties, the good faith duty is now an integral part of most legal systems,
and implementation problems are no longer perceived as reasons to
33
abolish it. It is also important to recall that other doctrines of gap-
filling instruct courts to pick out one-sided terms. The doctrine of
contra proferentem, for example, designates gap-fillers that are least fa-
34
vorable to the drafter of the contract. More generally, penalty de-
fault rules also require courts to utilize one-sided, non-market terms.
Having to supplement deals with terms most favorable to the re-
tracting party does not necessarily imply that courts would bear a
more burdensome judicial task. In most situations, courts would only
have to know the range of reasonable terms and then determine
whether the retracting party insisted on terms outside this range. In a
precontractual setting, when a party retracts from an understanding
by refusing to accept a proposal to settle the remaining issues, the
LA
court would have to determine if terms exist that are reasonable, but
more favorable, to the retracting party than those proposed.
Further, there are compelling reasons to believe that the task of
IM
filling gaps with terms most favorable to the defendant is within the
courts’ institutional capability. First, in adversarial proceedings, this
type of one-sided evidence is precisely what each party presents to the
SH
court. Even in the current system, where courts look for majoritarian
terms, parties provide self-serving evidence concerning disputed ele-
ments. This evidence is treated with justified suspicion by courts that
are seeking midrange gap-fillers, but in a no-retraction regime, it
LU
would be useful for picking the end-range, or most favorable, gap-

fillers. For example, in cases involving an agreement to agree over the
price, the court can choose the price as assessed by the defendant’s
PN
35
expert witness. Second, the court can extract the information by
H
32
Eric M. Holmes, A Contextual Study of Commercial Good Faith: Good Faith Disclosure
in Contract Formation, 39 U. PITT. L. REV. 381, 382-83 (1978) (footnote omitted); see also
Clayton P. Gillette, Limitations on the Obligation of Good Faith, 1981 DUKE L.J. 619, 642-49
(discussing the problems surrounding the good faith standard within a section entitled
“Administrative Difficulties in Remedying Bad Faith”).
33
See Melvin Aron Eisenberg, The Emergence of Dynamic Contract Law, 88 CAL. L.
REV. 1743, 1807-08 (2000) (maintaining that the difficulty in identifying bad faith
should not be a reason for failing to recognize the general duty).
34
See RESTATEMENT (SECOND) OF CONTRACTS § 206 (1981) (providing for “[i]nter-
pretation [a]gainst the [d]raftsman”); KNIFFIN, supra note 22, § 24.27 (rev. ed. 1998)
(discussing the contra proferentem doctrine).
35
See, e.g., Lassiter v. Kaufman, 581 So. 2d 147, 148-49 (Fla. 1991) (affirming the
trial court’s decision to pick the price assessed by the defendant landlord’s expert

instructing the defendant to designate the missing terms, with the

threat that, if the defendant fails to do so reasonably, the court will
36
pick its own term.
It should be noted that the principle of no-retraction could be
translated into legal commands either by rules or by standards. Noth-
ing in the shift from a consent regime to a no-retraction regime af-
fects the level of precision or generalization of the liability norm. The
mutual assent approach is sometimes implemented by rules (e.g., of-
fer and acceptance) and other times by standards (e.g., majoritarian
gap-fillers). Similarly, no-retraction can be a basis for rules (e.g., of-
fer-irrevocability) or for standards (e.g., pro-defendant gap-filling).
In the end, however, it might well be that a mutual assent regime
with majoritarian defaults is cheaper to administer than a no-
retraction regime with pro-defendant gap-fillers. In this case, one
contribution of the present analysis is in fleshing out an additional
LA
reason for the prevalence of the mutual assent regime. This regime
has maintained an intuitive appeal, not because it is the natural way
for contractual obligations to arise, but rather because it is the easier
way for contractual obligations to be enforced.
IM
E. The Efficiency of the No-Retraction Regime
SH
The no-retraction regime was presented above as a conceptual ad-
vance, as a “natural” legal platform for tracking the progress of nego-
tiations. It provides a more flexible set of tools for transforming the
LU
understandings between parties into legal obligations. This Section

attempts to rationalize the no-retraction regime on the basis of in-
strumental, rather than conceptual, grounds. It demonstrates that the
no-retraction regime proves superior in settings in which the social
PN
goal is to encourage precontractual reliance. In addition, it addresses

the concern that a no-retraction regime would chill the incentives of
parties to make proposals and distort their decisions to enter and exit
H
negotiations.
witness in a contract that featured an option to renew under a price to be agreed upon
by the parties).
36
This technique was used in Ontario Downs, Inc. v. Lauppe, 13 Cal. Rptr. 782 (Ct.
App. 1961). In that case, the court allowed the defendants to choose a parcel of land
to give to the plaintiff in fulfillment of a contract, with the threat that failure to select a
reasonable parcel would result in the court allowing the plaintiff to choose. Id. at 787.

1. The Holdup Problem
Anytime before or after the agreement, a party can make reliance

investments—expenditures that raise the value of the completed
transaction, but that have no value otherwise. It has long been recog-
nized that such investments are subject to a distortive holdup prob-
37
lem. When the party who incurs the cost of the investment
appropriates its full benefit, the incentives to invest are optimal. Un-
derinvestment occurs when the investing party bears the entire cost of
the investment but enjoys only a fraction of its benefit.
Consider, specifically, an investment that is made after some ini-
tial proposals or understandings have been discussed, but before the
parties have bound themselves to a particular division of the “pie.”
Take, for example, the case where two merging firms have reached
some understanding over the terms of the merger, but have not final-
ized the agreement. At this stage, one of the firms can make a rela-
LA
tionship-specific investment, which would increase the value of the
merger should it be finalized. The social goal at this stage is to induce
38
optimal, surplus-maximizing investment.
IM
2. Comparison of the Liability Regimes
SH
Let us compare two liability regimes. The first—the standard mu-
tual assent rule—imposes no liability on the parties prior to their
reaching a full-blown consensus. If, following the investment, the
other party insists on terms that are more aggressive than the ones
LU
discussed preliminarily and an agreement fails, no liability arises. The

second—the no-retraction principle—imposes reliance liability on the
other party if he retracts from the preliminary understanding.
PN
Each liability regime creates different incentives for the parties in-
volved in this merger example. Under the mutual assent regime,
there is no contract yet, and both parties are free to bargain for their
H
37
The holdup problem arises when parties cannot contract over reliance expendi-
tures due to high transaction costs, non-verifiability of the investment, and strategic
considerations. See Katz, supra note 12, at 1278 (describing the holdup problem in
relation to precontractual reliance investments). See generally Alan Schwartz, Incomplete
Contracts, in 2 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 277, 278-
79 (Peter Newman ed., 1998).
38
While this goal is strictly efficiency-oriented, it does not conflict with any fair-
ness- or distribution-oriented goals. Since the maximization discussed here is precon-
tractual, the subsequent contract will divide the surplus between the parties according
to factors independent of the maximization itself (e.g., the bargaining power of the
parties, legal constraints, etc.).

share of the surplus that was added by the investment. In particular,

they can ignore the pre-investment representation of terms, as it does
not lead to any liability. Their final agreement may deviate from the
initial terms and will instead divide the new post-investment surplus.
Because the cost of the investment will already be sunk, it will not be
factored into the subsequent bargaining. Thus, the investing party
can only capture a fraction of the ex post surplus, but since she bears
39
its entire cost, her incentives to invest will be suboptimal.
Under the no-retraction regime, in contrast, the opposing party is
limited in its ability to ignore previous understandings and proposals
it made and to extract a portion of the increased surplus. Such bar-
gaining strategies amount to a retraction, and if they are sufficiently
aggressive, they will lead to negotiation breakdown coupled with, at
the very least, an imposition of reliance liability on the retracting
party. This power to impose liability protects the investing party from
LA
feeling pressured to acquiesce to new, adverse terms. While renego-
tiation might still occur, the retracting party must restrain its position
to avoid negotiation breakdown. A retracting party cannot make a
IM
claim to a division of the pie that leaves the investing party with a
negative payoff, given her investment. In effect, any additional dollar
the investing party contributes increases the share of the surplus she
SH
subsequently can extract by one dollar, enabling her to enjoy the full
benefit of the investment. Thus, the investing party cannot be held
up by the retracting party, and her incentives to make investments in
40
this interim stage are optimal. Put differently, a full-blown contract
LU
39
The following example illustrates this distortion. Consider a sale transaction
PN
where, prior to any investment by the buyer, the buyer’s valuation is 100 and the
seller’s cost is 0. Assuming equal bargaining power, the parties reach an initial under-
standing over a price of 50. The buyer can make an investment of 30, increasing her
valuation by 50, to 150. It is efficient to make this investment and increase the net sur-
plus from 100 to 120 (150 – 30 ). Without the investment, the price will remain 50 and
H
the buyer’s net payoff will be 50 (100 – 50 ). With the investment, when the ex post
surplus will increase to 150, the buyer expects that the seller will retract from the initial
understanding and that the subsequent agreement will set a price of 75 (midrange of 0
and 150). This will leave the buyer with a net payoff of 45 (150 – 75 – 30 ), lower than
the payoff without the investment. Thus, the efficient investment will not be made.
40
To see how the rule against retraction resolves the holdup distortion, consider
again the above numerical example. Supra note 39. In the bargaining round that fol-
lows the buyer’s investment, although the buyer’s valuation increased to 150, the seller
cannot insist on a price greater than 120. A higher price will leave the buyer, who in-
vested 30, with a negative net payoff; the buyer will prefer to reject it and impose re-
traction liability on the seller, thus getting her cost reimbursed. Therefore, the subse-
quent price must lie in the range between 0 and 120 and—assuming equal bargaining
power—will equal 60. The buyer’s net payoff will be 60 (150 – 60 – 30 ), greater than

is unnecessary to protect precontractual reliance; the milder no-

41
retraction liability, coupled with reliance damages, will suffice.
3. Incentives to Enter Negotiations
The no-retraction principle reduces the parties’ freedom from

contract. In contrast to the all-or-nothing regime, under which a sig-
nificant portion of the negotiation is conducted without any liability
consequences, the no-retraction principle makes it costly for the par-
ties to cease negotiations. This early liability consequence, it might be
argued, would discourage parties from entering negotiations, making
42
proposals, and reaching precontractual understandings.
In situations where parties enter negotiations for reasons other
than to transact, this conjectured chilling effect is surely valid, but it
may also be quite desirable. If, for example, a party is entering nego-
tiations with an innocent opponent only to extract information from
LA
that opponent or to assert pressure on a third party, the negotiations
have no social value, and reducing their incidence by attaching liabil-
43
ity to retraction is a valuable effect. Even if the motivation of the
IM
party in entering negotiations is more innocent, forcing her to bear
SH
the non-investment payoff of 50, and thus, the buyer will elect to invest. Note that a
retraction does occur, but it is mild enough so that an agreement can still be com-
pleted.
41
This regime, although utilizing reliance damages, does not lead to the familiar
LU
overreliance problem, as identified by Steven Shavell and others. See , e.g., Steven Shav-
ell, Damage Measures for Breach of Contract, 11 BELL J. ECON. 466, 479-80 (1980) (ex-
plaining how reliance damages can lead to excessive investment). The reason, in a
nutshell, is that under no-retraction liability, the reliance investment is not guaranteed
PN
to yield returns; there is still the risk that a contract will not be formed and that the
investor will have to bear her costs.
42
See 1 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 3.26, at 361 (2d
ed. 1998) (describing a “chilling effect” of discouraging parties from entering negotia-
tions); Jason Scott Johnston, Communication and Courtship: Cheap Talk Economics and the
H
Law of Contract Formation, 85 VA. L. REV. 385, 416-17, 445-46 (1999) (arguing that liabil-
ity for pre-trade representations in the event of negotiation breakdown would cause
“the market to shrink” and would force parties to use more cautious bargaining strate-
gies, thereby wasting opportunities for efficient trade); Wouter P.J. Wils, Who Should
Bear the Costs of Failed Negotiations? A Functional Inquiry into Pre-Contractual Liability, 4 J.
ECONOMISTES & ETUDES HUMAINES 93, 103 (1992) (claiming that precontractual liabil-
ity “tends to lower inefficiently the incentives of parties to enter contract negotiations
at the outset”).
43
Indeed, under doctrines such as good faith bargaining and misrepresentation,
courts have limited the freedom of parties to strategically enter (and exit) negotia-
tions. See, e.g., 1 FARNSWORTH, supra note 42, § 3.26, at 354-55 (describing an example
of intentional misrepresentation in lease negotiations in which a court awarded dam-
ages based on the lessee’s reliance losses).

the cost she inflicted on an opponent would correct the otherwise ex-
cessive incidence of failed negotiations.
There are, to be sure, legitimate factors affecting the willingness
of parties to enter negotiations and the freedom they seek to exit ne-
gotiations. However, to the extent that parties enter negotiations that
have the potential of increasing overall surplus, a no-retraction re-
gime would enhance, rather than diminish, their willingness to nego-
tiate. The truth of this counterintuitive argument lies first in the fact
that, while the no-retraction regime curbs a party’s ability to exit
freely, it also provides her with the security that her counterpart will
not exit unilaterally. There is a symmetric upside to participating in a
regime that restricts the freedom to retract.
More importantly, as stated above, the no-retraction regime im-
44
proves the parties’ incentives to make precontractual investments.
These added investments increase the value that the parties eventually
LA
will divide in the contract, making both of them better off relative to a
regime—such as the all-or-nothing regime—that does not provide
similar reliance incentives. A rule that prohibits retraction from a pre-
IM
liminary representation, so long as it is coupled with reliance liability,
will unambiguously lead the parties to enter into negotiations in more
cases in which there is a potential surplus than they would in the ab-
SH
45
sence of liability.
44
LU
Supra note 40 and accompanying text.

45
This proposition is proven formally in Bebchuk & Ben-Shahar, supra note 12, at
456. To illustrate this effect, consider again the above example, supra notes 39, 40.
Assume now that the seller’s cost is not 0, but 110, and that if the parties enter negotia-
PN
tions, the seller makes an initial proposal of a price, after which the buyer can invest
and negotiations resume. Assume, as before, that the buyer can increase her valuation
from 100 to 150 by investing 30. This is a case where a potential surplus of 10 exists
(150 – 110 – 30 ), but only if the buyer invests.
Under the mutual assent regime, the buyer will not invest. The buyer expects that,
H
no matter what the seller’s original price proposal was, if she were to invest and in-
crease her valuation to 150, the final price will be set midway between 110 and 150, at
130, thus leaving the buyer with a negative net payoff (150 – 130 – 30 = –10 ). Expect-
ing that the buyer would not invest and that the surplus will remain negative, the par-
ties will not enter negotiations.
Under the no-retraction regime, as long as the seller’s initial proposal did not ex-
ceed 120, the buyer will invest. If the buyer invests, the seller cannot demand a price
greater than 120, as this will lead to breakdown in negotiations and liability. Thus, the
price will be set midway between 110 and 120, at 115. This leaves the buyer with a
positive net payoff (150 – 115 – 30 = 5 ) and thus, the investment will be made. The
seller, too, will end up with a positive payoff of 5 (= 115 – 110 ). Expecting the invest-
ment and the resulting positive payoffs, the parties will enter negotiations. Hence,
only under this regime will the parties enter negotiations.

Intuitively, the no-retraction regime can be viewed as a commit-

ment device. When parties negotiate a deal, their lack of commitment
and their freedom to walk away chills the incentives of their negotiating
partners to make reliance investments. This lower reliance level pro-
duces smaller contractual pies. For the same reason that parties enter
long-term, rather than short-term, contracts—to encourage relation-
ship-specific investment—the no-retraction regime increases the par-
46
ties’ investment in the relationship, thus increasing the surplus. In-
deed, the recognition that precontractual liability enhances the con-
47
tractual surplus is increasingly prominent in court decisions.
4. Unwanted Transactions
Another concern arising from the parties’ diminished freedom

from contract involves allocative inefficiency: Parties might end up
sticking with unwanted contractual partners and, consequently, miss
LA
out on opportunities to maximize the potential surplus.
There are several ways to address this concern. Note, first, that
parties are not bound to a relationship if it is indeed less efficient than
IM
its alternatives. They can, of course, abandon partners, although they
will effectively have to share with the rejected party a piece of the in-
creased surplus that is created by the more efficient transaction.
SH
To return, though, to the question of allocative efficiency, it is
true that the burden of liability can lead to an inefficient choice of
partner. If, say, the initial negotiation partner invested an amount, R,
LU
in reliance, and a new partner appears, offering a transaction that is

more efficient but not sufficiently so as to enable the initial partner to
recover R and still enjoy a greater surplus, the new partner will not be
accommodated. While this concern is valid, a couple of observations
PN
46
This claim, that the surplus is enhanced under the no-retraction regime, does
not imply that both parties are necessarily better off under the liability rule. It might
H
well be that the non-investing party, having to negotiate under the potential burden of
liability, is worse off than he would have been under the all-or-nothing regime. This
distributive effect, however, will not distort the incentives to enter negotiations. A
party whose payoff was positive in the absence of liability will not experience a negative
payoff under the no-retraction regime. For a technical proof of this claim, see Beb-
chuk & Ben-Shahar, supra note 12, at 456-57.
47
See, e.g., Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d 875, 884-85 (Ct.
App. 2002) (claiming that parties should have assurance that their investments in the
negotiations will not be wiped out by the other party’s retractions); see also Venture
Assocs. v. Zenith Data Sys., 96 F.3d 275, 278 (7th Cir. 1996) (“[A complex negotiation]
often is costly and time-consuming. The parties may want assurance that their invest-
ments . . . will not be wiped out by the other party’s footdragging or change of
heart . . . .”).

reduce its severity. First, the potential for the emergence of more at-
tractive partners should be taken into account when reliance is in-
vested. The greater this potential, the less that should be invested in
reliance by the initial partner. If courts can limit reliance liability to
reasonable, not actual, reliance, then the amount of reliance that will
be invested when there is a significant chance of a more efficient
48
partner is small. Second, while reliance by the initial partner
becomes a barrier to efficient contracting when a new partner arrives,
it increases the efficiency of the contract when a new partner does not
arrive. These two observations, taken together, suggest that, if the
likelihood of a new partner is high, reliance is not likely to be great
(and thus not a significant barrier) and, if the likelihood of a new
partner is low, reliance is likely to be elevated, its fruit being enjoyed
with high probability. Thus, the expected loss from unwanted part-
49
ners is fairly small.
LA
II. DOCTRINAL APPLICATIONS
The consensus principle underlies many of the fundamental doc-
IM
trines of contract formation. Accordingly, an alternative conception
of liability would affect the way these doctrines are rationalized and
applied. In this Part, I will begin to explore some of the prominent
SH
implications of a no-retraction regime.
A. Assent and Misunderstandings

LU
An illustrative case in which a dispute arises regarding the inter-

pretation of a contract’s language is one of misunderstanding. A
PN
48
When courts can verify the level of reasonable reliance, the investment is con-
tractible and the underinvestment problem can be resolved if the parties expressly
specify the desired level of reliance. Indeed, parties often do, and courts are willing to
H
protect such agreements. See, e.g., Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267,
274 (Wis. 1965) (examining a situation in which the parties agreed specifically on pre-
contractual investments).
49
Formally, let R denote the relationship-specific investment and V(R) the net
surplus function satisfying V ′ > 0 and V ′′ < 0. Assume that there is a probability, π ,
that, after R is sunk, a more efficient relationship will materialize, with a net surplus of
W. The optimal investment, R *, maximizes π W + (1 – π )V(R) – R and is characterized
by the first-order condition (1 – π )V ′(R *) = 1. We can write R * as a function of π , which
satisfies dR*/d π < 0, that is, the higher the probability of W, the lower is the optimal
investment that courts ought to protect. An inefficient transaction occurs when V(R *) <
W < V(R *) + R *; as π increases, R* decreases, and the likelihood of an inefficient transac-
tion—the chance that W will lie between V(R *) and V(R *) + R *—declines (although it
does not reach zero).

misunderstanding occurs when the parties agreed on a particular

term but dispute its proper meaning. Does a “chicken” mean a young
bird suitable for broiling and frying or an old fowl suitable only for
50
stewing? Does an obligation to deliver cotton via the Peerless ship
mean the vessel carrying this name that sails in October or the one
51
carrying the same name that sails in December? Under the prevail-
ing objective theory of assent, the law seeks to trace and enforce the
more reasonable among the competing meanings. Accordingly, if
one party actually knew at the time of contracting that the other party
attached a different meaning, or had reason to know of the attached
meaning, this party is “at fault” for the misunderstanding. This fault is
thus the basis for tipping the scales in favor of the meaning attached
52
by the other party.
When no party is at fault—i.e., neither knew or had reason to
know of the meaning attached by the other—there is no remaining
LA
basis for tipping the scale, and contractual liability does not arise. Al-
though both parties intended to be bound, in the absence of a clear
way to select among the competing interpretations, both parties are
53
IM
free to walk away, even if one has already performed its obligation.
Formally, this no-enforcement outcome—the only logical solution
under the mutual assent approach—is a neutral solution, biased to-
SH
ward neither of the proposed interpretations, equally barring each
party from enforcing its intended contract. Effectively, however, the
no-enforcement solution is usually favorable to the defendant. If the
dispute is over the existence or nonexistence of an obligation, the no-
LU
enforcement solution happens to be precisely the outcome favored by

the defendant, who, at the time of trial, claims that no obligation exists.
PN
50
See Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116, 117
(S.D.N.Y. 1960) (embodying a contractual misunderstanding of the term “chicken”).
51
See Raffles v. Wichelhaus, 159 Eng. Rep. 375, 376 (Ex. 1864) (resolving a con-
tractual misunderstanding over the meaning of the Peerless ship).
H
52
RESTATEMENT (SECOND) OF CONTRACTS § 201(2) (1981).
53
Id. §§ 20(1)(a), 201(3). There are two ways through which courts reach the no-
enforcement result. First, the absence of one reasonable interpretation implies that
there is no meeting of the minds and thus no contract, and consequently, none of the
contractual obligations can be enforced. This is the rationale of cases like Raffles, 159
Eng. Rep. 375, but such cases are quite rare. Second, and more common, are cases in
which the plaintiff simply cannot show that her interpretation is more reasonable. In
such circumstances, courts do not imply an absence of a contract, but simply fail to en-
force the obligation demanded by the plaintiff. In the procedural standoff with the
defendant, because the plaintiff did not meet the burden of persuasion, the defen-
dant’s position—the meaning she attaches to the contract—prevails. See, e.g., Frigali-
ment Importing , 190 F. Supp. at 121 (holding that, in order to prevail, the plaintiff has
to sustain the burden of showing that its meaning is more reasonable).

And even if both parties agree that an obligation exists but merely
dispute its affirmative scope or meaning, it is often in the interest of
one of the parties, in light of changed circumstances, to have no obli-
gation at all.
While these cases of pure misunderstanding are quite rare, they
constitute an important conceptual benchmark of the consensus prin-
ciple and have served as the point of departure in the study of mutual
54
assent doctrine. It is problematic, then, that under the mutual assent
doctrine, the court reaches a result that matches neither party’s in-
tent. Both parties intended to be bound to something, an intention
that this otherwise logical outcome frustrates.
The no-retraction approach achieves a different result. The existence
of a contract is not at stake, but merely its content. Since there are
two competing interpretations, the outcome under the no-retraction
approach can also be one of the two. Each party has an option to enforce
LA
the deal, but only under the terms intended by the other. Note, paradoxically,
that by giving the plaintiff an option to enforce a contract based on
the meaning assigned by the defendant, the pro-defendant bias inher-
IM
ent in the no-contract result is actually diminished. The defendant
cannot escape the deal altogether—an outcome she might, in light of
changed circumstances or opportunistic motives, prefer—but must
SH
yield to the plaintiff’s power to enforce the deal as she, the defendant,
intended it.
To illustrate the economic sense of a no-retraction approach, con-
55
sider the Peerless ship case. A contract for the sale of cotton provided
LU
for the shipment to be on a vessel identified as the Peerless, sailing

from Bombay to Liverpool. The buyer intended the shipment to ar-
rive on the Peerless vessel that departed in October, while the seller in-
PN
tended the shipment to arrive on the Peerless vessel that departed in

56
December. When the December Peerless arrived, the buyer refused
to accept the seller’s shipment, and the seller sued. Unable to pick
the more reasonable interpretation, the court held—and many com-
H
mentators consider this an inevitable and logical implication of the

mutual assent doctrine—that no contract existed and the buyer right-
57
fully rejected the shipment.
54
See, e.g., MARVIN CHIRELSTEIN, CONCEPTS AND CASE ANALYSIS IN THE LAW OF
CONTRACTS 36-38 (4th ed. 2001) (introducing the consensus ad idem principle by de-
scribing the Peerless case).
55
Raffles, 159 Eng. Rep. 375.
56
Id.
57
Id. at 376.

Unfortunately, the no-contract outcome allowed the buyer to es-

58
cape a speculative contract opportunistically. The no-retraction ap-
proach would have elegantly avoided this undesirable result. The
buyer-defendant, who claimed to have assigned a different meaning to
the shipment term, would not have been forced to accept the seller’s
meaning, but at the same time would not have been able to retract
from his own meaning. The seller-plaintiff could choose whether to
accept the deal as the buyer intended it—that is, according to the Oc-
tober terms—or to not enforce it at all. Given the facts of this case,
the seller would surely have opted to enforce the deal under the
buyer’s terms. The existence of two plausible meanings should not
have led to the one result nobody intended, namely, no contract.
The result arising from the no-retraction principle is consistent
with another solution courts have crafted when unable to select a
meaning that is more reasonable, a solution that accords with the pro-
LA
cedural allocation of the burden of persuasion. Consider, for exam-
ple, a deal involving the sale of chicken, with a misunderstanding be-
tween the seller and the buyer over what quality of chicken was
59
IM
required. In a suit by the buyer, who expected a higher quality of
chicken than the one intended (and delivered) by the seller, the seller
prevailed since the buyer was unable to prove that her interpretation
SH
was more reasonable.60 This is consistent with the no-retraction ap-
proach: A contract exists, but the buyer can only enforce the terms
that the seller intended, not the terms as she intended. Even though
LU
58
Brian Simpson’s historical account of this case makes it fairly clear that the
buyer-defendant acted opportunistically. A. W. BRIAN SIMPSON, LEADING CASES IN THE
COMMON LAW 151-53 (1996). It turns out that the buyer, who intended for the cotton
PN
to arrive on the October Peerless, never explicitly requested delivery when the October
Peerless arrived, two months before the seller made his own tender attempt. Id. at 152.
Simpson demonstrates that the buyer lost interest in the entire transaction since the
spot price of cotton dropped between the time the contract was formed and the arrival
of the October ship, from 17¼d to 15¼d per barrel. Id. The contract, which was an
H
instrument of financial speculation on future prices, turned out to be a losing deal for
the buyer, who could now acquire the same cotton on the spot market for significantly
less. In fact, by the time the December vessel arrived, the spot price recovered back up
to almost 17d. That is, the buyer’s loss would have been 2d per barrel under his own
interpretation of the contract, but only ¼d per barrel under the seller’s interpretation.
The buyer wanted the obligation to be dismissed, not because of the meaning the
seller attributed, but rather because circumstances changed and the contract turned
out to be unprofitable.
59
This example is modeled after Frigaliment Importing Co. v. B.N.S. International
Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960).
60
See id. at 121 (noting that both meanings could be grounded in objective defini-
tions of the disputed term and that, as a result, the plaintiff did not sustain the burden
of showing that his meaning should prevail).

there was no meeting of the minds, and even without supplementing

the disputed term with a court-drafted one, the obligation is enforce-
able in accordance with the dual-option logic. The terms enforced
are the ones intended by the party who turns out to be the defendant.
Note, though, that a Frigaliment-type result is reached under rules
of procedure rather than principles of contract. The court enforces a
contract and chooses its terms even though there is no mutual assent
and no clear way to select the more reasonable interpretation. Had
the substantive assent doctrine been applied, rather than the proce-
dural rule, it would have mandated a Peerless-type result of no con-
61
tract. A contractual obligation was enforced, in this case, despite the
substantive assent doctrine, and solely because of the rules of proce-
dure. (One can imagine a different scenario in which the seller is the
plaintiff, seeking payment for delivery that the buyer rejects; there,
the court might rule against the seller, as he too would fail to meet the
LA
burden of persuasion.) The results in Peerless and Frigaliment expose,
therefore, a tension between the substantive law of assent and the
procedural law of contract dispute resolution. The no-retraction ap-
IM
proach overcomes this tension. It provides the missing contract-
theoretical basis for Frigaliment’s decision to enforce a version of the
contract that depends on the identity of the defendant. It thus unifies
SH
the procedural and substantive perspectives, which can otherwise lead
to conflicting results.
B. Precontractual Agreements and the Contract/No-Contract Boundary

LU
During the course of negotiations, parties often reach preliminary

understandings acknowledged by handshakes, written memoranda,
and the like. At times, these understandings explicitly state that the
PN
parties do not intend to be bound until further agreement is reached.

Often, however, the existence of intent to be bound is ambiguous and
is inferred from surrounding circumstances, such as the comp-
H
rehensiveness of the understanding. What sets these understandings

apart from regular, enforceable contracts is their manifest incomplete-
ness or the fact that the parties have made it clear that they are in-
tended to be supplemented via further negotiations.
61
Indeed, a year after issuing the Frigaliment Importing decision, Judge Henry
Friendly admitted that the case might better have been decided on substantive assent
grounds. Dadourain Exp. Corp. v. United States, 291 F.2d 178, 187 n.4 (2d Cir. 1961)
(Friendly, J., dissenting).

Precontractual agreements and agreements to agree pose a diffi-

cult adjudicative task under the mutual assent doctrine. On the one
hand, it is clear that some consensus has been reached and some
commitment made; thus, allowing the parties to walk away freely
would frustrate their initial accomplishment. On the other hand, the
parties have made it clear that additional agreement needs to be
reached before there is a “contract,” and thus, enforcing their precon-
tractual understanding as if it were a contract (and filling its gaps with
court-imposed reasonable terms) would deprive the parties of the
power they sought to maintain—to reject unfavorable additional
terms. Courts, forced to abide by the contract/no-contract dichotomy
of the mutual assent doctrine, have found it difficult to reach consis-
62
tent decisions. Adjudication in this field has been criticized as “con-
63 64 65
fusing,” “inconsistent,” “all over the board,” and the “least predict-
66 67
able” in the entire area of contract law.
LA
Given this unpredictable pattern under the mutual assent regime,
the no-retraction principle has the potential of providing a framework
for a more consistent treatment of precontractual agreements. Under
62
IM
In the area of lease contracts, for example, one court has noted that the deci-
SH
sions dealing with agreements to agree are “in hopeless conflict.” Walker v. Keith, 382
S.W.2d 198, 199 (Ky. 1964).
63
Buechler, supra note 14, at 574.
64
Temkin, supra note 14, at 130 n.23.
65
Stephen R. Volk, The Letter of Intent, 16 INST. ON SEC. REG. 143, 464 (1986).
66
LU
See Farnsworth, supra note 11, at 259-60 (declaring that “[i]t would be difficult
to find a less predictable area of contract law”).
67
This confusion can be illustrated by comparing the decisions in two leading
cases, Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768 (Tex. App. 1987), and R.G. Group,
PN
Inc. v. Horn & Hardart Co., 751 F.2d 69 (2d Cir. 1984). In both cases, the parties
reached an agreement on a substantial portion, but not all, of the terms and acknowl-
edged that they had an “agreement-in-principle,” Texaco, 729 S.W.2d at 791, or “hand-
shake deal,” R.G. Group, 751 F.2d at 73. In each situation, one party retracted, not be-
cause it was dissatisfied by the resolution of the missing terms, but rather because it was
H
seeking opportunistic gain, against its previously stated intent. R.G. Group, 751 F.2d at
74; Texaco, 729 S.W.2d at 786. In Texaco, the court found that the deal was enforceable
as a contract and awarded damages of record-setting magnitude. Texaco, 729 S.W.2d at
795, 866. In R.G. Group, on the other hand, the court found that the deal was unen-
forceable and awarded no damages. R.G. Group, 751 F.2d at 79. The court in R.G.
Group reasoned that in a complex deal with so much at stake—in that case, a 25-branch
franchise agreement amounting to millions of dollars—“it would be unusual to rely on
an oral understanding,” and thus, “a requirement that the agreement be in writing and
signed simply cannot be a surprise to anyone.” Id. at 77. Ironically, although in Tex-
aco, the stakes and the complexity were far greater—a sale of control in a giant oil con-
glomerate with a complex ownership structure, where damages exceeded $10 billion—
the court found that intent to be bound could be manifested even prior to the memori-
alization of all the details into the written agreement. Texaco, 729 S.W.2d at 795.

the no-retraction approach, parties would be bound to the terms of

the precontractual understanding. But unlike standard contracts,
these precontractual agreements would not be supplemented by “rea-
sonable” gap-fillers. Instead, each party would have the option to en-
force a contract that contains the agreed-upon terms, supplemented
with terms proposed by, or most favorable (within reason) to the
other party. Thus, each party has the option to enforce upon the
other party a full agreement that is at least as profitable as the other
party had plausibly envisioned when entering the precontractual
agreement.
The no-retraction approach, when implemented through this dual-
option devise, provides an intermediate, rather than all-or-nothing,
liability consequence to the parties’ precontractual agreement (simi-
68
lar, again, to Fuller’s “sliding scale of enforceability”). There are dif-
ferent levels of intensity to precontractual agreements: they can lie
LA
anywhere on a continuum between very preliminary to almost full
consensus. A regime that focuses only on extremes and restricts the
legal outcome to either full expectation liability or no liability at all
IM
can rarely reflect the varied tones of parties’ partial understanding
along this continuum. It also leads the parties to make less-than-
optimal reliance decisions. And being so inherently unpredictable, it
SH
adds a component of risk that might chill the incentives of parties to
reach partial agreements. In contrast, under the no-retraction re-
gime, the burden of liability is proportional to the intensity of the
agreement. When very few terms are included in the preliminary
LU
agreement, the option that each party has to enforce a contract is

relatively less burdensome to the other party, since the many missing
terms are supplemented in a way most favorable to the other party. As
PN
more terms are contained in the agreement, less one-sided supple-

mentation is needed and the option each party has becomes more
burdensome to the other party. When the precontractual under-
standing is comprehensive and needs no supplementation, the option
H
to enforce it converges with standard contractual liability.

Another way to view the continuity property of the no-retraction
regime is to compare the terms of the deal contained in the options
that two parties have. A preliminary agreement is, in effect, two con-
tracts, each containing a different set of supplemented terms, with
each party having the option to enforce only one of them. When the
68
See sources cited supra note 1 (pressing for an ascending liability scheme that
would be based on different measures of damages).

preliminary agreement contains very few terms, the two contracts are
very different from each other. As more terms are contained in the
preliminary agreement and less one-sided supplementation is re-
quired, the two contracts converge until, when the preliminary under-
standing is comprehensive, the two contracts become identical.
C. Good Faith in Negotiations
The gradual rise of liability under the no-retraction principle pro-

vides a systematic foundation for one of the more ambiguous doc-
trines in contract law—the requirement to negotiate in good faith. In
the presence of precontractual agreements, and especially in the
presence of an “agreement to agree,” courts have increasingly regu-
lated the freedom from contract. While deciding not to enforce these
agreements as full-blown contracts, courts require the parties to con-
69
tinue negotiations in a bona fide attempt to reach a full agreement.
LA
In addition, they tailor some measure of reliance liability to a breach
70
of this duty. It is not clear, however, what the duty to continue nego-
tiations in good faith requires. As a result, the parties are left uncer-
IM
tain as to what type of bargaining tactic might be deemed unreason-
able. The no-retraction approach can resolve this ambiguity.
SH
For the good faith duty to be instrumental in inducing optimal
precontractual reliance, the negotiation tactics ought to conform, at
the very least, to the no-retraction principle developed here. A party
would be deemed in violation of the duty if she retracts from terms
LU
she previously agreed to or if she refuses to accept new terms offered

by the other party that are the most favorable terms for which she can
reasonably hope. Refusal to contract under such terms manifests a
motivation to break, rather than successfully culminate, the negotia-
PN
tions, and thus exhibits bad faith.

Consequently, if a party insists on terms that exceed standard or av-
erage market terms and refuses to accept reasonable, split-the-difference
H
69
See, e.g., Teachers Ins. & Annuity Ass’n of Am. v. Tribune Co., 670 F. Supp. 491,
499 (S.D.N.Y. 1987) (holding that a commitment letter represented a binding prelimi-
nary agreement and, thus, obligated both parties to seek to conclude a final agreement
by negotiating in good faith).
70
See, e.g., Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 73-74 (2d Cir.
1989) (discussing how a party may be liable for out-of-pocket expenses based on a
breach of its duty of good faith); Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d
875, 885 (Ct. App. 2002) (“[D]amages for breach of a contract to negotiate an agree-
ment are measured by the injury the plaintiff suffered in relying on the defendant to
negotiate in good faith. This measure encompasses the plaintiff’s out-of-pocket costs
in conducting the negotiations . . . .”).

proposals from her counterpart, this is not a bad faith negotiation

71
practice and should not give rise to liability. In line with the no-
retraction principle, this party has not retracted from actual or con-
structive previous representations. But when the other party caves in
and concedes all the contested issues, either in accordance with this
party’s previous demands or in accordance with the best alternative
this party can potentially find elsewhere, then the refusal of this party
72
to finalize a deal can be construed as bad faith conduct. Put differ-
ently, one way to determine bad faith is to assess the terms that are not
proposed. The defendant would want to show that there exist some
more favorable terms that were not proposed and that are within the
reasonable domain; the plaintiff would want to show that any term
more favorable to the defendant beyond what was proposed is not
reasonably attainable. In contrast to much of the good faith jurispru-
dence, this approach determines whether the defendant’s negotiation
LA
position is in good or bad faith not by the value of this position to the
73
plaintiff, but rather by its value to the defendant. To be sure, there
are many ethical factors that bear on the issue of what is bad faith in
IM
negotiations. This analysis does not exhaust such inquiry. The point
here is more limited: To the extent that the social concern is to en-
courage parties to rely on and invest in the negotiations, the good
SH
faith obligation can be instrumental in promoting this goal. In fact,
all that is required is a fairly lenient good faith standard, placing a
minimal burden on the parties. If parties are precluded from reject-
ing their own most favorable terms, optimal reliance would ensue.
LU
71
PN
See, e.g., PSI Energy, Inc. v. Exxon Coal USA, Inc., 17 F.3d 969, 973 (7th Cir.
1994) (holding that a coal supplier had not negotiated in bad faith by insisting on a
price that was above the market price).
72
This principle was rejected in Roberts v. Adams, 330 P.2d 900, 902 (Cal. Ct. App.
1958) (finding no violation of the duty to negotiate in good faith when parties failed to
H
agree on terms of payment, despite the plaintiff’s willingness to pay the entire price in
cash upfront). See also A/S Apothekernes Laboratorium for Specialpraeparater v.
I.M.C. Chem. Group, Inc., 873 F.2d 155, 159 (7th Cir. 1989) (finding no violation of
the duty to negotiate in good faith when a party refused to approve a deal that granted
all the contested issues in its favor). In the latter case, however, the concession was
made after the agreed-upon, sixty-day term to negotiate expired. Id. at 156.
73
For the view that bad faith should be assessed by the value of the terms to the
plaintiff, see White v. NLRB, 255 F.2d 564, 565-66 (5th Cir. 1958) (examining the value
of the defendant’s offer to the plaintiff in order to determine whether the defendant
negotiated in bad faith); Eisenberg, supra note 33, at 1810 (asserting that good faith
requires a party to accept a fair implication of any agreed-upon term); Farnsworth, su-
pra note 11, at 277 (highlighting potential examples of unfair dealing by focusing on
the value of proposals to the conceding party).

D. The Requirement of Definiteness
The requirement that the agreement be definite is another impli-

cation of the mutual assent principle. When the agreement fails to
include important terms, it is difficult to determine whether mutual
assent was reached. When there is no sound basis to infer what terms
the parties might have wanted, the presumption of consent is refuted
and no remedy can be provided. To hold otherwise is to “make the
contract over” and undermine the privilege of consent that the de-
74
fendant reserved. The choice under existing law is, again, between
75
no contract and a full-blown supplemented contract.
The common law has traditionally tended toward the no-contract
outcome. For example, a landlord who granted a tenant an option to
extend a lease at a price to be agreed upon was not bound in the re-
76
newal period; his promise was deemed insufficiently definite. This
traditional result has been weakened under the Uniform Commercial
LA
Code’s (the Code) “contract with open terms” approach, that more
aggressively supplements the parties’ agreement with reasonable or
77
majoritarian terms, including price terms. Nevertheless, both tradi-
IM
tional common law and the Code share the premise that the problem
is dichotomous: either a full-blown contract can be assembled with
the aid of gap-fillers, or no contract exists at all.
SH
In contrast, under the no-retraction principle, a promise that is
insufficiently definite can give rise to an intermediate result. The
party who seeks enforcement of the incomplete agreement is granted
LU
an option to enforce the transaction supplemented with terms that

are the most favorable (within reason) to the other party. The tenant,
in the above example, could enforce a lease extension under the
PN
74
See Sun Printing & Publ’g Ass’n v. Remington Paper & Power Co., 139 N.E. 470,
471 (N.Y. 1923) (presenting Judge Benjamin Cardozo’s famous dictum, “We are told
that the defendant was under a duty . . . to accept a term that would be reason-
H
able . . . . To hold it to such a standard would be to make the contract over”).

75
To illustrate this dichotomy, consider the opinions in Sun Printing, 139 N.E. 470.
An agreement left the price of future installments open, to be resolved in later nego-
tiations. When a finalized agreement was not reached, but after the parties performed
some of the immediate obligations, the parties disagreed as to whether there was a
binding contract. The court split between two views. The majority, led by Judge Car-
dozo, reversed the appellate court and held that no binding obligation existed. Id. at
342. Meanwhile, the dissent, led by Judge Frederick Crane, argued that the court
could supplement the agreement with a reasonable and fair provision. Id. at 350-51
(Crane, J., dissenting).
76
Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 417 N.E.2d 541, 544 (N.Y.
1981).
77
U.C.C. § 2-305 (2003).

landlord’s most favorable price index—a price no lower than what the
landlord could have sought when the agreement was to be reached.
This option is not equivalent to enforcing the indefinite promise
as a contract. The gaps, under this option approach, are filled with
terms different than the average/majoritarian terms. Using such ma-
joritarian terms would impose obligations on the defendant that she
has not willed. Instead, the missing terms must be such that the com-
pleted deal is guaranteed to be no worse than what the retracting
party could have presumptively intended when the incomplete prom-
ise was made, and it is enforced only if the promisee so chooses.
Indeed, in some situations, courts overcome the indefiniteness of
the agreement, using a “cure by concession” technique that is effec-
tively identical to the no-retraction regime. A party that seeks to en-
force an agreement can concede the missing terms by accepting terms
78
that are the most favorable to the other party. In his landmark deci-
LA
79
sion in Sun Printing & Publishing Ass’n v. Remington Paper & Power Co.,
Judge Benjamin Cardozo makes reference to such a technique:
If price and nothing more had been left open for adjustment, there
IM
might be force in the contention that the buyer would be viewed, in the
light of later provisions, as the holder of an option. This would mean
that [the buyer] . . . would have the privilege of calling for delivery in ac-
SH
80
cordance with a price established as a maximum.
Cardozo, however, rejects this approach in his decision. Thus, while

some courts have overcome the problem of indefiniteness in this
81
way, this approach is by no means universal. The following Section
LU
PN
78
See FARNSWORTH, supra note 21, § 3.29, at 219 (explaining “cure by consen-
sus”).
79
139 N.E. 470 (N.Y. 1923).
80
Id. at 470 (citation omitted).
H
81
For example, when parties left the payment terms “to be agreed upon,” courts
have allowed the buyer to “concede” the full payment in cash and with no delay,
namely, in a manner most favorable to the seller. See, e.g., Morris v. Ballard, 16 F.2d
175, 176 (D.C. Cir. 1926) (concluding that the purchaser could enforce a deal that
had not resolved the terms of payment if he was ready to pay the agreed price under
such terms as the vendor might impose); Matlack v. Arend, 63 A.2d 812, 817 (N.J.
1949) (stating that if the buyer “waives all credit and offers to pay cash, the defense
that the agreement is too indefinite is untenable”). It is not that courts perceive the
full payment in cash as the reasonable term that the parties intended. In fact, often-
times it is quite clear that the parties hoped to agree on installment or credit terms.
Rather, courts regard the buyer’s willingness to make full payment in cash as a waiver
that “obviate[s] any need to come to any agreement as to the manner and form of
payment.” Shull v. Sexton, 390 P.2d 313, 318 (Colo. 1964).

discusses the instances in which using this gap-filling approach would

be desirable.
E. Filling Gaps in Incomplete Agreements
The no-retraction regime’s solution to the problem of incom-

plete representation—the option each party has to enforce a contract
supplemented by terms most favorable to the other side—can be
viewed as a basis for a different principle of gap-filling in incomplete
agreements. In contrast to the “mimic the parties’ will” approach that
fills gaps with reasonable or majoritarian terms, and also in contrast to
the information-forcing default rule that fills gaps in a way that mini-
mizes information and communication costs, the no-retraction ap-
proach selects “pro-defendant” defaults: one-sided terms most favor-
able to the enforced-against party. Such default provisions are not
aimed at minimizing contract-drafting costs (as are the mimicking de-
LA
faults), nor do they purport to regulate the information flow during
the negotiations (as do “penalty” defaults). Instead, they monitor the
parties’ decisions to exit negotiations and retract from earlier repre-
IM
sentations. Moreover, if they are coupled with the reliance measure of
liability, they can efficiently regulate precontractual reliance decisions.
SH
This gap-filling approach provides a solution to a problem that is
one of the least-theorized sources of contractual incompleteness: par-
82
ties’ inability to agree over a disputed issue. In these situations, in
order to avoid a breakdown in the negotiations and a collapse of the
LU
relationship, parties may choose to leave the issue open or resolve it in

ambiguous terms. This incompleteness has little to do with drafting
costs (in fact, ambiguity is often more expensive to draft), nor with
asymmetric information. The all-or-nothing approach and standard
PN
gap-filling techniques would clearly violate the parties’ choice to re-

serve mutual veto power on the resolution of the disputed issue.
In fact, any gap-filling approach that utilizes definitive default provi-
H
sions would, if anticipated by the parties, have the ex ante effect of

precluding them from leaving an issue unresolved. The biased sup-
plementation approach under the no-retraction regime, which effec-
tively provides a dual -provision default—with its content depending
on the identity of the party seeking enforcement—is consistent with
82
See, e.g., OLIVER HART & JOHN MOORE, AGREEING NOW TO AGREE LATER: CON-
TRACTS THAT RULE OUT BUT DO NOT RULE IN (Nat’l Bureau of Econ. Research, Work-
ing Paper No. W10397, 2004) (offering a theoretical model of agreements that are de-
signed deliberately incomplete).

the parties’ strategic choice to disagree. In a sense, under this regime,

the parties can agree ex ante that the unresolved issue will never pro-
vide a basis for a unilateral decision to exit the deal, since the other
party has an option to concede it, and they can do so without actually
resolving the issue. The decoupled default terms enable parties to
83
create an obligation without mutual assent.
F. The Mechanics of Offer and Acceptance
Consensus theory is the foundation of the offer-and-acceptance

model of contract formation. If the parties have to reach consensus in
order to create contractual liability, then it is necessary to identify two
communications that manifest identical terms, and before such a con-
temporaneous union of communications occurs, both parties must be
84
free to walk away. Thus, doctrines that address the relations between
communications that are either non-identical or that create timing is-
LA
sues, such as revocation of offers, counteroffers, and battles of forms,
among others, are all corollaries of the consensus principle. Accord-
ingly, a liability regime that does not build this principle and does not
IM
require consensus would have numerous implications for the legal
consequences of the offer, acceptance, and other precontractual com-
munications.
SH
Before examining these implications, however, a point of caution
is in order. The offer-and-acceptance model of contract formation
is not always a useful representation of the negotiation process. In
LU
fact, under the premise that motivates much of the analysis through-
out this Essay—that mutual assent is reached piecemeal—the offer-
and-acceptance model is quite synthetic. There is not a single com-
munication in which a party sets forth the comprehensive list of terms
PN
it desires, to which the other party says “I accept.” Instead, communi-

cations proceed in many rounds, each relating to a different aspect of
the deal. Full-blown offers or counteroffers, if they exist, only trail
H
and memorialize a course of partial understandings. Nevertheless, if

the no-retraction idea is to have a general appeal, it must apply to the
83
The argument that parties are often interested in this type of unresolved or in-
terim commitment is developed more fully in a companion paper, Ben-Shahar, supra
note 8.
84
See Adams v. Lindsell, 106 Eng. Rep. 250, 251 (K.B. 1818) (“The defendants
must be considered in law as making . . . the same identical offer to the plaintiffs; and
then the contract is completed by the acceptance of it by the latter.”); Simpson, supra
note 2, at 258-62 (discussing the historical evolution of the offer-and-acceptance doc-
trine).

simple transactions in which communications do fit within the of-

fer/acceptance metaphorical framework. Accordingly, the following
is a tentative exploration of a few implications of the no-retraction
approach.
1. Doctrines that Permit Costless Retraction
Under the mutual assent regime, a party that manifested its will-
ingness to enter an agreement under some terms can freely retract as
long as the other party has not accepted these same terms. Thus, if
the communication amounts to what the law deems to be an “offer,”
current doctrine establishes that it can be withdrawn at no cost before
the intent to be bound becomes mutual, namely, any time prior to ac-
85
ceptance. Under the no-retraction principle, however, retraction in
such circumstances is not free, particularly if the other party relied on
the proposal. The offeror who revokes the offer must reimburse the
LA
offeree at least for the reliance investment incurred after the offer was
made. Similarly, if the communication does not amount to an “offer”
but is merely a solicitation of offers, or an invitation to deal, current
IM
doctrine allows the soliciting party to retract prior to (and even after)
the response by the other party, whereas the no-retraction regime will
impose liability on the soliciting party who is now unwilling to deal
SH
under the terms she solicited.
In some contexts, the law already recognizes mild versions of a no-
retraction principle. When a subcontractor makes a bid, which the
general contractor uses in computing her own bid, the subcontractor
LU
86
cannot revoke his terms, even before they are affirmatively accepted.
It is not consent that creates liability, but a one-sided, relied-upon
proposal.
PN
The no-free-revocation rule raises several potential concerns. First,

each party might be less willing to communicate proposals and would
H
85
U.C.C. § 2-205 (2003); Petterson v. Pattberg, 161 N.E. 428, 429 (N.Y. 1928)
(holding that an offer is revocable anytime before acceptance even though the offeree
incurs costs in reliance).
86
Drennan v. Star Paving Co., 333 P.2d 757, 759-60 (Cal. 1958). Some courts have
criticized this deviation from the mutual assent regime for its one-sided liability, expos-
ing subcontractors to bid shopping and bid chopping. See, e.g., Pavel Enters., Inc. v.
A.S. Johnson Co., 674 A.2d 521, 528 (Md. 1996) (noting that Drennan’s reasoning has
been criticized based on the fact that subcontractors are bound to general contractors
but general contractors are not bound to subcontractors). These courts have not rec-
ognized, however, the possibility of applying the no-retraction regime bilaterally. Gen-
eral contractors, too, can be barred from retracting: once they incorporate the sub-
contractor’s offer into their own bid, they may not retract.

prefer to wait for the other party to put forth a non-retractable pro-
posal, thus preserving its own freedom to walk away cost-free. This
problem could be particularly severe in situations where parties
expect that new information will affect their willingness to transact.
Further, parties might hesitate to enter negotiations, reducing the in-
cidence of efficient contracting.
As a general theoretical matter, this concern is not valid. Recall,
first, that if, in light of fresh information, a party wishes to revoke a
proposal, she can still do so under the no-retraction regime, but at a
cost. The only difference between the no-retraction regime and the
consensus regimes is who bears the cost of reliance sunk prior to the
proposer’s retraction. A party who, in the course of negotiations, ac-
quired new information, can revise her offer, or even dissolve the rela-
tionship, but if this retraction leads to a negotiation breakdown, she
87
must reimburse her counterpart’s expenses. As argued above, this
LA
added cost of retraction would increase, not reduce, the payoff from
contracting to both parties, including the proposing party. True, the
latter must bear a cost of potential liability for retraction. This cost,
IM
however, is more than offset by the benefit she derives from the in-
creased reliance investment by her negotiation partner. Namely, un-
der the no-retraction regime, negotiating partners have the greater
SH
security that their counterparts will not retract and walk away from
previous proposals, and in the presence of this enhanced security they
will have a greater incentive to make precontractual specific invest-
ments. These investments, in turn, increase the surplus that both par-
LU
ties end up dividing via the contract. Thus, the proposing party, by
surrendering the absolute freedom to retract, energizes the oppo-
nent’s investment and eventually enjoys the larger contractual pie.
PN
For example, a subcontractor is better off when his bid is irrevocable,

because the general contractor is more likely to rely on this bid and to
88
incorporate it into her own bid.
Another concern has to do with a party’s ability to make concur-
H
rent proposals to numerous potential partners, where a contract can

be entered into with, at most, one of the respondents. Would the
proposing party be liable to respondents who are turned down for
their response costs? Would such liability deter parties from making
87
Supra Part I.E.3.
88
See Drennan, 333 P.2d at 760 (arguing that the subcontractor benefits by having
his bid irrevocable and thereby enabling the contractor to rely on it).

concurrent proposals or from soliciting concurrent bids from multiple

parties?
The answer to this concern turns on what is deemed a retraction
in the presence of multi-party bids. If it is clear that the intent of the
soliciting party is to deal eventually with only one of the respondents,
then the original proposal to the multiple parties can be understood
to include an implicit condition that no more than one of the re-
sponses can lead to a deal. Thus, to avoid the burden of excessive li-
ability, the soliciting party need not opt out of the no-retraction re-
gime, but merely clarify to the recipients (if it is not already clear) that
the solicitation is not exclusive. Recall that the same problem arises
under the mutual assent regime, when more than one party responds
to an advertisement. The common law resolves this problem by classi-
89
fying the advertisement as an “invitation” rather than an “offer.” The
90
advertisement is not open for all recipients to accept. Here, a retrac-
LA
tion does occur if, say, the soliciting party insists on terms different
than ones she initially set out, rejects all the responses that conform to
the solicitation’s terms, or does not fairly consider one of the bids.
IM
But a retraction does not occur if the soliciting party is rejecting the
91
invited responses after impartially accepting one of the bids.
A further concern that the no-retraction regime may raise has to
SH
do with the expiration of precontractual proposals. How long must a
party, who made a proposal, wait before she can walk away from the
negotiations without bearing liability for retraction? Surely, the pro-
posal cannot be open indefinitely, binding the proposing party for-
LU
ever. Under the current regime, a party who made a proposal but
then seeks to terminate the negotiations can freely revoke the pro-
posal. Under the no-retraction regime, this course of action is not
PN
available, raising concerns that parties would be bound even when the
negotiations turned stale.
This concern can be dealt with by defining the retraction restric-
tions with greater precision. Recall that the limitation on retraction is
H
meant to prevent opportunistic retractions that are associated with

holdups. Retractions that are a result of impasse—of exhausted bar-
gaining and a sincere futility of negotiations—should not be grounds
89
RESTATEMENT (SECOND) OF CONTRACTS § 26, cmt. b, illus. 1 (1981).
90
Id. cmt. c (“In determining whether an offer is made, relevant factors include
the . . . number of persons to whom the communication is addressed.”).
91
For a similar understanding of the obligation to entertain bids, see Heyer Prods.
Co. v. United States, 140 F. Supp. 409, 413 (Ct. Cl. 1956); Farnsworth, supra note 11, at
238-39.

for liability. In the same fashion that current law determines the
length of time that unrestricted offers, if not revoked, remain open,
no-retraction doctrine can determine the length of time that propos-
als cannot be revoked. For example, the existing default rule estab-
92
lishes that an offer expires after a reasonable length of time. Such a
rule, if applicable and effective under a regime that permits free af-
firmative retraction, may also be applicable under a regime that does
93
not permit free retraction. The offeror’s interest to be free from fu-
tile negotiations can be addressed by shortening the term that is con-
sidered “reasonable” for an offer to remain open. Of course, the of-
feror may retract even earlier and, to the extent that the offeree has
not yet relied, do so without bearing any liability.
In general, it might be feared that a no-retraction regime, by re-
ducing each party’s unilateral control over the termination of the ne-
gotiations, would introduce more uncertainty into the negotiations
LA
stage. Note, though, that the diminished freedom to retract may only
increase, rather than reduce, the parties’ certainty as to their position.
Under this regime the parties know that serious precontractual state-
IM
ments lead to certain intermediate liability. In contrast, under the
current regime, parties are often uncertain whether their communica-
tions have put them in the realm of contract. The variance inherent
SH
in this binary regime, where legal consequences are either null or
harsh, is eliminated by the no-retraction regime.
To be sure, transactors who are accustomed to the free-retraction
regime might be intimidated by the no-retraction principle and, as
LU
a result, instinctively opt out of it. Such a reaction, however, can at

most confirm how deep-rooted the consensus principle is in the ex-
isting legal folklore. It cannot rationalize the consensus principle or
PN
94
its free-retraction corollary. Indeed, under different legal systems,
92
See RESTATEMENT (SECOND) OF CONTRACTS § 41 (1981) (stating that an offeree’s
H
power of acceptance will lapse after a reasonable amount of time unless the offer states
otherwise).
93
A similar approach applies to contract negotiations under the National Labor
Relations Act (NLRA), 29 U.S.C. §§ 151-169 (2000). Negotiations toward a collective
bargain can be terminated, and offers withdrawn, if they have reached an “impasse.” A
substantial body of case law defined the terms under which such withdrawal can occur.
See Farnsworth, supra note 11, at 282-83 (discussing the “impasse” concept as it relates
to breaking off negotiations).
94
Indeed, the requirement of mutual consent—and the need for an offer and an
acceptance—has been so deeply rooted in the intuitions of scholars and transactors
alike that it has often been packed into the definition of contract. James Gordley ar-
gues convincingly that there is not a single satisfactory philosophical account as to why
an offer cannot be conceived differently, for example, as a commitment that is binding

offers are considered irrevocable unless the offeror expressly stated

95
otherwise.
2. Doctrines That Deal with Nonconforming Communications
When parties exchange communications that do not manifest a

consensus, e.g., counteroffers, forms containing different material
terms, and the like, the mutual assent regime assigns all-or-nothing le-
gal consequences to their negotiations. On the “nothing” side, under
the rigid “mirror-image” rule of the common law, an offeree who ac-
cepts most of the terms and adds or modifies others is presumed to
reject the original offer, thereby terminating her power of acceptance.
Namely, the original offer expires, and the original offeror is free to
96
walk away. Even under the less rigid approach of the Code, an of-
feree who is adding or modifying material terms in response to an of-
fer is rejecting the offer and, unless the offer is renewed, can no
LA
97
longer accept the rejected terms. On the “all” side, if the parties’
conduct recognizes the existence of a contract, provisions are filled in
98
liberally.
IM
Under the no-retraction rule, nonconforming communications,
whether counteroffers or concurrent proposals, do not automatically
cancel out, but are instead baselines that each party sets for the other
SH
to accept. This exchange of proposals mode of negotiations repre-
sents the prototypical case of gradual convergence of the wills. It is
a continuous process whose essence, as argued in Part I, justifies
99
a “convergent” liability regime. Thus, neither party can unilaterally
LU
walk away from the terms it offered, unless the terms are affirmatively
PN
unless and until it is rejected by the other party. GORDLEY, supra note 20, at 175-80,
234.
95
See, e.g., Franco Ferrary, A Comparative Overview on Offer and Acceptance Inter
Absentes, 10 B.U. INT’L L.J. 171, 189-90 (1992) (observing that in Germany, Austria,
H
Switzerland, and Portugal, an offer is considered irrevocable). In Germany, an offer is

irrevocable after it has been received by the offeree, and it may provide that some ele-
ments are left to the determination of the offeree. BÜRGERLICHES GESETZBUCH
§§ 130(1), 315 (2000).
96
RESTATEMENT (SECOND) OF CONTRACTS § 36(1)(a) (1981) (“[The] offeree’s
power of acceptance may be terminated by rejection or counter-offer . . . .”); see also
Minneapolis & St. Louis Ry. v. Columbia Rolling-Mill Co., 119 U.S. 149, 152 (1886)
(determining that, after making a counteroffer that was not accepted, the plaintiff
could not fall back on the defendant’s original offer).
97
U.C.C. § 2-207(2) (2003).
98
§ 2-207(3).
99
See supra note 27 and accompanying text (discussing how the no-retraction re-
gime creates convergent liability).

rejected. As a default, a counteroffer need not be deemed a rejection,

but merely a basis for a reverse option. Following the counteroffer,
each party has the power of acceptance. In particular, the original of-
feror may either accept the counteroffer or refine its previous offer,
but cannot retract by insisting on more aggressive terms.
A party has, to be sure, a right to terminate the negotiations fol-
lowing a rejection of its offer. As in the case of multiple concurrent re-
spondents, where turning down one and choosing another bidder is
not a retraction, in the case of multiple sequential respondents, the of-
feror can turn and deal with a subsequent partner after the initial one
rejected the offer. This last observation highlights the proper scope
of the no-retraction regime. It is not designed to override parties’ le-
gitimate motivation to exit negotiations. A party that makes represen-
tations of terms may still turn around and refuse to deal if her partner
delayed his response unreasonably, rejected her offer outright, or in
LA
any other way failed to manifest his acceptance of the offer. Viola-
tions of the no-retraction principle occur, in principle, only if the re-
fusal to deal under the previously represented terms is part of a bar-
IM
gaining strategy that aims at capturing a bigger share of the surplus
than previously conceded.
SH
CONCLUSION
This Essay explores an alternative to one of the fundamental

building blocks of the law of contract formation—the requirement of
LU
mutual assent. It does not propose any change in the type of liability
that emerges when assent exists, but rather it explores an intermedi-
ate species of liability that could emerge when mutual assent does not
exist, prior to consensus. It shows that the two regimes converge
PN
when a consensus over terms exists; it is only when full consensus is

lacking that the two regimes diverge.
The analysis in this Essay focuses on one type of justification for
H
the no-retraction liability regime, namely, an economic justification

emphasizing reliance incentives. It identifies reliance damages as the
optimal measure of damages for retraction from precontractual rep-
resentations. It argues, however, that the no-retraction regime could
conceptually be coupled with various measures of damages and tai-
lored to promote other objectives of the transacting parties. Surely,
other contracting goals and social concerns can be affected by a shift
from an all-or-nothing regime to a continuous scale of enforceability,
and they may rationalize other remedies.

In comparison to the existing assent doctrines of contract law,

the no-retraction principle provides a different approach to many
fundamental problems of contract formation. Our brief transdoctrinal
journey in Part II demonstrates that under the no-retraction approach,
the legal resolution of mutual mistakes, precontractual agreements,
conflicting proposals, and more generally, gaps in incomplete con-
tracts, would be different than the existing order under the familiar
assent regime.
The analysis in this Essay, being exploratory in nature, is admit-
tedly lacking in rigor and in nuance. As a substitute to the mutual as-
sent “pillar” of contract law, the no-retraction principle potentially
applies to numerous contexts, with implications to many doctrines,
none of which were treated with sufficient detail here. A more com-
plete defense of the no-retraction regime would also have to identify
reasons why the consensus principle prevailed, historically. Accord-
LA
ingly, the analysis here is offered, not as a basis for reform, but as an
inquiry into some basic conceptions underlying our legal tradition. It
remains for future work to explore the extent to which the approach
IM
developed in this Essay has the horsepower to resolve pragmatically the
problems that have proven difficult for current doctrine and to exam-
ine whether these solutions advance the various social objectives asso-
SH
ciated with contract formation.
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3
Consideration
and other Tests
of Enforceability
Contents
LA
IM
3.1 Overview 106
3.2 Introduction 106
SH
3.3 Deeds 108

3.4 Consideration or reliance? 109
LU
3.5 Benefit and detriment 111

3.6 Mutual promises 111
PN
3.7 Consideration need not be ‘adequate’ but must be

‘sufficient’ 112
H
3.8 Past consideration is no consideration 118

3.9 Performance of existing duties 120
3.10 Consideration and the variation of contracts 135
3.11 The doctrine of promissory estoppel 137
3.12 Promissory estoppel and consideration 140
3.13 Promissory estoppel and the part payment of debts 147
3.14 Other types of estoppel 150
3.15 Alternative tests of enforceability 151
3.16 Principles of European Contract Law 159
3.17 Summary of key points 160
3.18 Further reading 161

106 The Modern Law of Contract
3.1 OVERVIEW
This chapter is concerned with the issue of the enforceability of promises. How
does English law decide whether a promise is to be treated as enforceable by the
courts? In investigating this question, the following topics will be considered:
Deeds. These constitute a means of indicating an intention to make an

enforceable promise through formal means – that is, putting the promise
into a particular type of document.
Consideration. The doctrine of ‘consideration’ is one of the hallmarks of
English contract law. It means, in effect, that promises do not have to take
any particular form, or be put in writing, but will be enforceable if there is
mutuality in the agreement – both parties bring something to it. Within this
doctrine it will be necessary to consider:
What constitutes ‘consideration’? Does it have to have a monetary
value?
LA
What is meant by the requirement that consideration must be
‘sufficient’, though not necessarily ‘adequate’?
Can an action already performed (past consideration) be consideration
IM
for a new promise? (Generally, it cannot.)
When will the performance of an existing duty constitute good
SH
consideration? The answer will depend on the type of duty.

Promissory estoppel. This doctrine allows a promise unsupported by
consideration to be enforced – generally in the context of the variation of an
LU
existing contract.
Part payment of debts. Generally, part payment of a debt is not good
consideration for the remission of the balance, unless promissory estoppel
PN
applies.
Alternative tests of enforceability. Other jurisdictions use ‘reliance’ as a test
H
of enforceability alongside consideration. To date, English law has made

limited use of this test.
3.2 INTRODUCTION
In the previous chapter, the factors which lead a court to conclude that there was
sufficient of an ‘agreement’ for there to be a binding contract were discussed. In
this chapter the focus is on the question of whether all agreements that meet the
requirements set out in that chapter will be treated as legally binding. The answer
is ‘no’ – agreement is a necessary but not sufficient condition for a binding legal
agreement. The English courts have developed other tests to assess the enforce-
ability of agreements. The principal one is the requirement of ‘consideration’, and
analysis of this doctrine will form the bulk of this chapter.

Consideration and other Tests of Enforceability 107
In essence the doctrine of consideration requires that both sides to the agree-
ment bring something to the bargain – if the obligations are all on one side, then
there will be no ‘consideration’, and probably no contract. This requirement
of consideration is a particular characteristic of the common law approach to
contractual obligations – it is not found in the same form in jurisdictions whose
contract law is not based on English law. It is not without its problems. There are
difficulties in deciding, for example, whether doing, or promising to do, something
which you are already obliged to do (e.g. under another contract, or as part of a
public duty) can be good consideration. Problems also arise in the context of the
variation of contracts. To what extent are parties who are involved in an ongoing
contractual relationship able to create binding variations to that contract, for
example, as a result of changed circumstances? English contract law does not
make this process easy. It also takes a very strict line on the issue of whether a
creditor who promises to forgo the balance of a debt on receipt of part payment
can be held to that promise.
In response to these problems, the English courts have developed a concept
that is now generally referred to as ‘promissory estoppel’. This is a secondary test
LA
of the enforceability of a promise, which does not replace ‘consideration’, but
operates in certain specific situations, particularly in relation to the variation of
IM
contracts and the part payment of debts, to mitigate the strict application of the
common law doctrine. Some analysts of the concept of promissory estoppel go
SH
further and argue that it is simply an example of a more wide ranging test of
enforceability which should be regarded as sitting alongside or even replacing
consideration. This argument is based around the concept of ‘reasonable
LU
reliance’, and suggests that it is in effect where the promisee has reasonably
acted in reliance on the promisor’s promise that that promise should be treated as
enforceable. This approach has received more acceptance in other common law
PN
jurisdictions (e.g. USA, Australia) than it has in the English courts. The issues
raised by this analysis are discussed towards the end of this chapter.
H
The final test of enforceability discussed in this chapter is the ‘deed’. This is a
test based on the form of the agreement, rather than its content, and can operate
to make one-sided agreements (such as the promise to make a gift) enforceable,
even though there is no consideration for the promise.
These tests of enforceability are not necessarily conclusive of the issue, how-
ever. The courts may still insist on asking the question as to whether an agreement
that contains offer, acceptance, and consideration, was actually intended to be
legally binding. The discussion of this overarching concept of ‘intention to create
legal relations’ is left to Chapter 4.
The chapter starts with a discussion of ‘deeds’, and then looks at consider-
ation, promissory estoppel, and ‘reasonable reliance’.

3.3 DEEDS
The ‘deed’ is a way of using the physical form in which an agreement is recorded
in order to give it enforceability. The agreement is put in writing and, traditionally,
‘sealed’ by the party or parties to be bound to it. The ‘seal’ could take the form of a
wax seal, a seal ‘embossed’ onto the document by a special stamp, or simply
the attachment of an adhesive paper seal (usually red).1 Such contracts were
also known as ‘contracts under seal’ (in contrast to ‘simple contracts’ which use
‘consideration’ as the test of enforceability).
The formal requirements for making a ‘deed’ are now contained in s 1 of the
Law of Property (Miscellaneous Provisions) Act 1989.2 There is no longer any
requirement that the document should be sealed.3 The document must, however,
make it clear ‘on its face’ that it is intended to be a deed, and it must be ‘validly
executed’ by the person making it or the parties to it.4 ‘Valid execution’ for an
individual means that the document must be signed in the presence of a witness
who attests to the signature.5 In addition there is a requirement of delivery – the
LA
document must be ‘delivered as a deed by [the person executing it] or a person
authorised to do so on his behalf’.6 For a company incorporated under the
Companies Acts, the position is governed by s 36A of the Companies Act 1985.7
IM
The ‘execution’ of a document by a company can take effect either by the affixing
of its common seal,8 or by being signed by a director and the secretary of the
SH
company, or by two directors.9 For a document executed by a company to be a

deed, it simply needs to make clear on its face that this is what is intended by
whoever created it.10 It will take effect as a deed upon delivery, but unless a
LU
contrary intention is proved, it is presumed to be delivered upon being executed.11

In OTV Birwelco Ltd v Technical and General Guarantee Co Ltd,12 it was held that
a deed was validly executed within s 36A of the Companies Act 1985 where a
PN
company had used its trading name rather than its registered name; nor did it
render the deed unenforceable that the seal used was engraved with the trading
H
name rather than the registered name (contrary to s 350 of the Companies Act
1985). Non-compliance with s 350 rendered the company concerned liable to a
fine, but had no automatic effect on the validity of the deed.
1 Indeed, it was probably sufficient for the document to indicate on its face that it was ‘sealed’, without the
need for any physical ‘sealing’ – see First National Securities Ltd v Jones [1978] Ch 109; Law Commission,
Working Paper No 93, paras 4.2–4.3.
2 This followed from the Law Commission Report No 163, Deeds and Escrows.
3 Section 1(1)(a); nor is there any limitation on the substances on which a deed may be written. At one time,
deeds were traditionally written on parchment rather than paper.
4 Section 1(2).
5 Section 1(3)(a). It may also be signed at the relevant person’s direction, but it must still be in his presence
and, in this case, in the presence of two witnesses who must each attest the signature: ibid.
6 Section 1(3)(b).
7 As inserted by the Companies Act 1989, s 130(2).
8 Section 36A(2).
9 Section 36A(3). The document should make it clear that it is being executed by the company.
10 Section 36A(5).
11 Ibid.
12 [2002] EWHC 2240 (TCC); [2002] 4 All ER 668.

If the parties to an agreement have taken the trouble to put it into the form
of a deed, following the requirements laid down by s 1 of the 1989 Act (or s 36A of
the Companies Act 1985), the courts will assume that it was their intention to
create a legally binding agreement, and will not inquire into whether the other
main test of enforceability (that is, ‘consideration’) is present. As will be seen
below, the characteristic of the modern doctrine of consideration is that there is
mutuality in the arrangement, with something being supplied by both parties to
the agreement. This is not necessary in an agreement which is put into the form of
a deed. Where, therefore, a transaction is ‘one sided’ with only one party giving,
and the other party receiving all the benefit without providing anything in
exchange, the deed is one certain way of making the arrangement enforceable.
Deeds may be used even where the transaction is supported by consider-
ation.13 This has traditionally been done in relation to complex contracts in the
engineering and construction industries. This is probably because, by virtue of the
Limitation Act 1980, the period within which an action for breach of an obligation
contained in a deed is 12 years,14 whereas for a ‘simple’ contract it is only six
years.15 The longer period is clearly an advantage in a contract where problems
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may not become apparent for a number of years. The practice of ‘sealing’
a document is also still used, even though it is no longer necessary even for a
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company. It may in some circumstances serve to make it clear that the document
is intended to be a ‘deed’. It does not in itself, however, make the transactions
SH
concerned any more or less enforceable.

For contracts which are not made in the form of a deed, ‘consideration’ is
generally used as the test of enforceability, and it is to this that we now turn.
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3.4 CONSIDERATION OR RELIANCE?

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The doctrine of consideration is one of the characteristics of classical English

contract law. This provides that no matter how much the parties to a ‘simple
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contract’ may wish it to be legally enforceable, it will not be so unless it contains

‘consideration’. What does the word mean in this context? It is important to note
that it does not have its ordinary, everyday meaning. It is used in a technical
sense. Essentially, it refers to what one party to an agreement is giving, or promis-
ing, in exchange for what is being given or promised from the other side. So, for
example, in a contract where A is selling B 10 bags of grain for £100, what is the
consideration? A is transferring the ownership of the grain to B. In consideration
of this, B is paying £100. Or, to look at it the other way round, B is paying A £100.
In consideration for this, A is transferring to B the ownership of the grain. From this
example it will be seen that there is consideration on both sides of the agreement.
It is this mutuality which makes the agreement enforceable. If B simply agreed to
13 The only situation in which a contract must be made by deed to have full effect is a lease of land for more than
three years: Law of Property Act 1925, ss 52 and 54(2). Even here the lease will have some effect in equity,
and will be enforceable, provided it is in writing (Walsh v Lonsdale (1882) 21 Ch D 9), and subject to any
intervening third party rights (for example, if the landlord sells the land).
14 Limitation Act 1980, s 8(1).
15 Ibid, s 5.

pay A £100, or A agreed to give B the grain, there would be no contract. The
transaction would be a gift and would not be legally enforceable.
The history of the development of this doctrine is a matter of controversy.
Some writers have argued that a study of the history of the English law of contract
shows that ‘consideration’, when first referred to by the judges, meant simply a
‘reason’ for enforcing a promise.16 According to this view, such ‘reasons’ could
be wide ranging. It was only in the late eighteenth century at the earliest,17 and
probably not until the production of the first contract textbooks in the second half
of the nineteenth century,18 that the doctrine of consideration came to be
regarded as consisting of the fairly rigid set of rules which it is now generally
regarded as comprising. The approach here is to deal with the doctrine as it
currently appears to be, but to keep in mind that there are alternative tests of
contract enforceability. The main alternative is the concept of ‘reasonable
reliance’. This will be discussed more fully at the end of this chapter,19 but a brief
outline will be given here, in order to put the discussion of consideration in a
proper perspective.
The concept of reliance as the basis for enforceability is that it is actions, and
LA
reliance on those actions, that creates obligations, rather than an exchange of
promises (as under the classical doctrine of consideration). Thus, the window
IM
cleaner who, having checked that you want your windows cleaning, then does the
work, does so in reliance on the fact that you will pay for what has been done. This
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is suggested to be a more accurate way of analysing many contractual situations

than in terms of the mutual exchanges of promises, which forms the paradigmatic
contract under the classical model.20 Once this principle is accepted, it then
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opens the door to enforcing agreements where there is nothing that the classical
law would recognise as ‘consideration’, provided that there is ‘reasonable
reliance’. This is accepted to a greater or lesser extent by many common law
PN
jurisdictions,21 but has only received limited support to date by the English courts
– though some recent decisions purportedly based on ‘consideration’ can be
argued to be more accurately concerned with ‘reliance’.22
H
We will return towards the end of the chapter to consider further questions
about the theoretical basis of consideration,23 and whether it is developing in a
way which may perhaps have links to its historical origins. At that point it will also
be worth looking more generally at the question of whether consideration still
retains its dominant position at the heart of the English law of contract, or whether
the growth in situations where promises may be enforceable in the absence of
consideration means that its role needs further reassessment. In the meantime, in
16 See, for example, Simpson, 1975a, Chapters IV–VII, and in particular p 321; Atiyah, 1986, Chapter 8. This is
discussed in more detail below, at 3.15.1.
17 See, for example, Rann v Hughes (1778) 7 Term Rep 350n; 4 Bro PC 27.
18 For example, Anson’s Law of Contract, first published in 1879.
19 See below, 3.15.2.
20 See Chapter 1, 1.2.
21 For example, the United States, Australia, New Zealand and Canada – see below, 3.15.2.
22 For example, Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1; [1990] 1 All ER 512 –
discussed below, 3.9.8
23 See below, 3.15.1.

the discussion of consideration in the following sections, the tension between the
classical theory and the more modern trends towards reliance-based liability
needs to be kept in mind, and will be highlighted at various points.
3.5 BENEFIT AND DETRIMENT
It is sometimes said that consideration requires benefit and detriment. The often
quoted, but not particularly helpful, definition of consideration contained in Currie
v Misa 24 refers to these elements:
A valuable consideration, in the sense of the law, may consist either in some right,
interest, profit or benefit accruing to one party or some forbearance, detriment, loss
or responsibility, given, suffered or undertaken by the other.
In other words, what is provided by way of consideration should be a benefit to

the person receiving it, or a detriment to the person giving it. Sometimes, both are
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present. For example, in the contract concerning the sale of grain discussed in the
previous section, B is suffering a detriment by paying the £100, and A is gaining a
benefit. B is gaining a benefit in receiving the grain, A is suffering a detriment by
IM
losing it. In many cases, there will thus be both benefit and detriment involved, but
it is not necessary that this should be the case. Benefit to one party, or detriment
SH
to the other, will be enough. Suppose that A agrees to transfer the grain, if B pays
£100 to charity. In this case, B’s consideration in paying the £100 is a detriment to
B, but not a benefit to A. Nevertheless, B’s act is good consideration, and there is
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a contract. In theory, it is enough that the recipient of the consideration receives

a benefit, without the giver suffering a detriment. It is difficult, however, to think of
practical examples of a situation of this kind, given that the traditional rule is that
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consideration must move from the promisee.

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3.6 MUTUAL PROMISES
The discussion so far has been in terms of acts constituting consideration. It is

quite clear, however, that a promise to act can in itself be consideration. Lord
Dunedin, in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd,25 for example,
approved the following statement from Pollock, 1902 (emphasis added):
An act or forbearance of the one party, or the promise thereof, is the price for which
the promise of the other is bought, and the promise thus given for value is
enforceable.
Suppose, then, continuing the example used above, that on Monday, A promises
that he will deliver and transfer the ownership of the grain to B on the following
Friday; and B promises, again on Monday, that when it is delivered she will pay
24 (1875) LR 10 Ex 153.
25 [1915] AC 847.

£100. There is no doubt that there is a contract as soon as these promises have
been exchanged, so that if on Tuesday B decides that she does not want the grain
and tries to back out of the agreement, she will be in breach of contract. But
where is the consideration? On each side, the giving of the promise is the con-
sideration. A’s promise to transfer the grain is consideration for B’s promise to
pay for it, and vice versa. The problem is that this does not fit easily with the idea
of benefit and detriment. A’s promise is only a benefit to B, and a detriment to A, if
it is enforceable. But it will only be enforceable if it is a benefit or a detriment. The
argument is circular, and cannot therefore explain why promises are accepted
as good consideration.26 There is no easy answer to this paradox,27 but the
undoubted acceptance by the courts of promises as good consideration casts
some doubt on whether benefit and detriment can truly be said to be essential
parts of the definition of consideration. It may be that the concept simply requires
the performance of, or the promise to perform, some action which the other
party would like to be done. This approach ignores the actual or potential detri-
ment. Alternatively, if it is thought that the idea of benefit and detriment is too
well established to be discarded, the test must surely be restated so that con-
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sideration is provided where a person performs an act which will be a detriment
to him or her or a benefit to the other party, or promises to perform such an act.
IM
On this analysis, benefit and detriment are not so much essential elements of
consideration, as necessary consequences of its performance.
SH
3.7 CONSIDERATION NEED NOT BE ‘ADEQUATE’ BUT MUST BE

‘SUFFICIENT’
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The view that the element of ‘mutuality’ is the most important aspect of the
doctrine of consideration is perhaps supported by the fact that the courts will
PN
not generally inquire into the ‘adequacy’ of consideration. ‘Adequacy’ means the
question of whether what is provided by way of consideration corresponds in
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value to what it is being given for. This is to be distinguished from the question of
whether consideration is ‘sufficient’, in the sense that what is being offered in
exchange is recognised by the courts as being in law capable of amounting to
consideration. This issue is discussed further below.
Looking first, however, at the question of adequacy, the reluctance of the
courts to investigate this means, for example, that if I own a car valued at £20,000,
and I agree to sell it to you for £1, the courts will treat this as a binding contract.28
Your agreement to pay £1 provides sufficient consideration for my transfer of
ownership of the car, even though it is totally ‘inadequate’ in terms of its relation-
ship to the value of the car.
This aspect of consideration was confirmed in Thomas v Thomas.29
26 Cf Atiyah, 1986, p 191.

27 Though Treitel has suggested that an unenforceable promise may nevertheless constitute a benefit or detri-
ment – Treitel, 1976.
28 This assumes that there is no evidence of any improper behaviour on the part of the purchaser to induce the
sale at such a low price, such as misrepresentation (see Chapter 9), duress (see Chapter 11) or the exercise of
‘undue influence’ (see Chapter 12).
29 (1842) 2 QB 851.

Key Case Thomas v Thomas (1842)

Facts: The testator, Mr Thomas, before his death, expressed a wish that his
wife should have for the rest of her life the house in which they had lived. After
his death, his executors made an agreement with Mrs Thomas to this effect,
expressed to be ‘in consideration’ of the testator’s wishes. There was also an
obligation on Mrs Thomas to pay £1 per year, and to keep the house in repair.
It was argued that there was no contract here, because Mrs Thomas had
provided no sufficient consideration.
Held: The statement that the agreement was ‘in consideration’ of the testator’s
wishes was not using ‘consideration’ in its technical contractual sense, but was
expressing the motive for making the agreement. The actual ‘consideration’
was the payment of £1 and the agreement to keep the house in repair. Either of
these was clearly recognised as good consideration, even though the payment
of £1 could in no way be regarded as anything approaching a commercial rent
for the property.
LA
IM
This approach to the question of ‘adequacy’ may be seen as flowing from a
‘freedom of contract’ approach. The parties are regarded as being entitled to
SH
make their agreement in whatever form, and on whatever terms they wish. The
fact that one of the parties appears to be making a bad bargain is no reason for
the court’s interference. They are presumed to be able to look after themselves,
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and it is only if there is some evidence of impropriety that the court will inquire
further.30 The mere fact that there is an apparent imbalance, even a very large one,
in the value of what is being exchanged under the contract, will not in itself be
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the catalyst for such further inquiry. It might be thought that with the decline of the
dominance of ‘freedom of contract’ during the twentieth century, this aspect of
the doctrine of consideration might have also weakened, but there is no evidence
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of this from the case law.31
3.7.1 ECONOMIC VALUE

Turning to the question of the ‘sufficiency’ of consideration (that is, whether what
is offered is capable of amounting to consideration), in coming to its conclusion
in Thomas v Thomas, the court pointed out that consideration must be ‘some-
thing which is of some value in the eye of the law’.32 This has generally been
interpreted to mean that it must have some economic value. Thus, the moral
obligation which the executors might have felt, or been under, to comply with the
testator’s wishes would not have been sufficient. An example of the application
30 See note 27, above. Campbell has argued that the fact that there appear to be exceptions to the basic
principle, in that adequacy will be relevant in raising suspicions of, for example, duress or undue influence,
means that this basic principle of classical theory is ‘metaphysical nonsense’: Campbell, 1996, p 44.
31 See, for example, Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87; [1959] 2 All ER 701 – discussed below,
3.7.1.
32 [1842] 2 QB 851, p 859 (per Patteson J).

LA
IM
SH
Figure 3.1
of this principle may perhaps be found in the case of White v Bluett.33 A father
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promised not to enforce a promissory note (that is, a document acknowledging a

debt) against his son, provided that the son stopped complaining about the
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distribution of his father’s property. It was held that this was not an enforceable
agreement, because the son had not provided any consideration. As Pollock CB
explained:34
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The son had no right to complain, for the father might make what distribution of his
property he liked; and the son’s abstaining from what he had no right to do can be no
consideration.
The courts have not been consistent in this approach, however. In the American
case of Hamer v Sidway,35 a promise not to drink alcohol, smoke tobacco,
or swear, was held to be good consideration, and in Ward v Byham 36 it was
suggested that a promise to ensure that a child was happy could be good
consideration.
33 (1853) 23 LJ Ex 36.
34 Ibid, p 37. If the son did actually comply with his father’s request, there is an argument that a ‘reliance’-based
approach would allow the son to recover (subject only to the question of whether this was a situation where
there was an intention to create legal obligations – for which see Chapter 4).
35 (1891) 27 NE 256; 124 NY 538. This case may reflect the greater willingness of United States courts to accept
‘reasonable reliance’ as a basis for contractual liability – see below, 3.15.2.
36 [1956] 2 All ER 318.

Even in cases which have a more obvious commercial context, the requirement
of economic value does not seem to have been applied very strictly. An example
is Chappell & Co v Nestlé Co Ltd.37
Key Case Chappell & Co v Nestlé Co Ltd (1960)

Facts: This case arose out of a ‘special offer’ of a familiar kind, from Nestlé,
under which a person who sent in three wrappers from bars of their chocolate
could buy a record, Rockin’ Shoes, at a special price. For the purpose of the
law of copyright, it was important to decide whether the chocolate wrappers
were part of the consideration in the contract to buy the record.
Held: The House of Lords decided that the wrappers were part of the con-
sideration, despite the fact that it was established that they were thrown away
by Nestlé, and were thus of no direct value to them.
LA
The only economic value in the wrappers that it is at all possible to discern is that
they represented sales of chocolate bars, which was obviously the point of
IM
Nestlé’s promotion. This is, however, very indirect, particularly as there was no
necessity for the person who bought the chocolate to be the same as the person
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who sent the wrappers in. In contrast to this decision, the House of Lords held in
Lipkin Gorman v Karpnale Ltd 38 that gambling chips, given in exchange for money
by a gambling club to its customers, did not constitute valuable consideration.
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The case concerned an attempt to recover £154,693 of stolen money which had
been received in good faith by the club from a member of the club. If ‘good
consideration’ for the money had been given by the club, then the money could
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not be recovered by the true owner. What the club had given for the money were
plastic chips which could be used for gambling, or to purchase refreshments
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in the club. Any chips not lost or spent could be reconverted to cash. This was
not regarded by the House of Lords as providing consideration for the money,
but simply as a mechanism for enabling bets to be made without using cash. If
the contract had been one for the straightforward purchase of the chips, then
presumably the transfer of ownership of the chips to the member would have
been good consideration, since the club presumably made such a contract when
it bought the chips from the manufacturer or wholesaler. The fact that the amount
of money paid by the member far exceeded the intrinsic value of the chips (that is,
their value as pieces of coloured plastic, rather than as a means of gambling)
would have been irrelevant under the principle discussed above relating to the
adequacy of consideration. The conclusion that on the facts before the court the
chips themselves were not consideration must, therefore, be regarded as being
governed by the situation in which they were provided. The contractual relation-
ship between the member and the club is probably best analysed in the way
37 [1960] AC 87; [1959] 2 All ER 701.

38 [1992] 2 AC 548.

suggested by Lord Goff, who took the view that the transaction involved a uni-
lateral contract under which the club issuing the chips agreed to accept them as
bets or, indeed, in payment for other services provided by the club. The case
should not be treated as giving any strong support to the view that consideration
must have some economic value.
An example of the lengths to which the courts will sometimes go to identify
consideration is De La Bere v Pearson.39 The plaintiff had written to a newspaper
which invited readers to write in for financial advice. Some of the readers’ letters,
together with the newspaper’s financial editor’s advice, were published. The
plaintiff received and followed negligently given advice which caused him loss.
Since the tort of negligent misstatement was at the time unrecognised, the
plaintiff had to frame his action in contract. But where was the consideration for
the defendants’ apparently gratuitous advice? The purchase of the newspaper
was one possibility, but there was no evidence that this was done in order to
receive advice. The only other possibility, which was favoured by the court, was
that the plaintiff, by submitting a letter, had provided free copy which could be
published. This was thought to be sufficient consideration for the provision of the
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advice, which it would be implied should be given with due care. IM
FOR THOUGHT
SH
Does this decision mean that those who run phone-in radio
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programmes where advice may be given should always

issue disclaimers, to protect themselves from being sued by
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dissatisfied recipients of advice?

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De La Bere v Pearson is a case which might well be considered to be dealt with

better by using ‘reasonable reliance’ as a basis for liability. If it was reasonable in
all the circumstances for the plaintiff to rely on the defendant’s advice, and he did
so to his detriment, he should be able to recover compensation.40 Such an
approach would be more satisfactory than the technical arguments about con-
sideration in which the court was obliged to indulge in applying the classical
theory.
The sufficiency of consideration has more recently been considered in a differ-
ent context in Edmonds v Lawson.41 The Court of Appeal was considering
whether there was a contract between a pupil barrister and her chambers in
relation to pupillage. The problem was to identify what benefit the pupil would
39 [1908] 1 KB 280.
40 This, in effect, would now be likely to be the position under the tort of negligent misstatement – discussed in
Chapter 9, 9.4.4.
41 [2000] 2 WLR 1091.

supply to her pupilmaster or to chambers during the pupillage. The court noted
that the pupil was not obliged to do anything which was not conducive to her own
professional development. Moreover, where work of real value was done by the
pupil, whether for the pupilmaster or anyone else, there was a professional obliga-
tion to remunerate the pupil. This led the court to the conclusion that there was no
contract between the pupil and pupilmaster, because of lack of consideration. It
came to a different view, however, as to the relationship between the pupil and
her chambers. Chambers have an incentive to attract talented pupils who may
compete for tenancies (and thus further the development of the chambers). Even
if they do not remain at the chambers (for example, by moving to another set,
or working in the employed bar or overseas), there may be advantages in the
relationships which will have been established. The conclusion was that:42
On balance, we take the view that pupils such as the claimant provide consideration
for the offer made by chambers . . . by agreeing to enter into the close, important and
potentially very productive relationship which pupillage involves.
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The court was therefore prepared to accept the general benefits to chambers in
the operation of a pupillage system as being sufficient to amount to consideration
IM
in relation to contracts with individual pupils, without defining with any precision
the economic value of such benefits.
SH
As these cases illustrate, the requirement of ‘economic value’ is not particularly

strict. Indeed, in the overall pattern of decisions in this area, it is the case of White
v Bluett (1853) which looks increasingly out of line. The flexibility which the courts
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have adopted in this area has led Treitel to refer to the concept of ‘invented
consideration’.43 This arises where the courts ‘regard an act or forbearance as the
consideration for a promise even though it may not have been the object of
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the promisor to secure it’; or ‘regard the possibility of some prejudice to the
promisee as a detriment without regard to the question of whether it has in fact
been suffered’.44 This analysis has been strongly criticised by Atiyah as an artificial
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means of reconciling difficult decisions with ‘orthodox’ doctrine on the nature

of consideration.45 He argues that if something is treated by the courts as con-
sideration, then it is consideration, and that Treitel’s ‘invented’ consideration is in
the end the same thing as ordinary consideration. If some cases do not, as a
result, fit with orthodox doctrine, then it is the doctrine which needs adjusting.46
As we have seen, the issue of the ‘sufficiency’ of consideration looks to the
type, or characteristics, of the thing which has been done or promised, rather than
to its value. In addition to the requirement of economic value, which as we have
seen is applied flexibly, there are two other issues which must be considered here.
The first is the question of so-called ‘past consideration’. The second is whether
42 [2000] 2 WLR 1091, p 1101.

43 See Treitel, 1976, and also 2007, p 78.
44 Ibid.
45 Atiyah, 1986, p 183.
46 Ibid. Atiyah, of course, argues for a broader concept of consideration anyway, as simply being a ‘reason’ for
the enforcement of a promise or obligation. This is discussed further at 3.15.1.

the performance of, or promise to perform, an existing duty can ever amount to
consideration.
3.8 PAST CONSIDERATION IS NO CONSIDERATION
Consideration must be given at the time of the contract or at some point after the
contract is made. It is not generally possible to use as consideration some act or
forbearance which has taken place prior to the contract. Suppose that I take pity
on my poverty-stricken niece and give her my old car. If the following week she
wins £10,000 on the football pools, and says she will now give me £500 out of her
winnings as payment for the car, is that promise enforceable? English law says no,
because I have provided no consideration for it. My transfer of the car was under-
taken and completed without any thought of payment, and before my niece made
her promise. This is ‘past consideration’ and so cannot be used to enforce an
agreement. A case which applies this basic principle is Roscorla v Thomas.47 The
plaintiff had bought a horse from the defendant. The defendant then promised
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that the horse was ‘sound and free from vice’, which turned out to be untrue. The
plaintiff was unable to sue on this promise, however, since he had provided no
consideration for it. The sale was already complete before the promise was made.
IM
A more recent example of the same approach is Re McArdle.48
SH
Key Case Re McArdle (1951)

Facts: William McArdle left a house to his sons and daughter. One of the sons
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was living in the house, and he and his wife carried out various improvements
to it. His wife then got each of his siblings to sign a document agreeing to
contribute to the costs of the work. The document was worded in a way which
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read as though work was to be done, and that when it was completed, the
other members of the family would make their contribution out of their share of
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William McArdle’s estate.
Held: The document did not truly represent the facts. If it had done so, then,
of course, it would have constituted a binding contract, but, as Jenkins LJ
pointed out:49
The true position was that, as the work had in fact all been done and
nothing remained to be done . . . at all, the consideration was a wholly
past consideration, and therefore the beneficiaries’ agreement for
the repayment . . . of the £488 out of the estate was nudum pactum, a
promise with no consideration to support it.
This being so, the agreements to pay were unenforceable.
47 (1842) 3 QB 234.
48 [1951] Ch 669; [1951] 1 All ER 905.
49 Ibid, p 678; p 910.

3.8.1 THE COMMON LAW EXCEPTIONS

The doctrine of past consideration is not an absolute one, however. The courts
have always recognised certain situations where a promise made subsequent to
the performance of an act may nevertheless be enforceable. The rules derived
from various cases have now been restated as a threefold test by the Privy
Council in Pao On v Lau Yiu Long.50 Lord Scarman, delivering the opinion of the
Privy Council, recognised that:51
. . . an act done before the giving of a promise to make a payment or to confer some
other benefit can sometimes be consideration for the promise.
For the exception to apply, the following three conditions must be satisfied. First,
the act must have been done at the promisor’s request. This derives from the case
of Lampleigh v Braithwait,52 where the defendant had asked the plaintiff to seek a
pardon for him in relation to a criminal offence which he had committed. After the
plaintiff had made considerable efforts to do this, the defendant promised him
£100 for his trouble. It was held that the promise was enforceable. Second,
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the parties must have understood that the act was to be rewarded either by a
payment or the conferment of some other benefit. In Re Casey’s Patents,53 the
IM
plaintiff had managed certain patents on behalf of the defendants. They then
promised him a one-third share in consideration of the work which he had done. It
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was held that the plaintiff must always have assumed that his work was to be paid
for in some way. The defendants’ promise was simply a crystallisation of this
reasonable expectation and was therefore enforceable.
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Third, the payment, or conferment of other benefits, must have been legally
enforceable had it been promised in advance. There is little that needs to be said
about this. It simply means that the usual requirements for a binding agreement
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must apply.
The effect of these tests is that consideration will be valid to support a later
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promise, provided that all along there was an expectation of reward. It is very
similar to the situation where goods or services are provided without the exact
price being specified. As we have seen, the courts will enforce the payment of a
reasonable sum for what has been provided. That is, in effect, also what they are
doing in situations falling within the three tests outlined above. It is an example of
the courts implementing what they see as having been the intention of the parties,
taking an approach based on third party objectivity.54
It can also be argued that the whole common law doctrine of ‘past consider-
ation’ could be dealt with more simply, and with very similar results, by an overall
principle of ‘reasonable reliance’. Thus, in Re McArdle, the son did the work
before any promise was made by his siblings. He did not, therefore, act in reliance
on their promises. By contrast, in Lampleigh v Braithwait and Re Casey’s Patents,
50 [1980] AC 614; [1979] 3 All ER 65.

51 Ibid, p 628; p 74.
52 (1615) Hob 105; 80 ER 255.
53 [1892] 1 Ch 104.
54 For which, see Chapter 2, at 2.4.1.

the work was done in reliance on a promise or expectation of payment. The

advantage of an analysis on these lines is that it involves one general principle
governing all situations, rather than stating a general rule and then making it
subject to exceptions. This is not, so far, however, the approach of the English
courts, which prefer to adhere to at least the form of classical theory.
3.8.2 EXCEPTIONS UNDER STATUTE

Two statutory exceptions to the rule that past consideration is no consideration
should be briefly noted. First, s 27 of the Bills of Exchange Act 1882 states that:
Valuable consideration for a bill [of exchange] may be constituted by (a) any con-
sideration sufficient to support a simple contract, (b) an antecedent debt or liability.
The inclusion of (b) indicates that an existing debt, which is not generally good
consideration for a promise,55 can be so where it is owed by a person receiving the
benefit of a promise contained in a bill of exchange.
The second statutory exception is to be found in s 29(5) of the Limitation Act
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1980, which provides that where a person liable or accountable for a debt56
acknowledges it, the right ‘shall be treated as having accrued on and not before
IM
the date of the acknowledgment’. The acknowledgment must be in writing and
signed by the person making it.57 The relevance of this provision to the current
SH
discussion is that if the acknowledgment is in the form of a promise,58 it will have

the effect of extending the limitation period for recovery of the debt, even though
no fresh consideration has been given. The statute is thus in effect allowing ‘past
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consideration’ to support a new promise.

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3.9 PERFORMANCE OF EXISTING DUTIES
Can the performance of, or the promise to perform, an act which the promisor is
H
already under a legal obligation to carry out, ever amount to consideration? Three
possible types of existing obligation may exist, and they need to be considered
separately. These are first, where the obligation which is alleged to constitute
consideration is already imposed by a separate public duty; second, where the
same obligation already exists under a contract with a third party; and, third,
where the same obligation already exists under a previous contract with the same
party by whom the promise is now being made.
3.9.1 EXISTING DUTY IMPOSED BY LAW: PUBLIC POLICY

Where the promisee is doing something which is a duty imposed by some public
obligation, there is a reluctance to allow this to be used as the basis of a contract.
It would clearly be contrary to public policy if, for example, an official with the duty
to issue licences to market traders was allowed to make enforceable agreements
55 See, eg, Roger v Comptoir d’Escompte de Paris (1869) LR 2 CP 393.

56 Or other ‘liquidated pecuniary claim’.
57 Limitation Act 1980, s 30(1).
58 It need not be so: Surrendra Overseas Ltd v Government of Sri Lanka [1977] 1 WLR 565, p 575.

LA
IM
Figure 3.2
SH
under which the official received personal payment for issuing such a licence. The
possibilities for corruption are obvious. It would be equally unacceptable for
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the householder whose house is on fire to be bound by a promise of payment in

return for putting out the fire made to a member of the fire brigade. The difficulty
PN
is in discerning whether the refusal to enforce such a contract is on the basis that
it is vitiated as being contrary to public policy,59 or because the consideration
which has been provided is not valid. The case law provides no clear answer. The
H
starting point is Collins v Godefroy.60 In this case, a promise had been made to
pay a witness, who was under an order to attend the court, six guineas for his
trouble. It was held that this promise was unenforceable, because there was no
consideration for it. This seems to have been on the basis that the duty to attend
was ‘a duty imposed by law’.
In cases where the possibilities for extortion are less obvious, there has been a
greater willingness to regard performance of an existing non-contractual legal
duty as being good consideration, though it must be said that the clearest state-
ments to that effect have come from one judge, that is, Lord Denning. In Ward v
Byham,61 the duty was that of a mother to look after her illegitimate child. The
father promised to make payments, provided that the child was well looked after
and happy, and was allowed to decide with whom she should live. Only the
looking after of the child could involve the provision of things of ‘economic value’
59 This is discussed further in Chapter 13.

60 (1831) 1 B & Ald 950; 120 ER 241.
61 [1956] 2 All ER 318.

sufficient to amount to consideration, but the mother was already obliged to do

this. Lord Denning had no doubt that this could, nevertheless, be good
consideration:62
I have always thought that a promise to perform an existing duty, or the performance
of it, should be regarded as good consideration, because it is a benefit to the person
to whom it is given.
The other two members of the Court of Appeal were not as explicit as Lord
Denning, and seem to have regarded the whole package of what the father asked
for as amounting to good consideration. This clearly went beyond the mother’s
existing obligation, but, as has been pointed out,63 did not involve anything of
economic value. So, on either basis, the decision raises difficulties as regards
consideration. Lord Denning returned to the same point in Williams v Williams,64
which concerned a promise by a husband to make regular payments to his wife,
who had deserted him, in return for her promise to maintain herself ‘out of the said
weekly sum or otherwise’. The question arose as to whether this provided any
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consideration for the husband’s promise, since a wife in desertion had no claim
on her husband for maintenance, and was in any case bound to support herself.
IM
Once again, Lord Denning commented:65
SH
. . . a promise to perform an existing duty is, I think, sufficient consideration to sup-

port a promise, so long as there is nothing in the transaction which is contrary to the
public interest.
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Once again, the other members of the Court of Appeal managed to find in the
wife’s favour without such an explicit statement. What this quote from Lord
PN
Denning makes clear, however, is that he regards the rule against using an existing
non-contractual duty as consideration as being based on the requirements of the
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public interest, which would arise in the examples using government officials of
one kind or another. Where this element is not present, however, he is saying that
an existing duty of this kind can provide good consideration.
The law on this issue remains uncertain but, in view of the position in relation to
duties owed to third parties, and recent developments in relation to duties already
owed under a contract with the promisor (that is, in the case of Williams v Roffey),
it seems likely that Lord Denning’s approach would be followed. There does not
seem to be any general hostility in English law to the argument that an existing
duty can provide good consideration. In other words, performance of, or the
promise to perform, an existing ‘public’ duty imposed by law can be good
consideration, provided that there is no conflict with the public interest.66
62 [1956] 2 All ER 318, p 319.

63 See above, 3.7.1.
64 [1957] 1 All ER 305.
65 Ibid, p 307.
66 [1991] 1 QB 1; [1990] 1 All ER 512 – discussed below, at 3.9.8.

FOR THOUGHT
Is this an area in which a ‘reliance’-based approach might pro-

vide a better answer? It would still be necessary to exclude
situations where public policy suggests that payments should
not be enforceable. In other situations where there is a ‘duty’,
the question would still arise as to whether the claimant’s
actions were undertaken in reliance on the defendant’s
promise, or simply because they were under a duty. This
would be a question of fact, however, rather than law.
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3.9.2 PUBLIC DUTY: EXCEEDING THE DUTY
Whatever the correct answer to the above situation, it is clear that if what is
promised or done goes beyond the existing duty imposed by law, then it can be
IM
regarded as good consideration. This applies whatever the nature of the duty, so
that even as regards public officials, consideration may be provided by exceeding
SH
their statutory or other legal obligations. The point was confirmed in Glasbrook
Bros v Glamorgan CC.67
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Key Case Glasbrook Bros v Glamorgan CC (1925)

Facts: In the course of a strike at a coal mine, the owners of the mine were
concerned that certain workers who had the obligation of keeping the mines
PN
safe and in good repair should not be prevented from carrying out their duties.
They sought the assistance of the police in this. The police suggested the
provision of a mobile group, but the owners insisted that the officers should be
H
billeted on the premises. For this, the owners promised to pay. Subsequently,
however, they tried to deny any obligation to pay, claiming that the police were
doing no more than fulfilling their legal obligation to keep the peace.
Held: The House of Lords held that the provision of the force billeted on the
premises went beyond what the police were obliged to do. Viscount Cave LC
accepted that if the police were simply taking the steps which they considered
necessary to keep the peace, etc, members of the public, who already pay
for these police services through taxation, could not be made to pay again.
Nevertheless, if, at the request of a member of the public, the police provided
services which went beyond what they (the police) reasonably considered
necessary, this could provide good consideration for a promise of payment.
67 [1925] AC 270.

This rule is now generally accepted, so that wherever the performance of an

act goes beyond the performer’s public duty, it will be capable of providing
consideration for a promise.
In relation to the police, however, the position is now dealt with largely by
statute. Section 25(1) of the Police Act 1996 states that:
The chief officer of a police force may provide, at the request of any person, special
police services at any premises or in any locality in the police area for which the force
is maintained, subject to the payment to the police authority of charges on such
scales as may be determined by that authority.
In Harris v Sheffield Utd FC,68 which concerned the provision of policing for
football matches, the court confirmed the approach taken in Glasbrook. More-
over, in applying the predecessor to s 25 of the Police Act 1996,69 the Court of
Appeal held that if a football club decided to hold matches and requested a police
presence, such presence could constitute ‘special police services’ even though
it did not go beyond what the police felt was necessary to maintain the peace.
LA
A ‘request’ for a police presence could be implied if police attendance was
necessary to enable the club to conduct its matches safely. The football club was
IM
therefore held liable to pay for the services provided. It seems, therefore, that the
holding of an ‘event’ to which the public are invited, but which cannot safely be
SH
allowed to go ahead without a police presence, will lay the organisers open to
paying for ‘special services’. To that extent, the position has gone beyond that
which applied in Glasbrook, in that under the statute the police can receive
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payment even though they are only doing what they feel is necessary to keep
the peace. The Court of Appeal’s decision in Harris clearly applies to sporting
events and entertainments. It is unclear whether it could apply to political rallies or
PN
demonstrations, though Balcombe LJ stated that, in his view, political events fell
into a different category:70
H
I do not accept that the cases are in pari materia and I do not consider that dismissal
of this appeal poses any threat to the political freedoms which the citizen of this
country enjoys.
Nevertheless, the effect of the interpretation of the statutory provisions adopted in

Harris means that in certain circumstances the police can receive payment for
doing no more than carrying out their duty to maintain public order.
3.9.3 EXISTING CONTRACTUAL DUTY OWED TO THIRD PARTY

If a person is already bound to perform a particular act under a contract, can the
performance of, or promise to perform, this act amount to good consideration for
a contract with someone else? Suppose that A is contractually bound to deliver
5,000 widgets to B by 1 June. B is to use these widgets in producing items which
68 [1987] 2 All ER 838.

69 That is, Police Act 1964, s 15, which used the same wording as s 25 of the 1996 Act.
70 [1987] 2 All ER 838, p 850.

he has contracted to supply to C. C therefore has an interest in A performing the

contract for delivery to B on time, and promises A £5,000 if the goods are
delivered by 1 June. Can A enforce this payment by C if the goods are delivered to
B on the date required? Perhaps somewhat surprisingly, the courts have given a
clear positive answer to this question. In other words, they have been quite happy
to accept that doing something which forms part, or indeed the whole, of the
consideration in one contract can perfectly well also be consideration in another
contract.
The starting point is the case of Shadwell v Shadwell.71
Key Case Shadwell v Shadwell (1860)

Facts: An uncle promised his nephew, who was about to get married, the sum
of £150 a year until the nephew’s annual income as a barrister reached 600
guineas. The uncle paid 12 instalments on this basis, but then he died, and the
payments ceased. The nephew sued the uncle’s estate for the outstanding
instalments, to which the defence was raised that the nephew had provided no
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consideration. The nephew put forward his going through with the marriage as
consideration. At the time, a promise to marry was as between the parties a
IM
legally enforceable contract.72
SH
Held: The majority of the court had no doubt that performance of the marriage
contract could be used as consideration for the uncle’s promise, on the basis
that that promise was in effect an inducement to the nephew to go through with
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the marriage. Erle CJ recognised that there was some delicacy involved in
categorising the nephew’s marriage to the woman of his choice as a ‘detri-
ment’ to him, but nevertheless considered that in financial terms it might well
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be. He put the issue in these terms:73
. . . do these facts shew a loss sustained by the plaintiff at his uncle’s

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request? When I answer this in the affirmative, I am aware that a man’s

marriage with the woman of his choice is in one sense a boon, and in that
sense the reverse of a loss: yet, as between the plaintiff and the party
promising to supply an income to support the marriage, it may well be
also a loss. The plaintiff may have made a most material change in his
position, and induced the object of his affection to do the same, and may
have incurred pecuniary liabilities resulting in embarrassments which
would be in every sense a loss if the income which had been promised
should be withheld.
Moreover, a marriage, while primarily affecting the parties to it, ‘may be an

object of interest to a near relative, and in that sense a benefit to him’. Thus, not
71 (1860) 9 CBNS 159; 142 ER 62.

72 This is no longer the case as a result of the Law Reform (Miscellaneous Provisions) Act 1970, s 1.
73 (1860) 9 CBNS 159, p 173; 142 ER 62, p 68.

only was going through with the marriage a ‘detriment’ to the nephew, it was
also a ‘benefit’ to his uncle. On this basis, there was no doubt that it could
constitute good consideration for the promise to pay the annuity.
The dissenting judge in Shadwell, Byles J, was not convinced that the uncle’s
promise was made on the basis that it was in return for the nephew getting
married. There is some force in this view of the facts,74 and a possible construc-
tion of the case is that the majority of the court was ‘inventing’ consideration,
because it felt that the nephew had relied on his uncle’s promise. If the nephew
had organised his affairs on the basis that he would continue to receive the
payment – a reliance reinforced by the fact that payments had been made
regularly over 12 years – then it would be unfair to withdraw it.75 Such an analysis
is relevant to the general issue of ‘reliance’ as an alternative to consideration, as
discussed at the end of this chapter. It is, however, the majority view in Shadwell v
Shadwell that has been accepted by later courts, and the case is therefore taken
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as authority for the proposition that performance of a contractual obligation owed
to a third party can be good consideration to found a contract with another
IM
promisor.
SH
3.9.4 DUTY TO THIRD PARTY: COMMERCIAL APPLICATION

The approach taken in Shadwell v Shadwell was subsequently applied in a com-
mercial context in Scotson v Pegg,76 where it was held that the delivery of a cargo
of coal to the defendant constituted good consideration, even though the plaintiff
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was already contractually bound to a third party to make such delivery. It was
more recently accepted as good law in New Zealand Shipping Co Ltd v
PN
Satterthwaite, The Eurymedon.77 Goods were being carried on a ship. The carriers
contracted with a firm of stevedores to unload the ship. The consignees of the
goods were taken to have promised the stevedores the benefit of an exclusion
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clause contained in the contract of carriage if the stevedores unloaded the goods.
The Privy Council viewed the stevedores’ performance of their unloading contract
as being good consideration for this promise. As Lord Wilberforce said:78
An agreement to do an act which the promisor is under an existing obligation to a

third party to do, may quite well amount to consideration and does so in the present
case: the promisee obtains the benefit of a direct obligation which he can enforce.
3.9.5 PERFORMANCE OR PROMISE?

In all three cases so far considered, it has been performance of the existing
obligation which has constituted the consideration. Can a promise to perform an
74 Which appears to have been accepted by Salmon LJ in Jones v Padavatton [1969] 2 All ER 616, p 621.
75 See the comments of Collins, 2003.
76 (1861) 6 H & N 295.
77 [1975] AC 154; [1974] 1 All ER 1015.
78 Ibid, p 168; p 1021.

existing obligation also amount to consideration? Take the example used at the
start of this section, where A is bound to deliver goods to B on 1 June, and C
promises A £5,000 if he does so. We have seen that if A does deliver by the
specified date, he will, on the basis of Shadwell v Shadwell and Scotson v Pegg,
be able to recover the promised £5,000 from C. What if, however, A also promises
to C that he will deliver by 1 June? In other words, the contract, instead of being
unilateral (‘if you deliver to B by 1 June I will pay you £5,000’) becomes bilateral?
A promises to deliver by 1 June; C promises £5,000. Is A’s promise to perform
in a way to which he is already committed by his contract with B sufficient con-
sideration for C’s promise, so that, if A fails to deliver on time, C, as well as B, may
sue A? The reference by Lord Reid in the quotation given above to ‘an agreement
to do an act’ would suggest that a promise is sufficient, though the facts of The
Eurymedon itself clearly involved a unilateral contract (‘if you unload the goods,
we promise you the benefit of the exclusion clause’). The issue was, however,
addressed more directly by the Privy Council in Pao On v Lau Yiu Long,79 where
it was held that such a promise could be good consideration. Citing The
Eurymedon, Lord Scarman simply stated:80
LA
Their Lordships do not doubt that a promise to perform, or the performance of, a pre-
IM
existing contractual obligation to a third party can be valid consideration.
SH
Given the general approach to consideration, under which promises themselves

can be good consideration, this decision is entirely consistent. The law on this
point is, therefore, straightforward and simple. The fact that what is promised or
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performed is something which the promisor is already committed to do under a

contract with someone else is irrelevant. Provided it has the other characteristics
of valid consideration, it will be sufficient to make the new agreement enforceable.
PN
3.9.6 EXISTING DUTY TO THE SAME PROMISOR

H
The issue of whether performance of an existing duty owed to the same promisor
can be good consideration is the most difficult one in this area. If there is a
contract between A and B, and A then promises B additional money for the
performance of the same contract, is this promise binding? It would seem that
the general answer should be ‘no’. It is normally considered that once a contract
is made, its terms are fixed. Any variation, to be binding, must be mutual, in the
sense of both sides offering something additional. If the promise is simply to carry
out exactly the same performance for extra money, it is totally one-sided. It would
amount to a rewriting of the contract, and so should be unenforceable.81
This approach was, until relatively recently, taken to represent English law on
this point. The authority was said to be the case of Stilk v Myrick.82
79 [1980] AC 614; [1979] 3 All ER 65.

80 Ibid, p 632; p 76.
81 This illustrates the difficulty which the classical doctrine of consideration has in dealing with relational con-
tracts, where the modification of obligations may well be necessary and expected: see Chapter 1, 1.6.
82 (1809) 2 Camp 317; 170 ER 1168; 6 Esp 129; 170 ER 851.

Key Case Stilk v Myrick (1809)

Facts: The dispute in this case arose out of a contract between the crew of
a ship and its owners. The crew had been employed to sail the ship from
London to the Baltic and back. Part way through the voyage, some of the
crew deserted. The captain promised that if the rest of the crew sailed the ship
back without the missing crew, the wages of the deserters would be divided
among those who remained. When the ship returned to London, the owners
refused to honour this promise. A crew member sued to recover the promised
money.
Held: The sailors could not recover. There was no consideration for the
promise to pay the extra money, as the sailors were only doing what they were
obliged to do under their existing contract – i.e. work the ship back to England.
The basis for the decision in Stilk v Myrick is not without controversy, not least
LA
because of the fact that it was reported in two rather different ways in the two
published reports (that is, Campbell and Espinasse).83 There was, for example,
IM
some suggestion that this decision was based on public policy, in that there was
a risk in this type of situation of the crew ‘blackmailing’ the captain into promising
SH
extra wages to avoid being stranded. This had been the approach taken in the
earlier, similar, case of Harris v Watson.84 This issue, and the alternative views of
Stilk v Myrick, is one to which we shall need to return later. For the moment,
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however, we will deal with the case in the way in which it has been traditionally
treated as part of the ‘classical’ law of contract. This view of it (which is stated in
the summary of the case above) has been based on the judgment of Lord
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Ellenborough, as reported by Campbell. He seemed to base his decision on the

lack of consideration, rather than public policy. The remaining crew were only
promising to do what they were already obliged to do under their existing con-
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tract, and this could not be good consideration. The desertion of part of the crew
was just part of the normal hazards of the voyage. Campbell’s report records Lord
Ellenborough’s views in the following way:85
There was no consideration for the ulterior pay promised to the mariners who
remained with the ship. Before they sailed from London, they had undertaken to do
all that they could under all the emergencies of the voyage. They had sold all their
services till the voyage should be completed . . . the desertion of a part of the crew is
to be considered an emergency of the voyage as much as their death; and those who
remain are bound by the terms of their original contract to exert themselves to the
utmost to bring the ship in safely to her destined port.
83 See, for example, Luther, 1999; Gilmore, 1974, pp 22–28.

84 (1791) Peake 102.
85 (1809) 2 Camp 317, p 319; 170 ER 1168, p 1169.

It might have been otherwise if they had not contracted for the whole voyage,
and had been free to leave at the time of the desertion, or if the captain had
‘capriciously’ dismissed part of the crew (rather than some sailors having
deserted). Such circumstances would fall outside the normal hazards of the
voyage. Thus, in either of these cases, the remaining crew might not have been
compelled by the original contract to proceed with the voyage, and would there-
fore have provided good consideration by agreeing to do so. On the facts which
had actually occurred, however, they had not provided any consideration for the
promise of extra money, and so could not recover it.
3.9.7 GOING BEYOND THE EXISTING DUTY

It is implicit in Stilk v Myrick that if the crew had gone beyond their existing
duty, they would have provided good consideration. In addition to the examples
given by Lord Ellenborough, the decision in Hartley v Ponsonby 86 suggests that a
certain level of desertion may in fact give rise to a situation falling outside the
normal hazards of the voyage. In this case, a ship which had started out with a
crew of 36 had, at the time that the relevant promise was made to the plaintiff, only
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19 left, of whom only four or five were able seamen. In this situation, it was held
that the voyage had become so dangerous that it was unreasonable to require
IM
the crew to continue. In effect (though the decision does not use this terminology),
the original contract with the plaintiff had been ‘frustrated’,87 and therefore a
SH
fresh contract on the revised (more favourable) terms could be created. The per-
formance of, or promise to perform, actions which are inside an existing duty
cannot, however, amount to consideration.
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3.9.8 A RE-CONSIDERATION: WILLIAMS V ROFFEY 88

The true basis for the decision in Stilk v Myrick is not without dispute, not least
PN
because of the differences noted above between the two published reports.89
Nevertheless, the analysis outlined above (based mainly on Campbell’s report)
has been accepted and applied, almost without question, in many cases.90
H
In 1990, however, a decision of the Court of Appeal cast some doubt on its
scope and continued validity. The case was Williams v Roffey Bros & Nicholls
(Contractors) Ltd.91
Key Case Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991)
Facts: The case concerned a contract to refurbish a block of flats. The
defendants were the main contractors for this work, and had engaged the
plaintiffs as sub-contractors to carry out carpentry work. The agreed price for
86 (1857) 7 E & B 872.

87 The doctrine of frustration is fully discussed in Chapter 15.
88 [1991] 1 QB 1; [1990] 1 All ER 512.
89 See, for example, Luther, 1999; Gilmore, 1974, pp 22–28.
90 For example, North Ocean Shipping Co Ltd v Hyundai Construction Co [1979] QB 705; [1978] 3 All ER 1170;
Atlas Express v Kafco [1989] QB 833; [1989] 1 All ER 641.
91 [1991] 1 QB 1; [1990] 1 All ER 512.

this was £20,000. Part way through the contract, the plaintiffs got into financial
difficulties, at least in part because the contract price for the carpentry work
was too low. The defendants were worried that the plaintiffs would not com-
plete the work on time or would stop work altogether. There was a penalty
clause in the main contract under which the defendants would have been
liable in the event of late completion. The defendants therefore promised to
pay the plaintiffs a further £10,300, at a rate of £575 for each flat completed.
On this basis, the plaintiffs continued to work on the flats, and completed a
further eight. Because, at this stage, it seemed that the defendants were going
to default on their promise of additional payments, the plaintiffs then ceased
work, and subsequently sued for the additional sums in relation to the eight
completed flats. The county court judge found for the plaintiffs, and the
defendants appealed. They argued that since the plaintiffs, in completing or
promising to complete the work on the flats, were only doing something they
were already bound to do under the existing contract with the defendants, they
provided no new consideration.
LA
Held: The Court of Appeal held that the promise to make the extra pay-
IM
ments was enforceable. The agreement provided a ‘practical benefit’ to the
defendants, in that it meant they were less likely to have to pay under a penalty
clause in the main contract relating to late performance, and avoided the
SH
trouble and expense of employing other carpenters.

LU
In considering the defendants’ argument that there was no consideration,

Glidewell LJ first outlined the benefits (as identified by counsel for the defendants)
PN
that accrued to the defendants from the plaintiffs’ continuation with the contract.
These were:92
H
. . . (i) seeking to ensure that the plaintiff continued work and did not stop in breach
of the sub-contract; (ii) avoiding the penalty for delay; and (iii) avoiding the trouble
and expense of engaging other people to complete the carpentry work.
In the view of Glidewell LJ and the rest of the Court of Appeal, this was enough to
support the defendant’s promise to make the additional payments. In reaching
this conclusion, all members of the court were at pains to stress that they were not
suggesting that the principle in Stilk v Myrick was wrong, but that the present case
could be distinguished from it.
92 [1991] 1 QB 1, p 11; [1990] 1 All ER 512, p 518.

FOR THOUGHT
Do you think the Court of Appeal would have come to the

same conclusion had it been the carpenters who had sought
extra payments from the defendants, as the price for continu-
ing to work on the flats, rather than the defendants taking the
initiative in offering the money?
3.9.9 WILLIAMS v ROFFEY: EFFECT ON STILK v MYRICK 93

The basis on which the court distinguished Williams v Roffey from Stilk v Myrick is
not wholly clear from the judgments. Similar benefits to those identified could be
said to have been present in Stilk v Myrick. For example, as a result of his promise,
the captain did not have to seek replacement crew, avoided delays, and made
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sure the existing crew continued to work.94 The main reason for distinguishing
Stilk v Myrick seems in fact to have been related to the alternative, public policy
IM
basis for the decision mentioned above. In other words, the court regarded it as
significant that there was in Williams v Roffey no question of improper pressure
SH
having been put on the defendants. Indeed, it was they who suggested the
increased payments.
The result is that the position as regards duties owed to the promisor is closely
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assimilated to the position in relation to duties owed to third parties. Thus,

Glidewell LJ summarised the current state of the law as follows:95
PN
. . . (i) if A has entered into a contract with B to do work for, or to supply goods or
services to, B in return for payment by B; and (ii) at some stage before A has com-
pletely performed his obligations under the contract B has reason to doubt whether
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A will, or will be able to, complete his side of the bargain; and (iii) B thereupon
promises A an additional payment in return for A’s promise to perform his con-
tractual obligations on time; and (iv) as a result of giving his promise B obtains in
practice a benefit, or obviates a disbenefit; then (v) the benefit to B is capable of
being consideration for B’s promise, so that the promise will be legally binding.
Williams v Roffey is clearly very significant as regards defining the limits of valid
consideration, and undoubtedly has the effect of widening those limits. Promises
to perform existing obligations can now amount to consideration, even between
contracting parties. Nevertheless, within these wider limits, consideration must
still be found, as Russell LJ makes clear:96
93 For further discussion of the potential implications of Williams v Roffey, see Halson, 1990; Hird and Blair,
1996.
94 See, also, Lee v GEC Plessey Telecommunications [1993] IRLR 383, discussed below.
95 [1991] 1 QB 1, p 16; [1990] 1 All ER 512, p 521.
96 Ibid, p 18; p 524.

Consideration there must . . . be but in my judgment the courts nowadays should be

more ready to find its existence so as to reflect the intention of the parties to the
contract where the bargaining powers are not unequal and where the finding of
consideration reflects the true intention of the parties.
This statement indicates the fact that despite the extensive intervention by
Parliament to control various aspects of the contractual relationship in particular
situations, where the courts are dealing with a business transaction between
parties who are more or less equal, they still adhere to the classical principles of
freedom of contract. The starting point is to decide what the parties have agreed,
and what their intentions were. Once these have been identified, the courts will
as far as possible give effect to them, unless there is a good reason for taking
another approach. In Williams v Roffey, the courts were faced with what appeared
to be a clear arrangement entered into voluntarily, and which in the end has the
potential to be for the benefit of both parties. In such a situation, arguments taking
a narrow view of the scope of the doctrine of consideration, which might allow one
party to escape the effects of a promise, freely given, from which it had gained
LA
some advantage, were inappropriate and unnecessary.
The approach taken in Williams v Roffey has subsequently been applied in two
IM
first instance decisions concerning commercial contracts – that is, Anangel Atlas
Compania Naviera SA v Ishikawajima-Harima Heavy Industries Co Ltd (No 2) 97 and
SH
Simon Container Machinery Ltd v Emba Machinery AB.98 In both cases, the
avoidance of the other party withdrawing from a contract was held to be sufficient
‘practical benefit’ to provide consideration for a new promise designed to keep
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them ‘on board’. In Lee v GEC Plessey Telecommunications,99 Williams v Roffey

was cited as supporting the view that, in the context of a contract of employment,
the employees provide sufficient consideration for an award of enhanced pay or
PN
redundancy terms by continuing to work under the contract. The abandoning by

the employee of any argument that the pay should be even higher or the terms
even more favourable means that ‘the employer has secured a benefit and
H
avoided a detriment’.100 If this is taken at its face value, then it clearly consigns
Stilk v Myrick to history. The seamen in accepting the offer of additional money
and not continuing to bargain for more would be providing sufficient benefit to
the employer and suffering sufficient detriment themselves to amount to con-
sideration for the Master’s promise. A recent reference to Williams v Roffey in the
High Court, however, suggests a more sceptical approach. In South Caribbean
Trading Ltd v Trafigura Beheer BV,101 the claimant had only agreed to unload a
cargo of oil on the basis that a letter of credit was extended by the defendants.
One question was whether the unloading of the oil, which the claimants were
already obliged to do, could constitute good consideration for the promise to
extend the letter of credit. The judge found the existence of other consideration,
97 [1990] 2 Lloyd’s Rep 526.

98 [1998] 2 Lloyd’s Rep 429.
99 [1993] IRLR 383.
100 Ibid, p 389.
101 [2004] EWHC 2576; [2005] 1 Lloyd’s Rep 128.

but stated, obiter, that he would not have treated the promise to unload as good
consideration. He noted that this would be contrary to the principle in Stilk v
Myrick. As regards Williams v Roffey he said:102
But for the fact that Williams v Roffey Bros was a decision of the Court of Appeal, I
would not have followed it. That decision is inconsistent with the long-standing rule
that consideration, being the price of the promise sued upon, must move from the
promisee.
He felt that the Court of Appeal in Williams v Roffey had relied too much on
analogies with three-party situations, to which different considerations applied.
Since, however, as he put it, the case had ‘not yet been held by the House of
Lords to have been wrongly decided’,103 he would have needed to distinguish it.
This he would have done on the basis that the claimants in this case had
put pressure, analogous to economic duress, on the defendants to accept the
variation in the contract. On that basis the case was different from Williams v
Roffey. This view may or may not be significant. It is only the opinion of one High
LA
Court judge and, as we have seen, other judges have been prepared to follow and
apply Williams v Roffey. Only the House of Lords will be able to determine whether
IM
it was not rightly decided; for the time being, it is binding on the lower courts.
Another response to Williams v Roffey and the subsequent cases is to suggest
SH
that, despite the fact that the decisions are put in the language of consideration,
they are in fact examples of the courts basing contractual liability on reasonable
reliance. In other words, the carpenters in Williams v Roffey had relied on the
LU
promise of extra money in completing the flats, and it was therefore right (in the
absence of any suggestion of impropriety on their part in extracting the promise)
that they should be able to recover this. The application of this principle to Stilk v
PN
Myrick would also lead to the seamen being able to recover, on the basis that their
continued crewing of the ship was based on the promise of extra payment. The
H
questions then become issues of fact: Was any improper pressure applied? Was
there in fact any reliance?104 Such issues are likely to be easier to determine than
technical arguments based on what precisely constitutes consideration.
3.9.10 LIMITATION ON WILLIAMS v ROFFEY

One limitation on the effect of the decision in Williams v Roffey was made clear by
the Court of Appeal in Re Selectmove.105 The case concerned an assertion by a
company that it had made a binding contract with the Inland Revenue under
which it could, effectively, pay off its tax liabilities by instalments. The Inland
Revenue argued that this agreement was not binding on them, because the com-
pany provided no consideration for the agreement to accept instalments: it was
only promising to do something (paying its debts) which it was already obliged
102 [2004] EWHC 2576; [2005] 1 Lloyd’s Rep 128, para 107.
103 [2004] EWHC 2576; [2005] 1 Lloyd’s Rep 128, para 109.
104 In other words, could it be shown that, as a matter of fact, the sailors did not rely on the promise, but would
have continued to work in any case?
105 [1995] 2 All ER 534; [1995] 1 WLR 474.

to do. The Court of Appeal, while deciding the case in favour of the Inland
Revenue on another point, considered whether Williams v Roffey could apply in
this situation. The company argued that the arrangement was to the Inland
Revenue’s ‘practical benefit’, because it meant that the company could stay in
business, and therefore be more likely to meet its debts. The Court of Appeal,
however, felt that this would be the case in relation to any agreement to pay by
instalments. To treat this as providing consideration would be in direct conflict
with the leading House of Lords decision on part payment of debts, that is, Foakes
v Beer,106 which had not even been cited in Williams v Roffey. The effect of Foakes
v Beer is that promises relating to the payment of existing debts have to be treated
as a separate category from promises concerned with other types of existing
contractual obligation. In general, a promise to pay a debt in instalments after the
due date (or the payment on the due date of less than was owed) will not amount
to consideration for any promise by the creditor (such as to accept such method
of payment, or to remit the whole debt where only partial payment was tendered).
The reversing of the decision in Foakes v Beer was a matter for the House of
Lords, or Parliament, and could not be undertaken by the Court of Appeal.
LA
IM
FOR THOUGHT
SH
Would it make a difference in Selectmove if a ‘reliance’

analysis were adopted? The question would be whether the
LU
company had altered its position, to its potential detriment,

in reliance on the Inland Revenue’s promise. It is not clear on
PN
the facts that it had done so, and so the result under this
analysis might be the same as that achieved by using
H
‘consideration’.
The current position is, therefore, that in relation to a promise to supply goods
or services, a renewed promise to perform an existing obligation can be good
consideration if the other party will receive a ‘practical benefit’, but that in relation
to debts, a promise to make payment will only be consideration if accompanied
by some additional benefit, such as payment early or, perhaps, in a different
place.107
106 (1884) 9 App Cas 605. This case is discussed in detail below, at 3.13.2.
107 Note that this restriction does not seem to have been accepted in Australia where, in Musumeci v Winadell
Pty Ltd (1994) 34 NSWLR 723, Santow J, while noting Re Selectmove, applied the Williams v Roffey
approach to a promise to accept a reduction in the rent payable on a lease.

3.10 CONSIDERATION AND THE VARIATION OF CONTRACTS
The above discussion leads conveniently into a review of the more general issue
of the way in which the doctrine of consideration affects the freedom of parties to
vary the obligations under a contract which they have entered into. This is an area
where classical theory has considerable difficulty in coping with the relational
aspect of many contracts.108
3.10.1 NEED FOR ACCORD AND SATISFACTION

We have already referred to the general principle under classical theory that for
a contract to be altered, there must be consideration. To use the language
often adopted by the courts, ‘accord and satisfaction’ must be present: ‘accord’
meaning agreement and ‘satisfaction’ essentially consideration. The approach
taken in Stilk v Myrick,109 as redefined in Williams v Roffey,110 fits into this general
principle. The same approach applies where a contract is brought to an end by
mutual agreement. As long as there are outstanding obligations on both sides
of the contract, the agreement to terminate will be binding. The foregoing of
LA
the existing rights under the contract will amount to good consideration for the
promise to release the other party from his or her obligation.
IM
3.10.2 THE CONCEPT OF ‘WAIVER’
SH
Over the years, however, this approach, though still applied where appropriate,
has often been found in practice to be too restrictive. Why should parties who are
on an equal footing, and who wish to vary obligations under an existing contract,
LU
not be allowed to do so, without worrying about the technicality of ‘con-

sideration’? Various concepts have been used to allow more flexibility, and to
give some force to agreed variations, even where these are not supported
PN
by consideration.111 One such is the concept of ‘waiver’. Under this principle, a

person who ‘waives’ (that is, promises not to enforce) certain rights under a con-
tract for a period of time may be stopped from later insisting on performance
H
in accordance with the letter of the contract. So, in Hartley v Hymans,112 a seller
requested to be allowed to make late delivery, and the buyer agreed to this.
When the seller delivered, the buyer refused to accept. It was held that the seller
was entitled to recover damages, despite the fact that delivery was outside the
terms of the contract and that the buyer’s promise to accept late delivery was
unsupported by consideration. The buyer had waived the right to insist on delivery
at a particular time and could not go back on that.
Waiver was used by the common law courts, but was then taken over by
the chancery courts, and is now almost exclusively an equitable concept. It is
important to note that waiver may not be permanent in its effect. The person
waiving the rights may do so for a fixed period of time, or may be able to revive the
108 See Chapter 1, 1.6.

109 (1809) 2 Camp 317; 170 ER 1168; 6 Esp 129; 170 ER 851.
110 [1991] 1 QB 1; [1990] 1 All ER 512.
111 This, it may be suggested, illustrates the weakness of the classical doctrine of consideration: the more the
exceptions mount, the less it can really be said to provide a coherent governing principle.
112 [1920] 3 KB 475.

original right by giving notice. The latter was the case in Charles Rickards Ltd v
Oppenheim.113 The contract here was for the building of a car body to fit a Rolls
Royce chassis. The suppliers promised the buyer that they could fulfil the contract
in ‘six or, at the most, seven months’. The precise specification of the work to be
done was agreed on 20 August 1947. The latest time for delivery, according to
the suppliers’ promise, was therefore 20 March 1948. The suppliers failed to meet
this deadline, which was held to be a term of the original contract. The buyer,
however, did not sue for breach of contract as soon as the date had passed, but
continued to seek delivery. This was regarded as the buyer having waived the
right to delivery at a particular time.
Although there was continued delay, the buyer would not have been able to
refuse delivery if the car had been finished in April, May or June 1948. By the end
of June, however, the buyer’s patience ran out, and on 29 June 1948 he told
the suppliers that unless the car was delivered by 25 July 1948, he would not
accept it. The car was not in fact finished until 18 October 1948. The suppliers
then sued for non-acceptance, on the basis of the buyer’s waiver of the original
term specifying a date for delivery. The Court of Appeal, however, did not accept
LA
that such a waiver was permanent in its effect. As Lord Denning put it:114
IM
It would be most unreasonable if, having been lenient and having waived the initial
expressed time, [the buyer] should thereby have prevented himself from ever there-
SH
after insisting on reasonably quick delivery. In my judgment, he was entitled to give a

reasonable notice making time of the essence of the matter.
LU
On the facts, the notice of four weeks given on 29 June 1948 was reasonable
and, once it had expired, the buyer – having waited many months for his car –
was entitled to cancel the contract. A waiver of rights will, therefore, generally be
PN
capable of withdrawal on the giving of reasonable notice.

Looked at in this way, the concept of equitable waiver has clear links with the
H
common law concept of estoppel. This is the rule whereby, if A, a party to an

action, has made a statement of fact on which the other party, B, has relied, A will
not be allowed to deny that the original statement was untrue.115 This rule applies
only to statements of existing fact, however. In Jorden v Money,116 an attempt was
made to apply it to a promise not to enforce a debt. Mrs Jorden had made
repeated statements that she would not enforce a bond for £1,200 issued by
Money, which she held. On the basis of that assurance, Money married. He then
sought a declaration from the courts that the debt had been abandoned. He
succeeded at first instance, but the House of Lords took a different view. Lord
Cranworth LC, having stated the general principles of the doctrine of estoppel,
continued:117
113 [1950] 1 KB 616; [1950] 1 All ER 420.

114 Ibid, p 624; p 423.
115 As will be seen from this description, estoppel is based on reliance. Waiver might also be said to be based
on the fact that a person relies on the other party’s promise not to enforce a particular contractual obligation.
116 (1854) 5 HL 185.
117 Ibid, p 214.

I think that that doctrine does not apply to a case where the representation is not a
representation of fact, but a statement of something which the party intends or does
not intend to do.
Whereas the former type of statement (representation of fact) may provide the
basis of an enforceable estoppel, the latter type (statement as to future intentions)
can only become enforceable by being made part of a contract. Mrs Jorden’s
statements were of the latter type and, therefore, since they had not been made
as part of a contract, were not enforceable. This decision established, therefore,
that the doctrine of estoppel in the strict sense had no application to promises.
Atiyah has argued forcefully that the orthodox view of Jorden v Money misunder-
stands what lay behind the reason why counsel argued it on the basis of estoppel
rather than contract.118 This was not that there was a lack of consideration for the
promise not to enforce the debt. Atiyah argues that the marriage would have
provided such consideration, since it was action taken in reliance on the promise
(even though not requested by the promisor).119 The problem was that, at the
time, the Statute of Frauds 1677 required such a promise to be evidenced in
LA
writing. Since there was no writing available, the plaintiff tried to plead the case
in estoppel rather than contract. The court, however, would not allow this to be
IM
used as a means of circumventing the requirements of the Statute of Frauds. To
do so, as Atiyah points out, would have constituted a significant undermining of
SH
the statute – ‘for it would have meant that any plaintiff who could show that he had
altered his position in reliance on the defendant’s promise could ignore the statute
and rely on estoppel’.120
LU
Nevertheless, even if Jorden v Money has been misunderstood (and not all
commentators would agree with Atiyah),121 it has been generally accepted in
subsequent cases as establishing that estoppel can only be used in relation to
PN
statements of existing fact.122 This means that simply because action was taken in
reliance on a promise, this will not in itself generally render the promise enforce-
able. To mitigate the practical problems caused by this analysis, particularly
H
where the parties are in agreement about wishing to vary the terms of a contract,
in the last 50 years the courts have developed the concept of equitable waiver into
a broader doctrine, generally referred to as ‘promissory estoppel’.
3.11 THE DOCTRINE OF PROMISSORY ESTOPPEL
The modern law on this topic, which gives rise to situations in which a contract
can in effect be varied without there being consideration, derives from Central
London Property Trust Ltd v High Trees House Ltd.
118 See Atiyah, 1986, at pp 234–38. The same point is made by Baker, 1979, p 27.
119 Cf Shadwell v Shadwell (1860) 9 CBNS 159; 142 ER 62 – see above, 3.9.3.
120 Atiyah, 1986, p 235.
121 See, for example, Treitel, 2007, p 126.
122 See, for example, Maddison v Alderson (1883) 8 App Cas 467; Argy Trading Development Co Ltd v Lapid
[1977] 1 WLR 444.

Key Case Central London Property Trust Ltd v High Trees House Ltd (1947)
Facts: The plaintiffs were the owners of a block of flats in London, which they
rented to the defendants at a rent of £2,500 per annum. Following the outbreak
of the Second World War in 1939, the defendants were unable to find sufficient
tenants to take the flats, because of the large numbers of people leaving
London. As a result, the plaintiffs agreed that, in the circumstances, the rent
could be reduced by half, to £1,250 per annum. This arrangement continued
until after the war ended in 1945, and the difficulty in letting the flats ceased.
The plaintiffs then sought to return to the original terms of the agreement, and
also queried whether they might not be entitled to claim the other half of the
rent for the war years, since the promise to accept less was not supported by
any consideration.
Held: Denning J confirmed that the plaintiffs were entitled to recover the full
rent from the end of the war. Their promise to take less had clearly only been
intended to last until that point. On the more general issue, however, he con-
LA
sidered that the plaintiffs would not be able to recover the balance for the
war years. The reason for this was that he thought that there was a general
IM
equitable principle whereby:123
SH
A promise intended to be binding, intended to be acted upon, and in fact

acted on, is binding so far as its terms properly apply.
These conditions were satisfied on the facts of this case in relation to what
LU
had happened during the war years, and the plaintiffs were bound by their
promise, which had been acted on by the defendants.
PN
Denning’s main authority for his analysis of the position relating to the war
H
years was the ‘equitable waiver’ case of Hughes v Metropolitan Railway.124 The
defendant held a lease of certain houses from the plaintiff. The lease contained a
covenant of repair within six months of being given notice. The plaintiff gave such
notice. The defendant then suggested that a sale might be arranged, and said
that it would defer carrying out any repairs until this had been discussed. Some
negotiations took place, but they did not result in an agreement for the sale. The
plaintiff then served notice to quit, on the basis of the defendant’s failure to
comply with the original notice to repair. It was held that the plaintiff was not
entitled to do this. The effect of the notice had been suspended while the
negotiations on the sale were taking place, and time did not start to run again until
these had broken down. Lord Cairns stated the general principle in the following
famous passage:125
123 [1947] KB 130.

124 Ibid, p 136.
125 (1877) 2 App Cas 439. He also cited Birmingham and District Land v London and Northwestern Railway Co
(1888) 40 Ch D 268 and Salisbury (Marquess) v Gilmore [1942] 2 KB 38. 124 (1877) 2 App Cas 439, p 448.

. . . it is the first principle on which all Courts of Equity proceed, that if parties who
have entered into definite and distinct terms involving certain legal results – certain
penalties or legal forfeiture – afterwards by their own act or with their own consent
enter upon a course of negotiation which has the effect of leading one of the parties
to suppose that the strict rights arising under the contract will not be enforced, or will
be kept in suspense, or held in abeyance, the person who otherwise might have
enforced those rights will not be allowed to enforce them where it would be inequit-
able having regard to the dealings which have thus taken place between the parties.
Denning J, in High Trees, asserted that this general principle supported his view
of the relationship between the parties in the case before him. His own statement
of the general principle, as set out above, however, raised considerable contro-
versy. First, taken at face value, it seemed to destroy the doctrine of consideration
altogether.126 Second, the application of the ‘equitable waiver’ approach to the
facts of the case (that is, the non-payment of rent) appeared to run counter to
the House of Lords’ decision in Foakes v Beer,127 which stated that part payment
of a debt can never be good satisfaction for the whole. Both of these objections,
LA
and their treatment in subsequent case law, must now be considered.
IM
SH
LU
PN
H
Figure 3.3
126 This may well have been his original intention, as he has indicated extra-judicially: Denning, 1979,
pp 197–203, 223.
127 (1884) 9 App Cas 605.

3.12 PROMISSORY ESTOPPEL AND CONSIDERATION
The first point to consider is whether the doctrine of promissory estoppel, as

restated and developed by Lord Denning, does strike at the heart of the doctrine
of consideration. The argument that it does is based on the fact that Denning, in
stating that ‘a promise intended to be binding, intended to be acted upon, and in
fact acted on, is binding so far as its terms properly apply’,128 was suggesting that
all that was needed to make a promise enforceable is that the party to whom it
was made has acted in reliance on it. In other words, it espouses a reliance-based
theory of the enforceability of contracts. It therefore becomes irrelevant whether
the promisee has provided anything in exchange in terms of a benefit to the
promisor, or a detriment suffered at the promisor’s request. As we have seen, the
classical doctrine of consideration requires one or other of these as a condition of
making a promise enforceable. If Denning’s statement is taken at face value,
however, then it would mean that if A promises B £10,000, intending it to be a
binding promise, and in reliance on this B decides to go out and buy a car, A
would be bound to the promise.129 The classical doctrine of consideration would
LA
hold that B has not provided any consideration, and that A is not therefore bound
to pay the £10,000.
IM
The question of whether the doctrine of consideration in its classical form does
still survive and, if it does not, the extent to which the doctrine of promissory
SH
estoppel has contributed to its demise is one to which we shall return at the
end of this chapter. At this stage, however, it is sufficient to note that the broad
formulation of ‘promissory estoppel’ by Denning in High Trees has been limited by
LU
subsequent decisions. These cases establishing the borderlines of the doctrine

can be viewed as supporting the view that it is simply an ‘exception’ to the general
doctrine of consideration and does not strike at its roots.
PN
There are five suggested limitations, of which four certainly apply: the status of
the fifth is less clear.
H
3.12.1 THERE MUST BE AN EXISTING LEGAL RELATIONSHIP

It is suggested that promissory estoppel cannot exist in a vacuum: there must
be an existing legal relationship between the parties which is being altered by
the promissory estoppel. This was clearly the case in High Trees itself. It was
concerned with the modification of the existing contractual rights between
the landlord and tenants. This limitation may also be said to be exemplified by the
following case.
128 [1947] KB 130, p 136.

129 A fully fledged reliance-based theory of enforceability would be likely to require B’s reliance to be ‘reason-
able’ – and perhaps foreseeable by A. See, further, below, 3.15.2.

Key Case Combe v Combe (1951)130

Facts: In this case, a husband and wife were getting divorced. Between the
decree nisi and absolute, the husband agreed to pay his wife £100 per annum
net of tax. The husband never paid any money, and after seven years his former
wife sued on the basis of his promise. Byrne J held that while there was no
consideration for the husband’s promise, the wife could recover on the basis of
the High Trees decision. The husband appealed.
Held: The trial judge’s decision was overturned by a Court of Appeal which
included Lord Denning himself.131 He commented that consideration remained
‘a cardinal necessity of the formation of a contract, but not of its modification
or discharge’.132 If this is so, then it severely limits the doctrine’s scope as a
general challenge to the doctrine of consideration. Promissory estoppel is
limited to the modification of existing legal relationships rather than to the
establishment of new obligations.133
LA
The existing relationship will generally be a contract. It seems, however, that
IM
this is not essential. The case of Durham Fancy Goods Ltd v Michael Jackson
(Fancy Goods) Ltd 134 concerned a bill of exchange drawn by the plaintiffs on the
SH
defendants. The plaintiffs made an error by putting on the bill ‘Accepted payable
. . . For and on behalf of M Jackson (Fancy Goods) Ltd’, whereas the proper name
of the company was ‘Michael Jackson (Fancy Goods) Ltd’. A director of the
defendant company signed his name on the bill and returned it,135 without point-
LU
ing out the error. When the bill was later dishonoured, the plaintiffs tried to enforce
the bill against the director. It was claimed that he was personally liable by virtue
PN
of s 108 of the Companies Act 1948, which renders a person who signs a bill liable
if the proper name of the company does not appear on the bill. It was held that the
director fell within s 108, because ‘M Jackson’ was not the same as ‘Michael
H
Jackson’. The plaintiffs were prevented from recovering from him, however, on the
basis that their action in writing the words of acceptance on the bill (including
the inaccurate name) amounted to a promise that ‘acceptance in that form would
be, or would be accepted by them as, a regular acceptance of the bill’.136 This, in
the view of Donaldson J, gave rise to a promissory estoppel, because it would
be inequitable to allow the plaintiffs to enforce against the director personally.
Such personal liability would not have arisen if the bill had been in the proper form.
130 [1951] 2 KB 215; [1951] 1 All ER 767.

131 Part of the reason for the decision was the fact that promissory estoppel could only be used as a ‘shield’
rather than as a ‘sword’: this is discussed further below, 3.12.3.
132 [1951] 2 KB 215, p 220; [1951] 1 All ER 767, p 770.
133 But cf the Australian case of Waltons Stores (Interstate) Ltd v Maher (1988) 76 ALR 513, discussed below,
3.15.2.
134 [1968] 2 QB 839; [1968] 2 All ER 987.
135 The director’s name was, in fact, Michael Jackson, and he was also secretary to the company.
136 [1968] 2 QB 839, at p 848; [1968] 2 All ER 987, p 991.

To the argument that promissory estoppel only arises where there is an existing
contractual relationship, Donaldson J commented:137
[T]his does not seem to me to be essential, provided that there is a pre-existing legal
relationship which could in certain circumstances give rise to liabilities and penalties.
Such a relationship is created by (a) s 108 of the Companies Act 1948, (b) the fact
that Mr Jackson was a director of Jacksons and (c) whatever contractual arrange-
ment existed between the plaintiffs and Jacksons which led to the plaintiffs drawing
a 90 day bill on Jacksons.
In Evenden v Guildford City FC,138Lord Denning appeared to go further and,

citing Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd, held that
promissory estoppel could apply in a situation where it appears there was no
existing legal relationship at all between the parties.139 He was supported in this
view by Browne LJ,140 who was, however, also prepared to find for the plaintiff on
the basis of a contractually binding promise.141
In The Henrik Sif,142 Webster J took the view that the ‘legal relationship’
LA
necessary as the background to a promissory estoppel could be found
where:143
IM
. . . two parties engaged in an exchange of correspondence in which one of them
SH
intends the correspondence to have legal effect in circumstances in which the

other knows of that first party’s intention and makes requests or purports to grant
extensions of time which could only be of relevance to the first party if the
correspondence between them affected their mutual rights and obligations.
LU
This seems to amount to a kind of ‘double-estoppel’: the failure to correct a false

PN
impression about the parties’ legal relationship leading to the context in which a
promissory estoppel could operate.
To the extent that these cases suggest that promissory estoppel can apply
H
even where there is no existing contract between the parties (within which con-
sideration will have been provided), they add weight to the suggestion that the
doctrine does have the effect of undermining the doctrine of consideration.
3.12.2 THERE MUST HAVE BEEN (DETRIMENTAL) RELIANCE

Under the normal rules for the creation of a contract, obligations may arise
as soon as promises have been exchanged. There is no need for either side to
137 [1968] 2 QB 839, at p 848; [1968] 2 All ER 987, p 847; p 991.

138 [1975] QB 917.
139 That is, it was a representation made by a company which was about to become the employer of the
plaintiff, to the effect that his new employment would be treated as continuous from that which he was
about to leave. This was important for the purpose of redundancy entitlement.
140 [1975] QB 917, p 926.
141 The third member of the Court of Appeal, Brightman J, also found for the plaintiff, on the basis that the
statutory presumption of continuous employment under s 9 of the Redundancy Payments Act 1965 could
not be rebutted in the light of the statement made by the new employer.
142 [1982] 1 Lloyd’s Rep 456.
143 Ibid, p 466. He relied to some extent on the comments of Robert Goff J in the first instance decision in
Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1981] 2 WLR 554.

have relied on the other’s promise in order to be able to enforce it. In relation to
promissory estoppel, however, the party trying to enforce the promise must have
taken some action on it. This simply means doing something as a result of it, for
example, paying the lower rent, as in High Trees. In some cases, it has been
suggested that the promisee must have suffered a detriment from such reliance,
but Lord Denning has consistently denied that this is necessary.
In WJ Alan & Co v El Nasr,144for example, the dispute concerned a letter
of credit, which had been opened in sterling rather than in Kenyan shillings, as
specified by the contract. The other party had, however, drawn on this credit in
relation to various transactions. The judge rejected the argument that this
amounted to a binding waiver of the original terms as to currency, because there
was no evidence that the party for whose benefit the waiver would operate had
acted ‘to their detriment’. Lord Denning in the Court of Appeal refused to accept
this as a necessary requirement for either waiver or promissory estoppel:145
I know that it has been suggested in some quarters that there must be detriment. But
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I can find no support for it in the authorities cited by the judge. The nearest approach
to it is the statement of Viscount Simonds in the Tool Metal case that the other must
have been led to ‘alter his position’146 . . . But that only means that he must have
IM
been led to act differently from what he otherwise would have done. And, if you study
the cases in which the doctrine has been applied, you will see that all that is required
SH
is that the one should have ‘acted on the belief induced by the other party’. That is
how Lord Cohen put it in the Tool Metal case, and is how I would put it myself.
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Megaw LJ agreed that there had been a binding waiver, though without dealing
with the specific point on ‘detriment’. Stephenson LJ left open the question of
whether ‘any alteration of position’ was sufficient, but held that on the facts the
PN
party acting on the waiver had suffered a detriment anyway. Despite the fact that
there is no absolutely clear authority on the issue, the current general view seems
H
to be that action taken in reliance on the promise is enough, without the need for a
specific detriment to be shown.
3.12.3 THE DOCTRINE CAN ONLY BE USED AS A ‘SHIELD NOT A SWORD’

The third limitation again derives from Combe v Combe,147 the facts of which have
been given above.148 The Court of Appeal, including Lord Denning, thought that
the attempt by the wife to use promissory estoppel to enforce her husband’s
promise was an inappropriate use of the doctrine. Promissory estoppel could not
form the basis of a cause of action, and would generally only be available as a
defence – ‘as a shield, not a sword’.149
144 [1972] 2 All ER 127.

145 [1972] 2 All ER 127, p 140.
146 Tool Metal Manufacturing Co v Tungsten Electric Co [1955] 2 All ER 657 – discussed below, 3.12.5.
147 [1951] 2 KB 215; [1951] 1 All ER 767.
148 See above, 3.12.1.
149 [1951] 2 KB 215, p 224; [1951] 1 All ER 767, p 772. This phrase was apparently used by counsel for the
defendant and adopted by Birkett LJ.

This limitation is clearly linked to the idea that the doctrine can only be used to
modify existing relationships, rather than to create new ones. It does not mean,
however, that promissory estoppel can only ever be used by a defendant, and
never by a claimant. For example, a landlord might promise to waive an obligation
to repair which would otherwise fall on the tenant. Suppose that the landlord
subsequently gives the tenant notice to quit for failing to carry out repairs. The
tenant could then go to court, as claimant, to challenge the notice. Reliance would
be placed on the landlord’s promise as having modified the tenant’s obligations.
The principle stated in Combe v Combe would not prevent the tenant from
bringing the action against the landlord.150
3.12.4 IT MUST BE INEQUITABLE FOR THE PROMISOR TO GO BACK

ON THE PROMISE
Promissory estoppel is, as we have seen, derived from the concept of equitable
waiver. Thus, as an equitable doctrine, its use is in the discretion of the courts, and
even if the other elements for the applicability of it exist, it may still not be applied
because it would be inequitable in the circumstances to do so. A clear example of
LA
the kind of situation where this would apply is the case of D and C Builders v
Rees.151
IM
SH
Key Case D and C Builders v Rees (1966)

Facts: The plaintiff builders had done work for the defendants and were owed
nearly £500. After pressing for payment for some time, the plaintiff agreed
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to take £300 in satisfaction of the account. Mrs Rees, who knew that the
plaintiffs were in financial difficulties, had told them that that was all they were
likely to get. Despite their promise to accept the £300 (a promise for which
PN
there was no consideration), the builders then sought to recover the balance of
the debt.
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Held: Lord Denning, in the Court of Appeal, held that although there was clearly
a promise here of a type which might raise promissory estoppel, the element of
intimidation in the defendant’s behaviour, knowingly taking advantage of the
plaintiffs’ circumstances, meant that it was not inequitable to allow the plaintiffs
to go back on their promise. The other members of the Court of Appeal did not
think it was even necessary to discuss the doctrine.152
150 For further discussion of these issues, see Halson, 1999; Thompson, 1983.
151 [1966] 2 QB 617; [1965] 3 All ER 837.
152 It may be significant that the contract in this case was at the ‘discrete’ as opposed to the ‘relational’ end of
Macneil’s spectrum of contracts (see Chapter 1, 1.6). There was thus less need for provision for modifica-
tion of obligations.

FOR THOUGHT
What do you think the position would have been in D and

C Builders if the builders had been aware of Mrs Rees’s
financial difficulties and had themselves agreed to reduce
the bill?
The inequity in D and C Builders was fairly obvious. The concept of ‘equitability’
does not necessarily imply impropriety on the part of the promisee, however. In
The Post Chaser,153 the promise was made and withdrawn within a few days.
Although the other side had relied on the promise, their position had not in fact
been prejudiced by such reliance. It was not, therefore, inequitable to allow the
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promisor to withdraw the promise.
The question is thus not simply whether the promisee acted in reliance on
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the promise, but whether there was sufficient reliance to make it inequitable
not to enforce the promise. Although Robert Goff J in The Post Chaser was
SH
clearly supportive of the view noted above that such ‘reliance’ does not require
‘detriment’, if there has been detriment, then inequitability may be much easier to
establish. In the absence of detriment, the court will probably look at the effect of
allowing withdrawal of the promise. Would this have a significant adverse affect
LU
on the promisee, because of the way in which he has organised his affairs in
the light of the promise? If not, then withdrawal is unlikely to be regarded as
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‘inequitable’.
3.12.5 THE DOCTRINE IS ONLY SUSPENSORY IN ITS EFFECT

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Does the doctrine have a permanent, or only a suspensory effect? This final limita-
tion on promissory estoppel is the one about which there is most uncertainty.
There is no doubt that in some circumstances a promissory estoppel will have a
purely suspensory effect. In Hughes v Metropolitan Railway,154 for example, the
notice of obligation to repair was simply put in abeyance while the negotiations
over a possible sale continued. It is also clear that in relation to some sorts of
contract, the effect can be to both extinguish some rights and suspend others.
This is what happened in High Trees itself. The right to receive the full rent during
the war years was extinguished by the estoppel, but because the promise
was interpreted as having only been intended to be applicable during the war,
once that was over, the original terms of the lease automatically revived. So, to
that extent, the effect was simply suspensory. Even if the promise is expressed
to last indefinitely, it is likely that it will be able to be withdrawn (and thus be only
153 [1981] 2 Lloyd’s Rep 695; [1982] 1 All ER 19.

154 (1877) 2 App Cas 439 – discussed above, 3.11.

suspensory in effect) by giving appropriate notice. In Tool Metal Manufacturing Co

v Tungsten Electric Co,155 for example, there was a promise to accept a reduced
royalty in relation to the operation of some patents. It was held that the promisor
could withdraw the promise by giving reasonable notice, from which point the
original terms of the agreement would come back into operation. The House of
Lords in fact held that the initiation of a previous, unsuccessful action to escape
from the promise constituted notice of withdrawal.
It is in relation to this type of continuing contract,156 therefore, that promissory
estoppel operates to both extinguish and suspend contractual rights. The
obligations to make the higher payments during the period of the operation in
both High Trees and the Tool Metal case were destroyed. The promisor was
unable to recover the additional amounts for that period. The original terms were
not in themselves extinguished, however, and could be reinstated for the future.
What is not clear is whether the doctrine of promissory estoppel could be
used to extinguish, rather than suspend, an obligation which is not a continuing
obligation. If, for example, the issue of inequitability had not arisen in D and C
Builders v Rees,157 would promissory estoppel have wiped out, or simply post-
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poned, the payment of the balance? It seems clear that if the doctrine is to have
any place at all in relation to this type of obligation, it must have the effect of
IM
extinguishing the right altogether. It would make no sense to say that Rees could
rely on D and C Builders’ promise to remit the balance of the debt, but that at any
SH
time the obligation to pay it could be revived by the giving of notice. It should be
remembered, however, that it was only Lord Denning who seriously considered
applying promissory estoppel in this situation, and that there has been no other
LU
reported case in which the doctrine has been applied to this kind of obligation.
The conclusion must be, however, that it is not true to say that promissory
estoppel can only operate in a suspensory way. The precise effect of promissory
PN
estoppel, in terms of whether it suspends or extinguishes rights, will depend

on the nature of the promise, and the type of contract to which it applies. If this
H
is the case, then promissory estoppel is no different in this respect from a con-
tractual modification which is supported by consideration. The precise effect of
such a modification also depends on the terms in which it is expressed, and
the nature of the contract with which it is concerned. It would have been quite
possible, for example, for an agreement of the type considered in High Trees
to have been entered into on the basis that, during the war, the tenants would
undertake additional responsibilities in respect of the maintenance of the
property in return for the landlord accepting the reduced rent, thus providing
consideration for the landlord’s promise. As far as the obligation to pay the rent
was concerned, the effect would have been the same as would occur through the
application of promissory estoppel. The landlord’s right to receive the full rent
would have been extinguished during the war, but would have revived once peace
had returned.
155 [1955] 2 All ER 657.

156 A ‘relational’ contract, in other words – see Chapter 1, 1.6.
157 [1966] 2 QB 617; [1965] 3 All ER 837.

If this is right, then putting forward the suspensory nature of promissory

estoppel as a basis for distinguishing it from the doctrine of consideration (and
thus adding weight to the view that it does not ‘undermine’ consideration) does
not look very convincing. In both cases, the issue of the suspension or extinction
of rights depends on the nature of the promise and the surrounding circum-
stances. It does not, therefore, depend on whether or not consideration was given
for the promise.
3.13 PROMISSORY ESTOPPEL AND THE PART PAYMENT OF DEBTS
3.13.1 THE COMMON LAW POSITION

The common law position on the part payment of debts is to be found in Pinnel’s
Case,158 as confirmed by the House of Lords in Foakes v Beer.159 The rule is that
part payment of a debt on the date on which it is due can never be satisfaction for
the full amount owed.160 The creditor will still be able to recover the balance of the
debt, unless the debtor can show that some consideration was supplied in return
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for the creditor’s agreement to take the lesser sum. Thus, if payment is made
early, or on the day, but at a different place from that specified in the contract, the
debt may be discharged. Equally, if the debtor provides goods, or services,
IM
instead of cash, this, if accepted by the creditor, will discharge the debt fully, even
if the value of what was supplied is less than the total amount owed: ‘The gift of a
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horse, a hawk, or a robe, in satisfaction is good.’161 Thus, the payment of £5 on

the due date could never discharge a debt of £100, but if the debtor offered
and the creditor accepted a book worth £5 in satisfaction, the creditor could not
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then claim the balance of £95. The justification for this rather odd rule is that the
book must have been regarded by the creditor as more beneficial than money,
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otherwise it would not have been accepted, and the court will not inquire further
into the creditor’s motives.
Two other situations are recognised by the common law as enabling a debt to
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be discharged, even though it has not been fully paid. The first is where the
payment is made by a third party. For example, in Hirachand Punamchand v
Temple,162 the debtor’s father made a payment in relation to a promissory note
which was accepted by the creditor in full settlement of the debt. It was held that
the creditor could not subsequently sue the debtor for the balance. This followed
a similar view taken in the earlier cases of Welby v Drake 163 and Cooke v Lister.164
Second, if a debtor owes money to several creditors, an agreement may be
reached whereby each of them is to receive a proportion of the money owed
158 (1602) 5 Co Rep 117a; 77 ER 237.

159 (1884) 9 App Cas 605.
160 It seems unlikely that a reliance-based approach would come up with any different general rule on this issue.
It is difficult to see that a debtor who has made part payment has ‘relied’ on a promise to accept this in full
satisfaction – unless, perhaps, the debtor has subsequently taken on other commitments on the basis that
the original debt has been extinguished.
161 (1602) 5 Co Rep 117a; 77 ER 237.
162 [1911] 2 KB 330.
163 (1825) 1 C & P 557.
164 (1863) CB(NS) 543.

(a ‘composition agreement’). In that situation, none of the creditors will be allowed

to sue the debtor to recover the full amount originally owed.165
Both of these two situations may be explained on the basis that the creditor
should not be allowed to act in a way which would constitute a ‘fraud’ on the party
who has made the part payment, but they do appear to be exceptions to the rule
that part payment of a debt must be supported by consideration in order to make
it enforceable.166
3.13.2 THE DECISION IN FOAKES v BEER

The rule in Pinnel’s Case was strictly obiter, in that the debtor had paid early, and
had therefore in any case provided sufficient consideration to discharge the whole
debt, but it was confirmed by the House of Lords in Foakes v Beer.
Key Case Foakes v Beer (1884)

Facts: Dr Foakes owed Mrs Beer a sum of money in relation to a judgment
debt. Mrs Beer agreed that Dr Foakes could pay this off in instalments. When
LA
he had done so, Mrs Beer sued to recover the interest on the debt, in relation
to the delay in the completion of payment resulting from the payment by
IM
instalments.
SH
Held: The House of Lords held that, even if Mrs Beer had promised to forego
the interest (which was by no means certain),167 it was an unenforceable
promise because Dr Foakes had provided no consideration for it. Part payment
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of a debt could not in itself distinguish the debt.

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The Court of Appeal has recently confirmed in two cases that this is still the
standard position as regards part payment of debts.
H
The first is Re Selectmove,168 which was discussed above;169 the second is

Ferguson v Davies.170 In the latter case, the plaintiff started a county court action
to recover a debt, originally stated at £486.50 but later increased to £1,745.79.
The defendant, as part of his ‘defence’ in relation to these proceedings, sent the
plaintiff a cheque for £150, sending letters to the plaintiff and the court indicating
that while he admitted liability to this extent, the cheque was sent in full settle-
ment of his dispute. The plaintiff, having sought advice from the county court,
presented the cheque for payment, but continued with his action. The trial judge
held that by accepting the £150, the plaintiff had compromised his action by a
binding ‘accord and satisfaction’. The Court of Appeal disagreed. Henry LJ, with
whom Aldous LJ agreed, did so on the basis that there was no consideration here
165 Good v Cheesman (1831) 2 B & Ald 328.

166 For other possible explanations for these decisions, see Treitel, 2007, p 126.
167 Cf the comments of Gilmore, 1974, at pp 31–32.
168 [1995] 2 All ER 534.
169 See above, 3.9.10.
170 [1997] 1 All ER 315.

for the plaintiff’s alleged agreement to abandon his claim. This was not a situation
where a claim for a disputed amount was settled by a compromise involving
partial payment by the debtor (a common basis for the settlement of legal
actions). On the contrary, the defendant had admitted liability for the £150 sent,
and so was giving the plaintiff nothing which could amount to consideration
for the plaintiff’s alleged agreement to forego any further claim. By his own
admission, he was bound in law to pay the £150, so this payment merely con-
stituted the settlement of an acknowledged debt, and could not serve as
consideration for any other promise. The principles of Foakes v Beer and D and C
Builders v Rees 171 applied, and the plaintiff was free to pursue his claim for the
balance which he alleged was owed to him.
It should perhaps be noted that the other member of the Court of Appeal,
Evans LJ, with whom Aldous LJ also agreed, decided the case on the different
ground that, on the facts, there was no true ‘accord’, in that the defendant’s
letters could reasonably be interpreted as not being intended to assert that the
£150 was sent as full settlement of all claims by the plaintiff. On the consideration
issue, Evans LJ specifically indicated that he was expressing no view. Neverthe-
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less, there is no doubt that, in the light of these latest Court of Appeal decisions,
the principles in Pinnel’s Case and Foakes v Beer remain good law in relation to
IM
the payment of debts. As Peter Gibson LJ put it in Re Selectmove:172
SH
Foakes v Beer was not even referred to in Williams’ case,173 and it is in my judgment
impossible, consistently with the doctrine of precedent, for this court to extend the
principle of Williams’ case to any circumstances governed by the principle of Foakes
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v Beer. If that extension is to be made, it must be by the House of Lords or, perhaps
even more appropriately, by Parliament after consideration by the Law Commission.
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3.13.3 THE EFFECT OF PROMISSORY ESTOPPEL ON FOAKES v BEER

What is the effect, if any, of the doctrine of promissory estoppel on these
principles? In this context, it is important to note that Foakes v Beer was decided
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in 1884, that is, seven years after Hughes v Metropolitan Railway. 174 Hughes was
not even cited in the later case. Given that three of the four members of the House
of Lords who delivered speeches in Foakes v Beer expressed some unhappiness
about the outcome to which they felt that the common law bound them,175 so that
they would gladly have accepted an escape route via the equitable doctrine of
waiver if that had been available, it must be assumed that the approach taken in
Hughes was considered to have no relevance to the situation of part payment of
debts. This, then, was a further way in which Lord Denning’s decision in Central
London Property Trust Ltd v High Trees House Ltd broke new ground. The case
was concerned, in effect, with the partial payment of a debt (that is, half the rent
171 [1966] 2 QB 617; [1965] 3 All ER 837 – discussed above, 3.12.4.

172 [1995] 2 All ER 531, p 538.
173 That is, Williams v Roffey [1991] 1 QB 1; [1990] 1 All ER 512.
174 (1877) 2 App Cas 439.
175 See (1884) 9 App Cas 605, p 613 (Lord Selborne); p 622 (Lord Blackburn); p 630 (Lord Fitzgerald).

for the war years). Nevertheless, Denning felt able to apply to it the Hughes
principle of ‘equitable waiver’, and it seems now to be generally accepted that this
doctrine, in its new guise of ‘promissory estoppel’, can mitigate the harshness of
the rule in Foakes v Beer, in appropriate cases.176 This is not to say that Foakes v
Beer would definitely be decided differently if it came before the House of Lords
again today. That would depend on what exactly Mrs Beer was found to have
promised, whether Dr Foakes could be said to have relied on that promise and
also on whether promissory estoppel can ever be applied to extinguish a ‘one-off’
debt as opposed to payment obligations under a continuing contract. This issue
has been discussed in the previous section, in considering whether promissory
estoppel is only suspensory in its effect. It is, however, probably significant that
the issue of promissory estoppel was not discussed in either Re Selectmove or
Ferguson v Davies. This would suggest that the courts remain reluctant to intro-
duce this principle into the area of part payment of simple debts.
3.14 OTHER TYPES OF ESTOPPEL
LA
Before leaving this area, we should also note two other types of estoppel which
IM
can have an effect on the operation of a contract. First, there is estoppel by
convention. This arises where the parties to an agreement have acted on the basis
SH
that some provision in the contract has a particular meaning. This type of estoppel
will operate to prevent one of the parties later trying to argue that the provision
means something different. An example of its use is Amalgamated Investment
and Property Co Ltd [‘AIP’] v Texas Commerce International Bank Ltd 177 (‘the
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Bank’). In this case, there was a contract of guarantee between AIP and the
Bank. The guarantee was in respect of a loan made by the Bank to a firm called
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Amalgamated (New Providence) Property Ltd (‘ANPP’), which was a subsidiary of

AIP. The guarantee contained a promise by AIP to repay money ‘owed to you’ (that
is, the Bank) by ANPP. In fact, ANPP had been lent the money not by the Bank
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direct, but by a specially created subsidiary of the Bank named ‘Portsoken’. When
AIP got into financial difficulties and went into liquidation, the liquidator sought a
declaration to prevent the Bank using money which it owed to AIP under another
transaction in order to discharge ANPP’s debt. It was argued that the guarantee
was not binding, because it only referred to money owing to the Bank itself,
whereas the money had actually been lent by Portsoken. There was no money
owed to the Bank by ANPP to which the guarantee could attach. It was held,
however, that all parties had acted on the basis that the wording of the guarantee
referred to the money lent by Portsoken to ANPP and, on that basis, an estoppel
by convention operated to prevent AIP arguing for a different meaning. Therefore,
176 Note that an Australian court has gone further: in Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723,
Santow J held that, following Williams v Roffey [1991] 1 QB 1, a promise to accept a reduced rent could
amount to a binding variation of the contract, without the need to rely on promissory estoppel.
177 [1982] QB 84; [1981] 3 All ER 577.

AIP’s liquidator could not stop the Bank from using the money owed to AIP in the
way it proposed.178
A more recent confirmation by the House of Lords of the concept of estoppel
by convention is to be found in Johnson v Gore Wood & Co.179 The majority of the
House held that the compromise of an action by a company against a firm of
solicitors did not preclude the managing director of the company subsequently
bringing a personal action against the firm. This was not an ‘abuse of process’
because the House felt that the earlier negotiations were based on the assump-
tion that a further proceeding by the managing director would be possible. This
assumption operated as an ‘estoppel by convention’.180
The second type of estoppel which needs to be noted is proprietary estoppel.
This operates in relation to rights in land only. It also differs from promissory
estoppel (though both are sometimes confusingly referred to as ‘equitable
estoppel’) in that it may be used to found a cause of action. In other words, it can
be used as a sword rather than a shield. An example of its use is Crabb v Arun
District Council.181 Mr Crabb owned a plot of land adjacent to a road. He decided
to sell half of the plot to the Arun District Council (ADC). The ADC built a road
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along one edge of the piece of land which it had bought. Mr Crabb was allowed
access to this road from a particular point on the land which he had retained. Mr
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Crabb then decided to sell another portion of this land. On the basis of a promise
from the council that he would be allowed another access point onto its road, he
SH
sold the piece of land containing the first access point. The ADC, despite the fact
that it had initially left a gap in its fencing at an appropriate point, then refused to
allow the second access. The result was that the piece of land that Mr Crabb had
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retained was completely blocked in, without any access from either the original
road or the road built by the ADC. Mr Crabb brought an action to compel the ADC
to grant him the second access point which had been promised. Although there
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was no consideration for this promise, Mr Crabb succeeded in his action. The
words and actions of the ADC had led Mr Crabb to believe that he would have the
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second access point, and he had relied on this to his detriment in selling the piece
of land containing the first access point. The Court of Appeal therefore allowed
him to succeed on the basis of a proprietary estoppel.
3.15 ALTERNATIVE TESTS OF ENFORCEABILITY
As we have seen, the English courts, following classical theory, profess to

use the existence of valid consideration as the test for the enforceability of
simple contracts. It is said that, in effect, consideration is both necessary and
sufficient to make an agreement binding. In particular, a promise unsupported by
178 Note that the judgments of the Court of Appeal are not unanimous on the issue of whether the Bank could
have sued on the promise in the guarantee (as opposed to using it as a defence to AIP’s action): Eveleigh LJ
took the view that it could not (see p 126), but Brandon LJ (on the facts, p 132) and Lord Denning MR (as a
matter of principle, p 122) thought that it could.
179 [2001] 1 All ER 481.
180 Lord Goff preferred to regard the situation as one involving a ‘promissory estoppel’ – though this led him to
the same conclusion as the majority: see [2001] 1 All ER 481, p 508.
181 [1975] 3 All ER 865.

consideration cannot be enforced. As was noted at the start of this chapter, how-
ever,182 this analysis is not universally accepted, even as an accurate description
of what the courts actually do. Indeed, we have already seen that there is a breach
in the standard approach via the concept of promissory estoppel, and a probable
weakening of it via the case of Williams v Roffey.183
3.15.1 WHAT DOES ‘CONSIDERATION’ REALLY MEAN?

One of the leading English sceptics in relation to the traditional analysis of the
doctrine of consideration is Professor Atiyah. His views are set out, inter alia, in
Chapter 8 of his Essays on Contract, entitled ‘Consideration: a re-statement’.184
Atiyah’s view, which is supported by some legal historians,185 is that ‘con-
sideration’ originated simply as an indication of the need for a ‘reason’ for
enforcing a promise or obligation, such as the fact that the promisee had given
something to the promisor in expectation that the promise would be fulfilled. It
became formalised, however, into a rigid set of rules, such as that there must
be benefit and detriment, that past consideration is no consideration, that con-
sideration must be of economic value, and that gratuitous promises will not
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generally be enforced.
In examining how these rules actually operate, however, Atiyah argues that
IM
they are not actually followed rigidly by the courts. For example, as regards the
need for benefit/detriment, he cites Chappell v Nestlé 186and Hamer v Sidway 187 as
SH
indicating that this is not necessary for a contract. Nor is it sufficient, in that
contracts in which there is clearly benefit or detriment may still not be enforced, as
we shall see in later chapters, because of considerations of illegality, duress, or
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undue influence. In relation to the need for economic value, Ward v Byham 188 may
be seen as an exception.
Moreover, the unenforceability of gratuitous promises is not applied where
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promissory estoppel operates. Atiyah argues that promissory estoppel, as

expounded in High Trees, was a step in the right direction, following a wrong
turning taken as a result of the misinterpretation of Jorden v Money 189 as an
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authority for the proposition that a statement of intention cannot give rise to an
estoppel. As we have seen,190 that case was actually decided as it was, according
to Atiyah, because of the requirements of the Statute of Frauds 1677, which at the
time required that a promise given in consideration of marriage (which was
the situation in Jorden v Money) had to be proved by writing.
Because there was no writing, the case could not be pleaded in contract and
was therefore pleaded as estoppel, but the court refused to allow this to be used
182 See above, 3.4.

183 [1991] 1 QB 1; [1990] 1 All ER 512.
184 Atiyah, 1986: this is in fact a revised version of an inaugural lecture delivered at the Australian National
University, Canberra, in 1971 and published by the Australian National University Press in the same year.
See also Atiyah, 1978, republished as Chapter 2 in Atiyah, 1986.
185 For example, Simpson, 1975a, Chapters IV–VII, and in particular p 321.
186 [1960] AC 87; [1959] 2 All ER 701 – discussed above, 3.7.1.
187 (1891) 27 NE 256; 124 NY 538 – discussed above, 3.7.1.
188 [1956] 2 All ER 318 – above, 3.9.1.
189 (1854) 5 HL 185.
190 Above, 3.10.2.

as a means of circumventing the requirements of the Statute of Frauds 1677. High

Trees, which recognised the enforceability of a statement of intention which had
been relied on, should have shown the way forward, but was thrown off course
by Combe v Combe.191 The real reason for the decision in that case, Atiyah says,
was not the fact that the wife was trying to use promissory estoppel as a cause
of action, but that justice was not on her side, because she was earning more
than her ex-husband. This was a reason (or consideration?) for not enforcing the
husband’s promise. But, in general, where there has been reasonable reliance on
a promise, even if the promisee has not provided what we should recognise as
‘consideration’ in the technical sense, Atiyah is of the view that the promise
should be enforceable. This concept of reliance would, he argues, be a more
satisfactory way of determining the existence of contractual obligations, as
opposed to the formalistic requirement of consideration, with all its technical
limitations.
What Atiyah is in effect arguing is that we should return towards the original
idea of ‘consideration’ as meaning a reason for enforcing a promise or acknow-
ledging an obligation. This would be a much more flexible doctrine. The dis-
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advantage, however, is that it would also be rather uncertain and unpredictable,
and might depend too much on what the individual judge thinks amounts to a
IM
sufficient reason for enforcing a promise on a particular set of facts. One possible
basis on which this might be done is by giving a greater status to the requirement
SH
of ‘intention to create legal relations’, to which we shall turn in the next chapter.
3.15.2 ‘RELIANCE’ AS A TEST OF ENFORCEABILITY

LU
It is at this point we must return to the issue raised at the beginning of this
chapter,192 that is, the role of ‘reliance’ as an alternative to, or replacement for,
consideration. One aspect of Atiyah’s criticisms is his view that in fact ‘reliance’
PN
provides a more accurate test of enforceability than the orthodox doctrine of

consideration, which takes as its paradigm the mutual exchange of ‘binding’
promises.193 Courts enforce promises where the promisee has relied on the
H
promise and it would therefore be unfair to allow the promisor to escape from his
or her commitment. This view is, for Atiyah, inaccurate both as a description of the
typical contract and in the light of the way in which the courts deal with them.
Many common transactions, such as booking holidays, making air reservations
and ordering goods are not commonly discussed by the participants in terms
of ‘promises’.194 It is actions, and reliance on actions, rather the exchange of
promises, which leads to the creation of obligations.195 On this basis, if you deliver
goods to me, on the basis that I will pay you for them, it is your action in trans-
ferring the goods to me which creates an enforceable obligation to pay. You have
acted to your detriment in reliance on the fact that I will pay for the goods. The
191 [1951] 2 KB 215; [1951] 1 All ER 767 – above, 3.12.1; 3.12.3.

192 Above, 3.4.
193 This aspect of his theories about contract appears at greatest length in Atiyah, 1986, Chapter 2. Cf also the
arguments of Baker concerning ‘reasonable expectation’ as the basis of contractual liability: Baker, 1979.
194 Ibid, p 23.
195 Atiyah goes on to question whether the law should enforce purely executory agreements, where there has
been no reliance by either party.

same is true of someone, for example, boarding a bus where there is a conductor
rather than the obligation to pay on entry. It is unrealistic to talk about my action in
terms of its containing an implied promise to pay the fare; rather it is my action
in taking advantage of the bus service, and being carried on my journey, which
creates the obligation to pay.
The notion of contractual obligations being based on reliance, rather than a
bargained for exchange, is not peculiar to Professor Atiyah.196 It has a long history
in the United States.197 Indeed, the American Restatement,198 even in its first
version published in 1932, recognised it as part of the law of obligations. In
addition to s 75, which contained what we would regard as an orthodox definition
of consideration based around the concept of ‘bargain’, it also included s 90,199
which reads:
A promise which the promisor should reasonably expect to induce action or

forbearance of a definite and substantial character on the part of the promisee and
which does induce such action or forbearance is binding if injustice can be avoided
only by the enforcement of the promise.
LA
As will be seen, this provides a test for the enforceability of promises not based
IM
on ‘consideration’ but on ‘reliance’, and this has remained a central part of the
American law of contract. This demonstrates that the English law of contract does
SH
not need to make consideration its primary, if not sole, test of enforceability.
Recent developments in Australia can be seen as indicating a similar trend away
from consideration.
LU
FOR THOUGHT
PN
Would using ‘reliance’ in place of or alongside consideration

H
as a test of enforceability create greater uncertainty in

deciding whether promises are enforceable? Would it be an
undesirable development for that reason?
It will be noticed that the language of s 90 of the American Restatement bears a

considerable similarity to that used by Lord Denning in developing the doctrine of
promissory estoppel.200 That doctrine can indeed be seen as basing contractual
196 A good review of the role of ‘reliance’ as a test of enforceability is to be found in Collins, 2003, Chapter 5.
197 For example, Fuller and Perdue, 1936.
198 Intended as a ‘model’ law for potential adoption by the individual States, but also as representing the current
law as revealed by the cases.
199 The process by which these two, rather contradictory, sections dealing with the basis of contractual
obligations came to co-exist in the same document is entertainingly described by Gilmore, 1974, pp 60–65.
200 See above, 3.11.

obligations on reasonable reliance. Its limitation as a rival to consideration is,

however, as we have seen, the reluctance of the English courts to accept that
it can operate to create new obligations rather than to vary existing ones. The
Australian courts have been bolder in taking that step, as shown by the case of
Waltons Stores (Interstate) Ltd v Maher.201 The case concerned the proposed
lease of a piece of land as part of a development project. The owners of the
land were led to believe that the prospective lessees would proceed with the
transaction, and that the necessary exchange of contracts would take place.202
With that expectation they demolished an existing building on the land, in
preparation for the construction of a new building to meet the lessees’ require-
ments. In fact, the lessees had already decided not to proceed with the agree-
ment. They failed to communicate this to the owners, even though they knew
that the work on demolishing the building had started. Could the owners claim
any compensation?
Although there appeared to be no contract between the parties, the High Court
of Australia allowed the owners to succeed on the basis of estoppel. The court
felt that the lessees, having ‘promised’ that the contract would proceed, had
LA
acted ‘unconscionably’ in knowingly allowing the owners to carry on with their
work, thereby incurring a detriment. The promise should therefore be enforced. In
IM
coming to this conclusion, Mason CJ and Wilson J make specific reference to
s 90 of the American Restatement, thus providing the link with the way in which
SH
promissory estoppel has been used in that jurisdiction. Brennan J set out a
six-point summary of the requirements for this type of estoppel:203
LU
(1) the plaintiff assumed or expected that a particular legal relationship exists
between the plaintiff and the defendant or that a particular legal relationship
will exist between them and, in the latter case, that the defendant is not free to
PN
withdraw from the expected legal relationship;

(2) the defendant has induced the plaintiff to adopt that assumption or
H
expectation;
(3) the plaintiff acts or abstains from acting in reliance on the assumption
or expectation;
(4) the defendant knew or intended him to do so;
(5) the plaintiff’s action or inaction will occasion detriment if the assumption or
expectation is not fulfilled; and
(6) the defendant has failed to act to avoid that detriment whether by fulfilling the
assumption or expectation or otherwise.
All these conditions were satisfied in the case, and so the owners (the plaintiffs)
were entitled to succeed in their action.
201 (1988) 164 CLR 387; 76 ALR 513. This case may be regarded as building on Legione v Hateley (1983) 152
CLR 406, where at least some members of the High Court of Australia had first accepted that promissory
estoppel should be applicable in Australia to preclude the enforcement of rights, at least between parties to
an existing contract.
202 A letter indicating this was sent by the lessees’ solicitor.
203 (1988) 164 CLR 387, p 428.

Waltons v Maher has the effect of extending promissory estoppel to apply in a

situation where it is being used to create a new cause of action. In other words,
it is doing what the Court of Appeal refused to do in Combe v Combe.204 It is thus,
in effect, allowing ‘detrimental reliance’ as an alternative to consideration, pro-
vided that such reliance can be said to make it ‘unconscionable’ for the promisor
to renege on the promise.
Subsequent decisions in Australia have accepted the principle applied in
Waltons’ case,205 and similar developments can be seen in New Zealand206 and in
Canada.207 Taking into account also s 90 of the American Restatement, it would
seem that in the common law world it is increasingly the approach taken by the
English courts, in limiting the scope for enforcing agreements on the basis of
reliance, that is out of line. It would not be surprising if the concept of promissory
estoppel were soon to be developed in England in a way which would bring the
law here more into step with the broader approach adopted elsewhere.208 It
seems, however, that any such development will have to be undertaken by the
House of Lords. That was the view of the Court of Appeal in Baird Textile Holdings
Ltd v Marks & Spencer plc.209 This was a preliminary hearing relating to an applica-
LA
tion to strike out the claimant’s action. The claimant’s case was based on Marks &
Spencer’s termination without notice of a long-standing arrangement under
IM
which it bought supplies from the claimant. The court held that the claimant had
no realistic chance of arguing either that the arrangement amounted to a contract
SH
(because of lack of certainty and of any evidence of an intention to create legal

relations) or that Marks & Spencer should be ‘estopped’ from bringing it to an end
without reasonable notice. The court was unanimous in the view that it would be
LU
necessary for the House of Lords to develop the law in the way suggested by
the claimant.210 Unless and until this happens, it cannot therefore be said that the
doctrine of consideration has as yet been replaced by a reliance-based approach
PN
to enforceability, though the areas where ‘exceptionally’ the latter approach is

allowed to be used has significantly increased over the last 50 years.
H
Before leaving this area, it should be noted that there may be a difference
between ‘consideration’ and ‘reliance’-based contracts in the area of remedies.
This topic is discussed more fully in Chapter 17, but the issue will be outlined here.
The traditional view is that the claimant who successfully argues that a contract
has been broken is entitled to recover damages to compensate for the lost
benefits that would have accrued had the contract been performed properly (the
204 [1951] 2 KB 215; [1951] 1 All ER 767.

205 For example, The Commonwealth of Australia v Verwayen (1990) 170 CLR 394; The Zhi Jiang Kou [1991]
1 Lloyd’s Rep 493.
206 For example, Burbery Mortgage Finance and Savings Ltd v Hindsbank Holdings Ltd [1989] 1 NZLR 356.
207 For example, Gilbert Steel Ltd v University Construction Ltd (1973) 36 DLR (3d) 496; Litwin v Pan (1986) 52
DLR (4th) 459.
208 For the contrary argument that promissory estoppel should be confined to the area with which it was
primarily developed to deal, at least in England (that is, the modification of existing contracts), see Halson,
1999.
209 [2001] EWCA 274; [2002] 1 All ER (Comm) 737.
210 Judge LJ, however, appeared rather more sympathetic to the claimant’s argument than either of the other
members of the court (the Vice-Chancellor, Sir Robert Andrew Morritt or Mance LJ).

‘expectation interest’). This will be the standard (though not universal) approach
where the contract is enforceable on the basis of the mutual exchange of con-
sideration. Where contractual obligations are based on ‘reliance’, however, it is
not certain that lost expectations will be compensated. This is reflected in the
current wording of s 90 of the American Restatement, which states that
‘The remedy granted for breach may be limited as justice requires’. Similarly, in
Australia, it has been suggested that what is recoverable as a result of the
breach of a promise which has been relied on, but which is not supported by
consideration, is damages to compensate the claimant for losses incurred
by reliance, rather than the benefits that might have accrued from full per-
formance.211 If this is the case, then it may be argued that, although reliance
may provide an alternative test of the enforceability of a promise, full con-
tractual liability (that is, liability which includes the obligation to compensate for
expected benefits) only arises from an agreement based on the exchange of
consideration.212
3.15.3 ‘PROMISE’ AS A TEST OF ENFORCEABILITY
LA
As has been pointed out earlier in this chapter,213 there are difficulties in fitting
a ‘promise’ within the normal definition of consideration as involving some
IM
detriment to the person providing the consideration or some benefit to the person
to whom it is provided. Given, however, that (again as noted above) much of the
SH
classical law of contract is centred on the notion that an exchange of promises

makes both enforceable, even while both are executory, it is not surprising to find
that there have been attempts to argue that ‘promises’ rather than reliance should
LU
be regarded as providing the badge of enforceability. This involves arguing that

the reason for enforcing a promise is the fact that the promisor has used this form
of discourse. Thus, the focus is on what the promisor has done, rather than (as
PN
with the consideration and reliance analyses) on what the promisee has done in
response to the promise. The fullest modern attempt to present this argument is
to be found in the work of Charles Fried.214
H
Drawing on the work of earlier philosophers,215 Fried argues that there is a

moral obligation to keep a promise, independent of reliance by the promisee, or of
utilitarian arguments about the benefits that may flow from promise-keeping.
Rather, the obligation to keep a promise ‘is grounded in respect for individual
autonomy and trust’.216 More fully:217
211 The Commonwealth of Australia v Verwayen (1990) 170 CLR 394.

212 For an argument that the gap as far as remedies is concerned is less than might appear at first sight,
see Collins, 2003, pp 89–90. Collins points out that a finding of an estoppel can lead to a requirement
to complete a promised obligation in situations where the normal contractual remedy would only be
damages.
213 Above, 3.6.
214 See Fried, 1981. For an argument for the enforcement of gratuitous promises based on an economic
analysis, see Posner, 1977.
215 For example, Immanuel Kant.
216 Fried, 1981, p 16.
217 Ibid.

An individual is morally bound to keep his promises because he has intentionally

invoked a convention whose function is to give grounds – moral grounds – for
another to expect the promised performance. To renege is to abuse a confidence
that he was free to invite or not, and which he intentionally did invite.
Part of Fried’s argument for putting ‘promise’ at the centre of contract is that the
doctrine of consideration is inadequate as a test of enforceability. He suggests
that two principle elements of the doctrine are mutually inconsistent. One says
that the law is not concerned with the adequacy of consideration.218 This appears
to support the idea that ‘the free arrangements of rational persons should be
respected’.219 The second principle is that only where something is given in
exchange for a promise should the promise be enforceable. This means that
‘the free arrangements of rational persons’,220 which might include the making of
binding gratuitous promises, can be frustrated by the doctrine of consideration.
His conclusion is that an analysis based on promise provides a more coherent
basis for enforceability. He recognises, however, that his approach does not
accord with Anglo-American contract law as it currently operates: ‘There are too
LA
many gaps in the common law enforcement of promises to permit so bold a
statement.’221 This mismatch between theory and reality has formed the basis of
IM
the criticisms of Fried’s approach, with Professor Atiyah as one of the strongest
sceptics.222 Atiyah suggests that the gaps in the extent to which promises are
SH
actually enforced by the courts means that it is preferable to view promises as

being ‘prima facie binding rather than absolutely and conclusively binding’.223 He
continues:224
LU
Exchanges of benefits are likely to be in the interests of those who make them, and
there is therefore a strong prima facie case for upholding them. Promises are likely to
PN
be relied upon and those who rely would suffer loss from breach: these too are prima
facie good reasons for upholding the binding nature of a promise.
H
It is only fair to note, however, that Fried is aware of the limitations of his thesis.
His conclusion, however, is that, although there are many gaps in the common law
enforcement of promises:225
. . . the doctrine of consideration offers no coherent alternative basis for the force of
contracts . . . Along the way to this conclusion I have made or implied a number of
qualifications to my thesis. The promise must be freely made and not unfair . . . It
must also have been made rationally, deliberately. The promisor must have been
218 See above, 3.7.

219 Fried, 1981, p 35.
220 Ibid.
221 Ibid, pp 37–38.
222 See Atiyah, 1986, Chapter 6.
223 Ibid, p 148.
224 Ibid.
225 Fried, 1981, p 38.

serious enough that subsequent legal enforcement was an aspect of what he should
have contemplated at the time he promised.
Put like this, it is clear that any analysis of contract based on Fried’s approach
will need to put considerable weight on the question of whether the promisor
intended (or, at least, should have realised that others would assume from his
words and actions that he was intending) to bind himself legally. As we saw
above,226 this is also an issue in relation to attempts to give a broad definition to
‘consideration’.
3.16 PRINCIPLES OF EUROPEAN CONTRACT LAW
The idea of a law of contract focused on ‘intention’ as the primary test of

enforceability rather than consideration or reliance is a possible one. The
Principles of European Contract Law use such a test. Article 2.101 which deals
with the conditions for the conclusion of a contract states:
LA
(1) A contract is concluded if:
(a) the parties intend to be legally bound; and
IM
(b) they reach a sufficient agreement without any further requirement.
(2) A contract need not be concluded or evidenced in writing nor is it subject to
SH
any other requirement as to form. The contract may be proved by any means,
including witnesses.
LU
Such an approach does not, of course, necessarily get rid of the problems or
issues discussed in this chapter. It is still necessary to determine when there is an
intention to be bound, and this will have to be determined from the words and
PN
actions of the parties, as is made clear by Art 2.102: ‘The intention of a party to be
bound by a contract is to be understood from the party’s statements or conduct
H
as they were reasonably understood by the other party.’ The focus will be on what
was meant by the parties’ words and actions, but it seems likely that whether
there was ‘mutuality’ in the agreement, and whether one party ‘relied’ on the other
will become relevant in deciding whether they implied an intention to make a
binding contract. ‘Intention’ will be the central issue, and the approach should
avoid some of the formal rigidity of the traditional ‘consideration-based’ focus of
the common law, but it will not increase certainty, and it will not be likely to make
the job of the courts any easier.
Of course, even within the common law, the question of whether there was an
intention to create legal relations is regarded as important. Discussion of the role
played by this concept is the subject matter of the next chapter.
226 Above, 3.15.1.

3.17 SUMMARY OF KEY POINTS
Promises can be enforceable when they are contained in a deed, supported

by consideration, or where the doctrine of promissory estoppel applies.
Consideration is the primary basis on which promises are enforceable in

English law.
Consideration can take the form of an action, or a promise to act. It need

not be ‘adequate’ (i.e. of equivalent value) but must be ‘sufficient’ (i.e. an act or
promise of a type recognised by the law).
LA
Consideration generally needs to have some economic value, but there are
some apparent exceptions to this.
IM
Past consideration is no consideration, except where there has been a prior
SH
request, and the situation is one in which payment would be expected.
The performance of existing duties will sometimes be good

LU
consideration, i.e.
where the duty is owed to a third party;
where the performance goes beyond what is required by the existing
PN
duty (either under law, or owed to another party);

where the performance results in a ‘practical benefit’ to the other
H
contracting party (Williams v Roffey (1990).
Part payment of a debt will never be good consideration for a promise to

discharge the debt, but may give rise to an issue of ‘promissory estoppel’.
A promise not to insist on strict rights under a contract will be binding where
the doctrine of promissory estoppel applies. This can apply to a promise to
accept part payment of a debt.
Promissory estoppel applies where

there is a variation of an existing legal relationship;
the promisee has relied on the promise;
it is used as a shield not a sword;
it would be inequitable to allow the promisor to go back on the
promise.

Some other common law jurisdictions (e.g. USA, Australia) accept

‘reasonable reliance’ as a basis for the enforceability of promises. English
law does not do so as yet, other than in the context of promissory estoppel.
3.18 FURTHER READING
Adams, J and Brownsword, R, ‘Contract, consideration and the critical path’

(1990) 53 MLR 536
Atiyah, PS, ‘Contracts, promises and the law of obligations’ (1978) 94 LQR 340
Atiyah, PS, ‘Consideration: a re-statement’, Chapter 8 in Atiyah, PS, Essays on

Contract, 1986, Oxford, Clarendon Press
LA
Campbell, D, ‘The relational constitution of the discrete contract’, Chapter 3 in
Campbell, D and Vincent-Jones, P (eds), Contract and Economic Organisation,
IM
1996, Aldershot: Dartmouth
Fried, C, Contract as Promise, 1981, Cambridge, Mass: Harvard University

SH
Press
Halson, R, ‘Sailors, sub-contractors and consideration’ (1990) 106 LQR 183

LU
Halson, R, ‘The offensive limits of promissory estoppel’ (1999) LMCLQ 256

PN
Hird, NJ and Blair, A, ‘Minding your own business – Williams v Roffey revisited’
[1996] JBL 254
H
O’Sullivan, J, ‘In defence of Foakes v Beer’ [1996] CLJ 219
Thompson, MP, ‘Representation to expectation: estoppel as a cause of action’

(1983) 42 CLJ 257
Treitel, GH, ‘Consideration: a critical analysis of Professor Atiyah’s fundamental

restatement’ (1976) 50 Australian LJ 439

COMPANION WEBSITE
Now visit the companion website to:
Revise and consolidate your knowledge of Consideration by tackling a series

of Multiple Choice Questions on this chapter
Test your understanding of the chapter’s key terms by using the Flashcard
glossary
Explore Consideration further by accessing a series of web links
LA
IM
SH
LU
PN
H

`Case Index
S. No. Case Details Page No.

1 Carlill vs. Carbolic Smoke Ball Company 1
2 Pharmaceutical Society of Great Britain vs. Boots Cash Chemists 14
(Southern) Ltd.
3 Lalman Shukul vs. Gauri Dat 22
4 Bhagwandas Goverdhandas Kedia vs. Girdharilal Parshottamdas and Co. 24
and Ors.
5 Harvey and Another Plaintiffs vs. Facey and Others Defendants 46
6 Paul Felthouse vs. Bindley 50
7 Union of India (UOI) vs. Maddala Thathiah 57
8 Rajendra Kumar Verma vs. State of Madhya Pradesh and Ors 65
9 Kanhaiya Lal Agrawal vs. Union of India (UOI) and Ors 68
10 Haridwar Singh vs. Bagun Sumbrui and Ors. 72
11 Indian Airlines Corporation vs. Madhuri Chowdhuri and Ors 80
12 Kedarnath Bhattacharji vs. Gorie Mahomed 139
13 Doraswamy Iyer vs. Arunachala Ayyar and Ors. 141
14 Masum Ali and Ors. vs. Abdul Aziz and Ors. 143
15 Nawab Khwaja Muhammad Khan vs. Nawab Husaini Begam 145
16 Dhurmodas Ghose vs. Mohori Bibee and Anr. 149
17 Khan Gul and Anr. Vs. Lakha Singh and Anr. 155
18 Ajudhia Prasad and Ors. v. Chandan Lal and Ors. 182
19 Raghunath Prasad Vs. Sarju Prasad 196
20 Subhas Chandra Das Mushib vs. Ganga Prosad Das Mushib and Ors. 202
21 Lakshmi Amma and Ors. vs. Talengalanarayana Bhatta and Ors. 212
22 Tarsem Singh vs. Sukhminder Singh 220
23 Gherulal Parakh vs. Mahadeodas Maiya and Ors. 230
24 Niranjan Shankar Golikari vs. The Century Spinning and Mfg. Co. Ltd. 261
25 Central Inland Water Transport Corporation Limited and Ors. vs. Brojo 273
Nath Ganguly and Ors.
26 Dhurandhar Prasad Singh vs. Jai Prakash University and Ors. 348

27 362
Satyabrata Ghose vs. Mugneeram Bangur and Comapny and Ors.
28 Alopi Parshad and Sons Ltd. vs. Union of India (UOI) 375
29 Punj Sons Pvt. Ltd. vs. Union of India (UOI) and Ors. 387
30 Easun Engineering Co. Ltd. vs. The Fertilisers and Chemicals 393
Travancore Ltd. and Ors.
31 Hadley and Another v Baxendale and Others 400
32 A. K. A. S. Jamal Appellant v. Moolla Dawood, Sons & Co. 411
Respondents
33 Karsandas H. Thacker vs. The Saran Engineering Co. Ltd. 417
34 Maula Bux vs. Union of India (UOI) 423
35 Shri Hanuman Cotton Mills and Ors. vs. Tata Air Craft Limited 427
36 Ghaziabad Development Authority vs. Union of India (UOI) and Ors. 445
37 State of West Bengal vs. B.K. Mondal and Sons 451

Carlill vs. Carbolic Smoke Ball Company; [1892] EWCA Civ 1
Hon'ble Judges/ Coram: Bowen, Lindley and A.L. Smith, JJ.
JUDGEMENT
Prior History:
On Appeal from the High Court of Justice Queen's Bench Division
Lord Justice Lindley:
I will begin by referring to two points which were raised in the Court below. I refer to them
simply for the purpose of dismissing them.First, it is said no action will lie upon this contract
because it is a policy. You have only to look at the advertisement to dismiss that suggestion.
Then it was said that it is a bet.Hawkins, J., came to the conclusion that nobody ever dreamt of
abet and that the transaction had nothing whatever in common with a bet. I so entirely agree with
him that I pass over this contention also as not worth serious attention.
Then, what is left? The first observation I will make is that we are not dealing with any inference
of fact. We are dealing with an express promise to pay #100 in certain events. Read the
advertisement how you will and twist it about as you will, here is a distinct promise expressed in
language which is perfectly unmistakable #100 reward will be paid by the Carbolic Smoke Ball
Company to any person who contracts the iufluenza after having used the ball three times daily
for two weeks according to the printed directions supplied with each ball.
We must first consider whether this was intended to be a promise at all, or whether it was a mere
puff which meant nothing.Was it a mere puff? My answer to that question is No and I base my
answer upon this passage: #1000 is deposited with the Alliance Bank, shewing our sincerity in
the matter. Now, for what was that money deposited or that statement made except to negative
the suggestion that this was a mere puff and meant nothing at all? The deposit is called in aid by
the advertiser as proof of his sincerity in the matter - that is, the sincerity of his promise to pay
this #100 in the event which he has specified.I say this for the purpose of giving point to the
observation that we are not inferring a promise; there is the promise, as plain as words can make
it. Then it is contended that it is not binding. In the first place, it is said that it is not made with

anybody in particular.Now that point is common to the words of this advertisement and to the
words of all other advertisements offering rewards. They are offers to anybody who performs the
conditions named in the advertisement and anybody who does perform the condition accepts the
offer. In point of law this advertisement is an offer to pay#100 to anybody who will perform
these conditions and the performance of the conditions is the acceptance of the offer.That rests
upon a string of authorities, the earliest of which is Williams v. Carwardine 4 B. Ad. 621, which
has been followed by many other decisions upon advertisements offering rewards.
But then it is said, Supposing that the performance of the conditions is an acceptance of the offer,
that acceptance ought to have been notified. Unquestionably, as a general proposition, when an
offer is made, it is necessary in order to make a binding contract, not only that it should be
accepted, but that the acceptance should be notified. But is that so in cases of this kind? I
apprehend that they are an exception to that rule,or, if not an exception, they are open to the
observation that the notification of the acceptance need not precede the performance. This offer
is a continuing offer. It was never revoked and if notice of acceptance is required - which I doubt
very much, for I rather think the true view is that which was expressed and explained by Lord
Blackburn in the case of Brogdenv. Metropolitan Ry. Co. 2 App. Cas. 666, 691 - if notice of
acceptance is required, the person who makes the offer gets the notice of acceptance
contemporaneously with his notice of the performance of the condition. If he gets notice of the
acceptance before his offer is revoked, that in principle is all you want. I,however, think that the
true view, in a case of this kind, is that the person who makes the over shews by his language and
from the nature of the transaction that he does not expect and does not require notice of the
acceptance apart from notice of the performance.
We, therefore, find here all the elements which are necessary to form a binding contract
enforceable in point of law, subject to two observations. First of all it is said that this
advertisement is so vague that you cannot really construe it as a promise that the vagueness of
the language shews that a legal promise was never intended or contemplated. The language is
vague and uncertain in some respects and particularly in this, that the #100 is to be paid to any
person who contracts the increasing epidemic after having used the balls three times daily for
two weeks. It is said, When are they to be used? According to the language of the advertisement
no time is fixed, and,construing the offer most strongly against the person who has made it, one

might infer that any time was meant. I do not think that was meant and to hold the contrary
would be pushing too far the doctrine of taking language most strongly against the person using
it. I do not think that business people or reasonable people would understand the words as
meaning that if you took a smoke ball and used it three times daily for two weeks you were to be
guaranteed against influenza for the rest of your life and I think it would be pushing the language
of the advertisement too far to construe it as meaning that. But if it does not mean that, what does
it mean? It is for the defendants to shew what it does mean; and it strikes me that there are two
and possibly three, reasonable constructions to be put on this advertisement, any one of which
will answer the purpose of the plaintiff.
Possibly it may be limited to persons catching the "increasing epidemic" (that is, the then
prevailing epidemic), or any colds or diseases caused by taking cold, during the prevalence of the
increasing epidemic. That is one suggestion; but it does not commend itself to me. Another
suggested meaning is that you are warranted free from catching this epidemic, or colds or other
diseases caused by taking cold, whilst you are using this remedy after using it for two weeks. If
that is the meaning, the plaintiff is right, for she used the remedy for two weeks and went on
using it till she got the epidemic. Another meaning and the one which I rather prefer, is that the
reward is offered to any person who contracts the epidemic or other disease within a reasonable
time after having used the smoke ball. Then it is asked, What is a reasonable time? It has been
suggested that there is no standard of reasonableness; that it depends upon the reasonable time
for a germ to develop! I do not feel pressed by that. It strikes me that a reasonable time may be
ascertained in a business sense and in a sense satisfactory to a lawyer, in this way; find out from
a chemist what the ingredients are; find out from a skilled physician how long the effect of such
ingredients on the system could be reasonably expected to endure so as to protect a person from
an epidemic or cold and in that way you will get a standard to be laid before a jury, or a judge
without a jury, by which they might exercise their judgment as to what a reasonable time would
be. It strikes me, I confess, that the true construction of this advertisement is that #100 will be
paid to anybody who uses this smoke ball three times daily for two weeks according to the
printed directions and who gets the influenza or cold or other diseases caused by taking cold
within a reasonable time after so using it; and if that is the true construction, it is enough for the
plaintiff.

I come now to the last point which I think requires attention- that is, the consideration. It has
been argued that this is nudum pactum - that there is no consideration. We must apply to that
argument the usual legal tests. Let us see whether there is no advantage to the defendants. It is
said that the use of the ball is no advantage to them and that what benefits them is the sale; and
the case is put that a lot of these balls might be stolen and that it would be no advantage to the
defendants if the thief or other people used them. The answer to that, I think,is as follows. It is
quite obvious that in the view of the advertisers a use by the public of their remedy, if they can
only get the public to have confidence enough to use it, will react and produce a sale which is
directly beneficial to them.Therefore, the advertisers get out of the use an advantage which is
enough to constitute a consideration.
But there is another view. Does not the person who acts upon this advertisement and accepts the
offer put himself to some inconvenience at the request of the defendants? Is it nothing to use this
ball three times daily for two weeks according to the directions at the request of the advertiser? Is
that to go for nothing? It appears to me that there is a distinct inconvenience, not to say a
detriment, to any person who so uses the smoke ball. I am of opinion, therefore, that there is
ample consideration for the promise.
We were pressed upon this point with the case of Gerhard v.Bates 2 E. B. 476, which was the
case of a promoter of companies who had promised the bearers of share warrants that they
should have dividends for so many years and the promise as alleged was held not to shew any
consideration. Lord Campbell's judgment when you come to examine it is open to the
explanation, that the real point in that case was that the promise, if any, was to the original bearer
and not to the plaintiff and that as the plaintiff was not suing in the name of the original bearer
there was no contract with him. Then Lord Campbell goes on to enforce that view by shewing
that there was no consideration shewn for the promise to him. I cannot help thinking that Lord
Campbell's observations would have been very different if the plaintiff in that action had been an
original bearer, or if the declaration had gone on to shew what a sociiti anonyme was and had
alleged the promise to have been, not only to the first bearer, but to anybody who should become
the bearer. There was no such allegation and the Court said, in the absence of such allegation,
they did not know (judicially, of course) what a sociiti anonyme was, and, therefore, there was

no consideration. But in the present case, for the reasons I have given, I cannot see the slightest
difficulty in coming to the conclusion that there is consideration.
It appears to me, therefore, that the defendants must perform their promise, and, if they have
been so unwary as to expose themselves to a great many actions, so much the worse for them.
LORD JUSTICE BOWEN:
I am of the same opinion. We were asked to say that this document was a contract too vague to
be enforced.
The first observation which arises is that the document itself is not a contract at all, it is only an
offer made to the public.
The defendants contend next, that it is an offer the terms of which are too vague to be treated as a
definite offer, inasmuch as there is no limit of time fixed for the catching of the influenza and it
cannot be supposed that the advertisers seriously meant to promise to pay money to every person
who catches the influenza at any time after the inhaling of the smoke ball. It was urged also, that
if you look at this document you will find much vagueness as to the persons with whom the
contract was intended to be made - that, in the first place, its terms are wide enough to include
persons who may have used the smoke ball before the advertisement was issued; at all events,
that it is an offer to the world in general, and, also, that it is unreasonable to suppose it to be a
definite offer, because nobody in their senses would contract themselves out of the opportunity
of checking the experiment which was going to be made at their own expense. It is also
contended that the advertisement is rather in the nature of a puff or a proclamation than a
promise or offer intended to mature into a contract when accepted. But the main point seems to
be that the vagueness of the document shews that no contract whatever was intended. It seems to
me that in order to arrive at a right conclusion we must read this advertisement in its plain
meaning, as the public would understand it. It was intended to be issued to the public and to be
read by the public.How would an ordinary person reading this document construe it?

It was intended unquestionably to have some effect and I think the effect which it was intended
to have, was to make people use the smoke ball, because the suggestions and allegations which it
contains are directed immediately to the use of the smoke ball as distinct from the purchase of it.
It did not follow that the smoke ball was to be purchased from the defendants directly, or even
from agents of theirs directly. The intention was that the circulation of the smoke ball should be
promoted and that the use of it should be increased. The advertisement begins by saying that a
reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the
increasing epidemic after using the ball. It has been said that the words do not apply only to
persons who contract the epidemic after the publication of the advertisement, but include persons
who had previously contracted the influenza. I cannot so read the advertisement. It is written in
colloquial and popular language, and I think that it is equivalent to this: #100 will be paid to any
person who shall contract the increasing epidemic after having used the carbolic smoke ball three
times daily for two weeks.
And it seems to me that the way in which the public would read it would be this, that if anybody,
after the advertisement was published, used three times daily for two weeks the carbolic smoke
ball and then caught cold, he would be entitled to the reward. Then again it was said:
How long is this protection to endure? Is it to go on for ever, or for what limit of time?
I think that there are two constructions of this document, each of which is good sense and each of
which seems to me to satisfy the exigencies of the present action. It may mean that the protection
is warranted to last during the epidemic and it was during the epidemic that the plaintiff
contracted the disease. I think, more probably, it means that the smoke ball will be a protection
while it is in use. That seems tome the way in which an ordinary person would understand an
advertisement about medicine and about a specific against influenza. It could not be supposed
that after you have left off using it you are still to be protected for ever, as if there was to be a
stamp set upon your forehead that you were never to catch influenza because you had once used
the carbolic smoke ball. I think the immunity is to last during the use of the ball. That is the way
in which I should naturally read it and it seems to me that the subsequent language of the
advertisement supports that construction. It says: During the last epidemic of influenza many
thousand carbolic smoke balls were sold and in no ascertained case was the disease contracted by

those using". (not "who had used") "the carbolic smoke ball, and it concludes with saying that
one smoke ball will last a family several months (which imports that it is to be efficacious while
it is being used) and that the ball can be refilled at a cost of 5s. I, therefore, have myself no
hesitation in saying that I think, on the construction of this advertisement, the protection was to
enure during the time that the carbolic smoke ball was being used. My brother, the Lord Justice
who preceded me, thinks that the contract would be sufficiently definite if you were to read it in
the sense that the protection was to be warranted during a reasonable period after use. I have
some difficulty myself on that point; but it is not necessary for me to consider it further, because
the disease here was contracted during the use of the carbolic smoke ball.
Was it intended that the #100 should, if the conditions were fulfilled, be paid? The advertisement
says that #1000 is lodged at the bank for the purpose. Therefore, it cannot be said that the
statement that #100 would be paid was intended to be a mere puff. I think it was intended to be
understood by the public as an offer which was to be acted upon.
But it was said there was no check on the part of the persons who issued the advertisement and
that it would be an insensate thing to promise #100 to a person who used the smoke ball unless
you could check or superintend his manner of using it. The answer to that argument seems to me
to be that if a person chooses to make extravagant promises of this kind he probably does so
because it pays him to make them, and, if he has made them, the extravagance of the promises is
no reason in law why he should not be bound by them.
It was also said that the contract is made with all the world- that is, with everybody; and that you
cannot contract with everybody. It is not a contract made with all the world. There is the fallacy
of the argument. It is an offer made to all the world; and why should not an offer be made to all
the world which is to ripen into a contract with anybody who comes forward and performs the
condition? It is an offer to become liable to any one who, before it is retracted, performs the
condition, and, although the offer is made to the world, the contract is made with that limited
portion of the public who come forward and perform the condition on the faith of the
advertisement. It is not like cases in which you offer to negotiate, or you issue advertisements
that you have got a stock of books to sell, or houses to let, in which case there is no offer to be
bound by any contract. Such advertisements are offers to negotiate - offers to receive offers-

offers to chaffer, as, I think, some learned judge in one of the cases has said. If this is an offer to
be bound, then it is a contract the moment the person fulfils the condition.
That seems to me to be sense and it is also the ground on which all these advertisement cases
have been decided during the century; and it cannot be put better than in Willes, J.'s,judgment in
Spencer v. Harding Law Rep. 5 C. P. 561, 563.
In the advertisement cases, he says, there never was any doubt that the advertisement amounted
to a promise to pay the money to the person who first gave information. The difficulty suggested
was that it was a contract with all the world. But that,of course, was soon overruled. It was an
offer to become liable to any person who before the offer should be retracted should happen to
be the person to fulfil the contract, of which the advertisement was an offer or tender. That is not
the sort of difficulty which presents itself here. If the circular had gone on, 'and we undertake to
sell to the highest bidder,'the reward cases would have applied and there would have been a good
contract in respect of the persons.
As soon as the highest bidder presented himself, says Willes, J., the person who was to hold the
vinculum juris on the other side of the contract was ascertained and it became settled.
Then it was said that there was no notification of the acceptance of the contract. One cannot
doubt that, as an ordinary rule of law, an acceptance of an offer made ought to be notified to the
person who makes the offer, in order that the two minds may come together. Unless this is done
the two minds may be apart, and there is not that consensus which is necessary according to the
English law - I say nothing about the laws of other countries- to make a contract. But there is this
clear gloss to be made upon that doctrine, that as notification of acceptance is required for the
benefit of the person who makes the offer, the person who makes the offer may dispense with
notice to himself if he thinks it desirable to do so and I suppose there can be no doubt that where
a person in an offer made by him to another person, expressly or impliedly intimates a particular
mode of acceptance as sufficient to make the bargain binding, it is only necessary for the other
person to whom such offer is made to follow the indicated method of acceptance; and if the
person making the offer, expressly or impliedly intimates in his offer that it will be sufficient to
act on the proposal without communicating acceptance of it to himself, performance of the
condition is a sufficient acceptance without notification.

That seems to me to be the principle which lies at the bottom of the acceptance cases, of which
two instances are the well-known judgment of Mellish, L.J., in Harris's Case Law Rep. 7 Ch.587
and the very instructive judgment of Lord Blackburn in Brogden v. Metropolitan Ry. Co. 2 App.
Cas. 666, 691, in which he appears to me to take exactly the line I have indicated.
Now, if that is the law, how are we to find out whether the person who makes the offer does
intimate that notification of acceptance will not be necessary in order to constitute a binding
bargain? In many cases you look to the offer itself. In many cases you extract from the character
of the transaction that notification is not required and in the advertisement cases it seems to me
to follow as an inference to be drawn from the transaction itself that a person is not to notify his
acceptance of the offer before he performs the condition, but that if he performs the condition
notification is dispensed with. It seems to me that from the point of view of common sense no
other idea could be entertained. If I advertise to the world that my dog is lost and that anybody
who brings the dog to a particular place will be paid some money, are all the police or other
persons whose business it is to find lost dogs to be expected to sit down and write me a note
saying that they have accepted my proposal? Why, of course, they at once look after the dog and
as soon as they find the dog they have performed the condition. The essence of the transaction is
that the dog should be found and it is not necessary under such circumstances, as it seems to me,
that in order to make the contract binding there should be any notification of acceptance. It
follows from the nature of the thing that the performance of the condition is sufficient acceptance
without the notification of it and a person who makes an offer in an advertisement of that kind
makes an offer which must be read by the light of that common sense reflection. He does,
therefore, in his offer impliedly indicate that he does not require notification of the acceptance of
the offer.
A further argument for the defendants was that this was a nudum pactum - that there was no
consideration for the promise -that taking the influenza was only a condition and that the using
the smoke ball was only a condition and that there was no consideration at all; in fact, that there
was no request, express or implied, to use the smoke ball. Now, I will not enter into an elaborate
discussion upon the law as to requests in this kind of contracts. I will simply refer to Victors v.
Davies 12 M. W. 758and Serjeant Manning's note to Fisher v. Pyne 1 M. G. 265, which
everybody ought to read who wishes to embark in this controversy. The short answer, to abstain

from academical discussion, is, it seems to me, that there is here a request to use involved in the
offer. Then as to the alleged want of consideration. The definition of "consideration" given in
Selwyn's Nisi Prius, 8th ed. p. 47, which is cited and adopted by Tindal, C.J., in the case of
Laythoarp v.Bryant 3 Scott, 238, 250, is this:
Any act of the plaintiff from which the defendant derives a benefit or advantage, or any labour,
detriment, or inconvenience sustained by the plaintiff, provided such act is performed or such
inconvenience suffered by the plaintiff, with the consent, either express or implied, of the
defendant. Can it be said here that if the person who reads this advertisement applies thrice daily,
for such time as may seem to him tolerable, the carbolic smoke ball to his nostrils for a whole
fortnight, he is doing nothing at all - that it is a mere act which is not to count towards
consideration to support a promise (for the law does not require us to measure the adequacy of
the consideration). Inconvenience sustained by one party at the request of the other is enough to
create a consideration. I think, therefore, that it is consideration enough that the plaintiff took the
trouble of using the smoke ball. But I think also that the defendants received a benefit from this
user, for the use of the smoke ball was contemplated by the defendants as being indirectly a
benefit to them, because the use of the smoke balls would promote their sale.
Then we were pressed with Gerhard v. Bates 2 E. B. 476. In Gerhard v. Bates 2 E. B. 476, which
arose upon demurrer, the point upon which the action failed was that the plaintiff did not allege
that the promise was made to the class of which alone the plaintiff was a member and that
therefore there was no privity between the plaintiffs and the defendant. Then Lord Campbell
went on to give a second reason. If his first reason was not enough,and the plaintiff and the
defendant there had come together as contracting parties and the only question was
consideration, it seems to me Lord Campbell's reasoning would not have been sound. It is only to
be supported by reading it as an additional reason for thinking that they had not come into the
relation of contracting parties; but, if so, the language was superfluous.The truth is, that if in that
case you had found a contract between the parties there would have been no difficulty about
consideration; but you could not find such a contract. Here, in the same way, if you once make
up your mind that there was a promise made to this lady who is the plaintiff, as one of the public
- a promise made to her that if she used the smoke ball three times daily for a fortnight and got
the influenza, she should have #100, it seems to me that her using the smoke ball was sufficient
10

consideration. I cannot picture to myself the view of the law on which the contrary could be held
when you have once found who are the contracting parties. If I say to a person,"If you use such
and such a medicine for a week I will give you #5," and he uses it, there is ample consideration
for the promise.
LORD JUSTICE A. L. SMITH:
The first point in this case is, whether the defendants' advertisement which appeared in the Pall
Mall Gazette was an offer which, when accepted and its conditions performed, constituted a
promise to pay, assuming there was good consideration to uphold that promise, or whether it was
only a puff from which no promise could be implied, or, as put by Mr.Finlay, a mere statement
by the defendants of the confidence they entertained in the efficacy of their remedy. Or as I
might put it in the words of Lord Campbell in Denton v. Great Northern Ry. Co.5 E. B. 860,
whether this advertisement was mere waste paper.That is the first matter to be determined. It
seems to me that this advertisement reads as follows:
#100 reward will be paid by the Carbolic Smoke Ball Company to any person who after having
used the ball three times daily for two weeks according to the printed directions supplied with
such ball contracts the increasing epidemic influenza, colds, or any diseases caused by taking
cold. The ball will last a family several months and can be refilled at a cost of 5s
If I may paraphrase it, it means this: "If you" - that is one of the public as yet not ascertained, but
who, as Lindley and Bowen, L.JJ., have pointed out, will be ascertained by the performing the
condition- will hereafter use my smoke ball three times daily for two weeks according to my
printed directions, I will pay you #100if you contract the influenza within the period mentioned
in the advertisement.
Now, is there not a request there? It comes to this: In consideration of your buying my smoke
ball and then using it as I prescribe, I promise that if you catch the influenza within a certain time
I will pay you #100
It must not be forgotten that this advertisement states that as security for what is being offered
and as proof of the sincerity of the offer, #1000 is actually lodged at the bank wherewith to
satisfy any possible demands which might be made in the event of the conditions contained
11

therein being fulfilled and a person catching the epidemic so as to entitle him to the #100. How
can it be said that such a statement as that embodied only a mere expression of confidence in the
wares which the defendants had to sell? I cannot read the advertisement in any such way. In my
judgment, the advertisement was an offer intended to be acted upon and when accepted and the
conditions performed constituted a binding promise on which an action would lie, assuming
there was consideration for that promise. The defendants have contended that it was a promise in
honour or an agreement or a contract in honour - whatever that may mean. I understand that if
there is no consideration for a promise, it may be a promise in honour, or,as we should call it, a
promise without consideration and nudum pactum; but if anything else is meant, I do not
understand it. Ido not understand what a bargain or a promise or an agreement in honour is
unless it is one on which an action cannot be brought because it is nudum pactum and about
nudum pactum I will say a word in a moment.
In my judgment, therefore, this first point fails and this was an offer intended to be acted upon,
and, when acted upon and the conditions performed, constituted a promise to pay.
In the next place, it was said that the promise was too wide, because there is no limit of time
within which the person has to catch the epidemic. There are three possible limits of time to this
contract. The first is, catching the epidemic during its continuance; the second is, catching the
influenza during the time you are using the ball; the third is, catching the influenza within a
reasonable time after the expiration of the two weeks during which you have used the ball three
times daily. It is not necessary to say which is the correct construction of this contract, for no
question arises thereon. Whichever is the true construction, there is sufficient limit of time so as
not to make the contract too vague on that account.
Then it was argued, that if the advertisement constituted an offer which might culminate in a
contract if it was accepted and its conditions performed, yet it was not accepted by the plaintiff in
the manner contemplated and that the offer contemplated was such that notice of the acceptance
had to be given by the party using the carbolic ball to the defendants before user, so that the
defendants might be at liberty to superintend the experiment. All I can say is, that there is no
such clause in the advertisement and that, in my judgment, no such clause can be read into it; and
I entirely agree with what has fallen from my Brothers, that this is one of those cases in which a
12

performance of the condition by using these smoke balls for two weeks three times a day is an
acceptance of the offer.
It was then said there was no person named in the advertisement with whom any contract was
made. That, I suppose, has taken place in every case in which actions on advertisement shave
been maintained, from the time of Williams v. Carwardine 4 B.Ad. 621 and before that, down to
the present day. I have nothing to add to what has been said on that subject, except that a person
becomes a persona designat a and able to sue, when he performs the conditions mentioned in the
advertisement.
Lastly, it was said that there was no consideration and that it was nudum pactum. There are two
considerations here. One is the consideration of the inconvenience of having to use this carbolic
smoke ball for two weeks three times a day; and the other more important consideration is the
money gain likely to accrue to the defendants by the enhanced sale of the smoke balls, by reason
of the plaintiff's user of them. There is ample consideration to support this promise. I have only
to add that as regards the policy and the wagering points, in my judgment, there is nothing in
either of them.
Appeal dismissed.
13

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd.; [1953] 1
Q.B. 401
Hon’ble Judges/ Coram; Somervell, Birkett and Romer L.JJ.
JUDGEMENT
The defendants' branch shop, consisting of a single room, was adapted to the "self-service"
system. The room contained chemist's department, under the control of a registered pharmacist,
in which various drugs and proprietary medicines included, or containing substances included,
in Part I of the Poisons List compiled under section 17 (1) of the Pharmacy and Poisons Act,
1933 , (but not in Sch. I to the Poisons Rules, 1949), were displayed on shelves in packages or
other containers, with the price marked on each. A customer, on entering the shop, was
provided with a wire basket, and having selected from the shelves the articles which he wished
to buy, he put them in the basket and took them to the cashier's desk at one or other of the two
exits, where the cashier stated the total price and received payment. That latter stage of every
transaction involving the sale of a drug was supervised by the pharmacist in control of the
department, who was authorized to prevent the removal of any drug from the premises.
In an action brought by the plaintiffs alleging an infringement by the defendants of section 18

(1) (a) (iii) of the Pharmacy and Poisons Act, 1933 , which requires the sale of poisons
included in Part I of the Poisons List to be effected by or under the supervision of a registered
pharmacist:- that the self-service system did not amount to an offer by the defendants to sell,
but merely to an invitation to the customer to offer to buy; that such an offer was accepted at
the cashier's desk under the supervision of the registered pharmacist; and that there was
therefore no infringement of the section.
Decision of Lord Goddard C.J. [1952] 2 Q.B. 795; [1952] 2 T.L.R. 340; [1952] 2 All E.R. 456
affirmed.
APPEAL from Lord Goddard C.J. Special case stated by the parties under R.S.C., Ord. 34, r. 1 .
The defendants carried on a business comprising the retail sale of drugs at premises at Edgware,
which were entered in the register of premises kept pursuant to section 12 of the Pharmacy and
14

Poisons Act, 1933 , and from which they regularly sold drugs by retail. The premises comprised
a single room, so adapted that customers might serve themselves, and the business there was
described by a printed notice at the entrance ag "Boot's Self-Service." On entry each customer
passed a barrier where a wire basket was obtained. Beyond the barrier the principal part of the
room, which contained accommodation for 60 customers, contained shelves around the walls and
on an island fixture in the centre, on which articles were displayed. One part of the room was
described by a printed notice as the "Toilet Dept." and another part as the "Chemists' Dept." On
the shelves in the chemists' department drugs, including proprietary medicines, were severally
displayed in individual packages or containers with a conspicuous indication of the retail price of
each. The drugs and proprietary medicines covered a wide range, and one section of the shelves
in the chemists' department was devoted exclusively to drugs which were included in, or which
contained substances included in, Part I of the Poisons List referred to in section 17 (1) of the
Pharmacy and Poisons Act, 1933 ; no such drugs were displayed on any shelves outside the
section, to which a shutter was fitted so that at any time all the articles in that section could be
securely inclosed and excluded from display. None of the drugs in that section came within Sch.
I to the Poisons Rules, 1949 (S.I. 1949, No. 539) .
The staff employed by the defendants at the premises comprised a manager, a registered
pharmacist, three assistants and two cashiers, and during the time when the premises were open
for the sale of drugs the manager, the registered pharmacist, and one or more of the assistants
were present in the room. Each customer selected from the shelves the article which he wished to
buy and placed it in the wire basket; in order to leave the premises the customer had to pass by
one of two exits, at each of which was a cash desk where a cashier was stationed who scrutinized
the articles selected by the customer, assessed the value and accepted payment. The chemists'
department was under the personal control of the registered pharmacist, who carried out all his
duties at the premises subject to the directions of a superintendent appointed by the defendants in
accordance with the provisions of section 9 of the Act.
The pharmacist was stationed near the poisons section, where his certificate of registration was
conspicuously displayed, and was in view of the cash desks. In every case involving the sale of a
drug the pharmacist supervised that part of the transaction which took place at the cash desk and
was authorized by the defendants to prevent at that stage of the transaction, if he *403 thought
15

fit, any customer from removing any drug from the premises. No steps were taken by the
defendants to inform the customers, before they selected any article which they wished to
purchase, of the pharmacist's authorization.
On April 13, 1951, at the defendants' premises, two customers, following the procedure outlined
above, respectively purchased a bottle containing a medicine known as compound syrup of
hypophosphites, containing 0.01% W/V strychnine, and a bottle containing medicine known as
famel syrup, containing 0.23% W/V codeine, both of which substances are poisons included in
Part I of the Poisons List, but, owing to the small percentages of strychnine and codeine
respectively, hypophosphites and famel syrup do not come within Sch. I to the Poisons Rules,
1949 .
The question for the opinion of the court was whether the sales instanced on April 13, 1951,
were effected by or under the supervision of a registered pharmacist, in accordance with the
provisions of section 18 (1) (a) (iii) of the Pharmacy and Poisons Act, 1933 .
The Lord Chief Justice answered the question in the affirmative.
The Pharmaceutical Society appealed.
H. V. Lloyd-Jones Q.C.
The real question at issue in this appeal is whether under the self-service system of trading
devised by the defendants the sale in fact takes place at the point where the customer removes
from the shelves the article that he wishes to buy, and puts it in the basket, or whether it takes
place at the cash desk, where the money is paid and the pharmacist is stationed. We contend that
the self-service system invites the customer to purchase, the price of each article being fully
displayed, and that the taking of an article by the customer is an acceptance of the trader's offer
to sell. Even if it be the law that a customer cannot demand goods merely because they are
displayed in a shop window, the position is different where goods are displayed inside a self-
service shop. It is submitted that the contract is made and the property passes at the moment
when the customer takes an article from the shelf and puts it in the receptacle. [Cheshire and
Fifoot's Law of Contract, 3rd ed., p. 26, and Timothy v. Simpson, referred to.] In Wiles v.
Maddison 3 a butcher was charged with offences against the Rationing Order, 1939, and the Meat
16

(Maximum Retail Prices) Order, 1940 , by offering meat for sale to registered customers at a
price exceeding the maximum, and in excess of the rationing quantity. He was acquitted,
although he had put aside the meat, with the price affixed, because the customers had given no
specific orders for the meat and he had not intended to deliver it until the following day. In the
words of Lord Caldecote C.J., "the facts were not such as to justify or permit a finding that there
had been an offer." Tucker J., agreeing, said: "or myself, I think that the position might be
different if the course of conduct between the butcher and the customer in this case had been
different, that is to say, if the evidence had been that the custom was for the butcher to put ... in
his shop certain quantities of meat allocated to certain customers at certain prices and if the
practice had been for the customers to call on a particular day and take away the meat." In the
present case, by their deliberately devised self-service system the defendants are making an offer
to sell, and the customer, when he takes an article from the shelf and puts it in the receptacle, is
accepting the offer. By section 17 (2) of the Sale of Goods Act, 1893 , the property in goods
passes when it is intended to pass, and here there is clearly an intention that the sale shall take
place at the spot where the customer takes the article from the shelf. The intention of the
legislature under the Act of 1933 was to interpose the possibility of guidance or veto on the part
of the pharmacist when a customer is selecting poisons, and even though at the time of payment
the pharmacist is present, the sales in question, it is submitted, were not effected in accordance
with the provisions of section 18.
G. G. Baker Q.C.
and G. D. Everington for the defendants were not called on to argue.
SOMERVELL L.J.
This is an appeal from a decision of the Lord Chief Justice on an agreed statement of facts,
raising a question under section 18 (1) (a) (iii) of the Pharmacy andPoisons Act, 1933. The
plaintiffs are the Pharmaceutical Society, incorporated by Royal charter. One of their duties is to
take all reasonable steps to enforce the provisions of the Act. The provision in question is
contained in section 18 . [His Lordship read the section and stated the facts, and continued:] It is
not disputed that in a chemist's shop where this self-service system does not prevail a customer
may go in and ask a young woman assistant, who will not herself be a registered pharmacist, for
17

one of these articles on the list, and the transaction may be completed and the article paid for,
although the registered pharmacist, who will no doubt be on the premises, will not know
anything himself of the transaction, unless the assistant serving the customer, or the customer,
requires to put a question to him. It is right that I should emphasize, as did the Lord Chief
Justice, that these are not dangerous drugs. They are substances which contain very small
proportions of poison, and I imagine that many of them are the type of drug which has a warning
as to what doses are to be taken. They are drugs which can be obtained, under the law, without a
doctor's prescription.
The point taken by the plaintiffs is this: it is said that the purchase is complete if and when a
customer going round the shelves takes an article and puts it in the receptacle which he or she is
carrying, and that therefore, if that is right, when the customer comes to the pay desk, having
completed the tour of the premises, the registered pharmacist, if so minded, has no power to say:
"This drug ought not to be sold to this customer." Whether and in what circumstances he would
have that power we need not inquire, but one can, of course, see that there is a difference if
supervision can only be exercised at a time when the contract is completed.
I agree with the Lord Chief Justice in everything that he said, but I will put the matter shortly in
my own words. Whether the view contended for by the plaintiffs is a right view depends on what
are the legal implications of this layout - the invitation to the customer. Is a contract to be
regarded as being completed when the article is put into the receptacle, or is this to be regarded
as a more organized way of doing what is done already in many types of shops - and a bookseller
is perhaps the best example - namely, enabling customers to have free access to what is in the
shop, to look at the different articles, and then, ultimately, having got the ones which they wish
to buy, to come up to the assistant saying "I want this"? The assistant in 999 times out of 1,000
says "That is all right," and the money passes and the transaction is completed. I agree with what
the Lord Chief Justice has said, and with the reasons which he has given for his conclusion, that
in the case of an ordinary shop, although goods are displayed and it is intended that customers
should go and choose what they want, the contract is not completed until, the customer having
indicated the articles which he needs, the shopkeeper, or someone on his behalf, accepts that
offer. Then the contract is completed. I can see no reason at all, that being clearly the normal
position, for drawing any different implication as a result of this layout.
18

The Lord Chief Justice, I think, expressed one of the most formidable difficulties in the way of
the plaintiffs' contention when he pointed out that, if the plaintiffs are right, once an article has
been placed in the receptacle the customer himself is bound and would have no right, without
paying for the first article, to substitute an article which he saw later of a similar kind and which
he perhaps preferred. I can see no reason for implying from this self-service arrangement any
implication other than that which the Lord Chief Justice found in it, namely, that it is a
convenient method of enabling customers to see what there is and choose, and possibly put back
and substitute, articles which they wish to have, and then to go up to the cashier and offer to buy
what they have so far chosen. On that conclusion the case fails, because it is admitted that there
was supervision in the sense required by the Act and at the appropriate moment of time. For
these reasons, in my opinion, the appeal should be dismissed.
BIRKETT L.J.
I am of the same opinion. The facts are clearly stated in the agreed statement of facts, and the
argument on them has been very clearly stated by Mr. Lloyd-Jones. I think that clearest of all
was the judgment of the Lord Chief Justice, with which I agree. In view of an observation which
I made during the argument, I should like to add that under section 25 of the Pharmacy and
Poisons Act, 1933 , it is the duty of the Pharmaceutical Society of Great Britain, by means of
inspection and otherwise, "to take all reasonable steps to enforce the provisions of Part I of this
Act" - that really deals with the status of the registered pharmacist - "and to secure compliance
by registered pharmacists and authorized sellers of poisons with the provisions of Part II of this
Act." This action has been brought by the Pharmaceutical Society in pursuance of that duty
which is laid upon them by statute, and the short point of the case is, at what point of time did the
sale in this particular shop at Edgware take place? My Lord has explained the system which had
been introduced into that shop in March of 1951. The two women customers in this case each
took a particular package containing poison from the particular shelf, put it into her basket, came
to the exit and there paid. It is said, on the one hand, that when the customer takes the package
from the poison section and puts it into her basket the sale there and then takes place. On the
other hand, it is said the sale does not take place until that customer, who has placed that package
in the basket, comes to the exit.
19

The Lord Chief Justice dealt with the matter in this way, and I would like to adopt his words 5 :
"It seems to me, therefore, that the transaction is in no way different from the normal transaction
in a shop in which there is no self-service scheme. I am quite satisfied it would be wrong to say
that the shopkeeper is making an offer to sell every article in the shop to any person who might
come in and that that person can insist on buying any article by saying 'I accept your offer.'"
Then he went on to deal with the illustration of the bookshop, and continued: "Therefore, in my
opinion, the mere fact that a customer picks up a bottle of medicine from the shelves in this case
does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy and
there is no sale effected until the buyer's offer to buy is accepted by the acceptance of the price.
The offer, the acceptance of the price, and therefore the sale take place under the supervision of
the pharmacist. That is sufficient to satisfy the requirements of the section, for by using the
words 'the sale is effected by, or under the supervision of, a registered pharmacist' the Act
envisages that the sale may be effected by someone not a pharmacist. I think, too, that the sale is
effected under his supervision if he is in a position to say 'You must not have that: that contains
poison,' so that in any case, even if I were wrong in the view that I have taken on the question as
to when the sale was completed, and it was completed when the customer took the article from
the shelf, it would still be effected under the supervision of the pharmacist within the meaning of
section 18."
I agree with that, and I agree that this appeal ought to be dismissed.
ROMER L.J.
I also agree. The Lord Chief Justice observed that, on the footing of the plaintiff society's
contention, if a person picked up an article, once having picked it up, he would never be able to
put it back and say that he had changed his mind. The shopkeeper would say: "No, the property
has passed and you will have to pay." If that were the position in this and similar shops, and that
position was known to the general public, I should imagine that the popularity of those shops
would wane a good deal. In fact, I am satisfied that that is not the position, and that the articles,
even though they are priced and put in shops like this, do not represent an offer by the
shopkeeper which can be accepted merely by the picking up of the article in question. I quite
agree with the reasons on which the Lord Chief Justice arrived at that conclusion and which
20

Birkett L.J. has just referred to, and to those observations I can add nothing of my own. I agree
that the appeal fails.
Appeal dismissed. Leave to appeal to House of Lords refused. (A. W. G)
21

Lalman Shukul vs. Gauri Dat; 1913 (11) ALJ 489
Hon’ble Judges/Coram: Banerji, J.
JUDGMENT
Banerji, J.
1. The facts of this case are these: In January last the nephew of the defendant absconded from home
and no trace of him was found. The defendant sent his servants to different places in search of the boy
and among these was the plaintiff who was the munib of his firm. He was sent to Hardwar and money
was given to him for his railway fare and other expenses. After this the defendant issued handbills
offering a reward of Rs. 501 to any one who might find out the boy. The plaintiff traced the boy to
Rishikesh and there found him. He wired to the defendant who went to Hardwar and brought the boy
back to Cawnpore. He gave to the plaintiff a reward of two sovereigns and afterwards on his return to
Cawnpore gave him Rs. 20 more. The plaintiff did not ask for any further payment and continued in
the defendant's service for about six months when he was dismissed. He then brought this suit, out of
which this application arises, claiming Rs. 499 out of the amount of the reward offered by the
defendant under the handbills issued by him. He alleged in his plaint that the defendant had promised
to pay him the amount of the reward in addition to other gifts and travelling expenses when he sent
him to Hardwar. This allegation has been found to be untrue and the record shows that the handbills
were issued subsequently to the plaintiff's departure for Hardwar. It appears, however, that some of the
handbills were sent to him there.
2. The Court below having dismissed the claim, this application for revision has been made by the
plaintiff and it is claimed on his behalf that as he traced out the boy he is entitled to the reward offered
by the defendant.
3. The learned Advocate for the defendant contends that the plaintiff's claim can only be maintained on
the basis of a contract, that there must have been an acceptance of the offer and an assent to it, that
there was no contract between the parties in this case and that in any case the plaintiff was already
under an obligation to do what he did and was, therefore, not entitled to recover. On the other hand, it
is contended on behalf of the plaintiff, that a privity of contract was unnecessary and neither motive
nor knowledge was essential. The learned Counsel for the plaintiff relies on the cases of Williams v.
22

Carwardine 4 B. & Ad. 621 : 1 N. & M. 418 : 2 L.J. (N.S.) K.B. 101 : 5 Car. & P. 566 : 38 R.R. 328 :
110 Eng. Rep. 590 and Gibbons v. Proctor 64 L.T. 594 : 55 J.P. 616. These cases, no doubt, support
the contention of the learned Counsel and the result of them seems to be that the mere performance of
the act is sufficient to entitle the person performing it to obtain the reward advertised for. These cases
have, however, been adversely criticised by Sir Frederick Pollock (Law of Contracts, 9th Edition,
pages 15 and 22) and by the American author Ashley in his Law of Contracts (pages 16, 23 and 24). In
my opinion a suit like the present can only be founded on a contract. In order to constitute a contract
there must be an acceptance of the offer and there can be no acceptance unless there is a knowledge of
the offer. Motive is not essential but knowledge and intention are. In the case of a public advertisement
offering a regard, the performance of the act raises an inference of acceptance. This is manifest from
section 8 of the Contract Act, which provides that "Performance of the conditions of a proposal.....is an
acceptance of the proposal." As observed by Ashley in the work on Contracts, already referred to, "If
there is intent to accept, the contract arises upon performance of the requested service during the
continuance of the offer and the offeree is then entitled to the reward promised" (page 23). Where,
therefore, an advertisement, offering a reward for the performance of a particular act, is published, and
the act is performed, there is a complete contract and a claim for the reward arises on the basis of a
contract.
4. In the present case, however, the claim cannot be regarded as one on the basis of a contract. The
plaintiff was in the service of the defendant. As such servant he was sent to search for the missing boy.
It was, therefore, his duty to search for the boy. It is true that it was not within the ordinary scope of
his duties as a munib to search for a missing relative of his master but when he agreed to go to
Hardwar in search of the boy he undertook that particular duty and there was an obligation on him to
search for and trace out the boy. Being under that obligation, which he had incurred before the reward
in question was offered, he cannot, in my opinion, claim the reward. There was already a subsisting
obligation and, therefore, the performance of the act cannot be regarded as a consideration for the
defendant's promise. For the above reasons I hold that the decision of the Court below is right and I
dismiss this application with costs.
23

Bhagwandas Goverdhandas Kedia vs. Girdharilal Parshottamdas and Co. and Ors.; AIR 1966
SC 543
Hon’ble Judges/Coram: J.C. Shah, K.N. Wanchoo and M. Hidayatullah, JJ.
JUDGMENT
J.C. Shah, J.
1. Messrs. Girdharilal Parshottamdas and Company - hereinafter called the plaintiffs - commenced an
action in the City Civil Court at Ahmedabad against the kedia Ginning Factory and Oil Mills of
Khamgaon - hereinafter called the defendants for a decree for Rs. 31,150/- on the plea that the
defendants had failed to supply cotton seed cake which they had agreed to supply under an oral
contract dated July 22, 1959 negotiated between the parties by conversation on long distance
telephone. The plaintiffs submitted that the cause of action for the suit arose at Ahmedabad, because
the defendants had offered to seed cotton seed cake which offer was accepted by the plaintiffs at
Ahmedabad, and also because the defendants were under the contract bound to supply the goods at
Ahmedabad, and the defendants were to received payment for the goods through a Bank of
Ahmedabad. The defendants contended that the plaintiffs has by a message communicated by
telephone offered to purchase cotton seed cake, and they [the defendants) had accepted the offer at
Khamgaon, that under the contract deliver)' of the goods contracted for was to be made at Khamgaon,
price was also to be paid at Khamgaon and that no part of the cause of action for the suit had arisen
within the territorial jurisdiction of the City Civil Court Ahemedabad.
2. On the issue of jurisdiction, the Trial Court found that the Plaintiffs had made an offer form
Ahmedabad by long distance telephone to the defendants to purchase the goods and that the defendants
had accepted the offer at khamgaon, that the goods were under the contract to be delivered at
Khamgaon and that payment was also to be made at Khamgaon. The contract was in the view of the
court to be performed at Khamgaon, and because of the offer made from Ahmedabad to purchase
goods the court at Ahmedabad could not be invested with jurisdiction to entertain the suit. But the
court held that when a contract is made by conversation on telephone, the place where acceptance of
offer is intimated to the offeror, is the place where the contract is made, and therefore the Civil Court
at Ahmedabad had jurisdiction to try the suit. A revision applications filed by the defendants against
24

the order, directing the suit to proceed on the merits, was rejected in limine by the High Court of
Gujarat. Against the order of the High Court of Gujarat, this appeal has been preferred with special
leave.
3. The defendants contend that in the case of a contract by conversation on telephone, the place where
the offer is accepted is the place where the contract is made, and that court alone has jurisdiction
within the territorial jurisdiction of which the offer is accepted and the acceptance is spoken into the
telephone instrument. It is submitted that the rule which determines the place where a contract is made
is determined by Sections 3 and 4 of the Indian Contract Act, and applies uniformly whatever may be
the mode employed for putting the acceptance into a course of transmission, and that the decisions of
the courts in the United Kingdom, dependent not upon express statutory provisions but upon he some
what elastic rules of common law, have no bearing in determining this question. The plaintiffs on the
other hand contend that making of an offer is a part of the cause of action in a suit for damages for
breach of contract, and the suit lies in the court within the jurisdiction of which the offeror has made
the offer which on acceptance has resulted into a contract. Alternatively, they contend that intimation
of acceptance of the offer being essential to the formation of a contract, the contract takes place where
such intimation is received by the offerer. The first contention raised by the plaintiff is without
substance. Making of an offer at a place which has been accepted elsewhere does not form part of the
cause of action in a suit for damages for breach of contract. Ordinarily it is the acceptance of offer and
intimation of that acceptance which result in a contract. By intimating an offer, when the parties are
not in the presence of each other, the offerer is deemed to be making the offer continuously till the
offer reaches the offeree. The offerer thereby merely intimates his intention to enter into a contract on
the terms of the offer. The offeror cannot impose upon the offeree an obligation to accept, nor
proclaim that silence of the offeree shall be deemed consent. A contract being the result of an offer
made by one party and acceptance of that very offer by the other, acceptance of the offer and
intimation of acceptance by some external manifestation which the law regards as sufficient is
necessary.
4. By a long and uniform course of decisions the rule is well settled that mere making of an offer does
not form part of the cause of action for damages for breach of contract which has resulted from
acceptance of the offer: see Baroda Oil Cakes Traders v. Purshottam Narayandas Bagulia and Anr.
AIR1954Bom491 . The view to the contrary expressed by a single Judge of the Madras High Court in
25

Sepulchre Brothers v. Sait Khushal Das Jagjivan Das Mehta I.L.R. (1942) Mad. 243, cannot be
accepted as correct.
5. The principal contention raised by the defendants raises a problem of some complexity which must
be approached in the light of the relevant principles of the common law and statutory provisions
contained in the Contract Act. A contract unlike a tort is not unilateral. If there be no meeting of minds
no contract may result. There should therefore be an offer by one party, express or implied, and
acceptance of that offer by the other in the same sense in which it was made by the other. But an
agreement does not result from a mere state of mind: intent to accept an offer or even a mental resolve
to accept an offer does not give rise to a contract. There must be intent to accept and some external
manifestation of that intent by speech, writing or other act, and acceptance must be communicated to
the offeror, unless he has waived such intimation, or the course of negotiations implies an agreement to
the contrary.
6. The Contract Act does not expressly deal with the place where a contract is made. Sections 3 and 4
of the Contract act deal with the communication, acceptance and revocation of proposals. By s. 3 the
communication of a proposal, acceptance of a proposal, and revocation of a proposal and acceptance
respectively, are deemed to be made by any act or omission of the party proposing, accepting or
revoking, by which he intends to communicated such proposal acceptance or revocation, or which has
the effect of communicating it. Section 4 provides:
"The communications of a proposal is complete when it comes to the knowledge of the person to
whom it is made."
7. The communication of an acceptance is Complete, -
as against the proposer, when it is put in a course of transmission to him, so as to be out of the power
of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer.
8. The communication of a revocation is complete - as against the person who make it, then it is put
into a course of transmission to the person to whom it is made, so as to be out of the power of the
person who makes it; as against the person to whom it is made, when it comes to his knowledge.
26

9. In terms s. 4 deals not with the place where a contract takes place, but with the completion of
communication of a proposal acceptance and revocation. In determining the place where a contract
takes place, the interpretation clauses in s. 2 which largely incorporate the substantive law of contract
must be taken into account. A person signifying 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 is said to
make a proposal Clause [a] 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: Clause (b), and
every promise and every set of promises, forming the consideration for each other is an agreement:
Clause (e). An agreement enforceable at law is a contract: Clause (k). By the second clause of s. 4 the
communication of an acceptance is complete as against the proposer, when it is put in a course of
transmission to him, so as to be out of the power of the acceptor. This implies that where
communication of an acceptance is made and it is put in a course of transmission to the proposer, the
acceptance is complete as against the proposer : as against the acceptor, it becomes complete when it
comes to the knowledge of the proposer. In the matter of communication of revocation it is provided
that as against the person who makes the revocation it becomes complete when it is put into a course
of transmission to the person to whom it is made, so as to be out of the power of the person who makes
it, and as against the person to whom it is made when it comes to his knowledge. But s. 4 does not
imply that the contract is made qua the proposer at one place and qua the acceptor at another place.
The contract becomes complete as soon as the acceptance is made by the acceptor and unless
otherwise agreed expressly or by necessary implication by the adoption of a special method of
intimation, when the acceptance of offer is intimated to the offeror.
10. Acceptance and intimation of acceptance of offer are therefore both necessary to result in a binding
contract. In the case of a contract which consists of mutual promises, the offeror must receive
intimation that the offeree has accepted his offer and has signified his willingness to perform his
promise. When parties are in the presence of each other, the method of communication will depend
upon the nature of the offer and the circumstances in which it is made. When an offer is orally made,
acceptance may be expected to be made by an oral reply, but even a nod or other act which indubitably
intimates acceptance may suffice. If the offeror receives no such intimation, even if the offeree has
resolved to accept the offer a contract may not result. But on this rule is engrafted an exception based
on ground of convenience which has the merit not a logic or principle in support, but of long
acceptance by judicial decisions. If the parties are not in the presence of each other, and the offeror has
27

not prescribed a mode ' of communication of acceptance, insistence upon communication of

acceptance of the offer by the offeree would be found to be inconvenient, when the contract is made by
letters sent by post. In Adams v. Lindsell 1 B & Ald. 681, it was ruled as early as in 1818 by the Court
of King's Bench in England that the contract was complete as soon as it was put into transmission. In
Adams's case (1 B & Ald. 681), the defendants wrote a letter to the plaintiff offering to sell a quantity
of wool and requiring an answer by post. The plaintiff accepted the offer and posted a letter of
acceptance, which was delivered to the defendants nearly a week after they had made their offer. The
defendants however sold the goods to a third party, after the letter of acceptance was posted but before
it was received by the defendants. The defendants were held liable in damages. The Court in that case
is reported to have observed that "if the defendants were not bound by their offer when accepted by the
plaintiffs till the answer was received, they the plaintiffs ought not to be bound till after they had
received the notification that the defendants had received their answer and assented to it, And so it
might go on ad infinitum. The rule Adam's case 1 B. & Ald. 681, was approved by the House of Lords
in Dunlop and others v. Vincent Higgins and others 1 H.L.C. 381. The rule was based on commercial
expediency, or what Cheshire calls "empirical grounds". It makes a large inroad upon the concept of
consensus, "a meeting of minds" which is the basis of formation of a contract. It would be futile
however to enter upon an academic discussion, whether the exception is justifiable in strict theory, and
acceptable in principle. The exception has long been recognised in the United Kingdom and in other
countries where the law of contracts is based on the common law of England. Authorities in India also
exhibit a fairly uniform trend that in case of negotiations by post the contract is complete when
acceptance of the offer is put into a course of transmission to the offerer : see Baroda Oil Cakes
Traders' case MANU/MH/0130/1954 : AIR1954Bom491 , and cases cited therein. A similar rule has
been adopted when the offer and acceptance are by telegrams. The exception to the general rule
requiring intimation of acceptance may be summarised as follows. When by agreement, course of
conduct, or usage of trade, acceptance by post or telegram is authorised, the bargain is struck and the
contract is complete when the acceptance is put into a course of transmission by the offeree by posting
a letter or dispatching a telegram.
11. The defendants contend that the same rule applies in the case of contracts made by conversation on
telephone. The plaintiffs contend that the rule which applies to those contracts is the ordinary rule
which regards a contract as complete only when acceptance is intimated to the proposer. In the case of
a telephonic conversation, in a sense the parties are in the presence of each other : each party is able to
28

hear the voice of the other. There is instantaneous communication of speech intimating offer and
acceptance, rejection or counter offer. Intervention of an electrical impulse which results in the
instantaneous communication of messages from a distance does not alter the nature of the conversation
so as to make it analogous to that of an offer and acceptance through post or by telegraph.
12. It is true that the Post and Telegraphs Department has general control over communication by
telephone and especially long distance telephone, but that is not a ground for assuming that the
analogy of a contract made by post will govern this mode of making contracts. In the case of
correspondence by post or telegraphic communication, a third agency intervenes and without the
effective intervention of that third agency, Letters or messages cannot be transmitted. In the case of a
conversation by telephone, once a connection is established there is in the normal course no further
intervention of another agency. Parties holding conversation on the telephone are unable to see each
other: They are also physically separated in space, but they are in the hearing of each other by the aid
of a mechanical contrivance which makes the voice of one heard by the other instantaneously, and
communication does not depend upon an external agency.
13. In the administration of the law of contracts, the Courts in India have generally been guided by the
rules of the English common law applicable to contracts, where no statutory provision to the contrary
is in force. The courts in the former Presidency towns by the terms of their respective letters patents,
and the courts outside the Presidency towns by Bengal Regulation III of 1793, Madras Regulation II of
1802 and Bombay Regulation IV of 1827 and by the diverse Civil Courts act were enjoined in cases
where no specific rule existed to act according to law or equity in the case of chartered High Court and
elsewhere according to justice, equity and good conscience which expressions have been consistently
interpreted to mean the rules of English common law, so far as they are application to the Indian
society and circumstance.
14. In England the Court of Appeal has decided in Entores Ltd. v. Mills Far East Corporation that:
"................................ Where a contract is made by instantaneous communication, e.g. by telephone, the
contract is complete only when the acceptance is received by the offeror, since generally an acceptance
must be notified to the offeror to make a binding contract."
15. In Entores Ltd.'s case (1955) 2 Q.B.D. 327 the plaintiff made an offer from London By Telex to the
agents in Holland of the defendant Corporation, whose headquarters were in New York, for the
29

purchase of certain goods, and the offer was accepted by a communication received on the plaintiffs
Telex machine in London. On the allegation that breach of contract was committed by the defendant
Corporation, the plaintiff sought leave to serve notice of a writ on the defendant Corporation in New
York claiming damages for breach of contract. The defendant Corporation contended that the contract
was made in Holland, Denning L. J. who delivered the principal judgment of the Court observed at p.
332:
"When a contract is made by post it is clear law throughout the common law countries that the
acceptance is a complete as soon as the letter is put into the post box, and that is the place where the
contract is made. But there is no clear rule about contracts is made by telephone or by Telex.
Communications by these means are virtually instantaneous and stand on a different footing. and after
examining the negotiations made in a contract arrived at by telephonic conversation on different
stages, Denning L. J. observed that in the case of a telephone conservation the contract is only
complete when the answer accepting the offer was made and that the same rule applies in the case of a
contract by communication by Telex. He recorded his conclusion as follows.
"................... that the rule about instantaneous communications between the parties is different from
the rule about the post. The contract is only complete when the acceptance is received by the offeror:
and the contract is made at the place where the acceptance is received.
16. It appears that in a large majority of European countries the rule based on the theory of consensus
add idem, is that a contract takes place where the acceptance of the offer is communicated to the
offeror, and no distinction is made between contracts made by post or telegraph and by telephone or
Telex. IN decisions of the State courts in the United States, conflicting views have been expressed, but
the generally accepted view is that by the technical law of contracts the contract is made in the district
where the acceptances is spoken. This is based on what is called the deeply rooted principal of
common law that where the parties impliedly or expressly authorise a particular channel of
communication, acceptance is effective when and where it enters that channel of communication. In
the text books there is no reference to any decision of the Supreme Court of the United States of
America on this question: America Jurisprudence, 2nd Edn. Vo. 17, Art. 54 p. 392 and Williston on
Contracts, 3rd Edn Vo. No. 1 p.
30

17. Obviously the draftsman of the Indian contract Act did not envisage use of the telephone as a
means of personal conversation between parties separated in space, and could not have intended to
make any rule in that behalf. The question then is whether the ordinary rule which regards a contract as
completed only when acceptance is intimated should apply, or whether the exception engrafted upon
the rule in respect of offers and acceptances by post and by telegrams is to be accepted. If regard be
had to the essential nature of conversation by telephone, it would be reasonable to hold that the parties
being in a sense in the presence of each other, and negotiations are concluded by instantaneous
communication of speech, communication of acceptance is a necessary part of the formation of
contract, and the exception to the rule imposed on grounds of commercial expediency is inapplicable.
18. The trial Court was therefore right in the view which it has taken that a part of the cause of action
arose within the jurisdiction of the Civil City Court. Ahmedabad, where acceptance was
Communicated by telephone to the plaintiffs.
19. The appeal therefore fails and is dismissed with costs.
M. Hidayatullah J.
20. Where and when is the communication of an acceptance complete under the Indian Contract Act.
When parties complete their contract by long distance telephone? On the answer to this question
depends the Jurisdiction of the Court trying the suit giving rise to this appeal. A contract was made on
the telephone and the proposer complains of its breach by the acceptor. We are hardly concerned with
the terms of the contract and they need not be mentioned. At the time of the telephonic conversation
the proposers who are plaintiffs in the suit [respondents here] were at Ahmedabad and the acceptor,
who is the defendant [appellant here] was at Khamgaon in Vidharbha. The plaintiffs' suit has been
instituted at Ahmedabad. If the acceptance was complete and contract was made when the appellant
spoke into the telephone at Khamgaon, the Ahmedabad court would lack jurisdiction to try the suit. It
would, of course, be otherwise if the acceptance was complete only on the reception of the speech at
Ahmedabad and that was the place where the contract was made.
21. The rules to apply in our country are statutory but the contract Act was drafted in England and the
English common law permeates it; however, it is obvious that every new development of the common
31

law England may not necessarily fit into the scheme and the words of our statute. If the language of
out enactment creates a non-possumus adamant rule, which cannot be made to yield to any new
theories held in foreign courts out clear duty will be to read the statue naturally and to follow it. The
Court of appeal in England in Entores Ltd. v. Miles Far East Corporation (1955) 2 Q.B.D. 327, held
that a contract made by telephone is complete only where the acceptance is heard by the proposer
[offeror in English common law] because generally an acceptance must be notified to the proposer to
make a binding contract and the contract emerges at the place where the acceptance is received and not
at the place where it is spoken into the telephone. In so deciding, the court of Appeal did not apply the
rule obtaining in respect of contracts by correspondence or telegrams, namely, that acceptance is
complete as soon as a letter of acceptance is put into the post box or a telegram is handed in for
despatch, and the place of acceptance is also the place where the contract is made. On reading the
reasons given in support of the decision and comparing them with the language of the Indian Contract
Act I am convinced that the Indian Contract Act does not admit our accepting the view of the Court of
Appeal.
22. Sir William Anson compared the proposal [offer in English common law] to a train of gun powder
and the acceptance to a lighted match. The picturesque description shows that acceptance is the critical
fact, even if it may not explain the reason underlying it. It is, therefore, necessary to see why the rule
about acceptance by post or by telegram was treated as a departure from the general rule of law that
acceptance must be communicated. The rule about acceptance by post or telegram is adopted in all
countries in which the English Common law influence is felt and in many others and, as will be shown
later, the Indian Contract Act gives statutory approval to it. That rule is that a contract is complete
when a letter of acceptance, properly addressed and stamped is posted, even if the letter does not reach
the destination or having reached it is not read by the proposer. The same principle appeal is to
telegrams. See Cowan v. O'Connor (1888) 20 Q.B.D. 640, Tinn v. Hoffman and co. (1873) 29 L.T.
271. The first question is whether the general rule or the special rule applies to contracts made on the
telephone and the second what is the position under the Indian Contract Act. The answer to the first
question is that there is difference of opinion in the countries of the world on that point and to the
second that the Indian Contract Act does not warrant the acceptance of the decision in the Entores case
(1955) 2 Q.B.D. 327. To explain the true position, as I understand it, I may start from the beginning.
32

23. A contract is an agreement enforceable by law and is the result of a proposal and acceptance of the
proposal. The proposal when accepted becomes a promise, Now it may be conceded, that, as Bowen L.
J. said in Carlill v. Carbolic Smoke Ball Co. (1893) 1 Q.B.D. 256 :
".......................... as an ordinary rule of law an acceptance of an offer made ought to be notified to the
person who makes an offer, in order that the two minds may come to there."
24. or, as Anson puts it, acceptance means in general a communicated Acceptance. This is the English
Common law rule and is also accepted in the United States, Germany and France. The communication
must be to the proposer himself unless he expressly or impliedly provides that someone else may
receive it. According to our law also [S. 7] in order to convert a proposal into a promise the acceptance
must be absolute and unqualified and in the manner prescribed or in some usually and reasonable
manner. The intention to accepts must be expressed by some act or omission of the party accepting. It
must not be mental acceptance a propositum in menti retentum though sometimes silence may be
treated as acceptance. Section 3 of our act says that the communications of acceptance is deemed to be
made by an act or omission of the party by which he intends to communicated such acceptance or
which has the effect of communicating it.
25. The difficulty arises because proposals and acceptances may be in presents or inter absents and it is
obvious that the rules must vary. In acceptance by words of mouth, when parties are face to face, the
rule gives gives hardly any trouble. The acceptance may be by speech, or sign sufficiently expressive
and clear to form a communication of the intention to accept. The acceptance takes effect instantly and
the contract is made at the sometime and place. In the case of acceptance inter absents the
communication must be obviously by some agency. Where the proposer prescribes a mode of
acceptance that mode must be followed. In other cases a a usual and reasonable manner must be
adopted unless the proposer waives notification. Cases in the last category are offers of reward for
some service [such as finding a lost purse or a stray dog [William v. Carwardine] 4 B & A 621, or
fulfilling some condition, such as trying a medicine [Carlill v. Carbolic Smoke Ball Co.-supra]. The
offer being to the whole world, the acceptance need not be notified and the contract is made when the
condition is fulfilled.
26. Then come cases of acceptance by post, telegraph, telephone, wireless and so on. In cases of
contracts by correspondent or telegram, a different rule prevails and acceptance is complete as soon as
33

a letter of acceptance is posted or a telegram is handed in for dispatch. One way to describe it is that
acceptance is complete as soon as the acceptor puts his acceptance in the course of transmission to the
proposer so as to be beyond his power to recall. Acceptance by post or telegram is considered a usual
mode of communications and it certainly is the most often followed. But letters get lost or miscarried
and telegram get garbled. What should happen if the letter got lost in the post or the telegraphic
message got mutilated or miscarried? It was held as early as 1813 in Adams v. Lindsell (1813) 106
E.R. 250, that even in such a contingency acceptance must be taken to be complete as soon as the letter
is posted and not when it is delivered. It was observed:
"For if the defendant were not bound by their offer when accepted by the plaintiffs till the answer was
received, then the plaintiffs ought not to be bound till after they had received the notifications that the
defendants and received their answer and assented to it and so it might go on ad infinitum. ".
27. Of course, if it is contemplated that the acceptance will be by post, what more can be acceptor do
than post the letter? The above question was asked by Lord Cottenham in Dunlop v. Higgins(1948) 9
E.R. 805, and the Lord Chancellor also asked the question: How can he be responsible for that over
which he had no control?"
28. Dunlop v. Higgins is the leading case in English Common law and it was decided prior to 1872
when the Indian Contract Act was enacted. Till 1872 there was only one case in which a contrary view
was expressed [British and American Telegraph Co. v. Colson [1871) 6 Ex. 108 , but it was
disapproved in the following year in Harris' case (1872) L.J.C. 625, and the later cases have always
taken a different view to that in Colson's case. In Henthorn v. Fraser (1892) 2 Ch. 27, Lord Hescehell
considered that Colson's case must be considered to be overruled. Earlier in 1879 4 Ex.216 [Household
Fire Insurance Co. v. Grant]. Bramwell L. J. was assailed by doubts which were answered by Thesiger
L. J. in the same case:
"A contract complete on the acceptance of an offer being posted but liable to being put an end to by
any accident in the post, would be more mischievous than a contract only binding on the parties upon
the acceptance actually reaching the offeror. There is no doubt that the implication of a complete, final
and absolutely binding contract being formed as soon as the acceptance of an offer is posted may in
some cases lead to hardship but it is difficult to adjust conflicting rights between innocent parties. An
offeror, if he chooses, may always make the formation of the contract which he proposes, dependent
34

on the actual communication to himself of the acceptance. If he trusts to the post, and it no answer is
received, he can make inquires of the person to whom the offer was addressed........ On the other hand
if the contract is not finally concluded except in the event of the acceptance actually reaching the
offeror, the door would be opened to the perpetration of fraud; besides there would be considerable
delay in commercial transactions; for the acceptor would never be entirely safe in acting upon his
acceptance until he had received notice that his letter of acceptance has reached its destination."
29. It is hardly necessary to multiply examples. It is sufficient to point out that Lord Denning [then
Lord Justice] in the Entores case also observes:
"When a contract is made by post it is clear law throughout the Common law countries that the
acceptance is complete as soon as the letter is put into the post box, and that is where the contract is
made."
30. Although Lord Romilly M. R. in Hebbs' case (1867) L.R. 4 Eq. 9, 12, said that the post office was
the common agent of both parties, in the application of this special rule the post office is treated as the
agent of the proposer conveying his proposal and also as his agent for receiving the acceptance. The
principles which underline the exceptional rule in English Common law are:
[i] the post office is the agent of the offeror to deliver the offer and also to receive the acceptance;
[ii] no contract by post will be possible, as notification will have to follow notifications to make certain
that each letter was duly delivered;
[iii] satisfactory evidence of posting the letter is generally available;
[iv] if the offeror denies the receipt of the letter it would be very difficult to disprove his negative; and
[v] the carrier of the letter is a third person over whom the acceptor has no control.
31. It may be mentioned that the law in the United States is also the same. In the American
Restatement [Contract: $ 74] it is stated that a contract is made at the time when and the place when
the last act necessary for its formation is performed. In the Volume on Conflict of laws, $326 reads:
"When an offer for a bilateral contract is made in one state and an acceptance is sent from another state
to the first state in an authorized manner the place of contracting is as follows:
35

[a] If the acceptance is sent by an agent of the acceptor, the place of contracting is the state where the
agent delivers it;
[b] if the acceptance is sent by any other means, the place of contracting is the state from which the
acceptance is sent.
32. Comment on these clauses is:
[a] "When acceptance is authorized to be sent by mail, the place of contracting is where the acceptance
is mailed.
[b] When an acceptance is to be sent by telegraph, the place of contracting is where the message of
acceptance is received by the telegraph company for transmission."
33. Professor Winfield [writing in 1939] said that this rule prevailed in Canada, South Africa, New
Africa New South Wales. Dealing with the European countries he said that three systems are followed
: [1] the system of Information under which the offeror must be notified and the contract is formed
only when the offeror is so informed. This prevailed in Belgium, Italy, Spain, Rumania, Bulgaria and
Portugal; [2] The system of declaration under which the contract is formed from the moment when the
recipient of the offer declares his acceptance, even without the knowledge of the offeror. This system
is divided into three theories:
"[1] theory of declaration stricto sensu, that is to say, declaration alone is sufficient.
[ii] theory of expedition, that is to say, the sending of the acceptance by post is enough though not a
bare declaration;
[iii] theory of reception that is to say, the reaching of the letter is the decisive factor whether the letter
is read or not.
34. The theory of reception as stated here is accepted in Germany Austira, Czechoslovakia, Sweden,
Norway, Denmark, Poland and the U. S. S. R. Prof. Winfield however, concludes:
"But the greater majority of states accept either the theory of declaration stricto sensu or the theory of
expedition. Among many others Dr. De Visscher [in his article in Revue de Droit International [1938]
36

" Du moment et de lieu de formation des contracts par correspondence en droit international prove?
Mentions Brazil, Egypt, Spain [Commercial Code], Japan, Morocco, Mexico............ France.................
in 1932 ......... decided in favour of expending theory"
[3] The mixed or Electric system: In this the contract is formed when the acceptance is received but it
relates back to the time when the acceptance was sent.
35. We now come to the question of telephone. Prof. Winfield expressed the opinion that the rule
which has been accepted for letters and telegrams should not be extended to communications by
telephone. He favoured the application of the general rule that an acceptance must be communicated.
He asked a question if the line is in such bad working order that the offeror hears nothing and if the
parties get in touch again and the offer is cancelled before it is accepted, will there be a contract ? he
answered:
"It is submitted that there is no communication until the reply actually comes to the knowledge of the
offeror. In the first place, the telephone is much more like conversation face to face than an exchange
of letters ............ the risk of mistake over the telephone is so great compared to written
communications that businessmen would demand or expect a written confirmation of what is said over
the telephone."
36. In this opinion Professor Winfield found support in the American Restatement [Contract : $ 65].
"Acceptance given by telephone is governed by the principles applicable to oral acceptance where the
parties are in the presence of each other: but he conceded that the decided cases in the United States
are to the Contrary. Williston [Contracts] at p. 238 gives all of them. In the decided cases the analogy
of post and telegraph I accepted for telephone and it is observed.
"The point decided by these cases related to the place of a contract rather than its existence, but the
decision that the place where the acceptor speaks is the place of the contract necessarily involves the
conclusion that it is the speaking of the acceptor, not the hearing of the offeror, which completes the
contract. [See Traders G. Co. v. Arnold P. Gin Co-Tex Civ. App. 225 S. W. 1011].
No doubt the decided cases are of the State courts but it is hardly to be expected that a decision on
such a point from the Supreme Court of the United States would be easily available. The Swiss Federal
37

Code of obligations, it may be mentioned, provides [Art. 4] Contracts concluded by telephone are
regarded as made between parties present if they or their agents have been personally in
communications."
37. Williston whose revised edition [1939] was available to Dr. Winfield, Observed that a contract by
telegram suggested analogies to a contract by correspondence but a contract over the telephone was
more analogous to parties addressing each other in presents and observed:
"A contract by telephone presents quite as great an analogy to a contract made when the parties are
orally addressing one another in each other's presence. It has not been suggested that in the latter case
the offeror takes the risk of hearing an acceptance addressed to him. The contrary has been
held.............. If then it is essential that the offeror shall hear what is said to him, or at least be guilty or
some fault in not hearing, the time and place of the formation of the contract is not when and where the
offeror speaks, but when and where the offeror hears or ought to hear and it is to be hoped that the
principles applicable to contracts between parties in the presence of each other will be applied to
negotiations by telephone."
38. The Entores case fulfilled the hope expressed by Williston and Professor Winfield. Before I deal
with that case I may point out that in Canada in Carrow Towing Co. v. The Ed Mc William, (46 D.L.R.
506), it was held, as the headnote correctly summarizes:
"Where a contract is proposed and accepted over the telephone, the place where the acceptance takes
place constitutes the place where the contract is made. Acceptance over the telephone is of the same
effect as if the person accepting it had done so by posting a letter, or by sending off a telegram from
that place".
39. Similarly, in the Restatement [Conflict of laws] the comment in $ 326, partly quoted before is:
[c] when an acceptance is to be given by telephone, the place of contracting is where the acceptor
speaks his acceptance;
[d] when it is by word of mouth between two persons standing on opposite sides of a state boundary
line, the place of contracting is where the acceptor speaks at the time he makes his acceptance.
38

[e] This rule does not apply to an offer which requires for acceptance actual communication of consent
to the offeror. In that case, the place of contracting is where the acceptance is received is accordance
with the offer.
40. $ 64 in the Volume on contract Says:
"An acceptance may be transmitted by any means which the offeror has authorized the offeree to use
and, if so transmitted, is operative and completes the contract as soon as put out of the offeree's
possession, without regard to whether it ever reached the offeror, unless the offer otherwise provides".
41. It may be mentioned that in an old English case [Newcomb v. De Roos] (1859) 2 E & E 271, Hill
J. observed:
"Suppose the two parties stood on different sides of the boundary line of the district : and that the order
was then verbally given and accepted. The contract would be made in the district in which the order
was accepted."
42. This case was expressly dissented from in the Entores case to which I now proceed. I have quoted
at length from Professor Winfield, Williston and the American Restatement because they lie beneath
the reasons given by the court of Appeal.
43. The question in the Entores case (1955) 2 Q.B.D 327, was whether under the Rules of the Supreme
Court the action was brought to enforce a contract or to recover damages or other relief for or in
respect of the breach of a contract made within the jurisdiction of the Court [or 11 r. 1]. As the contract
consisted of an offer and its acceptance both by a telex machine, the proposer being in London and the
acceptor in Amsterdam, the question was whether the Contract was made at the place where the
acceptor tapped out the message on his machine or at the place where the receiving machine
reproduced the message in London. If it was in London a writ of Summons could issue, if in
Amsterdam no writ was possible. Donovan J. held that the contract was made in London. The court of
Appeal approval the decision and discussed the question of contracts by telephone in detail and saw no
difference in principle between the telex printer and the telephone and applied to both the rule
applicable to contracts made by word of mount. Unfortunately no leave to appeal to the House of
Lords could be given as the matter arose in an interlocutory proceeding.
39

44. The leading judgment in the case was delivered by Lord Denning [Then Lord Justice] with whom
Lord Birkett [then Lord Justice] and Lord Parker [then Lord Justice] agreed. Lord Birkett gives no
reason beyond saying that the ordinary rule of law that an acceptance must be communicated applies to
telephonic acceptance and not the special rule applicable to acceptance by post or telegraph. Lord
Parker also emphasizes the ordinary rule observing that as that rule is designed for the benefit of the
offeror, he may waive it, and points out that the rule about acceptance by post or telegraph is adopted
on the ground of expediency. He observes that if the rule is recognized that telephone or telex
telecommunications [which are received instantaneously] become operative though not heard or
received, there will remain no room for then general proposition that acceptance must be
communicated. He illustrates the similarity by comparing an acceptance spoken so softly as not to be
heard by the offeror when parties are face to face, with a telephone conversation in which the
telephone goes dead before the conversation is over.
45. Lord Denning begins by distinguishing contracts made by telephone or telex from contracts made
by post or telegraph on the ground that in the former the communication is instantaneous like the
communication of an acceptance by word of mouth when parties are face to face. He observes that in
verbal contracts, there is no contact if the speech is not heard and gives the example of speech
drowned in noise from an aircraft. The acceptance, he points out, in such cases must be repeated again
so as to be heard and then only there is a contract. Lord Denning sees nothing to distinguish contracts
made on the telephone or the telex from those made by word of mouth and observes that if the line
goes dead or the speech is indistinct or the telex machine fails at the receiving end, there can be no
contract till the acceptance is properly repeated and received at the offeror's ends. But he adds
something which is so important that I prefer to quote his own words :
"In all the instances I have taken so far, the man who sends the message of acceptance knows that it
has not been received or he has reason to know it. So he must repeat it. But, suppose that he does not
know that his message did not get home he thinks it has. This may happen it the listener on the
telephone does not catch the words of acceptance, but nevertheless does not trouble to ask for them to
be repeated: or the ink on the teleprinter fails at the receiving end, but the clerk does not ask for the
massage to be repeated: so that the man who sends an acceptances reasonably believes that his
message has been received. The offeror in such circumstances is clearly bound, because he will be
estopped from saying that he did not receive the message of acceptance. It is his own fault that he did
40

not get it. But if there should be a case where the offeror without any fault on his part does not receive
the message of acceptance - yet the sender of it reasonably believes it has got home when it has not--
then I think there is no contract."
46. Lord Denning thus holds that a contract made on the telephone may be complete even when the
acceptance is not received by the proposer. With respect I would point out that Lord Denning does not
say where the contract would be complete in such a case. If nothing is heard at the receiving end how
can it be said that the general rule about a communicated acceptance applies? There is no
communication at all. How can it be said that the contract was complete at the acceptors end when he
heard nothing. If A says to B. Telephone your acceptance to me and the acceptance is not effective
unless A has heard it, the contract is not formed till A hearers it. It A is estopped by reason of his not
asking for the reply to be repeated, the making of the contract involves a fiction that A has heard the
acceptance. This fiction rests on the rule of estoppel that A's conduct induced a wrong belief in B. But
the question is why should the contract be held to be concluded where A was and not on the analogy of
letter and telegram where B accepted the offer? Why, in such a case, not apply the expedition theory?
47. Even in the case of the post the rule is one of assumption of a face and little logic is involved. We
say that the proposal was received and accepted at the proposers end. Of course, we could have said
with as much apparent logic that the proposal was made and accepted at the proposer end. It is simpler
to put the acceptor to the proof that he put his acceptance in effective course of transmission, than to
investigation the denial of the proposer. Again, what would happen if the proposer says that he heard
differently and the acceptor proves what he said having recorded it on a tape at his end? Would what
the proposer heard be the contract if it differs from what the acceptor said? Telegrams get garbled in
transmission but if the proposer asks for a telegram in reply he bears the consequences. As Ashurst J.
said in Lickbarrow v. Mason (1787) 102 E.R. 1192.
"Whenever one of two innocent parties must suffer by the act of third, he who has enabled such person
to occasion the loss must sustain it."
48. Other difficulties may arise. A contract may be legal in one state and illegal in another. Williston
reports one such case [Mullinix v. Hubbard] 109 C.C.A. 8, in which the legality of a bargain dealing in
cotton futures was held to be governed by New York law when orders were telephoned from
Arakansas as where such dealings were illegal, to New York city where they were legal. What happens
41

when the acceptor mistakes the identity of the proposer. One such case [Tideman and Co. v.
McDonalo] 275 S.W. 70 , has led to much institutional discussion [See 39 Har L. R. 388] and [1926] 4
Tax LR 252] quoted by Williston.
49. It will be seen from the above discussion that there are four classes of cases which may occur when
contracts are made by telephone: [1] where the acceptance is fully hard and understood: [2] where the
telephone fails as a machine and the proposer does not hear the acceptor and the acceptor knows that
his acceptance has not been transmitted; [3] where owing to some fault at the proposers end the
acceptance is not heard by him and he does not ask the acceptor to repeat his acceptance and the
acceptor believes that the acceptance has been communicated; and (4) where the acceptance has not
been heard by the proposer and he informs the acceptor about this and asks him to repeat his words. I
shall take them one by one.
50. Where the speech is fully heard and understood there is a binding contract and in such a case the
only question is as to the place where the contract can be said to be completed. Ours is that kind of a
case. When the communication fails and the acceptance is not heard, and the acceptor knows about it,
there is no contract between the parties at all because communications means an effective
communication or a communication reasonable in the circumstances, Parties are not ad idem all. If a
man shouts his acceptance from such a long distance that it cannot possibly be heard by the proposer
he cannot claim that he accepted the offer and communicated it to the proposer as required by s. 3 of
our contract Act, In the third case, the acceptor transmits his acceptance but the same does not reach
the proposer and the proposer does not ask the acceptor to repeat his message. According to Lord
Denning the proposer is bound because of his default. As there is no reception at the proposers end,
logically the contract must be held to be complete at the proposer's end. Bringing in considerations of
estoppel do not solve the problem for us. Under the terms of s. 3 of our Act such communication is
good because the acceptor intends to communicate his acceptance and follows a usual and reasonable
manner and puts his acceptance in the course of transmission to the proposer. He does not know that it
has not reached. The contract then results in much the same way as in the case of acceptance by letter
when the letter is lost and in the place where the acceptance was put in course of transmission. In the
fourth case if the acceptor is told by the offerer that his speech cannot be heard there will be no
contract because communication must be effective communication and the act of acceptor has not the
effect of communicating it and he cannot claim that he acted reasonably.
42

51. We are really not concerned with the case of a defective machine because the facts here are that the
contract was made with the machine working perfectly between the two parties. As it is the proposer
who is claiming that the contract was complete at his end, s. 4 of our act must be read because it crates
a special rules. It is a rather peculiar modification of the rule applicable to acceptance by post under
the English Common Law. Fortunately, the languages of s. 4 covers acceptance by telephone wireless
etc. The section may be quoted at this stage: "4. Communication when complete.
52. The Communication of a proposal is complete when it comes to the knowledge of the person to
whom it is made.
53. The Communication of an acceptance is complete:- as against the proposer, when it is put in a
course of transmission to him, so as to be out of the power of the acceptor.
54. as against the acceptor, when it comes to the knowledge of the proposer.
55. It will be seen that the communication of a proposal is complete when it comes to the knowledge
of the person to whom it is made but a different rule is made about acceptance. Communications of an
acceptance is complete in two ways [1] against the proposer when it is put in the course of
transmission to him so as to be out of the power of the acceptor; and [2] as against the acceptor when it
comes to the knowledge of the proposer. They theory of expedition which was explained above has
been accepted. Section 5 of the Contract act next lays down that a proposal may be revoked at any time
before the communication of its acceptance is complete as against the proposer, but not afterwards and
an acceptance may be revoked at any time before the communication of the acceptance is complete as
against the acceptor, but not afterwards. In the third case in may above analysis this section is bound to
furnish difficulties, if we were to accept that the contract is only complete at the proposer's end.
56. The present is a case in which the proposer is claiming the benefit of the completion of the contract
at Ahmedabad. To him the acceptor may say that the communication of the acceptance in so far as he
was concerned was complete when he [the acceptor] put his acceptance in the course of transmission
to him [the proposer] so as to be out of his [the acceptor's] power to recall. It is obvious that the word
of acceptance was spoken at Khamgaon and the moment, the acceptor spoke his acceptance he put it in
course of transmission to the proposer beyond his recall. He could not revoke his acceptance
thereafter. It may be that the gap of time was so short that one can say that the speech was heard
43

instantaneously, but if we are to put new inventions into the frame of our statutory law we are bound to
say that the acceptor by speaking into the telephone put his acceptance in the course of transmission to
the proposer, however quick the transmission. What may be said in the English common Law, which is
capable of being moulded by judicial dicta, we cannot always say under our statutory law because we
have to guide ourselves; by the language of the statute. It is contended that the communication of an
acceptance is complete as against the acceptor when it comes to the knowledge of the proposer but that
clause governs cases of acceptance lost through the fault of the acceptor. For example, the acceptor
cannot be allowed to say that he shouted his acceptance and communication was complete where noise
from an aircraft overhead drowned his words. As against him the communication can only be complete
when it comes to the knowledge of the proposer. He must communicate his acceptance reasonably.
Such is not the case here. Both sides admit that the acceptance was clearly heard at Ahmedabad. The
acceptance was put in the course of transmission at Khamgaon and under the words of our statute I
find it difficult to say that the contract was made at Ahmedabad where the acceptance was heard and
not at Khamgaon where it was spoken. It is plain that the law was framed at a time when telephones,
wireless, Telstar and Early Bird were not contemplated. If time has marched and inventions have made
it easy to communicate instantaneously over long distance and the language of our law does not fit the
new conditions it can be modified to reject the old principles. But we cannot go against the language
by accepting an interpretation given without considering the language of our Act.
57. In my opinion, the language of s. 4 of the Indian Contract Act covers the case of communication
over the telephone. Our Act does not provide separately for post, telegraph, telephone or wireless.
Some of these were unknown in 1872 and no attempt has been made to modify the law. It may be
presumed that the language has been considered adequate to cover cases of these new inventions. Even
the court of Appeal decision is of 1955. It is possible today not only to speak on the telephone but to
record the spoken words on a tape and it is easy to prove that a particular conversation took place.
Telephones now have television added to them. The rule about lost letters of acceptance was made out
of expediency because it was easier in commercial circles to prove the dispatch of the letters but very
difficult to disprove a statement that the letter was not received. If the rule suggested is accepted it
would put a very powerful defence in the hands of the proposer if his denial that he heard the speech
could take away the implications of our law that acceptance is complete as soon as it is put in course of
transmission to the proposer.
44

58. No doubt the authority of the Entores case is there and Lord Denning recommended an uniform
rule, perhaps, as laid down by the Court of Appeal. But the court of Appeal was not called upon to
construe a written law which brings in the inflexibility of its own language. It was not required to
construe the words: The communication of an acceptance is complete as against the proposer, when it
is put in a course of transmission to him, so as to be out of the power of the acceptor.
59. Regard being had to the words of our statute I am compelled to hold that the contract was complete
at Khamgaon. It may be pointed out that the same result obtains in the Conflict of law's as understood
in America and quite a number of other countries such as Canada. France, Etc. also apply the rule
which I have enunciated above even though there is no compulsion of any statute. I have, therefore,
less hesitation in propounding the view which I have attempted to set down here.
60. In the result I would allow the appeal with costs.
ORDER
61. In view of the opinion of the majority the appeal is dismissed with costs.
45

Harvey and Another vs. Facey and Others; [1893] A.C. 552
Hon’ble Judges/ Coram; The Lord Chancellor , Lord Watson , Lord Hobhouse , Lord
Macnaghten , Lord Morris and Lord Shand .
JUDGEMENT
On Appeal from the Supreme Court of Jamaica.
Contract—Negotiation by Telegram—Incompleteness—Acceptance of offer not proved.
Where the appellants telegraphed, “Will you sell us B. H. P? Telegraph lowest cash price,” and the
respondent telegraphed in reply, “Lowest price for B. H. P. £900,” and then the appellants
telegraphed, “We agree to buy B. H. P. for £900 asked by you. Please send us your title-deed in
order that we may get early possession,” but received no reply:— that there was no contract. The
final telegram was not the acceptance of an offer to sell, for none had been made. It was itself an
offer to buy, the acceptance to which must be expressed and could not be implied.
APPEAL from a decree of the Supreme Court (June 18, 1892) setting aside a decree of Curran, J.
(February 8, 1892), which dismissed the suit, which was one for specific performance of an alleged
contract in writing.
The facts are stated in the judgment of their Lordships.
The respondents, Facey and his wife, denied the contract, and pleaded sect. 4 of the Statute of Frauds.
The question decided in appeal was whether the three telegrams set out in the pleadings constituted a
binding agreement of sale and purchase.
The way in which the appeal came before their Lordships was, that on the 5th of July, 1892, the
Supreme Court gave leave to appeal against so much of the decree as was based on L. M. Facey's want
of authority to sell. On the 15th of March, 1893, special leave was granted by Her Majesty to appeal in
respect of the damages awarded, but at the same time liberty was given to the respondents to contest
the contract.
Sir Horace Davey, Q.C., and F. Safford, contended that they did, being in themselves a memorandum
46

of contract sufficient to satisfy the statute. Facey's telegraphic form contained his signature, and he had
authority to make it; and the telegram received by the appellants, which contained the names of the
sender and receiver written by the telegraph clerk in the ordinary course of his business, constituted a
sufficient signature within the meaning of the statute. Assuming the telegrams and telegraphic forms to
be sufficient to satisfy the statute, they contended that the Court of Appeal was right in holding that
they proved a binding agreement. As regards the power of L. M. Facey to sell, the property had been
purchased with his money, and the wife was mere trustee for the husband, who had always acted as
owner and had power to bind his wife's interest (if any), or at least to bind his own. They contended
that so much of the decree as declared the telegrams constituted a binding contract should be affirmed,
and that it should be held that the Mayor and Council of Kingston bought subject to the said contract in
its entirety, or so far as it was enforceable.
Farwell, Q.C., and Stewart Smith, for the respondents, in pursuance of leave reserved, contended that
the judgment of Curran, J., should be restored, and the judgment of the Appeal Court discharged.
Apart from the question of L. M. Facey's authority to sell, the claim under the circumstances to
specific performance, and the effect of the Statute of Frauds , the initial difficulty in the case was that
the telegrams on the face of them did not disclose a completed contract.
F. Safford, replied.
[1893 July 29.] The judgment of their Lordships was delivered by
LORD MORRIS:—
The appellants instituted an action against the respondents to obtain specific performance of an
agreement alleged to have been entered into by the respondent Larchin M. Facey for the sale of a
property named Bumper Hall Pen. The respondent L. M. Facey was alleged to have had power and
authority to bind his wife the respondent Adelaide Facey in selling the property. The appellants also
sought an injunction against the Mayor and Council of Kingston to restrain them from taking a
conveyance of the property from L. M. Facey.
The case came on for hearing before Mr. Justice Curran who dismissed the action with costs, on the
ground that the agreement alleged by the appellants did not disclose a concluded contract for the sale
and purchase of the property. The Court of Appeal reversed the judgment of Curran, J., and declared
47

that a binding agreement for the sale and purchase of the property had been proved as between the
appellants and the respondent L. M. Facey, but that the appellants had failed to establish that the said
L. M. Facey had power to sell the said property without the concurrence of his wife the said Adelaide
Facey, or that she had authorized him to enter into the agreement relied on by the appellants, and that
the agreement could not therefore be specifically performed, and the Court ordered that the appellants
should have forty shillings for damages against L. M. Facey in respect of the breach of the agreement,
with costs in both Courts against L. M. Facey in respect of the breach of the agreement.
The appellants obtained leave from the Supreme Court to appeal to Her Majesty in Council, and
afterwards obtained special leave from Her Majesty in Council to appeal in respect of a point not
included in the leave granted by the Supreme Court, but the Order in Council provided that the
respondents should be at liberty at the hearing, without special leave to contest the contract alleged in
the pleadings and affirmed by the Court of Appeal.
The appellants are solicitors carrying on business in partnership at Kingston, and it appears that in the
beginning of October, 1891, negotiations took place between the respondent L. M. Facey and the
Mayor and Council of Kingston for the sale of the property in question, that Facey had offered to sell it
to them for the sum of £900, that the offer was discussed by the council at their meeting on the 6th of
October, 1891, and the consideration of its acceptance deferred; that on the 7th of October, 1891, L.
M. Facey was travelling in the train from Kingston to Porus, and that the appellants caused a telegram
to be sent after him from Kingston addressed to him “on the train for Porus,” in the following words:
“Will you sell us Bumper Hall Pen? Telegraph lowest cash price - answer paid;” that on the same day
L. M. Facey replied by telegram to the appellants in the following words: “Lowest price for Bumper
Hall Pen £900”; that on the same day the appellants replied to the last-mentioned telegram by a
telegram addressed to L. M. Facey “on train at Porus” in the words following: “We agree to buy
Bumper Hall Pen for the sum of nine hundred pounds asked by you. Please send us your title deed in
order that we may get early possession.” The above telegrams were duly received by the appellants
and by L. M. Facey. In the view their Lordships take of this case it becomes unnecessary to consider
several of the defences put forward on the part of the respondents, as their Lordships concur in the
judgment of Mr. Justice Curran that there was no concluded contract between the appellants and L. M.
Facey to be collected from the aforesaid telegrams. The first telegram asks two questions. The first
question is as to the willingness of L. M. Facey to sell to the appellants; the second question asks the
48

lowest price, and the word “Telegraph” is in its collocation addressed to that second question only. L.
M. Facey replied to the second question only, and gives his lowest price. The third telegram from the
appellants treats the answer of L. M. Facey stating his lowest price as an unconditional offer to sell to
them at the price named. Their Lordships cannot treat the telegram from L. M. Facey as binding him in
any respect, except to the extent it does by its terms, viz., the lowest price. Everything else is left open,
and the reply telegram from the appellants cannot be treated as an acceptance of an offer to sell to
them; it is an offer that required to be accepted by L. M. Facey. The contract could only be completed
if L. M. Facey had accepted the appellant's last telegram. It has been contended for the appellants that
L. M. Facey's telegram should be read as saying “yes” to the first question put in the appellants'
telegram, but there is nothing to support that contention. L. M. Facey's telegram gives a precise answer
to a precise question, viz., the price. The contract must appear by the telegrams, whereas the appellants
are obliged to contend that an acceptance of the first question is to be implied. Their Lordships are of
opinion that the mere statement of the lowest price at which the vendor would sell contains no implied
contract to sell at that price to the persons making the inquiry. Their Lordships will therefore humbly
advise Her Majesty that the judgment of the Supreme Court should be reversed and the judgment of
Curran, J., restored. The appellants must pay to the respondents the costs of the appeal to the Supreme
Court and of this appeal.
49

Paul Felthouse vs. Bindley; 142 E.R. 1037
(1862) 11 Common Bench Reports (New Series) 869
A. & B. verbally treated for the purchase of a horse by the former of the latter. A few days
afterwards, B. wrote to A. saying that he had been informed that there was a misunderstanding as to
the price, A. having imagined that he had bought the horse for 30l., B. that he had sold it for 30
guineas. A. thereupon wrote to B. proposing to split the difference, adding,—“If I hear no more
about him, I consider the horse is mine at 30l. 15s.” To this no reply was sent. No money was paid,
and the horse remained in B.'s possession. Six weeks afterwards, the defendant, an auctioneer who
was employed by B. to sell his farming stock, and who had been directed by B. to reserve the horse
in question, as it had already been sold, by mistake put it up with the rest and sold it. After the sale
B. wrote to A. a letter which substantially amounted to an acknowledgment that the horse had been
sold to him:—Held, that A. could not maintain an action against the auctioneer for the conversion of
the horse, he having no property in it at the time the defendant sold it,—B.'s subsequent letter not
having (as between A. and a stranger) any relation back to A.'s proposal.
This was an action for the conversion of a horse. Pleas, not guilty, and not possessed.
The cause was tried before Keating, J., at the last Summer Assizes at Stafford, when the following
facts appeared in evidence:—The plaintiff was a builder residing in London. The defendant was an
auctioneer residing at Tamworth. Towards the close of the year 1869, John Felthouse, a nephew of
the plaintiff, being about to sell his farming stock by auction, a conversation took place between the
uncle and nephew respecting the purchase by the former of a horse of the latter; and, on the 1st of
January, 1860, John Felthouse wrote to his uncle as follows:—
“Bangley, January 1st, 1861.
“Dear Sir,—I saw my father on Saturday. He told [870] me that you considered you had bought
the horse for 30l. If so, you are labouring under a mistake, for 30 guineas was the price I put
upon him, and you never heard me say less. When you said you would have him, I considered
you were aware of the price, as I would not take less. “ John Felthouse .”
50

The plaintiff on the following day replied as follows:—
“London, January 2nd, 1862.
“Dear Nephew,—Your price, I admit, was 30 guineas. I offered 30l.,—never offered more: and
you said the horse was mine. However, as there may be a mistake about him, I will split the
difference,—30l. 15s.—I paying all expenses from Tamworth. You can send him at your
convenience, between now and the 25th of March. If I hear no more about him, I consider the
horse mine at 30l. 15s.
“Paul Felthouse”
To this letter the nephew sent no reply; and on the 25th of February the sale took place, the horse in
question being sold with the rest of the stock, and fetching 33l., which sum was handed over to John
Felthouse. On the following day, the defendant (the auctioneer), being apprised of the mistake, wrote
to the plaintiff as follows:—
“Tamworth, February 26th, 1861.
“Dear Sir,—I am sorry I am obliged to acknowledge myself forgetful in the matter of one of Mr.
John Felthouse's horses. Instructions were given me to reserve the horse: but the lapse of time,
and a multiplicity of business pressing upon me, caused me to forget my previous promise. I
hope you will not experience any great inconvenience. I will do all I can to get the horse again:
but shall know on Saturday if I have succeeded. “William Bindley.”
On the 27th of February, John Felthouse wrote to the plaintiff, as follows:—
“Bangley, February 27th, 1861.
“My dear Uncle,—My sale took place on Monday last, and we were very much annoyed in one
instance. When Mr. Bindley came over to take an inventory of the stock, I said that horse
(meaning the one I sold to you) is sold. Mr. B. said it would be better to put it in the sale, and he
would buy it in without any charge. Father stood by whilst he was running it up, but had no idea
but he was doing it for the good of the sale, and according to his previous arrangement, until he
heard him call out Mr. Glover. He then went to Mr. B. and said that horse was not to be sold. He
51

exclaimed he had quite forgotten, but would see Mr. Glover and try to recover it, and says he
will give 5l. to the gentleman if he will give it up: but we fear it doubtful. I have kept one horse
for my own accommodation whilst we remain at Bangley: and, if you like to have it for a few
months, say five or six, you are welcome to it, free of any charge, except the expenses of
travelling: and if, at the end of that time, you like to return him, you can; or you can keep him,
and let me know what you think he is worth. I am very sorry that such has happened; but hope
we shall make matters all right; and would have given 5l. rather than that horse should have been
given up. “ John Felthouse .”
On the part of the defendant it was submitted that the letter of the 27th of February, 1861, was not
admissible in evidence. The learned judge, however, overruled the objection. It was then submitted
that the property in the horse was not vested in the plaintiff at the time of the sale by the defendant.
A verdict was found for the plaintiff, damages 33l., leave being reserved to the defendant to move to
enter a nonsuit, if the court should be of opinion that the objection was well founded.
Dowdeswell, in Michaelmas Term last, accordingly obtained a rule nisi, on the grounds that
“sufficient title or possession of the horse, to maintain the action, was not vested in the plaintiff at
the time of the wrong; that the letter of John Felthouse of the 27th of February, 1861, was not
admissible in evidence against the defendant: that, if it was admissible, being after the sale of the
horse by the defendant, it did not confer title on the plaintiff; and that there was at the time of the
wrong no sufficient memorandum in writing, or possession of the horse, or payment, to satisfy the
statute of frauds.” Carter v. Toussaint , 5 B. & Ald. 855, 1 D. & R. 515, and Bloxam v. Sanders , 4
B. & C. 941, 7 D. & R. 396, were referred to.
Powell shewed cause. There was an ample note of the contract in writing to satisfy the statute of
frauds. When the parties met in December, 1860, it was agreed between them that the plaintiff
should become the purchaser of the horse. It is true, there was a slight misunderstanding as to the
price, the plaintiff conceiving he had bought it for 30l, the nephew thinking he had sold it for 30
guineas. On being apprised by the nephew that he was under a mistake, the plaintiff wrote to him
proposing to split the difference, concluding with saying,—“If I hear no more about him, I consider
the horse is mine at 30l. 15s.” The question is whether there has not been an acceptance of that offer
by the vendor, though nothing more passed between the uncle and nephew until after the 25th of
52

February, the day on which the sale by auction took place. Could the plaintiff after his letter of the
2nd of January have refused to take the horse? It is true that letter was unanswered; but it was proved
that the nephew afterwards spoke of the horse as being sold to the plaintiff, and desired the
auctioneer (the defendant) to keep it out of the sale. Although written after the conversion, the letter
of the 27th of February was clearly evidence, and coupled with the plaintiff's letter of the 2nd of
January, constituted a valid note in writing, even as between the uncle and the nephew. [Keating, J.
You were bound to shew a binding contract for the sale of the horse before the 25th of February.]
The letter of the nephew of the 27th is an admission by him that he had before that day assented to
the bargain with the plaintiff. [Byles, J. That only shews a binding contract on the 27th of February.
What right had the plaintiff to impose upon the nephew the trouble of writing a letter to decline or to
assent to the contract?] It was not necessary that he should assent to the contract by writing: it is
enough to shew that he assented to it. [Byles, J. There was no delivery or acceptance: and there could
be no admission of delivery and acceptance. Willes, J. To be of any avail, you must make out a valid
contract between the uncle and nephew prior to the 25th of February.] It was not necessary that the
assent to the terms of the plaintiffs letter should be in writing. In Dobell v. Hutchinson , 3 Ad. & E.
355, 5 N. & M. 251, it was held that, where a contract in writing, or note, exists which binds one
party to a contract, under the statute of frauds, any subsequent note in writing signed by the other is
sufficient to bind him, provided it either contains in itself the terms of the contract, or refers to any
contract which contains them. So, in Smith v. Neale , ante, vol. ii., p. 67, it was held that a written
proposal, containing the terms of a proposed contract, signed by the defendant, and assented to by
the plaintiff by word of mouth, is a sufficient agree-ment within the 4th section of the statute of
frauds. [Willes, J. That was a very peculiar case. The plaintiff had done all that she had agreed to do,
and nothing remained to be done but performance on the defendant's part. But to say that transactions
between third parties are to be controlled or affected by an intermediate letter written by a person
who is no party to the record, is a somewhat startling proposition. Byles, J. I feel great difficulty in
seeing how the nephew's subsequent admission can be binding on the defendant, or even evidence
against him.] It is enough that the memorandum relied on to satisfy the statute of frauds is made at
any time before action brought: Bill v. Bament , 9 M. & W. 36.
Montague Smith, Q. C., and Dowdeswell, in support of the rule. The letter of the 27th of February
was clearly inadmissible. The 17th section of the 29 Car. 2, c. 3, provides that “no contract for the
sale of any goods, &c., shall be allowed to be good, except some note or memorandum in writing of
53

the bargain be made and signed by the parties to be charged by such contract,” &c. At the time the
sale complained of here took place, there clearly was no binding contract for the sale of the horse by
the nephew to the plaintiff. [Willes, J. Could the plaintiff have insured the horse on the 25th of
February?] He could not: he had no insurable interest. [Willes, J. As to third persons, one cannot see
any reason for giving a relation to the subsequent writing, though as between the immediate parties
one can.] Carter v. Toussaint, 5 B. & Ald. 855, 1 D. & R. 515, is a far stronger case than the present.
There, a horse was sold by verbal contract, but no time was fixed for payment of the price. The horse
was to remain with the vendors for twenty days without any charge to the vendee. At the expiration
of that time, the horse was sent to grass, by the direction of the vendee, and by his desire entered as
the horse of one of the vendors; and it was held that there was no acceptance of the horse by the
vendee, within the 29 Car. 2, c. 3, s. 17. And see Smith's Mercantile Law, 4th edit. p. 468, et seq.
Here, the plaintiff had clearly no property in the horse on the 25th of February, the day of the sale by
the defendant. How, then, can an admission ex post facto by a stranger affect the relative positions of
the parties to this record on that day?
Willes , J. I am of opinion that the rule to enter a nonsuit should be made absolute. The horse in
question had belonged to the plaintiff's nephew, John Felthouse. In December, 1860, a conversation
took place between the plaintiff and his nephew relative to the purchase of the horse by the former.
The uncle seems to have thought that he had on that occasion bought the horse for 30l., the nephew
that he had sold it for 30 guineas: but there was clearly no complete bargain at that time. On the 1st
of January, 1861, the nephew writes,—“I saw my father on Saturday. He told me that you considered
you had bought the horse for 30l. If so, you are labouring under a mistake, for 30 guineas was the
price I put upon him, and you never heard me say less. When you said you would have him, I
considered you were aware of the price.” To this the uncle replies on the following day,—“Your
price, I admit, was 30 guineas. I offered 30l.; never offered more: and you said the horse was mine.
However, as there may be a mistake about him, I will split the difference. If I hear no more about
him, 1 consider the horse mine at 30l. 15s.” It is clear that there was no complete bargain on the 2nd
of January: and it is also clear that the uncle had no right to impose upon the nephew a sale of his
horse for 30l. 15s. unless he chose to comply with the condition of writing to repudiate the offer. The
nephew might, no doubt, have bound his uncle to the bargain by writing to him: the uncle might also
have retracted his offer at any time before acceptance. It stood an open offer: and so things remained
until the 25th of February, when the nephew was about to sell his farming stock by auction. The
54

horse in question being catalogued with the rest of the stock, the auctioneer (the defendant) was told
that it was already sold. It is clear, therefore, that the nephew in his own mind intended his uncle to
have the horse at the price which he (the uncle) had named,—30l. 15s.: but he had not communicated
such his intention to his uncle, or done anything to bind himself. Nothing, therefore, had been done
to vest the property in the horse in the plaintiff down to the 25th of February, when the horse was
sold by the defendant. It appears to me that, independently of the subsequent letters, there had been
no bargain to pass the property in the horse to the plaintiff, and therefore that he had no right to
complain of the sale. Then, what is the effect of the subsequent correspondence? The letter of the
auctioneer amounts to nothing. The more important letter is that of the nephew, of the 27th of
February, which is relied on as shewing that he intended to accept and did accept the terms offered
by his uncle's letter of the 2nd of January. That letter, however, may be treated either as an
acceptance then for the first time made by him, or as a memorandum of a bargain complete before
the 25th of February, sufficient within the statute of frauds. It seems to me that the former is the
more likely construction: and, if so, it is clear that the plaintiff cannot recover. But, assuming that
there had been a complete parol bargain before the 25th of February, and that the letter of the 27th
was a mere expression of the terms of that prior bargain, and not a bargain then for the first time
concluded, it would be directly contrary to the decision of the court of Exchequer in Stockdale v.
Dunlop , 6 M. & W. 224, to hold that that acceptance had relation back to the previous offer so as to
bind third persons in respect of a dealing with the property by them in the interim. In that case,
Messrs. H. & Co., being the owners of two ships, called the “Antelope” and the “Maria,” trading to
the coast of Africa, and which were then expected to arrive in Liverpool with cargoes of palm-oil,
agreed verbally to sell the plaintiffs two hundred tons of oil,—one hundred tons to arrive by the
“Antelope,” and one hundred tons by the “Maria.” The “Antelope” did afterwards arrive with one
hundred tons of oil on board, which were delivered by H. & Co. to the plaintiffs. The “Maria,”
having fifty tons of oil on board, was lost by perils of the sea. The plaintiffs having insured the oil on
board the “Maria,” together with their expected profits thereon,—it was held that they had no
insurable interest, as the contract they had entered into with H. & Co., being verbal only, was
incapable of being enforced.
Byles, J. I am of the same opinion, and have nothing to add to what has fallen from my Brother
Willes.
55

Keating, J. I am of the same opinion. Had the question arisen as between the uncle and the nephew,
there would probably have been some difficulty. But, as between the uncle and the auctioneer, the
only question we have to consider is whether the horse was the property of the plaintiff at the time of
the sale on the 25th of February. It seems to me that nothing had been done at that time to pass the
property out of the nephew and vest it in the plaintiff. A proposal had been made, but there had
before that day been no acceptance binding the nephew.
Willes, J. Coats v. Chaplin, 3 Q. B. 483, 2 Gale & D. 552, is an authority to shew that John
Felthouse might have had a remedy against the auctioneer. There, the traveller of Morrisons,
tradesmen in London, verbally ordered goods for Morrisons of the plaintiffs, manufacturers at
Paisley. No order was given as to sending the goods. The plaintiffs gave them to the defendants,
carriers, directed to Morrisons, to be taken to them, and also sent an invoice by post to Morrisons,
who received it. The goods having been lost by the defendants' negligence, and not delivered to
Morrisons,—it was held that the defendants were liable to the plaintiffs.
56

Union of India (UOI) Vs. Maddala Thathiah; AIR 1966 SC 1724
Judges/Coram: J.R. Mudholkar, K. Subba Rao and Raghubar Dayal, JJ.
JUDGMENT
Raghubar Dayal, J.
1. The facts giving rise to this appeal, by special leave, are these : The Dominion of India, as the owner
of the Madras and Southern Mahratta Railway, represented by the General Manager of that railway,
invited tenders for the supply of jaggery to the railway grain shops. The respondent submitted his
tender for the supply of 14,000 imperial maunds of cane jaggery during the months of February and
March 1948. The tender form contained a note in paragraph 2 which was meant for the quantity
required and the described dates of delivery. This note was: "This Administration reserves the right to
cancel the contract at any stage during the tenure of the contract without calling up the outstandings on
the unexpired portion of the contract."
2. The Deputy General Manager of the Railways, by his letter dated January 29, 1948, accepted this
tender. The letter asked the respondent to remit a sum of Rs. 7,900/- for security and said that on
receipt of the remittance, official order would be placed with the respondent. In his letter dated
February 16, 1948, the Deputy General Manager reiterated the acceptance of the tender subject to the
respondent's acceptance of the terms and conditions printed on the reverse of that letter. Among these
terms, the terms of delivery stated: Programme of delivery to be 3,500 maunds on March 1, 1948;
3,500 maunds on March 22, 1948; 3,500 on April 5, 1948; and 3,500 maunds on April 21, 1948. At the
end of the terms and conditions was a note that the administration reserved the right to cancel the
contract at any stage during the tenure of the contract without calling up the outstandings on the
unexpired portion of the contract. The date for the delivery of the four installments were slightly
changed by a subsequent letter dated February 28, 1948.
3. By his letter dated March 8, 1948, the Deputy General Manager informed the respondent that the
balance quantity of jaggery outstanding on date against the order dated February 16, 1948, be treated
as cancelled and the contract closed. The protests of the respondent were of no avail as the railway
administration took its stand against the stipulation that the right to cancel the contract at any stage was
reserved to it. Ultimately, the respondent instituted the suit against the Union of India (UOI) for
57

recovering damages resulting from breach of contract. The trial Court dismissed the suit holding that
the railway administration could cancel the contract without giving any reason whenever it liked,
without making itself liable to pay any damages. The High Court held that the clause reserving the
right in the appellant to cancel the contract was void and in view of the trial Court having not decided
the issue about damages, remanded the suit for disposal after dealing with that matter. It is against this
decree that the Union of India (UOI) has filed this appeal after obtaining special leave.
4. The contentions raised for the appellant are two. One is that on a proper construction of the terms of
the contract, the appellant had agreed to but only such quantity of jaggery as it might require, up to a
maximum of 14,000 maunds and therefore there was no enforceable obligation to purchase the entire
quantity. The other contention is that the respondent had expressly agreed to the impugned clause and
that therefore the appellant was at liberty to terminate the contract at any stage of the duration of the
contract with respect to the outstanding obligations under it. The stipulation is valid and binding on the
parties and it amounted to a provision in the contract itself for its discharge or determination. On the
other hand it is contended for the respondent that the contract was a complete contract of the supply of
a definite quantity of jaggery viz., 14,000 maunds, on the dates mentioned in the order dated February
16, 1948, to start with, and ultimately on the dates mentioned in the subsequent letter dated February
28, and that the stipulation relied on was repugnant to the contract and, even if valid, the appellant
could rescind the contract only for good and reasonable ground and not arbitrarily.
5. To decide the contentions raised it is necessary to construe the true nature of the contract between
the parties which has given rise to these proceedings. The relevant conditions of tender are described
in paragraphs 2, 8 and 9 and are set out below: "2. Quantity required and described dates of delivery. -
14,000 imperial maunds of cane jaggery are required for the months of December 1947 and January
1948 and should be delivered in equal lots of 1,750 imperial maunds each commencing from 10th
December 1947 and completed on 31st January 1948.
Note: This Administration reserves the right to cancel the contract at any stage during the tenure of the
contract without calling up the outstandings on the unexpired portion of the contract.
8. Security deposit. - Five percent of the tender value will be required to be paid by the successful
tenderer as security deposits towards proper fulfilment of the contract. This amount will carry no
interest. This should be paid in cash in addition to the earnest money already paid to the Paymaster and
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Cashier of this Railway, Madras, and his official receipt obtained therefor. Cheques and drafts will not
be accepted in payment of security deposit. In the case of contracts or the supply of gingelly oil, the
security deposit will be arranged only after 90 days have elapsed from the date of the last supply
against the order.
9. Placing of order. - A formal order for supply will be placed on the successful tenderer only on the
undersigned being furnished with the receipt issued by the Paymaster and Cashier of this Railway for
the security deposit referred to in paragraph 8."
Paragraph 12 provides for the rejection of supplies if they be of unacceptable quality. Paragraph 13
deals with penalties and reads thus: "
Penalties. - When supplies are not effected on the dates as laid down in the Official Order or when
acceptable replacement of the whole or part of any consignment which is rejected in accordance with
paragraph 12 is not made within the time prescribed the administration will take penal action against
the supplier in one or more of the following ways :-
(a) Purchase in the open market at the risk and expenses of the supplier goods of quality contracted for,
to the extent due;
(b) Cancel any outstandings on the contract and;
(c) Forfeit the security deposit."
6. The respondent made an offer to supply the necessary quantity of jaggery during the period it was
wanted and expressed its readiness to abide by the terms and conditions of the tender. He agreed to
supply the jaggery at the rate mentioned in his letter. This tender was accepted by the letter dated
January 29, 1948. So far, the offer of a supply of a definite quantity of jaggery during a specified
period at a certain rate and the acceptance of the offer would constitute an agreement, but would fall
short of amounting to a legal contract inasmuch as the date of delivery of the jaggery was not
specified. Only the period was mentioned. The agreement arrived at therefore could be said, as urged
for the appellant, to be a contract in a popular sense with respect to the terms which would govern the
order for supply of jaggery. The acceptance of the tender did not amount to the placing of the order for
any definite quantity of jaggery on a definite date. Paragraph 9 of the tender referred to the placing of a
59

formal order for the supply of jaggery, after the respondent had not only made a security deposit as
required by the provisions of paragraph 8 but had also furnished a receipt issued for that deposit to the
Deputy General Manager, Grain Shops. So construed, the note in paragraph 2 of the tender would refer
to cancel this agreement, loosely called a contract, at any stage during the tenure of that agreement
without calling up the outstandings on the unexpired portion of the contract.
7. The various expressions used in this note point to the same conclusion. The expression 'tenure of the
contract' contemplates the contract being of a continuing nature. It is only a contract with a sort of a
tenure. The contract is to be cancelled at any stage during such a tenure, that is, it could be cancelled
during the period between the acceptance of the tender and March 31, 1948, the last date for the
delivery of the jaggery under the contract. The note further provided that as a result of the cancellation,
the appellant will not call up the outstandings on the unexpired portion of the contract. This expression
can only mean "without ordering the supply of jaggery which was to be delivered within the remaining
period of the contract", that is, the period between the date of cancellation and March 31, 1948.
8. Paragraph 13 dealing with penalties draws a distinction between outstandings on the contract and
the purchase of the goods to the extent not supplied by the respondent. The provision about penalty
comes into operation when the supplies are not effected on the dates laid down in the official order, or
when acceptable replacement of the whole or part of any consignment which is rejected is not made
within the time prescribed. Clause (a) of para 13 contemplates penal action by purchasing in the open
market at the risk and expenses of the supplier, goods of the quality contracted for to the extent due,
either due to the failure to supply or due to failure to replace rejected goods which had been supplied
in compliance of an order. Clause (b) of para 13 contemplates a further penal action in the form of
cancellation of any outstandings on the contract. Such a cancellation could only be of the balance of
the supplies agreed upon but not yet supplied. If this expression was meant to cover the goods for
which order had been placed but whose date of delivery had not arrived, a different expression would
have been more appropriately used.
9. The appellant's letter dated January 29, 1948, which conveyed the acceptance of the tender, directed
the respondent to remit a certain sum for the security deposit and stated that on receipt of advice of
remittance official order would be placed. This is the order contemplated by para 9 of the tender.
60

10. By his letter dated February 16, 1948, the Deputy General Manager repeated in paragraph 1 of the
letter that the tender dated January 27, 1948, was accepted for the supply of jaggery, only subject to
the respondent's acceptance of the terms and conditions printed on the reverse. The tender had already
been accepted. There was no occasion to re-open the question of the acceptance of the tender or to re-
inform the respondent about the acceptance of the tender or to obtain a second acceptance of the
respondent to the terms and conditions of the tender. No occasion could have arisen for imposing any
fresh conditions for the acceptance of the tender which had been accepted earlier.
11. Paragraph 2 of the letter contains a definite order for despatching and delivering of the
consignment to the Assistant Controller of Grain Shops. The details given in the letter provided for the
entire supply of 14,000 maunds to be in four equal installments, each installments to be delivered on a
particular date. The only other condition or term in this letter is: "This administration reserves the right
to cancel the contract at any stage during the tenure of the contract without calling up the outstandings
on the unexpired portion of the contract."
12. This is identical in terms with the note in paragraph 2 of the tender can bear the same construction
with respect to that portion of the goods to be supplied for which no formal order had been placed. If
this note had a particular reference to the cancellation of the orders, if that was possible in law, its
language would have been different. It would have referred to the right to cancel the orders about the
delivery of the consignments and would have provided that the orders for such supplies which were to
be made on dates subsequent to the date of cancellation would stand cancelled or that the appellant
would not be bound to take delivery of such consignments which were to be delivered on dates
subsequent to the cancellation of the orders. There is nothing in this letter that the formal order placed
is subject to this condition. The condition governed the acceptance of the tender according to the
content of para 1 of this letter.
13. It appears that the order has been placed on a printed form which could be used also for placing an
order for delivery of part of the commodity which the tenderer has agreed to supply. That seems to be
the reason why that particular recital appears in the letter. It cannot possibly have any bearing on a
case like the present where the railway administration has definitely placed an order for the supply of
the entire quantity of the commodity for which a tender had been called.
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14. In this connection we may refer to the language of the letter of the Deputy General Manager dated
March 8, 1948, which informed the respondent about the cancellation of the contract. The letter states
that the balance quantity of jaggery outstanding on date against the above order, i.e., the order dated
February 16, 1948, is treated as cancelled and the contract closed. This letter itself draws a distinction
between the order and the contract. The contract has a reference to the agreement consisting of the
offer of supply of jaggery and acceptance of the offer by the Deputy General Manager.
15. We are therefore of the view that the condition mentioned in the note to para 2 of the tender or in
the letter dated February 16, 1948, refers to a right in the appellant to cancel the agreement for such
supply of jaggery about which no formal order had been placed by the Deputy General Manager with
the respondent and does not apply to such supplies of jaggery about which a formal order had been
placed specifying definite amount of jaggery to be supplied and the definite date or definite short
period for its actual delivery. Once the order is placed for such supply on such dates., that order
amounts to a binding contract making it incumbent on the respondent to supply jaggery in accordance
with the terms of the order and also making it incumbent on the Deputy General Manager to accept the
jaggery delivered in pursuance of that order.
16. We may refer to what was said by this Court in Chatturbhuj Vithaldas Jasani v. Moreshwar
Parashram MANU/SC/0092/1954: [1954]1SCR817, in connection with an arrangement arrived at
between the Central Government and a firm of bidi manufacturers, Moolji Sickka & Company. The
arrangement under which the firm was to sell and the Government was to buy from the firm from time
to time two brands of bidis manufactured by it. The contention raised before the Court was that this
arrangement amounted to a contract for the supply of goods within the meaning of that section. The
contract was said to be embodied in four letters. This Court said : "But except for this the letters
merely set out the terms on which the parties were ready to do business with each other if and when
orders were placed and executed. As soon as an order was placed and accepted a contract arose. It is
true this contract would be governed by the term set out in the letters but until an order was placed and
accepted there was no contract." Reference may also be made to what is said in 'Law of Contract', by
Cheshire & Fifoot (5th Edition) at p. 36.
"There is no doubt, of course, that the tender is an offer. The question, however, is whether its
'acceptance' by the corporation is an acceptance in the legal sense so as to produce a binding contract.
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This can be answered only by examining the language of the original invitation to tender. There are at
least two possible cases. First, the corporation may have stated that it will definitely require a specified
quantity of goods, no more and no less, as, for instance, where it advertises for 1,000 tons of coal to be
supplied during the period January 1st to December 31st. Here the 'acceptance' of the tender is an
acceptance in the legal sense, and it creates an obligation. The trader is bound to deliver, the
corporation is bound to accept, 1,000 tons, and the fact that delivery is to be by installments as and
when demanded does not disturb the existence of the obligation."
17. On the basis of this note, the acceptance of the respondent's tender by the Deputy General Manager
may even amount to a contract in the strict sense of the term, but we do not consider it in that sense in
view of the provisions of paragraphs 8 and 9 of the tender requiring a deposit of security and the
placing of the formal order.
The other case illustrated by Cheshire and Fifoot is : "Secondly, the corporation advertises that it may
require articles of a specified description up to a maximum amount, as, for instance, where it invites
tenders for the supply during the coming year of coal not exceeding 1,000 tons altogether, deliveries to
be made if and when demanded, the effect of the so-called 'acceptance' of the tender is very different.
The trader has made what is called a standing offer. Until revocation he stands ready and willing to
deliver coal up to 1,000 tons at the agreed price when the corporation from time to time demands a
precise quantity. The 'acceptance' of the tender, however, does not convert the offer into a binding
contract, for a contract of sale implies that the buyer had agreed to accept the goods. In the present
case the corporation has not agreed to take 1,000 tons, or indeed any quantity of coal. It has merely
stated that it may require supplies up to a maximum limit."
"In this latter case the standing offer may be revoked at any time provided that it has not been accepted
in the legal sense; and acceptance in the legal sense is complete as soon as a requisition for a definite
quantity of goods is made. Each requisition by the offeree is an individual act of acceptance which
creates a separate contract."
18. We construe the contract between the parties in the instant case to be of the second type. The note
below para 2 of the tender form, reserving a right to cancel an outstanding contract is then consistent
with the nature of the agreement between the parties as a result of the offer of the respondent accepted
by the appellant and a similar note in the formal order dated February 16, 1948, had no reference to the
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actual order but could refer only to such contemplated supplies of goods for which no orders had been
placed.
19. In view of the construction we have placed on the contract between the parties it is not necessary to
decide the other contention urged for the appellant that the stipulation in the not amounted to a term in
the contract itself for the discharge of the contract and therefore was valid, a contention to which the
reply of the respondent is that any such term in a contract which destroys the contract itself according
to the earlier terms is void as in that case there would be nothing in the alleged contract which would
have been binding on the appellant.
20. We are of opinion that the order of the High Court is correct and therefore dismiss the appeal with
costs.
21. Appeal dismissed.
64

Rajendra Kumar Verma vs. State of Madhya Pradesh and Ors.; AIR 1972 MP 131
Judges/Coram: Bishambhar Dayal, C.J. and A.P. Sen, J.
JUDGMENT
Bishambhar Dayal, C.J.
This is a writ petition under Article 226 of the Constitution of India challenging the recovery being
made against the petitioner in the following circumstances:--
The respondents advertised for receiving tenders for the sale of Tendu-Patta. (leaves) from unit No. 7,
Budni. The petitioner gave a tender in pursuance of the tender notice No. 1972-X. 69 dated 25-3-1969
at the rate of Rs. 38.25 p per standard bag. He also deposited some amount as security. The tenders
were to be opened on 9th April 1969 but before they were actually opened, the petitioner made an
application (Annexure 'A') resiling from his tender and requested that since he has withdrawn his
tender it may not be opened at all. The tender was, however, opened as this was the only tender
submitted for that unit.
It is contended that subsequently the unit was also auctioned but since no offers were received, the
tender of the petitioner was sent to the Government for acceptance. The Government accepted the
tender and since the petitioner did not execute the purchaser's agreement, proceedings were now being
taken for recovery of Rs. 24,846.12 p. on the allegation that the Tendu leaves of the unit were sold to
somebody else later and the balance was recoverable from the petitioner.
The contention of the petitioner is two-fold. In the first place, as he had withdrawn his tender before it
was opened and accepted, there was no tender on behalf of the petitioner. The other contention is that
there being no valid contract executed by the petitioner under Article 299 of the Constitution, there
was no enforceable contract between the petitioner and the State Government and, therefore, no
recovery on the ground of the existence of a contract could be made from the petitioner.
The reply on behalf of the respondents is that under the tender condition No. 10 (b) (i) a tenderer may
be allowed to withdraw his tender of anv unit of a division before the commencement of the opening
of tenders of that division on the condition that on opening the remaining tenders, there should be at
least one valid tender complete in all respects available for consideration for that particular unit. In this
65

case, since there was no other tender, the tender given by the petitioner could not be withdrawn. We
are unable to accept this contention. A person who makes an offer is entitled to withdraw his offer or
tender before its acceptance is intimated to him. The Government, by merely providing such a clause
in tender notice could not take away that legal right of the petitioner. The fact that the petitioner had
applied for withdrawal of the tender is not denied. It is, therefore, quite clear that when the tenders
were opened, there was really no offer by the petitioner and, therefore, there could be no contract
either impliedly or explicitly between the parties.
It has been repeatedly held by this Court and by the Supreme Court that unless there is a valid contract
executed as envisaged by Article 299(1) where the Government is a party, there could be no
enforceable contract at all. In K.P. Chowdhry v. State of M. P. (MANU/SC/0023/1966 : AIR 1967 SC
203:1966 MPLJ 1057 ), their Lordships of the Supreme Court specifically laid down as follows:--
"The provisions of Article 299(1) of the Constitution are mandatory. There can be no implied contract
between the Government and another person. If such implied contracts are allowed, they would in
effect make that article useless, for then a person having a contract with Government which was not
executed at all in the manner provided in Article 299(1) could get away by saying that an implied
contract may be inferred on the facts and circumstances of a particular case ..............."
Learned counsel for the respondents further contended that these tender notices were issued under
Section 12 of the M.P. Tendu Patta (Vyapar Viniyaman) Adhiniyam of 1964 and consequently, the
terms thereof should be treated as law on the subject and enforceable as such. We are unable to agree
with this contention. No rules have been framed for the disposal of the tendu leaves. Section 12 of the
M.P. Tendu Patta (Vyapar Viniyaman) Adhiniyam of 1964 only authorises the Government to dispose
of Tendu leaves as it considered proper. The terms given in the tender notice are merely executive
directions laid down for the purposes of receiving offers. From a perusal of the tender notice, it is clear
that a tender notice cannot have the status of law and could not be enforced as such.
Lastly, the learned counsel for the respondent relied upon the case reported in Century Spinning and
Manufacturing Co. Ltd. v. Ulhasnagar Municipal Council MANU/SC/0397/1970 : AIR 1971 SC
1021:1971 MPLJ 16 ). In that case, the situation was entirely different and it was not a matter which
could possibly cover a dispute between the parties in this case. There, the Municipal Council wanted to
include a particular land within the municipal area on which several factories had been set up.
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Objections were raised by the factory owners on the ground that by such inclusion, octroi tax would
become chargeable on the articles imported by the factory owners and their work would become
impossible. An undertaking was given to the effect that no octroi would be charged from them for a
particular time and on that assurance, the area was included within the municipal limits. Before that
Period expired, the Municipality imposed octroi and in those circumstances, their Lordships of the
Supreme Court observed as follows:--
"Public bodies are as much bound as private individuals to carry out representations of facts and
promises made by them, relying on which other persons have altered their position to their prejudice:
The obligation arising against an individual out of his representation amounting to a promise may be
enforced ex contractu by a person who acts upon the promise: when the law requires that a contract
enforceable at law against a public body shall be in certain form or be executed in the manner
prescribed by statute, the obligation if the contract be not in that form may be enforced against it in
appropriate cases in equity."
That was a case where the fundamental rights of the factory owners to carry on their business were to
be greatly affected by imposition of the tax upon them. If a promise had been given that such
imposition of tax would not take place for a certain period and against that fact, it started levying
octroi duty amounting to lacs of rupees, it was considered that imposition of tax contrary to that
promise was an unreasonable restriction and on that basis, it was said that the public body would be
bound by its undertaking. That was not a case which was amenable to the law of contracts and the
provisions of Article 299 of the Constitution were wholly irrelevant. The principles laid down in that
case cannot, therefore, be applicable to the facts of this case which is clearly governed by the law of
contract and consequently by the provisions of Article 299 of the Constitution. We, see no force in this
contention also. Moreover there is no equity ill favour of the respondents either.
The result, therefore, is that the writ petition is allowed and the demand against the petitioner is
quashed. Parties shall bear their own costs. The outstanding amount of the security deposit shall be
refunded to the petitioner.
67

Kanhaiya Lal Agrawal Vs. Union of India (UOI) and Ors.; AIR 2002 SC 2766
Judges/Coram: S. Rajendra Babu and P. Venkatarama Reddi, JJ.
JUDGMENT
S. Rajendra Babu, J.
1. Leave granted.
2. The first respondent invited tenders for execution of five items of work including supply, delivery
and stacking of 75,000 cubic metre Machine crushed track ballast as per specifications at its depot in
Naurozabad and loading it into railway wagons. The supply period was for 24 months. The conditions
in the tender notice required that the rates at which supply was to be made had to be stated in words as
well as in figures against each item of work as per Schedule attached thereto; that the tenders
submitted with any omissions or alteration of the tender document were liable to be rejected; however,
permissible corrections could be attached with due signature of tenderers; that the tenderer should hold
the offer open till such date as may be specified in the tender which was for a minimum period of 90
days from the date of opening of the tender; that contravention of the conditions would automatically
result in forfeiture of security deposit; that the tender was liable to be rejected for non-compliance of
any of the conditions in the tender form.
3. Five tenders were received. The appellant made his tender on 27.02.2001 with a covering letter that
if his offer is accepted within the stipulated time rebate would be offered by him to the effect that in
case the contract was given to him within 45 days, 60 days and 75 days, he would extend rebate of 5%,
3% and 2% respectively on the rates tendered by him. Respondent No. 5 had made a similar offer but
after five days of the opening of the tender, while the appellant had made such offer of rebate even at
the time of making the tender in the letter accompanying the tender documents. However, respondent
No. 5 offered to reduce rates by 1.25% if accepted in 30 days and 1% if accepted in 45 days. the 1st
respondent accepted the tender offered by the appellant on the rates subject to rebate. Agreement was
entered into by him on 19.04.2001. Respondent No. 5 filed a writ petition claiming that his tender
should have been accepted, as the rates offered by him are the lowest.
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4. The learned Single Judge, before whom acceptance of the tender offered by the appellant was
challenged, took the view that the tender notice did not admit of an offer being made in the form of
rebate as offered by the appellant and it was also clear that an offer made by respondent No. 5 after the
opening of the tender is of no consequence and gave the direction of taking fresh offers from the
appellant and Respondent No. 5. The matter was carried in appeal to the Division Bench. The Division
Bench, after adverting to several decisions on the question of award of contracts, stated that the tender
notice did not contemplate any attachment of conditions by giving rebate which would amount to
alteration of the tender document which is impermissible; that the tender should be unconditional and
relaxation, if any, should have been notified to all the tenderers to enable them to change their rates;
that all the tenderers should have been treated equally and fairly, and on that basis, took the view that
the tender of Respondent No. 5 is at a lower rate and hence, acceptable and set aside the order of the
learned Single Judge directing fresh negotiations with the parties. The Division Bench directed that
supply of material by the appellant be stopped forthwith and balance material be taken from
Respondent No. 5 at the rate furnished by him. Hence, these appeals against the order of the High
Court.
5. This Court is normally reluctant to intervene in matters of entering into contracts by the
Government, but if the same is found to be unreasonable, arbitrary, mala fide or is in disregard of
mandatory procedures it will not hesitate to nullify or rectify such actions.
6. It is settled law that when an essential condition of tender is not complied with, it is open to the
person inviting tender to reject the same. Whether a condition is essential or collateral could be
ascertained by reference to consequence of non-compliance thereto. If non-fulfilment of the
requirement results in rejection of the tender, then it would be essential part of the tender otherwise it
is only a collateral term. This legal position has been well explained in G.J. Fernandez v. State of
Karnataka and Ors.,.
7. In the present case, the short question that falls for consideration is whether the tender offered by the
appellant with the rebate could have been accepted and whether such acceptance would affect the
interests of any other party.
8. The letter dated 27.2.2001 accompanying the tender made by the appellant after setting out rate
offered by him also set out certain circumstances with a note in the following terms:-
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"Note:- I would like to offer if the tender is finalised in my favour:
(a) 5% reduction in rate within 45 days;
(b) 3% reduction in rate within 60 days;
(c) 2% reduction in rate within 75 days;
(d) to make use of the machinery at the quickest possible time."
9. Bureaucratic delay is a notorious fact and delay in finalising tenders will cause hardship to the
tenderer. In such circumstances, if a hardened businessman makes an attractive offer of concessional
rates if tender is finalized within a shorter period, it cannot be said that the rates offered are subject to
conditions. The rates offered are clear and the time within which they are to be accepted is also clear.
As long as such offer does not militate against the terms and conditions of inviting tender it cannot be
said that such offer is not within its scope. All that is required is that offer made is to be kept open for a
minimum period of 90 days. Offer in compliance of that term has been made by the appellant. The
concession or rebate given is an additional inducement to accept the offer expeditiously to have a
proper return on the investment made by the tenderer in the equipment and not keeping the labour idle
for long periods which is part of commercial prudence. The commercial aspect of each one of the
offers made by the parties will have to be ascertained and, thereafter a decision taken to accept or
reject a tender.
10. The Division Bench of the High Court proceeded on the basis that the offer of concession is
contrary to the terms of tender but we have demonstrated to the contrary.
11. Now the appellant made his offer of concessional rates along with the tender while Respondent No.
5 made such offer after opening of the tenders. It is difficult to conceive that the Respondent No. 5
who is a prudent businessman would not be aware of commercial practice of giving rebate or
concession in the event of quick finalization of a transaction. What the appellant offered was part of
the tender itself while the Respondent No. 5 made such offer separately and much later. There was
nothing illegal or arbitrary on the part of Railway Administration in accepting the offer of the
appellant, which was made at the time of submitting the tender itself.
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12. In the result, we allow these appeals by setting aside the orders made by the High Court both by the
Division Bench and the learned Single Judge and dismiss the writ petition. No costs.
71

Haridwar Singh Vs. Bagun Sumbrui and Ors.; (1973 )3SCC 889
Judges/Coram: K.K. Mathew and K.S. Hegde, JJ.
JUDGMENT
K.K. Mathew, J.
1. The appellant filed a writ petition before the High Court of Patna praying for quashing an order
passed by the Minister of Forest, Government of Bihar, on December 13, 1970, and for issue of a writ
in the nature of mandamus directing the respondents 1 to 5 to give effect to the previous order of the
Minister of Forest dated November 27, 1970. The writ petition was heard by a Division Bench of the
Court and the petition was dismissed. This appeal, by special leave, is from that judgment.
2. There is a bamboo coup know as "Bantha Bamboo coup" in Chatra North Division of Hazaribagh
district. On July 22, 1970, the Forest Department of the Government of Bihar advertised for settlement
of the right to exploit the coup by public auction. The auction was held in the office of the Divisional
Forest Officer on August 7, 1970. Five persons including the appellant participated in the auction.
Though the reserve price fixed in the tender notice was Rs. 95,000/-, the appellant's bid of Rs. 92,001/-
, being the highest, was accepted by the Divisional Forest Officer. The petitioner thereafter deposited
the security amount of Rs. 23,800/- and executed an agreement. The Divisional Forest Officer reported
about the auction sale to the Conservator of Forests, Hazaribagh Circle, by his letter dated August 25,
1970. As the price for which the coup was provisionally settled exceeded Rs. 50,000/-, the Conservator
of Forests forwarded the papers regarding the auction sale to the Deputy Secretary to Government of
Bihar, Forest Department, for confirmation of the acceptance by the Government. Since the
provisional settlement was made for an amount less than the reserve price, the matter was also referred
to the Finance Department. The Finance Department invited comments from the Divisional Forest
Officer as to why the settlement was made for a lesser amount. The Divisional Forest Officer, by his
letter dated October 30, 1970, submitted his explanation for the provisional settlement at an amount
below the reserve price. When the matter was pending before the Government, the appellant expressed
his willingness to take the settlement at the reserve price of Rs. 95,000/-, by his communication dated
October 26, 1970. The appellant thereafter filed an application on November 3, 1970, praying for
settlement of the coup on the basis of the highest bid. The Minister of Forest, by his proceedings dated
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November 27, 1970, directed that the coup may be settled with the highest bidder, namely the
appellant, at the reserve price. A telegram was sent by the Government to the Conservator of Forests,
Hazaribagh Circle on November 28, 1970, with a copy of the same to the Conservator of Forest, Bihar,
confirming the auction sale to the appellant at the reserve price of Rs. 95,000/-. As no intimation was
received by the Divisional Forest Officer, he did not communicate the proceedings of the Minister to
the appellant. One Mo. Yakub, Respondent No. 6, filed a petition on December 4, 1970, before the
Government of Bihar, Respondent No. 1, offering to take the settlement of the coup in question for Rs.
1,01,125/-. A telegram was sent by the Government on December 5, 1970, to the Divisional Forest
Officer, directing him not to take any action on the basis of the telegram dated November 28, 1970,
sent to him in pursuance of the proceedings of the Government dated November 27, 1970. That
telegram was received by the Divisional Forest Officer on December 10, 1970, and the Divisional
Forest Officer, by his letter dated December 10, 1970, informed the Government that the previous
telegram dated November 28, 1970, was not received by him and so it content was not communicated
to the appellant. The whole matter was thereafter placed before the Minister of Forest and the Minister,
by his proceedings dated December 13, 1970, cancelled the settlement of the coup with appellant and
settled the same with Respondent No. 6 for Rs. 1,01,125/-. The Government thereafter sent-telegrams
on December 21, 1970, to the Conservator of Forests and the Divisional Forest Officer, informing
them that the coup had been settled with Respondent No. 6. the Divisional Forest Officer, by his letter
dated December 23, 1970, directed Respondent No. 6 to deposit the security amount and to pay the
first installment Respondent No. 6 deposited the same and executed an agreement.
3. The contention of the appellant in the writ petition was that there was a concluded contract when the
bid of the appellant was accepted by the Divisional Forest Officer though that was subject to
confirmation by the Government and that, when the Government confirmed the acceptance by its
proceedings dated November 27, 1970, it was no longer within the power of Government to make the
settlement of the coup upon the 6th Respondent by its proceedings dated December 13, 1970. It was
also contended in the alternative that the settlement of the coup in favour of the 6th Respondent was in
violation of statutory rules and, therefore, in any event, that settlement was invalid.
4. As already indicated, the High Court negatived these contentions and upheld the validity of the
settlement in favour of the 6th Respondent.
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5. The special conditions in the tender notice makes it clear that the Divisional Forest Officer has the
right to accept a bid of less than Rs. 5,000/-, that acceptance of a bid of more than Rs. 5,000/- by him
is subject to confirmation by the Chief Conservator of Forests and the Forest Department of the Bihar
Government, that an auction sale for an amount of more than Rs. 5,000/- would not be recognised until
it is confirmed by the competent authority, and that a bid made in auction and which has been
provisionally accepted by the Divisional Forest Officer shall be binding on the bidder for two months
from the date of auction or till the date of rejection by the competent authority, whichever is earlier.
6. Counsel for the appellant contended that there was a conditional acceptance of the offer of the
appellant by the Divisional Forest Officer, that on confirmation by the Government, that acceptance
became unconditional and, therefore, there was a concluded contract when the Government confirmed
the acceptance, even though the confirmation was not communicated to the appellant. In support of
this, he relied on The Rajanagaram Village Cooperative Society v. Veerasami Mudaly [1950] 11
M.L.J. 486. There it was held that in the case of a conditional acceptance in the presence of a bidder,
the condition being that it is subject to approval or confirmation by some other person, the acceptance,
though conditional, has to be communicated and when that is communicated, there is no further need
to communicate the approval or confirmation which is the fulfilment of the condition. It was further
held that a conditional acceptance has the effect of binding the highest bidder to the contract if there is
subsequent approval or confirmation by the person indicated, that he cannot resile from the contract or
withdraw the offer, and if there is approval or confirmation, the contract becomes concluded and
enforceable. This decision was considered in Somasudaram Pillai v. Provincial Government of Madras
A.I.R. 1947 Mad 366 where Chief Justice Leach, speaking for the Court said that, to have an
enforceable contract, there must be an offer and an unconditional acceptance and that a person who
makes an offer has the right to withdraw it before acceptance, in the absence of a condition to the
contrary supported by consideration. He further said the fact that there has been a provisional or
conditional acceptance would not make any difference as a provisional or conditional acceptance
cannot in itself make a binding contract.
7. The question whether by an acceptance which is conditional upon the occurrence of a future event a
contract will become concluded was considered by Williston and this is what he says : Williston On
Contracts, Vol. 1, 3rd Ed. Section 77A.
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A nice distinction may be taken here between (1) a so-called acceptance by which the acceptor agrees
to become immediately bound on a condition not named in the offer, and (2) an acceptance which
adopts unequivocally the terms of the offer but states that it will not be effective until a certain
contingency happens or fails to happen. In the first case there is a counter-offer and rejection of the
original offer; in the second case there is no counter-offer, since there is no assent to enter into an
immediate bargain. There is, so to speak, an acceptance in escrow, which is not to take effect until the
future. In the meantime, of course, neither party is bound and either may withdraw. More over, if the
time at which the acceptance was to become effectual is unreasonably remote, the offer may lapse
before the acceptance becomes effective. But if neither party withdraws and the delay is not
unreasonable a contract will arise when the contingency happens or stipulated event occurs.
8. In this case, it is not the want of communication of the confirmation by the Government to the
appellant that really stands in the way of there being a concluded contract, but rather the want of
confirmation by the Government of the conditional acceptance by the Divisional Forest Officer. The
appellant's bid was for Rs. 92,001/-. The acceptance of the bid by the Divisional Forest Officer was,
therefore, subject to confirmation by Government. The proceedings of the Minister dated November
27, 1970, would show that he did not confirm the acceptance of the offer by the Divisional Forest
Officer. What the Minister did was not to confirm the acceptance made by the Divisional Forest
Officer, but to accept the offer made by the appellant in his communication dated October 26, 1970,
that he would take the coup for the reserved price of Rs. 95,000/-. There was, therefore, no
confirmation of the acceptance of the bid to take the coup in settlement for the amount of Rs. 92,001/-.
If the offer that was accepted was the offer contained in the communication of the appellant dated
October 26, 1970, we do not think that there was any communication of the acceptance of that offer to
the appellant. The telegram sent to the Conservator of Forest, Hazaribagh, by the Government on
November 28, 1970, cannot be considered as a communication of the acceptance of that offer to the
appellant. The acceptance of the offer was not even put in the course of transmission to the appellant;
and so even assuming that an acceptance need not come to the knowledge of the offer or, the appellant
cannot contend that there was a concluded contract on the basis of his offer contained in his
communication dated October 26, 1970, as the acceptance of that offer was not put in the course of
transmission. Quite apart from that, the appellant himself revoked the offer made by him on October
26, 1970, by his letter dated November 3, 1970, in which he stated that the coup may be settled upon
75

him at the highest bid made by him in the auction. We are, therefore, of the opinion that there was no
concluded contract between the appellant and the Government.
9. This takes us to the question whether the settlement in favour of the 6th Respondent was in violation
of any statutory rule. The appellant's contention was that the settlement in favour of the 6th
Respondent by a private treaty was in violation of the Rules of executive business made under Article
166(3). Rule 10 of the Rules provides:
(1) No department shall, without previous consultation with the Finance Department, authorise any
orders (other than orders pursuant to any general or special delegation made by the Finance
Department) which:
(a) either immediately or by their repercussion, will affect the finances of the State, or which, in
particular,
(i) involve any grant of land or assignment of revenue or concession, grant, lease or licence of mineral
or forests, rights or a right to water power of any easement or privilege in respect of such concession.
(2) Where on a proposal under this Rule, prior consultation with the Finance Department is required,
but on which the Finance Department might not have agreed, no further action shall be taken on any
such proposal until the cabinet takes a decision to this effect.
A copy of the letter from the Deputy Secretary to the Government of the Accountant General, Bihar,
dated November 22, 1967 would show that some relaxation of Rule 10(1) of the rules of executive
business was made by the Finance Department relating to lease of forest Coups or forest produce of
the value of more than Rs. 50,000/-. That letter reads as under:
Subject: Revision of procedure in issuing any order involving any grant of lease, sale or licence of
minerals of forest rights if such order is issued by the Administrative Department at the Secretariat
level.
Sir,
I am directed to say that in relaxation of Rule 10(1) of the Rules of Executive Business, Government
have been pleased to decide that the Forest Department shall authorise orders sanctioning leases of
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Forest coups or produce of the value of more than Rs. 50,000/- (rupees fifty thousand) each, subject to
the following conditions that:
(1) Reserve price of the coup has been fixed before auction.
(2) Highest bid should be accepted.
(3) Highest bid should not be less than the reserve price.
(4) Any relaxation to the above conditions may not ordinarily be allowed except with the prior
concurrence of the Finance Department.
10. Before the High Court the contentions of the 6th Respondent were, firstly, that the Rule 10(1) is
not a statutory rule and secondly, that it did not concern lease of forest land. The High Court, without
deciding the question whether the rule is a statutory Rule, held that the rule has nothing to do with the
lease of forest coups and said that there was nothing which prevented the Government from giving the
coup on lease by private treaty. The High Court, therefore, held that there was no bar, statutory or
otherwise, to the settlement of the coup in favour of Respondent No. 6 by private negotiation and as
such the settlement in his favour was valid.
11. Counsel for the appellant argued that the High Court went wrong in its conclusion that Rule 10(1)
as relaxed, did not apply to the grant of the lease of the coup in question and that it really prohibited a
lease of forest land except by public auction. We are not satisfied that the construction contended for is
correct. Neither Rule 10(1) nor the rule as relaxed says that forest land can be leased only by public
auction. Rule 10(1) in so far as it is relevant to the present case only says that no department shall,
without prior consultation with the Finance Department, authorise by any order, title lease or licence of
mineral or forests. The relaxation made to Rule 10(1) as evidenced by the letter from the Deputy
Secretary to the Government is to the effect that in the case of lease of forest land of the value of more
than Rs. 50,000/-, if made by public auction, it can only be made subject to the conditions mentioned
there. In other words, Rule 10(1) as relaxed does not prohibit the grant of a lease by private treaty. The
rule read in the context of its relaxation as mentioned in the letter of the Deputy Secretary would only
show that consultation with the Finance Department is not necessary for a lease, if the lease is of land
of the value of more than Rs. 50,000/- and is granted in pursuance of a public auction held in
conformity with the conditions mentioned in the letter of the Deputy Secretary.
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12. Now the question is whether the coup in question was settled in favour of the 6th Respondent in
accordance with Rule 10(1). It is clear from the records relating to the proceedings for the grant of the
lease in favour of the 6th Respondent that the Finance Department was not consulted before the
Minister passed the order on December 13, 1970, to grant the lease. But counsel for the Government of
Bihar and 6th Respondent contended that Rule 10(1), in so far as it requires prior consultation with the
Finance Department, is only directory in character and, therefore, even if there was no prior
consultation, the settlement was valid. So, the question arises whether Rule 10(1) which requires prior
consultation with the Finance Department is mandatory or not.
13. Several tests have been propounded in decided cases for determining the question whether a
provision in a statute, or a rule is mandatory or directory. No universal rule can be laid down on this
matter. In each case one must look to the subject matter and consider the importance of the provision
disregarded and the relation of that provision to the general object intended to be secured. Prohibitive
or negative words can rarely be directory and are indicative of the intent that the provision is to be
mandatory (see Earl T. Crawford. The Construction of Statues, pp. 523-4).
14. Where a prescription relates to performance of a public duty and to invalidate acts done in neglect
of them would work serious general inconvenience or injustice to persons who have no control over
those entrusted with the duty, such prescription is generally understood as mere instruction for the
guidance of those upon whom the duty is imposed [see Dattatreya Moreshwar Pangerkar v. The State
of Bombay and Ors.
15. Where, however, a power or authority is conferred with a direction that certain regulation or
formality shall be complied with, it seems neither unjust nor incorrect to exact a rigorous observance
of it as essential to acquisition of the right or authority (see Maxwell, Interpretation of Statutes, 6th
edition, pp. 649-650).
16. In this case, we think that a power has been given to the Minister in charge of the Forest
Department to do an act which concerns the revenue of the State and also the rights of individuals. The
negative or prohibitive language of Rule 10(1) is a strong indication of the intent to make the rule
mandatory. Further, Rule 10(2) makes it clear that where prior consultation with the Finance
Department is required for a proposal, and the department on consultation, does not agree to the
proposal, the department originating the proposal can take no further action on the proposal. The
78

cabinet alone would, be competent to take a decision. When we see that the disagreement of the
Finance Department with a proposal on consultation, deprives the department originating the proposal
of the power to take further action on it. the only conclusion possible is that prior consultation is an
essential pre-requisite to the exercise of the power.
We, therefore, think that the order passed by the Minister of Forest, Government of Bihar on
December 13, 1970, settling the coup in favour of the 6th Respondent was bad and we quash the order.
17. We allow the appeal to the extent indicated but make no order as to costs.
79

Indian Airlines Corporation vs. Madhuri Chowdhuri and Ors.; AIR 1965 Cal 252
Judges/Coram: P.B. Mukharji and Syed Sadat Abdul Masud, JJ.
JUDGMENT
P.B. Mukharji, J.
1. This is an appeal by the defendant, Indian Airlines Corporation, from the judgment and decree of P.
C. Mallick, J. decreeing the plaintiffs' suit for the sum of Rs. 1,50,000/- and another sum of Rs. 5000/-
with interest at the rate of 6 per cent per annum and with costs.
2. The suit arises out of an unfortunate and tragic air crash at Nagpur when a Dakota air plane VT-
CHF crashed soon after it started flying from Nagpur to Madras. All the passengers and the crew were
killed and the only person who escaped with severe injuries and burns was the Pilot, Desmond Arthur
James Cartner. This accident took place on the 12th December, 1953 at about 3-25 a.m.
3. In that Aircraft travelled one Sunil Baran Chowdhury, a young man of about 28 years of age, a
business man from Calcutta, who had flown from Calcutta to Nagpur and was taking his journey in
that ill-fated Aircraft from Nagpur to Madras at the time of the accident. The plaintiffs in this suit are
(1) the widow of the deceased Sunil Baran Chowdhury, (2) his minor son and (3) his minor daughter.
The widow as the mother of the minors acted as the next friend in the plaint. The Indian Airlines
Corporation is the defendant in this suit. This suit was instituted on or about the 10th December, 1954,
just before the expiry of one year from the date of the accident.
4. The plaint states that the plaintiffs are the heirs and legal representatives of the deceased Sunil Baran
Chowdhury and that the action is brought for their benefit. Sunil Baran was a passenger by Air from
Calcutta to Madras via Nagpur in the Aircraft of the defendant Corporation and had duly purchased the
ticket. The ticket had certain terms and conditions which will be relevant later on. It is pleaded in the
plaint that as a result of the accident Sunil Baran was killed. In the particulars of the accident given in
the plaint it is said that the accident took place on the 12th December, 1953 at 3-25 a.m. about two
miles from the end of the runway of Sonegaon Airport at Nagpur when the said plane attempted to
land owing to engine trouble immediately after it had taken off from the said aerodrome. On that
ground it is pleaded that the defendant is liable for damages for breach of contract in not safely
80

carrying the passenger and for breach of duties under the Carriage by Air Act and/or of the
Notification thereunder. There is an alternative plea in the plaint which alleges that the deceased died
of the said accident which was caused by the negligence and/or misconduct of the defendant
Corporation or its agents. The plaint pleads specifically the particulars of negligence in the following
terms:
(a) The port engine of the plane lost power after getting air-borne causing a swing and that it was due
to defective supervision and check up.
(b) That the swing corrected itself when the port engine revived again.
(c) In spite of failure of the port engine and/or correction thereof, the Captain and/or Pilots in charge
did not follow the ordinary and usual procedure under such circumstances, namely, did not throttle
back the engine and land straight ahead though there was sufficient length of runway available in front,
to land and pull up even with the wheels down and certainly with the wheels up.
(d) Even though the engine revived, the fact that the gear was down was overlooked by both the pilots.
(e) A false starboard engine fire warning precipitated the attempt at forced landing obviously on
account of defective supervision and check up.
(f) The lack of sufficient intensive checks for emergency procedures during the past twelve months
preceding the accident which it is alleged, if carried out, might have given the pilot confidence, apart
from practice enabling him to deal coolly with an emergency of this nature.
5. On these grounds the plaintiffs claimed damages. The basis of the damage pleaded in the plaint is
that the deceased belonged to a long-lived family and lost the normal expectation of a happy life of at
least 65 years and that he was a well known businessman and industrialist in the City of Calcutta and
that his average earnings were Rupees 60,000/- a year. It is also pleaded in the plaint that the deceased
had a great future and was the support of the plaintiffs and by his death they had lost all means of
support and living. It was, therefore, claimed that the estate of the deceased had suffered loss and
damage which were assessed at a sum of Rs. 20,00,000/-. In addition the plaintiffs claimed that the
said Sunil Baran carried with him Rs. 5000/- in cash and kind which was also lost by reason of that
accident.
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6. In the written statement the defendant, Indian Airlines Corporation, relies on the terms and
conditions of the passenger's Air Ticket dated the 11th December, 1953 issued by the defendant to the
said Sunil Baran Chowdhury. In particular the defendant Corporation relies on the exemption clause as
an express term and condition of the said ticket which reads inter alia as follows:
"The carrier shall be under no liability whatsoever to the passenger, his/her heirs, legal representatives
or dependants or their respective assigns for death, injury or delay to the passenger or loss, damage,
detention or delay to his baggage or personal property arising out of the carriage or any other services
or operations the Carrier whether or not caused or occasioned by the act, neglect or negligence or
default of the Carrier, or of pilot flying operational or other staff or employees or agent of the Carrier,
or otherwise howsoever and the Carrier shall be held indemnified against all claims, suits, actions,
proceedings, damages, costs, charges and expenses in respect thereof arising out of or in connection
with such carnage or other services or operations of the Carrier."
7. It is pleaded in the written statement that the deceased Sunil Baran knew all the said terms and
conditions of the said ticket and that in any event the defendant Corporation brought to the notice of
and or took all reasonable steps to bring to the notice of the deceased passenger the existence of the
said terms and conditions. The defendant denied the existence of any contract other than that
mentioned in the ticket or that it committed any breach of contract or that the Carriage by Air Act
applied or that it had committed any breach of duty as alleged or at all. In particular the defendant
denied the allegations of negligence and misconduct.
8. The defendant Corporation also denied all charges of defective supervision or check up. It denied
also that in case of immediate revival of the engine the usual or ordinary procedure was to throttle back
the engine and to land straight ahead as alleged. It denied that the Captain or the Pilot in charge could
land straight ahead or should have attempted to land straight ahead. It further pleaded in the written
statement that the Captain and the pilots in exercise of their judgment decided on spot not to throttle
back the engine and to land straight ahead as alleged. The defendant also pleaded that in any event it
was at best an error in the judgment or decision of the pilot for which the defendant was not liable and
that the pilot was a skilled and competent expert and he had acted bona fide reasonably and in good
faith.
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9. The defendant also pleaded that the Aircraft held a valid certificate of air worthiness and was
regularly maintained in accordance with the approved maintenance Schedules and had the valid
certificate of daily inspection, that the crew held valid licenses and were qualified to undertake the
flight and had sufficient checks and training, and that the captain had sufficient flying experience or,
the route. The all-up weight did not exceed the authorised take off weight. The aircraft carried
sufficient fuel and oil. The engines were duly run up and tested by the pilots prior to take off and the
take off run was normal. Most careful and reasonable examination of the plane was made before flight
which did not reveal any defect or possibility of any failure. It also says that no mechanism has been
devised whereby failure of engine of the plane could be completely eliminated. This will be found
inter alia in paragraph 11 of the written statement.
10. The defendant denied all liability to pay damages as alleged or at all. The defendant also pleaded
that the alleged moveable in cash and kind amounting to Rs. 5000/-, if any, was the personal luggage
of the said deceased passenger and it was in the custody and control of the said deceased and not of the
defendant Corporation or the pilot and that the defendant and/or its agents or servants did not lake
charge of or were not in possession or control of the said moveables.
11. There was a long and elaborate trial of this unfortunate accident. Numerous witnesses were
examined and a large number of documents are in evidence.
12. For the plaintiffs Sm. Madhuri Chowdhury, the widow, Anil Behary Bhaduri, Secretary of Chand
Bali Steamer Service Co. where the deceased worked, Saraj Kumar Paul, an employee in the firm of
Messrs. A. C. Das Gupta and Co., Chartered Accountants, of the said Chand Ball Steamer Service Co.
who produced certain balance-sheets of the Company and Mr. R. N. Banerjee, Barrister-at-Law and
Liquidator of the said Chand Bali Steamer Service Co. were examined. Incidentally this witness Mr.
Banerjee said that he was appointed a Liquidator of this Company, Chand Bali Steamer Service Co. in
1955. The evidence of these witnesses relates to the family status and condition of the deceased
passenger and his probable or the then actual earning capacity.
13. On behalf of the defendant Corporation a large number of witnesses gave evidence. In the facts of
this accident no one is alive except the pilot, to speak directly about the plane and its accident. Captain
Cartner, therefore, is the most important witness on behalf of the defendant Corporation. The next
important witness was Johnson Berry. He was also a pilot flying Indian Airlines Corporation Planes. In
83

fact he was the senior Commander who had also been flying Dakotas since 1947. The importance of
his evidence lies in the fact that he was present near about the spot when the accident took place. In the
early morning of the 12th December, 1953, be was at Nagpur for operating the night airmail from
Delhi to Nagpur and from Nagpur to Delhi. He was at that relevant time waiting at Nagpur to take
night airmail back to Delhi. He was also in charge of a Dakota. His scheduled time to leave was at 3-
20 a.m. This Madras bound aircraft which met with the accident was just in front of him to taxi out.
Therefore, he was immediately behind this ill-fated aircraft, the distance between his piano and that
plane would be hardly 100 yards. The importance of his evidence, therefore, cannot be over-
emphasised. Strangely enough neither his name was mentioned nor his evidence discussed by the
learned trial Judge.
14. The third witness for the defendant Corporation was Herber Vivian Dequadros who is also an
expert, an Engineer and at the time of giving evidence was the General Manager and Chief Engineer of
Jamair Co. Private Ltd. a private limited company operating in Calcutta as a non-scheduled operator as
a charter company. The next was Basanta Kumar Bajpai, who was the Assistant Aerodrome Officer
under the Civil Aviation Department-Director General of Civil Aviation, Union of India. He gave
evidence inter alia to prove that Captain Cartner's licence was without any blemish and that he has not
only authorised to fly Dakotas but Super Constellation, Constellation and Boeing type of aircraft. Then
there was the evidence of Sooda Nathan Lokanath who was the Station Engineer, at Nagpur and who
was also a witness before the court of enquiry. Other witnesses for the defendant Corporation were
Kritanta Bhusan Gupta from the Traffic Department of the defendant "Corporation who spoke about
the issue of the ticket and its conditions, Chattubhai Shomnath Gajjar also a Station Engineer in
Bombay employed by Deccan Airways which previously controlled this line, N. B. Patel, who was a
pilot in the Defendant Corporation, Kaparaju Gangaraju, Deputy Chief Engineer in charge of
Hyderabad Station who gave evidence showing that the aircraft in suit came to Bombay on December
11, 1953 from Begumpet, Hyderabad and before it left Begumpet inspection of the aircraft was carried
out. H. R. D. Suja who was in charge of loading and/or unloading the aircraft at Nagpur and who
spoke inter alia of the list of passengers on board the Madras bound plane.
15. There were also other witnesses for the defendant Corporation like Rama Rao Prahlad Rao Huilgal,
Area Manager of the defendant Corporation at Delhi who was in the Deccan Airways in 1947 as a
Senior Captain. A. K. Rao, Aircraft Maintenance Engineer of the defendant Corporation at Begumpet,
84

Hyderabad, from which the aircraft flew, J. B. Bayas, Controller of aero-nautical inspection, New
Delhi who inter alia gave evidence to say that no device has been found out by Science or Technology
as yet by which air-locking can be completely excluded; a point which will be material later on when
we shall discuss the judgment under appeal, D. N. Banerjee, the Traffic Assistant of Airways India
Ltd. who spoke about the notice hung up in front of the Booking office at Mission Row, Calcutta, G.
V. Rai, Inspector of the defendant Corporation who was at Begumpet in November, 1953 and finally
S. V. Probhu who proved some signature and was Inspector on duty at Begum-pet
16. There is a large body of documentary evidence including log book entries, load sheet, certificate of
inspection reports and sheets, daily reports, daily routine schedules of departure, Instruments and
electrical routine check sheet, licences and also the report of the court of enquiry of the accident, apart
from many correspondence and news paper reports.
17. It may be appropriate to mention here that immediately after the accident the Government of India
Ministry of Communications, ordered a formal investigation in exercise of the powers conferred by
Rule 75 of the Indian Aircraft Rules, 1937. Mr. N. S. Lokur was appointed the Chairman of this court
of enquiry assisted by Captain K. Vishwanath of Air India International and Mr. M. G. Pradhan,
Deputy Director General of Civil Aviation as assessors in the said investigation. This investigation was
ordered on the 16th December, 1953 within four days of the accident. The report of this investigation
and enquiry or what is called in this connection this Court of Enquiry was submitted to the
Government of India on the 30th December, 1953. This is also marked as an exhibit in this suit and
about its admissibility there has been some controversy which fortunately was not pressed in the long
run.
18. The learned trial Judge held that the exemption clause was illegal, invalid and void and he also
held on the facts that Captain Cartner, the pilot, was negligent and therefore, the defendant Corporation
as the employer of Captain Cartner was liable in law. On a careful consideration of the learned Judge's
decision on (1) the exemption clause and (2) the negligence of Captain Cartner, we have come to the
conclusion that his decision cannot be sustained. We shall presently discuss these two questions which
are crucial in this appeal.
85

19. In addition to these two points the learned Judge has discussed the doctrine of res ipsa loquitur and
the applicability of common law in India and relying on his judgment in Sm. Mukul Dutta Gupta v.
Indian Airlines Corporation dated 11-8-1961: he came to the conclusion:
"In my judgment, the rules of justice, equity and good conscience applicable to internal carrier by air
in India are not the rules of common law carrier in England, but the rules to be found in Carriage by
Air Act, 1934. The Indian legislature has indicated that it should be applied to non international air
carriage of course "subject to exception, adaptation and modification.""
Although the power to except, adapt or modify was given to the Central Government, yet the learned
Judge himself applied them without the Central Government acting in the matter, in the belief that it
was open to him to extend that law in that manner, We are unable to accept this view and we are of the
opinion that the learned trial Judge's view noticed above is erroneous.
20. The most important question in this appeal is the validity or otherwise of the exemption clause.
The learned trial Judge has held the exemption clause to be invalid, illegal and void on that ground
that:
(a) it is against Section 23 of the Indian Contract Act, although however he has found that the
agreement was not bad on the ground of unreasonableness;
(b) this exemption clause cannot deprive the heirs and legal representatives of the deceased because
they did not enter into this contract and, therefore, such an exemption clause would be unavailing
under the Fatal Accident Act under which the present suit for damages has been brought;
(c) this exemption clause is bad on the ground that somehow or other broad principles of the Warsaw
Convention should be applied to India not as such but as rules of justice, equity and good conscience
which according to the learned Judge this exemption clause violates. In other words, the learned trial
Judge appears to take the view that the exemption clause is against the principles of some policy which
though not technically applicable in this country is some how or other against some kind of equity and
good conscience and, therefore will be regarded as against the public policy.
21. We are satisfied on this point that the learned Judge's decision that the exemption clause is invalid
is erroneous. It is against both, the principles of law as well as against decided authorities which are
86

binding on us and which have settled the law after a long series of many decisions on the point. The
only case on which the learned Judge relied for his decision on this point is Secy. of State v. Mt.
Rukhminibai. What the learned Judge failed to appreciate about that case is that it is not an authority
on the exemption clause at all. In fact it does not deal with the validity or otherwise of any exemption
clause of this nature or of any exemption clause in a ticket containing these express terms exempting
the liability for negligence. This case lays down the proposition that though there is a strong
presumption that any rule of English law is in accordance with the principles of justice, equity and
good conscience in England, yet the Court in India is entitled to examine the rules in order to find out
whether the rules are in accordance with the true principles of equity. Sir Barnes Peacock said in the
case Degumburee Dabee v. Eshan Chunder Sein 9 Suth WR 230 whether the rules were in accordance
with the true principles of equity (sic) and that the Courts in India had on several occasions, refused to
apply a rule of English law on the ground that it was not applicable to Indian society and
circumstances. The only question on which these observations were being made by the learned Judges
there in the Nagpur case was how far the English doctrine of common employment applied in India to
cases which in England would have come under the Employers' Liability Act. That was the only
question. There no question turned up on exemption clause in a contract or as a term or a condition in a
ticket for carriage exempting liability for negligence. All these observations, therefore, about common
law, equity and good conscience that are to be found there, are only obiter except in so far as they
relate to the point of the doctrine of common employment. That was the only point discussed and
decided there. We are satisfied that this Nagpur case is no authority for holding that in the instant
appeal before us the exemption clause is illegal and invalid.
22. Before discussing the English law it will be appropriate to discuss the binding authorities and
decisions so far as this court is concerned. It is laid down clearly and without any ambiguity by the
Privy Council as early as 1891 in Irrawaddy Flotilla Co. v. Bugwan Das, 18 Ind App 121 (PC) that the
obligation imposed by law on common carriage in India is not founded upon contract, but on the
exercise of public employment for reward. In fact, that decision of the Privy Council is a clear
authority to say that the liability of common carriers in India is not affected by the Indian Contract Act
1872. Therefore, no question of testing the validity of this exemption clause with reference to Section
23 of the Indian Contract Act can at all arise. The Contract Act does not profess to be a complete Code
dealing with the law relating to contracts and the Privy Council says that it purports to do no more than
87

to define and amend certain parts of the law. Lord Macnaghten, at page 129, put the law beyond any
doubt in the following terms:
"At the date of the Act of 1872, the law relating to common carriers was partly written, partly
unwritten law. The written law is untouched by the Act of 1872. The unwritten law was hardly within
the scope of an Act intended to define and amend the law relating to contracts. The obligation imposed
by law on common carriers has nothing to do with contract in its origin. It is a duty cast upon common
carriers by reason of their exercising a public employment for reward. 'A breach of this duty' says
Dallas, C. J., Bretherton v. Wood (1821) 3 B and B 54 is a breach of the law, and for this breach an
action lies founded on the common law which action wants not the aid of a contract to support it'. If in
codifying the law of contract the Legislature had found occasion to deal with tort or with a branch of
the law common to both contract and tort, there was all the more reason for making its meaning clear."
23. Having regard to this decision of the Privy Council which we consider to be binding on us there is
no scope left for further argument that an exemption clause of this kind is hit by any section of the
Contract Act, be it Section 23 or any other section, because the Indian Contract Act itself has no
application. In fact the subsequent observation of Lord Macnaghten at p. 130 of the report puts the
whole position beyond argument and controversy so far as this court is concerned, when His Lordship
said:
"The combined effect of Sections 6 and 8 of the Act of 1865 (Carriers Act 1865) is that, in respect of
property not of the description contained in the Schedule, common carriers may limit their liability by
special contract, but not so as to get rid of liability for negligence. On the Appellants' construction the
Act of 1872 (The Indian Contract Act) reduces the liability of common carriers to responsibility for
negligence, and consequently there is no longer any room for limitation of liability in that direction.
The measure of their liability has been reduced to the minimum permissible by the Act of 1865".
24. Finally, therefore, Lord Macnaghten observed at p. 131 of the report as follows:
"These considerations lead their Lordships to the conclusion that the Act of 1872, (Indian Contract
Act) was not intended to deal with the law relating to common carriers, and notwithstanding the
generality of some expressions in the chapter on bailments, they think that common carriers are not
within the Act".
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a. No doubt, it may be essential to point out straightway at this stage that the Carriers Act of 1865 has
no application to the facts of this case because that Act deals only with property and that also not in
carriage by air.
25. Mr. Dutt Roy, appearing for the plaintiffs-respondents attempted to distinguish this Privy Council
decision by saying that this decision was only concerned with Sections 151 and 152 of the Indian
Contract Act which deal only with the bailment and therefore, was no authority on Section 23 of the
Contract Act. We are unable to accept that distinction because the ratio of the decision of the Privy
Council rests on the fact that the whole of the Indian Contract Act as pointed out by Lord Macnaghten
did not apply to the law relating to common carriers
26. A Division Bench of this Court also had occasion to discuss the exemption clause and its validity
in an Air Ticket. That will be found in Indian Airlines Corporation v. Keshavlal F. Gandhi. This
Division Bench decision is a clear authority for the proposition that the present appellant Indian
Airlines Corporation is a common carrier and that the relationship between the parties to the contract
of carriage is to be governed by common law of England governing the rights and liabilities of such
common carriers. This Division Bench decision proceeds to lay down that the law permits common
carriers totally to contract themselves out of liabilities for loss or damage of goods carried as common
carriers. Then it comes to the conclusion that parties to the contract bind themselves by the contract
and it is not for the court to make a contract for the parties or to go outside the contract. The Division
Bench also expressed the view that if the contract offends against the provisions of the Contract Act,
e.g., if opposed to public policy, then only the court may strike down the contract, but even then it
cannot make a new contract for the parties.
27. The exemption clause which the Division Bench was considering in that case also exempted the
Airlines Corporation from
"any liability under the law whether to the sender or to the consignee or to their legal representatives,
in case of damage or loss or pilferage or detention from any cause whatsoever (including negligence or
default of pilots, agents, flying ground or other staff or employees of the carrier or breach of statutory
or other regulations) whether in the course of journey or prior, or subsequent thereof, and whether
while the freight be on board the aircraft or otherwise".
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28. The Division Bench came to the conclusion that this contract did not offend against the provisions
of the Indian Contract Act and that it gave complete immunity to the defendant Corporation from loss
or damage to the goods consigned to its care for carriage.
29. The argument that Section 23 of the Contract Act was not considered in that case cannot also be a
reason to hold that this particular section of the Contract Act makes this exemption clause bad. In
Bombay Steam Navigation Co. v. Vasudev Baburao Kamat the view of Sankaran Nair, J., in his
dissenting judgment in Sheik Mahammad Ravuther v. B. I. S. N. Co. Ltd. ILR 32 Mad 95 expressing
the opinion that Section 23 of the Contract Act hits such exemption clause was rejected. In fact in a
recent decision of the Madras High Court in Indian Airlines Corporation v. Jothaji Maniram, the point
is made clear beyond doubt. There it is held that a common carrier is a person who professes himself
ready to carry goods for everybody. In the case of a common carrier the liability is higher, because he
is considered to be in the position of insurer with regard to the goods entrusted to him. But where it is
expressly Stipulated between the parties that the carrier is no" a common carrier, that conclusively
shows that the carrier is not liable as a common carrier. It was also distinctly laid down by that
decision that even assuming that the carrier could be deemed to he a common carrier or held liable as
such, it was open to such a carrier to contract himself out of liability as common carrier, or fix the limit
of his liability. This Madras decision given by Ram-chandra Iyer, J., reviews all the relevant decisions
on this point. It also notices at page 288 of the report the view of Sankaran Nair, J. and rejects it.
30. In a recent Division Bench decision of the Assam High Court in Rukmanand Ajitsaria v. Airways
(India) Ltd. 71 certain important propositions of law are clearly laid clown. It is an authority to say that
the liability of the internal carrier by Airways who is not governed by the Indian Carriage by Air Act,
1934, or by the Carriers Act, 1865 is governed by the English Common law since adopted in India and
not by the Contract Act. It proceeds to lay down that under the English common law, the carrier's
liability is not that of a bailee only, but that of an insurer of goods, so that the carrier is bound to
account for loss or damage caused to the goods delivered to it for carriage, provided the loss or
damage was not due to an act of God or the King's enemies or to some inherent vice in the thing itself.
It also lays down that at the same time, the common law allows the carrier almost an equal freedom to
limit its liability by any contract with the consignor. In such a case, its liability would depend upon the
terms of the contract or the conditions under which the carrier accepted delivery of the goods for
carriage. It provides that the terms could be very far-reaching and indeed they could claim exemption
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even if the loss was occasioned on account of the negligence or misconduct of its servants or even if
the loss or damage was caused by any other circumstance whatsoever, in consideration of a higher or
lower amount of freight charged. In unmistakable terms the learned Chief Justice of the Assam High
Court says that, however amazing a contract of this kind may appear to be, yet that seems to be the
state of the law as recognised by the common law of England and adopted by the Courts in India.
Lastly this decision of the Division Bench of the Assam High Court is an authority for the proposition
that the clause in a contract of carriage by air giving complete immunity to the carrier from liability
could not be impugned on the ground that it was hit by Section 23 of the Indian Contract Act, because
the Contract Act had no application to the case nor could it be said to be opposed to public policy. The
learned Chief Justice of the Assam High Court points out that Exemption clauses of this nature have
been upheld by the Courts and there being no other statutory bar as provided under the Indian Carriers
Act or under the Indian Carriage by Air Act, which have no application to this case, under the common
law a contract of this nature was permissible and therefore, this decision also dissents from the
decision of Sankaran Nair, J. as mentioned above. Sarjoo Prosad, C. J., in this decision observes at p.
74 of the report quoted above on the point of Section 23 of the Indian Contract Act as hitting the
validity of such an exemption clause as follows:
"These weighty observations of Sir Sankaran Nair compel serious attention and attract by their
freshness and originality; but it seems too late now to turn away from the beaten track of judicial
precedents, which have since acquired all the sanctity of a stare decisis. I am, however, unable to
understand, and I say so with the utmost respect, how the learned Judge could overlook the very point
which the Judicial Committee of the Privy Council had decided and held that the carrier's liability was
governed by the English common law and not by the terms of the Contract Act, especially when that
decision was given by the Privy Council with full consciousness of the conflict of judicial opinion in
India. That the said decision of the Judicial Committee has been subsequently followed in other cases
is beyond question."
31. The Privy Council decision and all the Indian decisions, therefore, are against the finding of the
learned trial Judge in this case. Looking at the English Law and the High authorities of the English
Law the conclusion is further reinforced.
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32. Before we discuss the English Law and the English decisions on this point we may notice this that
Mr. Dutt Roy for the respondent realising the mass of authorities against his contention tried to
distinguish them by saying that all these cases related to goods and not to human life. He appears to
suggest, as the learned trial Judge has also said, that while for some reason or other there could be
complete exemption including one for negligence in case of contract for the carriage of goods such a
cause would be bad it is concerned the carriage of passengers and their life. In jurisprudence dealing
with the law of Common carriers it is difficult to see how the difference could be drawn legally
between goods and life.
33. Fortunately, however, this point is also decided by the high authority of the House of Lords and
that also in recent times. In the leading case of Ludditt v. Ginger Coote Airways, Ltd. 1947 AC 233
Lord Wright at p. 245 after quoting the words of Maule J., observed as follows:
"In tin's passage Maule J. is speaking of carriers of goods, but the same principle is true, mutatis
mutandis, of a carrier of passengers who in law is neither an insurer nor precluded from making a
special contract with his passengers."
34. Lord Wright in the same report at p. 242 accepted the classic enunciation on this point by Lord
Haldane in Grand Trunk Ry. Co. of Canada v. where Lord Haldane stated at p. 747 (of AC): (at p. 55
of AIR) as follows:
''There are some principles of general application which it is necessary to bear in mind in approaching
the consideration of this question. If a passenger has entered a train on a mere invitation or permission
from a railway company without more, and he receives injury in an accident caused by the negligence
of its servants, the company is liable for damages for breach of a general duty to exercise care. Such a
breach can be regarded as one either of an implied contract, or of a duty imposed by the general law,
and in the latter case as in form a tort. But in either view this general duty may, subject to such
statutory restrictions as exist in Canada and in Engand in different ways, be superseded by a specific
contract which may either enlarge, diminish or exclude it. If the law authorises it, such a Contract
cannot be pronounced to be unreasonable by a court of justice. The specific contract, with its incidents
either expressed or attached by law, becomes in such a case the only measure of the duties between the
parties, and the plaintiff cannot by any device of form get more than the contract allows him."
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35. It is, therefore, clear that the distinction that the learned Counsel for the respondents attempted to
make between a contract for carriage of goods and a contract for carriage of passengers cannot be
sustained. Both can be limited and both can exclude liability even for negligence.
36. Without multiplying authorities on this point which in our view are almost unanimous today we
shall refer to another decision of the House of Lords in Hood v. Anchor Line (Henderson Brothers)
Ltd. The import of this decision answers some point faintly argued on behalf of the respondents how
far small words printed at the foot of the document exempting liability were binding on the passenger.
Lord Finlay L. C. at pages 842-843 observed inter alia as follows:
''In my opinion the Courts below were right. Out of many authorities bearing upon the point I think it
necessary to refer to three only--Henderson v. Stevenson (1875) 2 HL Sc 470; Parker v. South Eastern
Ry. Co. (1877) 2 CPD 416 and Richardson, Spence and Co. v. Rowntree (1894) AC 217. The first of
these cases is a decision of this House that a condition printed on the back of a ticket issued by a
steamship packet company absolving the company from liability of loss, injury, or delay to the
passenger or his luggage was not binding on a passenger who has not read the conditions and has not
had his attention directed to the conditions by anything printed on the face of the ticket, or by the
carrier when issuing it. The second and the third of these cases show that if it is found that the
company did what was reasonably sufficient to give notice of conditions printed on the back of a ticket
the person taking the ticket would be bound by such conditions.
It is quite true that, it the contract was complete, subsequent notice would not vary it, but when the
passenger or his agent gets the ticket he may examine it before accepting, and if he chooses not to
examine it when everything reasonable has been done to call his attention to the conditions he accepts
it as it is."
37. It has been found by the learned trial Judge that these conditions in the present case exempting the
carrier from liability were duly brought to the notice of the passenger and that he had every
opportunity to know them. Here in the Court of Appeal we are satisfied on the record that it was so.
38. Blackburn, J., in the well known case of McCawley v. Furness Rly. Co dealing with a case of
personal injury lays down the same principle that civil liability, as distinguished from criminal
liability, can be excluded by an appropriate agreement, and observed as follows:
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"The duty of a carrier of passengers is to take reasonable care of a passenger, so as not to expose him
to danger, and if they negligently expose him to danger, and he is killed, they might be guilty of man-
slaughter, and they would certainly be liable to the relatives of the deceased in damages. But here the
passenger was carried under special terms; that agreement would not take away any liability that might
be incurred as to criminal proceedings, but it regulates the right of the plaintiff to recover damages.
The plea stairs that it was agreed that the plaintiff, being a drover travelling with cattle, should travel at
his own risk; that is, he takes his chance, and, as far as having a right to recover damages, he shall not
bring an action against the company for anything that may happen in the course of the carriage. It
would of course be quite a different thing were an action brought for an independent wrong, such as an
assault, or False imprisonment. Negligence in almost all instances would be the act of the Company's
servants, and "at his own risk" would of course exclude that, and gross negligence would be within the
terms of the agreement; as to wilful, I am at a loss to say what that means: but any negligence for
which the company would be liable (confined, as I have said, to the journey, and it is so confined by
the declaration) is excluded by the agreement."
39. These weighty observations of Blackburn, J. found approval subsequently. Atkin L.J. in Rutter v.
Palmer (1922) 2 KB 87 at p. 94 referred to the above decision. In the case of (1922) 2 KB 87 there was
a clause "Customers cars are driven at customer's sole risk" and it was held that the above clause
protected the defendant from liability for the negligence of his servants, and that the action failed.
Discussing the general principles on this point and specially on the construction and interpretation of
the words used in exemption clause, whether sufficient to exclude liability under a ton-tract or also of
tort Denning L. J. in White v. John Warwick and Co. Ltd. (1953) 1 WLR 1285 at p 1293 lays down the
following principles:
"In this type of case two principles are well settled. The first is that if a person desires to exempt
himself from a liability which the common law imposed on him, he can only do so by a contract freely
and deliberately entered into by the injured party in words that are clear beyond the possibility of
misunderstanding. The second is; if there are two possible heads of liability on the part of defendant,
one for negligence, and the other a strict liability, an exemption clause will be construed, so far as
possible, as exempting the defendant only from his strict liability and not as relieving him from his
liability for negligence."
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There, however, there was no finding on negligence and a new trial was ordered for a finding on that
issue.
40. Without discussing any more English case law on the point we can profitably refer to the Third
Edition Vol. 4 of Halsbury's Laws of England, Articles 465 and 466 at pages 186 to 188. The law is
clearly formulated there. The statement of law there is that any contract which contains conditions
enlarging, diminishing or excluding a carrier's common law duty of care to his passengers cannot, in
the absence of any statutory restriction on the imposition of such conditions, be pronounced
unreasonable by a court of justice with a view to one party getting more than the contract allows him;
but it would seem that conditions which are wholly unreasonable are not binding upon a passenger
even if steps otherwise reasonable have been taken to give him notice of them. But then it stated that
any term in a contract for the conveyance of a passenger in a public service vehicle negativing or
restricting liability or imposing conditions as to the enforcement of liability in respect of the death or
bodily injury of the passenger when being carried in or entering or alighting from the vehicle; is void.
That moans that this exemption of liability may be prevented by statute and if that is so the statute inter
alia will prevail. But then the point here in India is that no Act applies to internal carriage by air. The
Warsaw Convention does not apply; nor is there any statute which prevents or limits the scope or
content of such an exemption clause. Therefore, it is significantly pointed out in 31 Halsbury (Third
Edition) in Article 1214 at pages 765-766 that,
"There are no statutory terms and conditions for the carriage of passengers, but, as a common carrier
could vary his liability by making a special contract, so railway undertakers can carry passengers on
their own terms and conditions by means of a special contract usually made between the undertakers
and the passenger by the buying of a ticket."
41. Taking a clue from this statement of the law Mr. Dutt Roy, learned Counsel for the respondent
appealed to certain special statutes in India not connected with internal carriage by air. For instance he
draws our attention to Section 82A of the Indian Railways Act introduced in 1943 by the Railways
Amendment Act. It provides:
"When in the course of working a railway an accident occurs, being either a collision between trains of
which one is a train carrying passengers or the derailment of or other accident to a train or any part of a
train carrying passengers, then whether or not there has been any wrongful act, neglect or default on
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the part of the railway administration such as would entitle a person who has been injured or has
suffered loss to maintain an action and recover damages in respect thereof, the railway administration
shall, notwithstanding any other provision of law to the contrary, be liable to pay compensation to the
extent set out in Sub-section (2) and to that extent only for loss occasioned by the death of a passenger
dying as a result of such accident, and for personal injury and loss, destruction or deterioration of
animals or goods owned by the passenger and accompanying the passenger in his compartment or on
the train, sustained as a result of such accident"
Sub-section (2) of Section 82A provides.
"The liability of a railway administration under this section shall in no case exceed ten thousand rupees
in respect of any one person."
Far from helping the respondent's contention on this point this statutory example goes against that
contention. It shows that a statute had to he made in order to prevent the right to contract out If there
was no such right then there was no need for such a provision. Secondly it also contains the remnant of
a recognition of that right by limiting the quantum of damage so that even if in actual fact there is more
damage in particular that damage is not recoverable. It is an implicit recognition of the law that an
exemption clause could be made under certain terms and conditions. The point is that if it was
necessary to introduce such a statutory amendment to bring the railway accidents within the bounds of
law, then applying the parity of reasoning it must follow that when such a law in the carriage by air
within India is not similarly amended, it will not be right to import such notions from other statutes
with regard to other carriers for it might equally be the policy to leave freedom of contract untouched
in new vehicles of transport such as the air. Again on the other hand a loss of life whether it takes place
on the land or in the air cannot mean different damages and if the Railways Act is to be the measure of
such loss, a view which we reject, the Indian legislature in the Railways Act appears to put the
maximum value of human life at ten thousand rupees.
42. The learned Counsel for the respondent in his journey for exploration in the field of other statutes
came upon Section 63 of the Motor Vehicles Act which provides:
"Any contract for the conveyance of a passenger in a stage carriage or contract carriage, in respect of
which a permit has been issued under this Chapter, shall, so far as it purports to negative or restrict the
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liability of any person in respect of any claim made against that person in respect of the death of or
bodily injury to, the passenger while being carried in, entering or alighting from the vehicle, or
purports to impose any conditions with respect to the enforcement of any such liability, be void."
The answer on this point again is that this section of the Motor Vehicles Act is not such a statute or
statutory provision which at all applied to internal carriage by air. It cannot be applied by analogy.
43. These statutory provisions in other statutes seem to indicate that the legislature in its wisdom, has
not up till now thought fit to legislate on this point about internal carriage by air in India either to limit
or exclude contract for exemption for liability.
44. On this overwhelming mass of authority we are bound to hold that both in respect of Contract Act
and tort the present exemption clause set out above in the appeal before us is good and valid and it
legally excludes all liability for negligence. We also hold that it cannot be held to be bad under Section
23 of the Contract Act as stated above.
45. It now remains to discuss the learned trial Judge's finding that this exemption clause is bad under
the Fatal Accidents Act because it purports to bind the heirs and legal representatives of the
contracting party who could not be bound by such a contract. A decision on this point must depend on
the provision of the Fatal Accidents Act. The Fatal Accidents Act of 1855 provides by Section 1-A as
follows:
"Whenever the death of a person shall be caused by wrongful act, neglect or default and the act,
neglect or default is such as would (if death had not ensued) have entitled the party injured to maintain
an action and recover damages in respect thereof, the party who would have been liable if death had
not ensued shall be liable to an action or suit for damages, notwithstanding the death of the person
injured, and although the death shall have been caused under such circumstances as amount in law to
felony or other crime."
"Every such action or suit shall be for benefit of the wife, husband, parent and child, if any, of the
person whose death shall have been so caused, and shall be brought by and in the name of the
executor, administrator or representative of the person deceased; and in every such action the Court
may give such damages as it may think proportionate to the loss resulting from such death to the
parties respectively, for whom and for whose benefit such action shall be brought; and the amount so
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recovered, after deducting all costs and expenses, including the costs not recovered from the
defendant, shall be divided amongst the before mentioned parties or any of them, in such shares as the
Court by its Judgment or decree shall direct."
46. A glance at the above provision, will at once make it clear that what is being preserved is the right
of the contracting party to recover damages for neglect or default and nothing more. Significant words
are "If death had not ensued" "the party injured to maintain an action and recover damages in respect
thereof". Therefore, what is enuring to the benefit of the husband, wife, parent or child is the personal
right to recover damages. Normally in the case of death this right is extinguished by death following
the principle, actio personalis moritur cum persona. This Act prevents such extinguishment, though
that is not its only effect. But nevertheless these heirs or the specified beneficiaries under the Act do
not get any higher right, than that of the person had he lived. It is the same right as the person would
have got to recover damages if he had not died. It is his claim. Therefore, he before death can contract
to extinguish that right. When he does so the beneficiaries or his heirs under the Act then would not get
that right. No doubt what the beneficiaries under the Act has got is a new right of action which was not
there in the law before, but it is the same right of action which the contracting party would have got if
he had not died. It is in that sense that the famous observation of Lord Blackburn in Mary Seward v.
The owner of the "Vera Cruz” should be understood. Lord Blackburn said there:
"... I think that when that Act (Lord Campbell's Act) is looked at it is plain enough that if a person dies
under the circumstances mentioned, when he might have maintained an action if it had been for an
injury to himself which he had survived, a totally new action is given against the person who would
have been responsible to the deceased if the deceased had lived; an action which, as is pointed out in
Pym v. Great Northern Rly. Co. (1862) 2 B and S 759, is new in its species, new in its quality, new in
its principle, in every way new, and which can only be brought if there is any person answering the
description of the widow, parent, or child, who under such circumstances suffers pecuniary loss by the
death. That is a personal action, if personal action there ever can be."
Although the Lord Campbell's Act in England and the Fatal Accidents Act here remove the operation
of the maxim "actio personalis moritur cum persona" yet in so far as it gives a right to the specified
beneficiaries under the Act, it is new cause of action, and that is what Lord Chancellor Selborne in the
same case at p. 67 observed:
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"Lord Campbell's Act gives a new cause of action clearly, and does not merely remove the operation
of the maxim, "actio personalis moritur cum persona", because the action is given in substance not to
the person representing in point of estate the deceased man, who would naturally represent him as to
all his own rights of action which could survive, but to his wife and children, no doubt suing in point
of form in the name of his executor. And not only so, but the action is not an action which he could
have brought if he had survived the accident, for that would have been an action for such injury as he
had sustained during his lifetime, but death is essentially the cause of the action, an action which he
never could have brought under circumstances which if he had been living would have given him, for
any injury short of death which he might have sustained, a right of action, which might have been
barred either by contributory negligence, or by his own fault, or by his own release, or in various other
ways"
47. This principle was further explained and clarified and considered by the English Court of Appeal
in Nunan v. Southern Rly. (1924) 1. K. B. 223, which specially considered the question at what point
of time was it necessary to consider whether the deceased person would have had such a right of
action. The Court of Appeal followed the dictum of Lord Dunedin in the House of Lords in British
Electric Rail Co. v. Gentile, to the effect that:
"Their Lordships are of opinion that the punctum temporis at which the test is to be taken is at the
moment of death, with the idea fictionally that death has not taken place."
After explaining and following that dictum, Bankes L. J. at page 226 of the report of the case (1924) 1
KB 223 observes as follows: "On the authority of that decision one shirts with the question, what was
the position of the deceased at that particular moment? In some cases the deceased may not have been
entitled at any time to maintain an action for the injury complained of, as where he had by his own
negligence contributed to that injury, or, before the act or neglect which caused the injury had been
done or committed, he had contracted with the defendants that he would under no circumstances claim
any damages for such an act or neglect. In other cases he may originally have been entitled to maintain
an action for the injury and may by his own conduct have disentitled himself to maintain it, as where
he has compromised a claim in respect of it, or has allowed the time to go by within which under some
Act, such as the Public Authorities Protection Act, the action ought to have been commenced."
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48. Lord Justice Scrutton at pp. 227-28 of the same report put the matter clearly beyond all doubts in
the following terms: "The Fatal Accidents Act has, I think, been interpreted, by authorities which are
binding on us, to mean that the dependants have a new cause of action, yet cannot recover on that
cause of action unless the deceased had at the time of his death a right to maintain an action and
recover damages for the act, neglect or default of which they complain. He may have lost such a right
in a number of ways he may have been guilty of contributory negligence; he may have made a contract
by which he excluded himself from the right to claim damages, and in such a case as that the decisions
in Haigh v. Royal Mail Steam Packet Co., Ltd. (1884) 49 LT 802 and the Stella, 1900 P. 161 show that
the right of his dependants would be also barred. Again he may have lost his right from failure to make
a claim within the period limited by some statute; or he may have lost it by reason of, a release by
accord and satisfaction. In all these cases, if he could not have brought an action at the time of his
death neither can his dependants."
49. These observations clearly lay down the law that if the deceased had by a contract during his life
time excluded himself from the right to claim damage, his dependants or beneficiaries under the Act
cannot claim it Following this principle, with which we agree, we are satisfied that the condition in the
contract exempting liability is not hit by the Fatal Accidents Act and cannot be invalidated thereunder.
50. The learned trial Judge appears to apply the principles of Warsaw Convention embodied in the
Carriage by Air Act of 1934 and by the application of those principles came to the conclusion that the
exemption clause was bad and invalid because of such principles. It is difficult to accept the trial
Judge's reasoning on this point and we are of opinion that he was clearly wrong in law in applying
those principles. He realised his difficulties and therefore, he applied them as rule of justice, equity and
good conscience. The Indian Carriage by Air Act, 1934, has no application whatever in the present
case because:
(1) it applies only in the case of international carriage by air which it is not in the present case and
(2) the application of that Act to carriage by air which is not international can only be made by the
Central Government by notification in the official Gazette which has not been done in this case, On
those two grounds alone the learned Judge's application of the Act or its schedules is clearly wrong in
the facts of this case.
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51. The preamble to the Carriage by Air Act, 1934, itself expressly says that it is an Act to give effect
to a Convention for the unification of certain rules relating to international carriage by air. The
preamble also recites that the Warsaw Convention for the unification of certain rules relating to
international carriage by air (sic) and which is to be found in the First Schedule to that Act. The clear
definition of "international carriage" in Rule 1 of the First Schedule shows that this Warsaw
Convention cannot be applied to internal carriage by air in India at all. Rule 22 of the First Schedule
containing the Warsaw Convention limits the carrier's liability for each passenger to the sum of
1,25,000 francs. The next rule, Rule 23, says that:
"Any provision tending to relieve the carrier of liability or to fix a lower limit than that which is laid
down in these rules shall be null and void, but the nullity of any such provision does not involve the
nullity of the whole contract which shall remain subject to the provisions of this Schedule." If this Act
itself does not apply its schedule cannot apply and these rules of the Warsaw Convention cannot apply
to the internal carriage by air in India. To apply them to India as principles of justice, equity and good
conscience is to violate the statute. There is in this particular case no scope for the introduction of
vague and undefined rules of justice, equity and good conscience because of the very specific
provision of Section 4 of the Carriage by Air Act, 1934 which provides as follows:
"'The Central Government may, by notification in the Official Gazette apply the rules contained in the
First Schedule and any provision of Section 2 to such carriage by air, not being international carriage
by air as defined in the First Schedule, as may be specified in the notification, subject, however to such
exceptions, adaptations and modifications, if any, as may be so specified."
52. In my judgment, this express provision in Section 4 of this Act excludes the application of the rules
of Warsaw Convention to internal carriage by air in India unless the Central Government chooses to
apply it and that also by proper publication in the Gazette and also with such exceptions, adaptations
and modifications as it thinks fit. That shows that it bars the application of the rules of Warsaw
Convention to internal carriage by air in India by judges through the back door of the vague
conception of justice, equity and good conscience. The legislature by Section 4 did not leave any scope
for such a course to be adopted. What the learned Judge has done in this connection is not to apply
even the rules of the Warsaw Convention as it appears but he has picked and chosen some only of
those rules and says that he would apply them on the ground of justice, equity and good conscience.
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We have no hesitation in holding that such a course is not permissible at all under the Act If anybody
can modify, adapt or make exception, Parliament has expressly legislated it is the Central Government
and not the Judge or the Court in India, Therefore, the learned trial Judge's application of some only of
the Rules of Warsaw Convention by modification, exception and adaptation to the facts of this case is
entirely illegal and erroneous. It may be emphasised in this connection that although the Warsaw
Convention was signed on the 12th October, 1929 and although the Carriage by Air Act was passed in
1934 the fact that for these long thirty years up to this year 1964, the Central Government has not
chosen to make any rules either with or without modification, adaptation or exception under Section 4
of that Act to apply them to Internal Carriage by Air Act in India, shows that Parliament in India is not
prepared to apply these rules at this stage to internal carriage by air.
53. In that view of the matter so far as the exemption clause is concerned it is not necessary for us to
discuss, far less to decide, the general proposition which the learned trial Judge lays clown that English
Common Law of torts should not be applied in India and should be modified in their application to
India not only by considerations of justice, equity and good conscience but also by looking at
particular statute in England and introducing the principles of such English statute into India under the
cover of rules of justice, equity and good conscience, and on the plea that the very home of Common
Law has altered such rules of Common Law by statute. This Court is of the opinion that it is far too
late in the day in India, specially in the field of torts to debar generally the English Common Law and
its broad notions. Specially in the field of torts there has been significantly little, if no codification at
all here in India. Application of Common Law and particularly on the Original Side of this Court is
recognised not only expressly by such provisions as in Clauses 4 and 18 of the Charter of 1774,
Section 11 of the High Court Act, 1871, clauses 18 and 19 of the Letters Patent, Section 115 of the
Government of India Act and Article 372 of the Constitution. Apart from the constitutional documents
cited above many high authorities of case law have put the matter beyond doubt. Lord Macnaghten in
18 Ind App 121 (PC) already cited on another point observed at p. 125 of the report on ibis point as
follows;
"For the present purpose it is not material to inquire how it was that the common law of England came
to govern the duties and liabilities of common carriers throughout India. The fact itself is beyond
dispute. It is recognised by the Indian Legislature in the Carriers Act, 1865, an Act framed on the lines
of the English Carriers Act of 1830."
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54. Our Supreme Court clearly expressed the view in Director of Rationing and Distribution v.
Corporation of Calcutta, that far from the Constitution of India making any change in the legal position
it is clearly indicated that the laws in force, which expression must be interpreted as including the
common law of England which was adopted as the law of this country before the Constitution came
into force continue to have validity, even in the new set up, except in so far as they come in conflict
with the express provisions of the Constitution. The learned Chief Justice of India observed at p. 1360
of that report as follows:
"If we compare the provisions of Article 366(10) which defines ''existing law" which has reference to
law made by a legislative agency in contradistinction to "laws in force" which includes not only
statutory law, but also custom or usage having the force of law, it must be interpreted as including the
common law of England which was adopted as the law of this country before the Constitution came
into force."
55. Setalvad in his Hamlyn Lectures on the Common Law in India at pages 30 to 56 points out that the
principles of English Law came to be administered particularly in the mofussil as justice, equity and
good conscience. In the High Court in its Original jurisdiction the position was otherwise. No doubt
some of the peculiar common law doctrines were not adopted in India. Setalvad also points out at page
108 of that book that "An important branch of law which has remained uncodified in India is the law
relating to civil wrongs". The learned author also points out at page 110 that a draft of a code of torts
for India was prepared by Sir Frederick Pollock but it was never enacted into law and finally observes
as follows:
"In the absence of a code the law of civil wrongs administered in India is almost wholly the common
law of England. So much of the English law as seemed suitable to Indian conditions has been applied
as rules of justice, equity and good conscience."
The courts in India have made their own departures from the common law rules to adjust them to
Indian conditions for instance-
(a) the doctrine of common employment as in the case already cited AIR 1937 Nag 354;
(b) non application of the English common law principle that although it is possible to bring separate
actions against joint tortfeasors the sums recoverable under these judgments by way of damages are
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not in the aggregate to exceed the amount of the damages awarded by the judgment first given as in
Nawal Kishore v. Rameshwar Nath, (S). Setalvad also points out at page 34 of the Hamlyn Lectures
that "The Indian law of torts still consists of the rules of the English common law applied by judicial
decisions to India with some variations," It is unnecessary to pursue, therefore, this branch any further.
56. Before concluding our observations on the exemption clause it will be appropriate to state the
position in law as put by she learned Editor of the Twelfth Edition of Clerk and Lindsell on Torts in
Article 804 page 447 in the following terms:
"Subject to some statutory exceptions, it is always possible by a suitable contract to exclude liability
for negligence. In every case whether liability is excluded depends on the true construction of the
contract."
Numerous authorities there cited may be seen and it is needless for us to discuss them here. Lord
Morton in Canada Steamship Lines Ltd. v. The King, reported in 1952 AC 192, summarised the
principles of construction of exemption clause, with which we respectfully agree, by suggesting three
principles, namely,--
(1) If the clause contains language which expressly exempts the person in whose favour it is made
from the consequence of the negligence of his own servants, effect must be given to that provision;
(2) If there is no express reference to negligence, the court must consider whether the words used are
wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the person in
whose favour clause is made; and
(3) If the words used are wide enough for the above purpose, the court must then consider whether "the
head of damage may be based on some ground other than that of negligence."
Applying those principles of construction the exemption clause in this case by express use of the words
"negligence" and "however" cover the claim made in these two suits.
57. The learned Counsel for the respondent not only argued that the exemption clause was bad and
invalid but also that it could be severed upholding the rest of the contract. The reason for his doing so
apparently was that if the whole contract of the deceased under the ticket was bad then his presence
inside the aircraft might be reduced to the presence of a trespasser whose right to claim damages
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would be more circumscribed because then the important question would arise whether there would be
any duty to take care at all towards the trespasser who might not be an invitee. The point does no more
arise for our decision because we have held that the present exemption clause is good and valid. We
need, however, say only this that we approve and follow the decision on this point by another Division
Bench of this Court in AIR1962Cal290.
58. No doubt in theory and also in practice some contracts can be partially good and partially bad, but
then that depends on the question if the bad clause is at all severable without striking at the very root or
foundation of the contract. In my opinion an exemption clause of this nature cannot be severed from
the contract at all. It is the very basis and foundation of the contract of carnage. The carrier says that he
is prepared to take the passenger by air provided the passenger exempts him from liability for
negligence. Such a clause is the foundation of the contract. To suggest that this clause can be severed
and the rest of the contract of the carriage can be enforced is to beg the whole question. No doubt the
carriage is for the price of the ticket but then that carriage and that price are only on that very condition
that the carrier shall be exempt from any liability as stated in the exemption clause. To exclude this
clause and to uphold other clauses is to make an entirely new contract which the courts cannot and
should not allow.
59. Lord Chancellor Viscount Haldane in 1915 AC 740 (AIR 1915 PC 53) observed at p. 748 (of AC):
(at p. 56 of AIR), as follows:
"In a case to which these principles apply, it cannot be accurate to speak, as did the learned Judge who
presided at the trial, of a right to be carried without negligence, as if such a right existed independently
of the contract and was taken away by it. The only right to be carried will be one which arises under
the terms of the contract itself; and these terms must be accepted in their entirety. The company owes
the passenger no duty which the contract is expressed on the face of it to exclude, and if he has
approbated that contract by travelling under it he cannot afterwards reprobate it by claiming a right
inconsistent with it. For the only footing on which he has been accepted as a passenger is simply that
which the contract has defined."
60. Lord Haldane in that case also observed at p. 747 (of AC): (at p. 55 of AIR) as follows:
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"But in either view this general duty may, subject to such statutory restrictions as exist in Canada and
in England in different ways, be superseded by a specific contract, which may either enlarge, diminish,
or exclude it. If the law authorizes it, such a contract cannot be pronounced to be unreasonable by a
Court of justice. The specific contract, with its incidents either expressed or attached by law, becomes
in such a case the only measure of the duties between the parties, and the plaintiff cannot by any
device of form get more than the contract allows him."
Reference in this connection may also be made to Cheshire and Fifoot, on Law of Contract, Fourth
Edition at pages 326 to 329 and 8 Halsbury page 147 Article 256.
61. For these reasons I hold that the exemption clause in the contract is good and valid and is a
complete bar to the plaintiffs' right of action in the present case.
62. The next point urged on behalf of the appellant was the question of the application of the doctrine
of res ipsa loquitur in air accidents. Long and elaborate arguments have been advanced before us. The
learned trial Judge has discussed it at length and came to the conclusion that the maxim of res ipsa
loquitur applied to this case. Mr. Mitter, learned Counsel for the appellant has challenged that decision.
a. On a careful consideration of different authorities, we have come to the conclusion that it is not
possible to take a doctrinaire view on this branch of the law. There can be no general proposition. It
cannot be said that res ipsa loquitur never applies in the case of air accident. Nor can it be said that that
it always applies in case of all air accidents. In our opinion it depends on the facts and circumstances in
the particular air accident, under consideration by the Court. Res ipsa loquitur means the things speak
for itself. If the accident is such that it speaks for itself then in that case it applies to air accident just as
much as it does in other cases. On the other hand if the accident is such that the thing does not speak
for itself then it does not apply in the case of that particular air accident just as much as it would not
apply in other cases. What however is important to bear in mind is the special context in which air
accident takes place when judging whether the accident speaks for itself.
63. Charles S. Rhyne in Aviation Accident Law published in 1947 by the Columbia Law Book
Company, Washington, at pages 130 to 188, has very carefully discussed this question of the
application of the doctrine of res ipsa loquitur. One view is that the doctrine of res ipsa loquitur is
inapplicable to aeroplane accidents and is based upon the belief that at the time of the occurrence of
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the accident the present stage of development of aviation would not allow for any conclusion that the
accident would not have happened unless there was negligence on the part of the aeroplane operator.
In other words, the doctrine has been held inapplicable because one of the requisites for its application,
that the accident is such as does not in the ordinary course of things happen if due care had been
exercised, has not been met With the technical knowledge of aircraft design, construction and
maintenance which has been gained in the past several years, together with improved safety devices
for aircraft and the progress made in accurately forecasting weather conditions, and with growing
improvement in science and technology file application of the doctrine of res ipsa loquitur will be
made easier. The other view which the courts have taken is that res ipsa loquitur is the doctrine of
general application and although it developed at a time when aeroplane or air transport was not
contemplated, it may be extended to it if the facts and circumstances so permit.
64. But a very good working test was laid down by the Massachusetts Supreme Judicial Court in
Wilson v. Colonial Air Transport, Inc 278 Mass 420 which held:
"the principle of res ipsa loquitur only applies when the direct cause of the accident and so much of the
surrounding circumstances as were essential to its occurrence were within the sole control of the
defendants or of their servants".
The facts of the case are also relevant because of the present facts in the appeal before us. In that
Massachusetts case the plaintiff relied upon the doctrine where one of the engines of the airplane in
which he was riding as a passenger went dead necessitating a forced landing during which the plaintiff
suffered damage. In this appeal before us that is also one of the questions. The Massachusetts Court
held that without evidence being introduced showing whether employees of the air transport company,
or others, inspected the plane prior to the flight during which the accident occurred, the Court could
not determine if the defendant was in sole control of the surrounding circumstances essential to the
occurrence of the accident and the res ipsa loquitur doctrine was therefore not applicable. Similarly it
has been held by the United States Circut Court of Appeals, in Morrison v. Le Tourneau Co. of
Georgia, 138 Fed 339 that the doctrine was inapplicable where there could be only conjecture as to
what caused a plane equipped with dual controls to crash into the side of a mountain.
65. Shawcross and Beaumont on Air Law, Second Edition, 1951, discusses this question in Article
345, at pages 320 to 324. The learned Authors expressed their view at page 321 as follows:
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"It is of great importance in aircraft cases, and was the subject of much argument in the U. S. Courts
and is applied in Canada. It is submitted that the application of the maxim must depend on the facts of
each particular aircraft accident."
With respect we accept that view and hold that there can be no general proposition.
66. Among the illustrations given by Shaw-cross and Beaumont at page 323 is one where a machine
crashed owing to the failure of one of its engines within a few seconds of leaving the ground, when the
doctrine of res ipsa loquitar was not applied and in support of that three American cases were cited
namely, Wilson v. Colonial Air Transport Inc (1932) US Av R 139; Hagymssi v. Colonial Western
Airways Inc (1931) US Av R 73 and Law v. Transcontinental Air Transport, Inc (1931) US Av R 205.
There is another illustration given there of a case where the aircraft crashed without any apparent cause
in the case of Smith v. Whitley and Nelson (1943) US Av R 20. There the aircraft went into a spin and
crashed and pilot gave evidence for the plaintiff that he did not know why. It was held by the Supreme
Court of North Carolina that the doctrine of res ipsa loquitur did not apply because
"any number of causes may have been responsible for the plane falling, including causes over which
the pilot has absolutely no control, it being common knowledge that aircrafts do fall without fault of
the pilot."
67. At this stage it will be appropriate to notice the leading decision of the House of Lords on this
point in Woods v. Duncan 1946 AC 401. In explaining the doctrine of res ipsa loquitur in that case
which was the case where a submarine sank with loss of life, the House of Lords lays down that
"the principle of res ipsa loquitur only shifts the onus of proof in that a prima facie case is assumed to
be made out, throwing on the defendant the task of proving that he was not negligent; this does not
mean that he must prove how and why the accident happened; it is sufficient if he satisfies the court
that he personally was not negligent"
68. In this present appeal Captain Cartner who was the only witness to speak about the accident said in
no unmistakable terms that he was not only not negligent but he used his best judgment and ability. In
fact there was no other way out. The learned trial Judge of course in this case rejected Capatin
Cartner's evidence on this point and the reasons of that" rejection we shall presently examine.
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69. In this respect it will, therefore, he necessary to notice some of the crucial observations made by
the House of Lords in this case of 1946 AC 40L Lord Simon at page 441 of the report observed:
"I have said that Lieutenant Woods can by an affirmative proof that he was not negligent discharge the
burden that lies upon him without satisfying the Court how otherwise the accident happened and I
think that he has done so."
At page 439 Lord Simon said:
"But to apply this principle is to do no more than shift the burden of proof. A prima fade case is
assumed to be made out which throws upon him the task of proving that he was not negligent This
does not mean that he must prove how and why the accident happened; it is sufficient if he satisfies the
court that he personally was not negligent It may well be that tire court will be more easily satisfied of
this fact if a plausible explanation which attributes the accident to some other cause is put forward on
hrs behalf; but this is only a factor in the consideration of the probabilities. The accident may remain
inexplicable, or at least no satisfactory explanation other than his negligence may be offered yet if the
Court is satisfied by his evidence that he was not negligent the plaintiff's case must fail."
70. I shall refer to some of the observations made in the speeches of Lord Russell of Killowen, Lord
Macmillan, and Lord Simon in this case. Lord Russell at page 425 of the same report observed:
"The principle does not involve this that, notwithstanding that affirmative proof, he must be held to
have been negligent, unless he can solve the mystery and prove how the bow-cap came to be open at
the critical moment."
Lord Macmillan at pp. 427 and 428 of the same report lays down the following principle:
"Despite the searching investigation, official and judicial, to which the circumstances of the calamity
have been subjected, it has proved impossible to ascertain some of the most crucial facts, and exactly
what happened must now remain a mystery for all time. It is not the task of this House to find an
Answer to the problems which the loss of the Thetis presents. The question for this House in these
appeals is limited to one aspect of the matter, namely, whether on the evidence adduced enough has
been established in fact to bring home liability in law to the defendants or any of them for the death of
two of the men who lost their lives in the disaster."
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I shall close the reference to this case with the following observations of Lord Simon at page 419
which reads as follows:
"The case against Lieutenant Woods has been nut as an application of the principle known as res ipsa
loquitur, since he was in charge of the forward compartment. Even so, that principle only shifts the
onus of proof, which is adequately met by showing that he was not in fact negligent. He is not to be
held liable because he cannot prove exactly how the accident happened."
On this principle, which we accept, it was wrong for the trial Judge to hold the defendant Corporation
or Captain Cartner liable even if the theory of air lock as the cause of the accident did not find favour
with the trial Court.
71. The position of the application of the doctrine of res ipsa loquitur has recently been considered and
reviewed again in the decision of Moore v. R. Fox and Sons, reported in (1956) 1 Q. B. 596. In that
case the doctrine of res ipsa loquitur was applied and it was painted out that the employers had not
discharged the onus of proof placed on them merely by showing that the accident was inexplicable.
The principle that this case appears to formulate is that it was not sufficient to show several
hypothetical causes consistent with the absence of negligence and that the accident might have
occurred without negligence on their part. It lays down the principle that to discharge the onus they
(employers) had to go further and either show that they had not been negligent, or give an explanation
of the cause of the accident which did not connote negligence by them. Mr. Dutta Roy the learned
Counsel for the respondents relied on the judgment of Evershed M. R. in this case. There it was not
affirmatively proved that the employers were not negligent, and only certain hypothesis was offered as
probable causes of the accident. The situation here in the appeal before us is entirely different. Here
there is positive proof and affirmative statement by the pilot himself that he was not negligent and also
other evidence. In addition to it there is also the evidence that the cause of the accident was air-lock.
Therefore, the principles laid down both by the House of Lords decision in 1946 AC 401 as well as by
1956-1 QB 596 are against the respondents. The present appeal satisfies the tests laid down by the
House of Lords if the evidence of Captain Cartner and for the defendant Corporation denying
negligence is accepted. It is necessary to point out here that the present appeal is not a case where there
was no evidence by the defendant to prove that he was not negligent.
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72. A subsequent development of the law was suggested by Lord Denning in House of Lords in Brown
v. Rolls Royce Ltd., (1960) 1 All ER HL 577 by drawing a distinction between legal burden of proof
and the shifting of inferences of fact, as evidence is tendered, which may cause negligence to be
inferred unless further evidence is adduced, and in that sense only, may raise a presumption that needs
to be rebutted.
73. The question of res ipsa loquitur really is one relating to the onus of proof. Ordinarily the onus of
proof of negligence is on the person who alleges it. But where the doctrine of res ipsa loquitur applies
it means that the thing itself speaks for negligence and carries an inference that there was negligence.
Hence the res or the thing prima facie proves negligence and so the onus shifts on the defendant to
prove that there was no negligence. This is important at the beginning to determine the onus of proof
and as to who should lead evidence first. In this case it was immaterial because the Counsel on either
side agreed that the defendant should first give evidence to show that the defendant was not negligent.
Therefore, there was really no contest technically speaking when the procedure was one of agreement
about the onus of proof. Secondly, this point about the application of the doctrine of res ipsa loquitur
becomes less important now when all the evidence has been gone into. When all the evidence is on the
record the question of onus is no longer material and it is for us in the court of appeal to go over all the
records, facts and evidence and to come to a decision of our own whether there was negligence on the
part of the defendant or not. Nor is it any more a distinction between the legal proof and the shifting of
inference as Lord Denning suggests. In Chandra Kishore Tewari v. Deputy Commr. of Lucknow in
charge of Court of Wards, Sissandi Estate, the Privy Council pointed out at p. 219 on this question of
burden of proof as follows:
"In this case, however, the question is not of any practical importance since both parties have given
ample evidence in proof and disproof of the genuineness of the letters and the Courts are called upon
only to draw their conclusion on the question after consideration of the entire evidence and the fair
probabilities of the case irrespective of technical considerations affecting the burden of proof."
Same view was expressed by the Supreme Court in Moran Mar Basselios Catholicos v. Thukalan
Paulo Avira, AIR 1959 SC 31 at p. 38 by the observation:
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"The question of burden of proof at the end of the case, when both parties have adduced their evidence
is not of very great importance and the court has to come to a decision on a consideration of all
materials."
Again the Supreme Court in Paras Nath v. Smt. Mohani Dasi, AIR 1959 SC 1204 at p. 1205 observed
"The onus of proof loses much of its importance where both the parties have adduced their evidence."
74. On these authorities and for the reasons stated above we hold that the maxim or res ipsa loquitur
may or may not apply to air accidents, It will depend on the facts of each accident. The test is whether
the accident speaks for itself or not. If it does then res ipsa loquitur applies; if it does not the maxim
does not apply. Secondly we hold that it is a rule of evidence bearing primarily on the question of
onus. It loses, therefore, its importance in a case where all the evidence has been tendered as fully as
available and where no question arises about any evidence or any witness or any record being
withheld. In other words the expression res ipsa loquitur means no mysterious law and if we may be
permitted to quote a classic observation of Morris L.J., in Roe v. Minister of Health (1954) 2 Q. B. 66:
"This convenient and succinct formula possesses no magic qualities; nor has it any added virtue, other
than that of brevity, merely because it is expressed in Latin."
75. The learned Editors of Clerk and Lindsell on Torts, Twelfth Edition, 1961, in Article 796 at page
442 mentions three factors and formulates the proposition in this way: The doctrine applies:
"(1) When the thing that inflicted the damage was under the sole management and control of the
defendant, or of some one for whom he is responsible or whom he has a right to control; (2) the
occurrence is such that it would not have happened without negligence. If these two conditions are
satisfied it follows, on a balance of probability, that the defendants, or the person for whom he is
responsible, must have been negligent There is, however, a further negative condition; (3) there must
be no evidence as to why or how the occurrence took place. If there is, then appeal to res ipsa loquitur
is inappropriate, for the question of the defendant's negligence must be determined on that evidence."
We accept this enunciation of the principle on this point.
76. In view of the nature of the maxim of res ipsa loquitur as discussed above a further question arises
in this appeal how far the pleadings affect this maxim. If the plaintiff himself in his plaint pleads
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particulars of negligence and particulars of the accident then the question is--Can the doctrine of res
ipsa loquitur any more apply? In other words, if the plaintiff is not relying on the thing itself to speak
and if the plaintiff himself alleges proof of negligence and specific causes of the accident then how far
is he disentitled from invoking the doctrine of res ipsa loquitur. The learned trial Judge came to the
conclusion that on the pleadings the plaintiffs had not disentitled themselves to rely on this maxim. We
have already set out in detail the particulars of the plaint and the particulars of negligence and accident
given therein. We do not quite appreciate why the learned Judge came to this conclusion In the facts of
this case specially when the defendant took upon himself the burden of disproving the negligence and
going to the box first and specially when all the evidence had been given before him. Mitter, however
has insisted that as the learned Trial Judge has come to a finding the Court of appeal should give its
decision on the question as it is one of vital importance.
77. As a broad proposition if the plaintiff alleges negligence and gives particulars then according to the
well settled principles of evidence and pleading the plaintiff must bear the burden of proving what he
pleads in the plaint. After all if the plaintiff gives particulars of the negligence and the defendant's case
is that he had not been negligent then it is difficult for the defendant to disprove particulars of the
alleged negligence which is denied by the defendant. It leads to a very illogical situation and strictly
speaking it will not satisfy what Clerk and Lindsell described above as the "negative condition",
namely, there must bo no evidence as to why or how the occurrence took place. If this negative
condition is not satisfied the learned Authors further say that the doctrine of res ipsa loquitur does not
apply.
78. The learned trial Judge realised the difficulty of this problem but he apparently treats the evidence,
particulars and pleading in this case as mere guess work. The verification, however, does not suggest
that these particulars are mere matters of guesswork but they are said to be "matters of record" which
obviously meant the records of the Court of Enquiry. The other reason which the learned trial Judge
suggested was to quote his words
"Indeed the cause of the accident had to be judicially determined. ........ .so as to absolve the court from
making any enquiry as to any other probable cause. If the Court is not absolved from the responsibility
of finding out the cause of the accident other than the one pleaded in the particulars the rule of res ipsa
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loquitur must apply having regard to the nature of the accident and to the fact that the cause of accident
is unknown which is to be found out on investigation".
These observations are directly against the principles laid down by the House of Lords in 1946 AC 401
discussed above. We are afraid, the learned trial Judge here has made a confusion between the burden
of proof and the duties of the Court. The burden of proof is not upon the Court but upon the parties and
the litigants before the Court. The burden of Court is the burden of the decision namely to find out on
the evidence the correct conclusion. The Court in finding out the correct conclusion can come to any
decision or finding by accepting or rejecting the plaintiff's or the defendant's version or can come to an
independent version of its own, but which the court feels is established on the record.
79. We now come to the merits of this case to find out whether negligence has been established against
the defendant or its servants or agents. It is perhaps not necessary for us to deal with the merits having
regard to our decision on the exemption clause. Nevertheless as the learned trial Judge has discussed
the merits and there have been elaborate arguments before us on the question of merits, I think it is
necessary that we should express our opinion on this question also.
80. The learned trial Judge came to a number of findings on this point. First he finds fault with Captain
Cartner that he did not inform the control power about the engine trouble and his decision to fend.
According to him the pilot should have done that. Secondly he finds fault with the pilot because the
under carriage was not geared up. Thirdly, the learned Judge holds that the "cut" in the port engine
took place when the aircraft had just become airborne in about the middle of the runway and was
flying at a speed of less than 100 miles per hour, and he did not accept the evidence of Captain Cartner
that the speed was about 110 miles per hour when the port engine cut for the first time. The learned
trial Judge apparently came to the conclusion that Captain Cartner was prevaricating to prove namely-
(1) that the engine trouble took place when the aircraft was flying at a speed of over 100 miles, so that
according to the emergency regulation the pilot should not land ahead; and
(2) there was no runway left to land ahead. This the learned Judge holds to be an attempt to cover the
pilot's negligence for not attempting to land ahead when there was engine trouble during the take-off
and when the aircraft was flying at speed less than 100 miles per hour. Lastly the learned Judge came
to the conclusion that there was no sufficient evidence to enable him to record a finding that the cause
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of the failure of the engine in this case was due to air-lock which was the evidence of Captain Cartner.
In the circumstances the learned Judge found that the pilot Captain Cartner failed to comply with the
rules laid down in the Operation Manual and that amounted to a breach of duty to take care which a
pilot was bound to take in the interest of the safety to the aircraft and its passengers. He, therefore, held
that there was negligence in law and it was an actionable wrong. This in brief is the main conclusion of
the learned trial Judge on the question of negligence and on the merits of the case, which has been
bitterly criticised by Mr. Gouri Mitter, learned Counsel for the Appellant
81. To deal with this question of merits it will be appropriate and proper in our view to bear in mind
certain broad context of facts in which the accident took place. He time element is extremely important
in this case. The time involved is so short that long hairsplitting arguments in a theoretical atmosphere
to judge negligence appear to be not only unrealistic but also actually inaccurate. The accident took
place within one minute from the time of take-off. See the answer of Capatin Cartner to question 288.
Again the accident took place within 30 seconds from the time when the aircraft became air-borne. See
Captain Cartner's answer to question 289, The time that elapsed between the engine reaching the
height of 150 it and the pilot's taking a turn on the left and the port engine failing for the second time
the accident took place within 8 or 10 seconds. This is intended to show that there was and could be no
time for communication with the control room. The whole accident took place within a minute when
all the attention of the pilot had to be focussed on a fast developing scene of emergency. It is,
therefore, incorrect in our view in such circumstances to hold pilot's failure to communicate with the
control room as proof of negligence.
82. Now about the under carriage not being up. Here also the facts and the context of the facts must be
clearly borne in mind. The evidence is that it takes about one whole minute for the operation for the
whole under-carriage to go up. In fact the pilot gives the direction to the co-pilot and the co-pilot took
at least 5 to 7 seconds to complete the whole operation. The evidence of Captain Cartner on this point
may be found in his answers to questions 112, 113, 114, 115 and 116. He is supported also on this
point by the evidence of Herbert Vivian Dequadros in answer to question 265 as well as by pilot N. B.
Patel in his answer to questions 71 and 72. The evidence of Captain Cartner that he had ordered his co-
pilot to put up the gear cannot, therefore, be disbelieved by the test of the fact that it was found by the
Court of Enquiry that the landing gear at the time of the accident was fully in an extended position.
The reason is that the evidence of Captain Cartner who is alive has to be accepted about his order to
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his co-pilot to gear up and his evidence also that his co-pilot started making the operation for gearing
up must also be accepted. The fact that the gear did not go up is due to the fact that the going up of the
gear itself takes a minute or a minute and a half and the accident took place before that period was out.
83. The next broad consideration which must always guide the Courts in these matters is the caution
that an error of judgment in a situation like this in an emergency in the air is not to be lightly treated as
negligence in law. The main principle is clearly formulated in 28 Halsbury Articles 10, 11, and 12 at
pages 12 to 14. This principle may be stated in a few short broad propositions. The degree of care
required is proportionate to the degree of risk, as explained in Paris v. Stepney Borough Council, 1951
AC 367. Again it has been said that special caution is required from those handling firearms or from
those dealing with dangerous articles, such as gas or explosives. That principle may be extended to
those handling aircraft but then it is said and pointed out in Halsbury that if a person is placed in a
situation where risk of personal danger is so imminent as to amount to an emergency, he may be
excused liability for an injury resulting from his acts. Self-interest and the instinct to preserve and
protect one's own life indicate that conclusion. The test in such a case is not whether a better course
was in fact open, but whether what was done was what an ordinary prudent man might reasonably
have been expected to do in such an emergency, as explained in the observations of Lord Blackburn in
the case of Stoomvaart Maatschappy Nederland v. Peninsular and Oriental Steam Navigation Co.
(1880) 5 AC 876 at p. 891 and also in Esso Petroleum Co. Ltd. v. Southport Corporation 1956 AC 218.
Where the emergency is so great that no reasonable exercise of foresight, care, or skill would have
prevented the accident which caused the injury, no blame is attached to the defendant and there is no
cause of action, so clearly laid down by Lord Hailsham in Swadling v. Cooper 1931 AC 1 at p. 9.
84. This aspect of the case that an error of judgment is not actionable negligence in law is important in
this appeal. We are not at all satisfied that in the fact of this case there was any error of judgment on
the part of the pilot Captain Cartner. But even assuming that there was any error on his part, having
regard to the principles aid down above, this Court cannot hold that such error was actionable
negligence in law. It is emphasised by Shawcross and Beaumont on Air Law, Second Edition, 1951,
page 320 that an error of judgment is not necessarily negligence, and if a pilot, without negligence on
his own part, is confronted with a sudden emergency requiring an immediate decision he is only
required to act as a reasonably prudent man would act in such an emergent situation. In support of that
proposition the learned Editors cited Parkinson v. Liverpool Corporation (1950) 1 All ER 367. The
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facts of this appeal clearly show that there was an emergency of the most acute kind. Things happened
in quick succession such as port engine cutting dead, false fire alarm signal and the starboard engine
also failing and all this happening within the short span of barely a minute.
85. The point is of practical importance in this case, because the learned trial Judge came to hold that
when the first failure of port engine took place the plane had become just air borne and was flying at a
speed of 100 miles per hour at an altitude of 10 to 15 ft and that the rules prescribed in the Operation
Manual were applicable and the pilot should have then attempted to land straight ahead either with the
under carriage down or with the belly. In coming to that conclusion the learned Judge appears to have
made some miscalculation on figures. But even on that basis he found that 820 yards run-way was left
to land and that the learned Judge thought was sufficient for the pilot to land ahead. In coming to this
conclusion the learned Judge missed the most significant evidence on the point and completely failed
to consider its effect This finding that there could he any landing as suggested by the learned Judge in
the theory that he has given in his judgment, was arrived at by ignoring a, vital evidence on this point.
It was not merely the evidence of Captain Cartner but there was the evidence of a pilot of great
experience who was just immediately behind this ill-fated plane and that is the evidence of Johnson
Berry. Johnson Berry's evidence was not even mentioned in the whole of the judgment of the learned
Judge and we consider this failure to realise the importance of the evidence of Johnson Berry vitiates
the judgment of the trial judge on the point of negligence. This witness who can be said to be an eye-
witness apart from Captain Cartner himself was particularly asked how long it took Captain Cartner
for the aircraft from the height of about 150 ft. to touch the ground. His answer was that it was a matter
of a second (see Berry's answer to question No. 32). He was then asked that after Captain Cartner had
developed a swing on the left and that was corrected could he not land his aircraft on the remaining
portion of the runway which was before him. The very clear evidence of Johnson Berry is that that
would have been "equally risky to obtain a take-off at this stage because he had already crossed more
than half the runway". See Berry's answer to question No. 33. His evidence is that there was barely less
than half the runway left. In fact he said that it would be barely one-third of the runway that was left
and that it was difficult to state correctly. Now the runway was of the total length of 2140 yds and if
barely one-third was left then that would be about 700 yds That was quite inadequate for the landing.
86. The learned Judge came to this wrong finding not merely because he missed the evidence of
Johnson Berry but also because he ignored a good deal of expert evidence that was given in this case
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on the space necessary to land. There was no discussion of this Expert evidence in his judgment. That
expert evidence was not only of witnesses but also of technical documents which were exhibited in this
case which were not considered at all by the learned judge while he came to the conclusion on such a
vital point. Marked portions of the operating instrument in the Flight Manual such as Exhibits 39(A),
39(B) and 39 (C) are extremely relevant, on the point which the learned Judge completely missed.
They show that at least 1026 yds of runway were required for landing operation itself having regard to
the stalling speed which means at least 72 miles per hour and it takes about 100 yds for every 10 miles
of speed and another 100 yds to get down the ground level. In this connection the extremely important
evidence of Huilgal in his answers to questions 137, 142-150, 151 to 163, 119 to 131 and questions
132-136 are decisive to show that the learned Judge's conclusion on this point cannot be sustained. No
reason is given by him as it could not have been given why such evidence of Huilgal and Johnson
Berry and such documentary evidence as (a), (b) and (c) series of Exhibit 39 should be rejected. It was,
therefore, not enough for the learned trial Judge just only to discard the evidence of Captain Cartner on
this point and overlook all this other crucial evidence of unimpeachable weight and veracity from the
other sources on the very same point.
87. If, therefore, the alternative theory which the learned trial Judge has propounded in his judgment is
described as "equally risky" by no less an expert as Johnson Berry then it appears in such a case that
even if Berry is wrong and the learned Judge is right about aircraft manipulation, it is at best a case of
error of judgment which is not actionable negligence.
88. It is essential to emphasise again that in accident cases on special emergencies such as this the
common law rule of law that the conduct of the defendant Air Company or his employee must be
judged by the standard of what an ordinary prudent man would do when faced with sudden emergency,
should be sensibly and reasonably applied. In case of a sudden emergency a pilot is not required to
exercise that degree of skill and care which would be required by a calm review of the facts long after
the accident had occurred. The Courts are prone to this kind of unrealistic post mortem discussion and
this was discouraged and condemned in Thomas v. American Airway Inc 1935 US Av R 102 and
quoted by Charles S. Rhyne on Aviation Accident Law, 145. Another principle with which we also
agree on the same page indicated by the learned Author is that
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"If a man is confronted with a dangerous situation not of his own making, and there are several
Courses open to him, and he is required to make a quick judgment, the failure to exercise the best
possible judgment would not of itself constitute negligence."
In support of that proposition the authority of Conklin v. Canadian Colonial Airways 1934 US Av R
21 and 1935 US Av R 97 has been cited. Similarly in the Murphy v. Neely, 1935 US Av R 80 the
pilot's action in cutting off the ignition of an aeroplane when confronted with an emergency landing
was not held to be negligence.
89. Apparently the learned Judge was greatly persuaded by the decision of Goddard, J. Fosbroke
Hobbes v. Airwork, Ltd. and British American Air Services Ltd. (1937) 1 All ER 108 where it is said
that it is prima facie evidence of negligence on the part of a pilot if the aircraft crashes as it is taking
off and before it attains the height at which the journey is to be performed. But the point here is not of
prima facie evidence of negligence. The evidence is not merely of Captain Cartner himself although
the importance of his testimony is unquestioned because he is the only surviving person to give
evidence of the accident as all others on board the plane, passengers and crew alike, have died. There
is also the evidence of technical documents as well as of expert witnesses mentioned above which
showed that Captain Cartner was not negligent, even if we leave aside his very positive answer to
question 321 when he said.
"I acted to the best of my judgment and ability. I have a great deal of experience in handling Dakotas--
in a single engine performance--in the airforce training where a great deal of time was allotted to
training. I acted in the way my training called for and to the best of my ability and judgment."
90. In this connection interesting observations are to be found in the decision of Horabin v. British
Overseas Airways Corporation. "It lays down that the mere fact that an act was done contrary to a plan
or to instructions, or even to the standards of safe flying, to the knowledge of the person doing it, does
not establish wilful misconduct on his part, unless it is shown that he knew that he was doing
something contrary to the best interests of the passengers and of his employers or involving them in a
greater risk than if he had not done it. A grave error of judgment, particularly one apparent as such in
the light of after events, is not wilful misconduct if the person responsible thought he was acting in the
best interests of the passengers and of the aircraft. Lastly this decision lays down another important
principle that in determining whether or not there has been wilful misconduct, each act must be
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considered independently, and, though each act may be looked at in the light of all the evidence, it is
not permissible to put together several minor acts of carelessness, none of them amounting to
misconduct in itself, and find that together they amount to misconduct.
91. Applying these principles we cannot hold in this case even assuming everything against Captain
Cartner that his action was at all actionable negligence and we are bound to hold that it was at best
only an error of judgment.
92. But the more serious consideration is that the facts of negligence have not been established against
the defendant or its pilot Captain Cartner. It is needless to point out that the defendant Corporation was
not negligent in appointing Captain Cartner. Captain Cartner has an unblemished license. He has been
flying since 1945 when he was about 18 years of age. Me has been a full-fledged pilot from 1946. He
has a very high number of flying hours to his credit. The evidence is that he has as many as 3676
flying hours' experience. He has been flying with credit not only Dakotas but also Super-
Constellations. To employ such a person as pilot was not an act of negligence by the defendant
Corporation.
93. The finding of the trial Judge that the pilot, Captain Cartner did not observe the rules of flight is
erroneous. We shall briefly indicate why it is so. The learned Judge was misguided by the Operation
Manual of the Deccan Airways Ltd. marked as Exhibit H(1) in the suit. According to the learned trial
Judge, Captain Cartner, the pilot, did not observe the following rules of flight. "Engine failure during
take off: When the engine fails before attaining the speed of 110 miles per hour, the following
procedure should be carried out:
"Close the throttle on the other engine and land straight ahead with under carriage down if you can
slop before the end of the runway is reached, but before you come to the end of the runway if the
aircraft is likely to continue into obstacle beyond the runway, retract the undercarriage and allow the
aircraft to go on the belly as this will be safer."
Leaving aside Mr. Mitter's argument that the evidence that the speed was above 110 miles and this
provision in the Operation Manual did not apply, there are other reasons why the application of the
above rule has been inappropriate in the facts of this case. According to Captain Cartner he did follow
the rules. His whole answer on this point is that this was not a case of engine failure as he understood
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it. It was not a case of any kind of defect in the engine itself. According to him the port engine when at
first stopped revived almost immediately. A defective engine could not have revived. His evidence,
therefore, is that there was something wrong with the feeding of the engine through the fuel pipe.
Therefore, his evidence is that it must have been a case of air-lock. A point which we shall presently
discuss. Captain Cartner's evidence on this point appears also to be correct because not only the
learned trial Judge himself found as a fact that both the engines were in good condition and operative
but that is also a fact found by the Court of Enquiry. There is also supporting evidence on the point. It
is said that both the engines were in good working condition. The engines were tested after the
accident and were found to be sound and good. If that is so then this was not a case of engine failure in
the sense of defect in the engine itself. That being so, the above rule does not apply. It was not a case
of defect in the engine. There is, therefore, no procedure laid down for the type or emergency which
took place in this case. There was, therefore, no breach of any rule in the Operation Manual or of any
statutory rules or regulations in this case. In fact no procedure is laid down as far as we can discover
from records for such a kind of emergency.
94. Secondly, the more compelling reason why this cannot be a ground for finding negligence against
Captain Cartner is that even if this Rule applied, as quoted above, its language shows that it leaves
enough freedom and discretion, as it must, to the pilot whether the rules should be strictly adhered to
or departed from. From an examination of the language of the rule quoted above it will be seen that the
significant expressions are "If you can stop before the end of the runway is reached," "If the aircraft is
likely to continue into obstacle. . . ." Now it is the pilot who is the judge to find out if he can stop
before the end of the runway is reached or if the aircraft is likely to continue into obstacle. Now
Captain Cartner's evidence is positive on the point that he could not stop before the end of the runway.
It is not only his evidence but he is supported by almost all the documentary and oral evidence on the
point without any exception. It is impossible for this Court to disregard the importance of unchallenged
evidence on this point.
95. Indeed the learned Judge himself at one stage appears to find that and yet somehow misses its
importance later on. Indeed the learned Trial Judge says in his judgment towards the end as follows:
''Captain Cartner almost landed the aircraft with safety. But for the obstruction of the 'bund' he would
have landed the aircraft safely. All subsequent acts of the pilot were clone with efficiency and courage
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and must be commanded. The accident, however, would not have happened if the pilot landed the
aircraft ahead when there was the first failure of the engine during take off, when the aircraft was just
airborne."
96. Now that finding shows that Captain Cartner almost landed with safety. It does shows that all his
subsequent acts were done with efficiency and courage and were to be commanded. It also shows that
it was not the fault in landing which was the cause of the aeroplane perishing but the obstruction was
caused by the 'bund" outside the runway. Therefore, even on that finding it cannot be said that what the
pilot did was actionable negligence.
97. As we have indicated above the pilot could not land the aircraft ahead when there was the first
failure of the engine during take off. There are two very significant reasons why he could not do so. In
the first place this first failure of the engine passed off immediately it had occurred. It is not humanly
possible in that fateful moment to come to a definite conclusion that he must land ahead immediately.
It is neither reasonable nor practicable to hold it against the pilot. But the more cogent reason is that
there was not enough space for landing or belly landing and the minimum space required on the
evidence appears to be at least 1055-56 yds which were not there at that time.
98. This brings us to the question of air-lock. Captain Cartner's evidence is that this cutting of the
engine was due to air lock. In answer to questions 203 and 204 he expresses his opinion that it was an
air-lock and not a mechanical defect of the engine itself and his answers to question 1094 where he
spoke of the faulty condition of both the engines must be read in that light. Air-lock is caused by a
particle of trapped air which may be carried along and sent to the engine--to the Carburetor of the
engine. When one of these particles of airlock reaches the carburettor the engine is starved of fuel and
loses power. This in simple language is an airlock as described by Captain Cartner in answer to
question 213, and questions 234 to 236. Captain Cartner was very definite on this point and in cross-
examination in answer to question 692 he said that the cause of the failure was airlock in this case.
Captain Cartner also in answer to question 308 said "the left engine had no power at all at that time
because it failed for second time completely failed and did not revise again." Proceeding further in
answer to question 309 he said that it was not left to any action for consideration. Belly landing had
just to be done and there was no choice left and his choice was a limited one, and it was in fact belly
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landing. Finally in answer to question 329 Captain Cartner definitely gave his opinion about the cause
of this accident in these terms:
"I felt that because of the left engine failure and subsequent accident that followed--it was due to
airlocks or to airlock in instalments along the pipe line--airlock of the left engine."
Again in answer to question 351 when Captain Cartner was asked whether it was right to say that the
port engine lost power after getting airborne because of defects of supervision or check up, he said;
"I did not feel that all. Right from that day I have always felt that this was an airlock and that is what I
said to the Court of Enquiry at the hospital. I felt it was an airlock which had caused the two failures of
the left engine."
Therefore, Captain Cartner's evidence is positive and unchallenged that this accident in the facts and
circumstances of the case was due to airlock. There is nothing in evidence to contradict this statement.
The learned trial Judge's theory that airlock happens on occasions few and far between or once in a
blue moon even assuming to be right on the evidence cannot contradict in the facts of this appeal, the
positive evidence of Captain Cartner on this point.
99. It has been suggested that airlock was not likely in this case because of three reasons, namely-
(1) airlocks are not likely to happen in cold weather such as in December and they happen more or less
in hot weather during day time and not at night;
(2) airlocks are not likely to happen when the tank is full at the time of take off and they happen when
the aircraft has made a long journey" and the tank has become somewhat empty :
(3) airlocks usually happen only in a running plane and not when the plane actually is not in high flight
and was barely taking off.
100. The other probable cause that airlocks cannot happen in quick succession seemed also to weigh
with the learned Judge. Giving due weight to these considerations this Court is of the opinion that
these inferences and these probabilities cannot override in the facts of this appeal, the positive
evidence of Captain Cartner that in this particular case eliminating the other possibilities of vapour
lock etc. airlock was the cause of the accident. Besides, there is evidence to show that airlocks also can
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happen in quick succession and there can be one, two or three airlocks. H. V. Dequadros another
expert gave definite evidence that even though airlocks are rare they may occur in succession. In
answer to question 194 he said "now this airlock may get broken up into five or six more and they may
come out at one time or one may follow the other." He repeats the same in answer to question 238
while he was asked how many airlocks may come by saying--"may be one, may be two. From my
experience I have had one." He repeats the same thing in answer to question 241. Again in answer to
question 246 this witness says "He might have two, another might have three." talking about airlocks.
Evidence of another Expert Captain Huilgal is also relevant when in answers to questions 177 to 179
he also expressed the view that it could be airlock. Specially in answer to question 179 he said this
"To the best of my knowledge an airlock is a very peculiar thing. I have had personal experience of
airlock recurring four or five times before I could clear it, as it happened with me at 8000 ft. I did not
have any pressure of time on me to feel any emergency as such."
101. Mr. Mitter has strongly criticised the learned trial Judge's finding by saying that he had dismissed
all the evidence of not only Captain Cartner but also of the other experts merely because of the
possibility that airlocks happen only rarely and that it is a remote possibility and therefore, he cannot
think about it in the present case. On the evidence we are satisfied that there is enough evidence to
record a finding that the cause of the failure in this case was airlock however, normally unpredictable
that may be.
102. This case of airlock seems to be also amply proved by the deposition of K. Gangaraju before the
court of enquiry and which has been marked as Exhibit G in the present proceedings. Now Gangaraju's
evidence there establishes a number of important points. Not only was he the Chief Inspector of Indian
Airlines Corporation Line No. 5, but he also said this that he himself inspected the wreckage of this
aircraft. The points that he makes are; (1) there was no defect in the engines and he had examined the
engines after the crash; (2) from the wreckage it is not possible to say how the port engine failed; (3)
The port carburettor filter was removed by the Director of Aeronautical Inspection and it was
discovered that there was petrol still in the Carburettor (4) the record shows that no snags were ever
reported about the port engine and (5) from the wreckage it could not be said that the engine or any of
its parts were on fire since they are clean of any smoke. That being so the only cause for such an
accident would be airlock. The evidence of Bayas in answer to questions 60, 61 and 64 to 65
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establishes that no device has yet been invented to totally exclude airlock. There is also other evidence
in support of this. Indeed there was no cross-examination to show that danger of airlock could be
completely eliminated by any device. As the fuel feeding system was not defective and as there is no
other cause either for negative elimination of other causes it is established beyond reasonable doubt
that this particular accident on the facts was due to airlock.
103. We are, therefore, unable to hold that Captain Cartner was in any way negligent and we set aside
the finding and judgment of learned Judge on that point.
104. Mr. Dutt Roy, learned Counsel for the respondent urged that even apart from Captain Cartner the
defendant Corporation was negligent in so far as it allowed the Dakota to fly and this Dakota aircraft
was not air worthy and it had mechanical and other defects. His first difficulty in this respect is that the
findings of the learned trial Judge are against him. There is no cross-objection by the respondent in this
matter. Nevertheless Mr. Dutt Roy argued that the plane was not airworthy and was defective, and
therefore, the defendant Corporation was negligent in providing such an aircraft for carriage and so it
was liable for damages for loss of life. His next submission on the point is that there was a previous
accident in this very same plane. He put that question to K. Gangaraju, Deputy Chief Engineer in
question No. 775. But his answer was "to my knowledge no accident took place". In fact all that this
evidence shows is that there was a forced landing previously. Some suggestions thereafter came to be
made to this witness that it made a forced landing in Jharsuguda in answer to questions 784 and 785 on
the 30th September, 1953. But that was not an accident. Criticisms were made that the fuel pump drive
shaft was broken, to which the answer given by Gangaraju as follows: "There are many cases of that
nature" and in answers to questions 786 and 787 he says that fuel pump was replaced by a completely
overhauled pump from the stores.
105. Mr. Dutt Roy's next submission was that Dakotas are very old types of plane and are not as such
airworthy. We have given our anxious consideration to this branch of Mr. Dutt Roy's argument but we
are unable to accept his submission on this point. The following facts are all against Mr. Dutt Roy's
submission.
1. The aircraft held a valid certificate of airworthiness. It had been maintained in accordance with the
approved maintenance schedules and had a valid certificate of daily inspection. That was also the
finding of the court of enquiry.
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2. The engines were duly run up and tested by the pilot prior to take off and the take off run was
normal.
3. In fact the court of enquiry finds that the crew held valid licenses and were qualified to undertake
the flight. The Captain had sufficient flying experience on the route.
4. The all-up weight did not exceed the authorised take-off weight and there is no suggestion that the
position of the centre of gravity was not within the safe limits. The aircraft carried sufficient fuel and
oil.
5. The Captain was in possession of all relevant meteorological communications and air traffic control
information and other data required for the flight.
6. The weather conditions were good.
106. In fact this particular plane was flying on the route and flew from Begumpet, Hyderabad to
Bombay and from Bombay to Nagpur without any trouble. Therefore, it was airworthy by all practical
and reasonable tests and by all this mass of evidence, independently of the statutory presumption that
what is stated in the certificate of airworthiness is correct. We are satisfied that this aircraft was
airworthy and did not suffer from any lack of inspection or mechanical defect so as to bring home a
charge of negligence on that aspect against the defendant Corporation.
107. This will be the proper stage where it is necessary to make a reference to the fact of the report of
the Court of Enquiry and its contents. Apparently the learned trial Judge was greatly influenced by this
report, not merely in ideas but it appears also by the actual language or expression used in the report.
As already stated the accident took place on the 12th December 1953 at 3.25 a.m. when it was flying
from Nagpur to Madras. The Government appointed Court of Enquiry under Rule 75 of the Indian
Aircraft Rules, 1937, on or about the 16th December, 1953. The report of this Court of Enquiry was
made on or about 30th December, 1953. The finding of the report briefly is that soon after the aircraft
got airborne, at approximately 10 or 15 ft. from the ground, there was a failure of the port engine, but it
picked up again within a few seconds and the aircraft was able to climb rapidly to a height of about
150 ft. At that height the Captain commenced turning to the left. During the process, the aircraft lost
considerable height, and the starboard engine fire warning light came on. Being too near the ground
the pilot decided to land, and in doing so, the aircraft hit the ground in a nose-down attitude; that on
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the impact with the ground, the aircraft was damaged, but travelled further and hit a bund swung
violently to starboard and caught fire; that neither of the propellers was feathered and both were in fine
pitch; and that it was also found that both the engines had partial power at the time of the impact and
both the propellers were rotating at the same speed. Under Rule 75(6) of the Indian Aircraft Rules
"The Court shall make a report to the Central Government stating its findings as to the causes of the
accident and the circumstances thereof and adding any observations and recommendations which the
Court thinks fit to make with a view to the preservation of life and avoidance of similar accidents in
future including, a recommendation for the cancellation, suspension or endorsement of any licence or
certificate issued under these rules."
108. Now this report which is an Exhibit in this case marked Exhibit D although under objection by
Mr. Mitter and which objection we shall presently deal with, contains some significant features. It has
not recommended the cancellation, suspension or endorsement of the licence of Captain Cartner.
Under Rule 75(6) of the Indian Aircraft Rules, 1937, the duty of the Court of Inquiry was to make a
report stating its finding "on the causes of the accident." It appears that this report did not find "the
causes of accident" but found in Paragraph 16 what is described as "Probable cause of the accident". In
these matters it is essential to emphasise that in a Formal investigation under Rule 75 of the Indian
Aircraft Rules by a Court of Inquiry assisted by experts there should be a strict finding on the causes of
the accident and not "probable" causes Now under the heading "Probable cause of the accident" all that
this report says is:
"Loss of critical height during a steep left hand turn, with the under-carriage down, executed by the
pilot at an unsafe altitude, in an attempt to return back to the aerodrome, after experiencing a
temporary loss of power of the port engine soon after getting air borne. A false starboard engine fire
warning precipitated the attempt at forced landing."
In this probable cause of accident this Court of Enquiry did not clearly suggest that negligence of
Captain Cartner was the cause of the accident Many references were made from which an inference
could be drawn about Captain Cartner's negligence but it was not put down by the Court that Captain
Cartner's negligence was the cause of the accident. It is said in the report that Captain Cartner did not
follow the procedure laid down in the Operation Manual and that weighed with the learned trial judge
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109. We have given our reasons why we do not consider that Captain Cartner failed to follow the
Operation Manual. In the first place we are of opinion that the Rules in the Operation Manual had no
application to meet the particular emergency which arose in this case. In other words, it was not a case
of engine failure or defect in the engine in which event the Operation Manual would come into play.
Secondly, we have already stated that even the Operation Manual has given discretion to the pilot
himself and we hold that Captain Cartner used his best judgment in the circumstances. We are,
therefore, unable to accept the finding of the Court of Enquiry that Captain Cartner did not follow the
Operation Manual. We confess that we are puzzled by the actual sentence used on this point in the
report of Enquiry, which is very significant. We cannot but help reading the whole sentence in order to
understand what is meant by the sentence. The report says on this point:
"It is evident that the Captain did not follow the procedure recommended in the Operation Manual of
Indian Airlines Corporation. Line 5, when the engine failure occurred, possibly because the engine had
revived again."
I am not sure whether it is a finding that he did not follow the procedure Manual and that he should
have done it or whether it is an explanation that he need not have followed it because the engine had
revived. It appears to be a double edged statement. We do not, however, accept at all in the evidence
before us in this Court that there was sufficient length of runway left in front of the Captain to land as
it appears to have been found by the court of enquiry.
110. It is not necessary for us to say anything more on this report. This report does not bind us. We
have to come to our independent finding on the evidence before us. The evidence before us is more
complete and tested by cross-examination
111. It will be proper to dispose of a point of objection which Mr Mitter, learned Counsel for the
appellant took. His submission is that the report is not evidence The learned trial Judge treated it as
evidence under Section 35 of the Evidence Act and marked it as Exhibit in the suit. Briefly put, Mr.
Mitter's submission is that this is a formal investigation under Section 7 of the Aircraft Act, 1934 and
Rule 75 of the Indian Aircraft Rules, 1937. But before this Court of enquiry according to Mr. Mitter
there is (1) no one, (2) no parties and (3) no cross-examination. He submits that it is a kind of
investigation as it is described under the rules. That only means that the report cannot bind the court.
But these facts do not make the report inadmissible. On that point Mr. Mitter submitted that under
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Sub-rules (2), (4) and (6) of Rule 75 of the Indian Aircraft Rules it is the Central Government alone
which can make the report published and there is no evidence whether the report was published by the
Central Government. He also said that nobody came to prove that the report was published; only a
printed copy was produced which according to Mr. Mitter's submission was not a proof under Sections
61, 63, 64, 67, 75 and 76 of the Evidence Act. He further submits that the learned Judge was wrong in
treating it under Section 35 of the Evidence Act, because this report is not "an entry in any public or
other official book, register or record" within the meaning of that section. He says it is a report by
itself. It is an ad hoc report. It is not a report as contemplated under Section 35 of the Evidence Act.
Therefore, Mr. Mitter submits that Section 35 of the Evidence Act is not at all applicable,
112. In support of Mr. Mitter's argument he has relied on a number of authorities to show that Section
35 does not apply and they are: Raja Leelanand Singh v. Mt. Lakhiputee Thakurain, 22 Suth WR 231.
at p. 233; Mohan Bikram Shah v. Deonarain Mahtoat p. 457: Jogesh Chandra v. Mokbul Ali, AIR at
p. 475; Kali Prosanna v. Nagondra Nath, 44 Cal WN 873 at p. 884; Ghanaya v. Mehtab, AIR 1934 Lah
890 at pp. 891-892 and finally on Ramalakshmi Ammal v. Sivanantha Perumal Sethurayar, 14 Moo
Ind App 570 at pp. 587-88 (PC). But this last case of the Privy Council is a judgment delivered before
the Indian Evidence Act came into force.
113. As against this Mr. Dutt Roy, learned counsel for the respondents relied on the Privy Council
decision in Raja v. Perianayagum, 1 Ind App 209 at p. 238 (PC) and Mt. Subhani v. Nawab dealing
with Wilson's Manual of Customary Law in the form of questions and answers and is not really any
kind of report (sic). Mr. Dutta Roy also relied on the case of Baldeo Das v. Gobind Das
114. This point on the facts of this case may be disposed of briefly. We accept Mr. Mitter's submission
that this report of the Court of Enquiry, cannot be regarded as an entry in a public or official book,
register or record within the meaning of Section 35 of the Evidence Act. It cannot, however, be
disputed that this enquiry is a formal and statutory enquiry under Section 7 of the Aircraft Act 1934
read with Rule 75 of the Aircraft Rules. It was not a private enquiry. The enquiry related to the causes
of accident. We consider this report to be a relevant fact under Section 5 of the Evidence Act because
it bears on the question of the existence or non-existence of every fact in issue and of such other facts
which are regarded as relevant under the Evidence Act. This report is also a fact which speaks of the
occasion, cause or effect or facts in issue under Section 7 of the Evidence Act. The report is also
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admissible as a fact under Section 9 of the Evidence Act because it is a fact necessary to explain or
introduce a fact in issue or relevant fact or which support or vebut an inference suggested by a fact in
issue or relevant fact or fix the time and place at which any fact in issue or relevant fact happened.
Now for these reasons we hold that the report of the Court of Enquiry in this very accident is a relevant
fact and as such is admissible.
115. The next question is, how it should be proved. Before deciding this point, it will be appropriate to
record here that this report was produced by the appellant's witness, Basanta Kumar Bajpayee from his
file under cross-examination in answer to questions 162-165. It is admitted in those answers that the
report is a printed report and published by the Government of India under Rule 75 of the Indian
Aircraft Rules. This witness Mr. Bajpayee is the Assistant Aerodrome Officer under the Civil Aviation
Department, Director General of Civil Aviation, Union of India. The report bears all the authentic
marks of Official recognition such as the title "Government of India, Ministry of Communications,"
the insignia of three lions and the Asoke Chakra with the official caption and a title "Report of the
Court of Enquiry on the accident to Indian Airlines Dakota VT-CHF on the 12th December 1953 near
Nagpur". Its very first page contains the communication by the Court Mr. N. S. Lokur to the Secretary
to the Government of India, Ministry of Communications, New Delhi. On those facts we have no
hesitation in holding that it has been properly and duly proved under Section 81 of the Evidence Act
which directs that the court shall presume the genuineness of every document purporting to be a
document directed by any law to be kept by any person, if such document is kept substantially in the
form required by law and is produced from proper custody. We hold that this report answers that
description. It is certainly a document. Secondly it is a document directed in law to be kept by any
person because under Rule 75(6) of the Aircraft Rules the court is obliged to make report to the
Central Government. Naturally the Central Government has to keep this record and to receive it.
Thirdly, it is also a document substantially in the form required by law because it contains the findings,
circumstances, observations and recommendations as mentioned in Rule 75(6) of the Aircraft Rules.
Lastly, it also answers the test of Section 81 of the Evidence Act because it was produced from proper
custody in the sense that it was produced by a Government official who was directly connected with
the Aerodrome under the Director General of Civil Aviation. We, therefore, hold this report to be both
relevant and admissible as well as duly proved.
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116. We, however, accept Mr. Mitter's submission that although the report is admissible and has been
duly proved as a fact of this case, yet the evidence tendered before the Court of Enquiry is not
necessarily evidence here unless these questions and answers put to the witnesses were put to these
witnesses who deposed at the trial here and only those portions of that evidence before the Court of
enquiry which was tendered before the witness concerned will alone be evidence here and not
otherwise. This report, however, does not become evidence under Sections 2 and 3 of the Commercial
Evidence Act, 1939.
117. At this stage a brief reference to the statutory provisions so far as the Air Law in India is
concerned will not be out of place. So far as the carriers generally are concerned, one of the earliest
statutes in India is the Carriers Act 1865. But it is wrong to think that this statute at all applies to
Carriage by air or even to passengers by Air. This Act is only limited to loss or damage to property and
the common carrier mentioned there in is only the common carrier by land or inland navigation.
118. Although aeroplanes or Airships were nonexistent or barely existent in India in 1911, nevertheless
India had an Indian Airships Act of 1911 being Act 17 of 1911. This was an Act to control the
manufacture, possession, use, sale, import and export of airships. Under Sections 3, 5, 6 and 13 of this
Act there was provision for making rules. It was under this Act of 1911 that the Indian Aircraft Rules
of 1920 were made, The Indian Aircraft Rules of 1920 were particularly made under Sections 3 and 6
of the Indian Airships Act of 1911 described as the Indian Aircraft Act of 1911 (Act 17 of 1911). The
next landmark was reached after the international Warsaw Convention and a special statute was passed
in India called the Carriage by Air Act, 1934. As already indicated this was only an Act to give effect
to an international Convention for the unification of certain rules relating to international carriage by
air. It did not regulate internal carriage by air in India. In that year again there was another Act called
the Indian Aircraft Act, 1934 (Act XXII of 1934). This was an Act to make better provision for the
control of the manufacture, possession, use, operation, sale, import and export of aircraft. Section 5 of
that Act gave rule making power to the Central Government. Section 20 of this Indian Aircraft Act,
1934 repealed the Indian Aircraft Act of 1911, and the entry relating thereto in the First Schedule to
the Repealing and Amending Act, 3914 and the Indian Aircraft Amending Act of 1915. In this
connection reference may be made to the Repealing Act 1938 (Act 1 of 1938) and in particular Section
2 In the Schedule thereof. The next statutory landmark is the Air Corporations Act, 1953 (Act 27 of
1953). The purpose of this Act was to provide for the establishment of Air Corporations, to facilitate
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the acquisition by the Air Corporations of undertakings belonging to certain existing air companies and
generally to make further and better provisions for the operation of air transport services. The existing
other companies which were taken over by the Air Corporations were Air India Ltd., the Air Services
of India Ltd., the Airways (India) Ltd. the Bharat Airways Ltd., the Deccan Airways Ltd. the
Himalayan Aviation Ltd., the Indian National Airways Ltd., the Kalinga Airlines and the Air India
International Ltd. It will be seen from this that the Deccan Airways Ltd. was one of the existing
companies which was taken over by the Corporations and this particular plane involved in the accident
belonged to this Deccan Airways Ltd. Under the Air Corporations Act of 1953 two Air Corporations
were established.
(1) The Indian Airlines Corporation which is the defendant in this suit and other is the Air India
International. Section 7 of this Act describes the functions of these Corporations. Section 17 of this Act
provides for the general effect of vesting of undertakings in the Corporation. Section 20 provides for
the arrangement regarding officers and employees of existing air companies. Sections 44 and 45 of the
Act gave the officer power to make rules and regulations. This completes a short picture of the
statutory position of the Air Law in India.
119. The reason for making this brief reference to the statutory position of Air law in India is to
indicate that no one of these Acts prevents the carrier from contracting out of the liability for
negligence for an internal carriage by air in India. In that respect the position is different here in India
than in England or in America where there are special and particular statutes bearing on the subject.
The unqualified right of exemption recognised by the Common Law, was cut down by the Warsaw
Convention and applies to international carriage under the Indian Carriage by Air Act of 1934. What is
said in the International treaties or arrangements such as Warsaw Convention cannot under the cover
of "justice, equity and good conscience" be judicially incorporated into the law of India--statutory or
otherwise or else other statutes and foreign treaties will become law In India under that cover. This
will be not only a most hazardous step but we consider it to be illegal to adopt and apply foreign
treaties and contents of foreign statutes as rules of justice, equity and good conscience in India. In this
view of the matter it will not be necessary for us to discuss the arguments in the cases cited before us
on the question whether even if there was a statute preventing an exemption clause could it be waived
by a passenger by signing a ticket with the above condition. The argument took the turn that such a
clause can be for the benefit of the particular class of persons as passengers by air and therefore they
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could waive the benefit if they liked. We do not think it is necessary for us at all to discuss this in this
appeal because the question in our view does not arise. It does nut arise because there was no law so
far as internal carriage by air is concerned which prevents or limits the common law right to contract
out of liability for negligence.
120. Finally it now remains for us to discuss the arguments advanced on the question of damage in this
case. The learned trial Judge has awarded damages on two heads, He has given a lump sum of Rs.
1,50,000/- equally divided between the three plaintiffs--widow, son and the daughter. He has also
given a decree for the sum of Rupees 5000/- which was said to be the value in cash and kind with the
passenger who died.
121. The damage for Rs. 1,50,000/- is calculated under the Fatal Accidents Act. The material words
used in the Fatal Accidents Act have already been quoted and in this connection of damage they are
first in the preamble which says that it is an Act to provide "compensation to families for loss
occasioned by the death of a person caused by actionable wrong;" then the material words are "the
damage should be such as the Court may think proportionate to the loss resulting from such death to
the parties respectively." It is said in Section 1A of the Act that the share of the damage to be divided
among the parties should be in such proportion as the Court by its judgment and decree directs. It is
also said by Section 2 of that Act that claim for the loss to the estate may also be added and the
expression used there is "pecuniary loss to the estate of the deceased."
122. The learned trial Judge practically disbelieved the whole of the evidence regarding damage. He
says that the deceased was a young man of 28 and was the only son of his father who was
comparatively a prosperous man. The Chandbali Steamer Service Ltd. in which the deceased worked
was a private limited company of which the father, mother and the deceased were members and were
directors of the company. The learned trial Judge rightly disbelieved the books of account which were
tendered to prove that the deceased was entitled to a remuneration of Rs. 1000/- per month plus 21/2
per cent commission on the total freight. It was said that this remuneration was based on a resolution
of the Board of Directors, but no salary or commission was in fact proved to have been paid to the
deceased. The entries in the books of account were unreliable because all of them were made at the
end of the financial year, 31st March and were made according to the directions of the Directors. No
balance-sheet of this company was tendered in evidence. It is proved that the company became
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insolvent in 1955 and went into liquidation within barely a year and half of the accident. The learned
trial Judge records that there is no evidence about the cause of the bankruptcy of the company. From
this it would appear that there was admittedly no earning by the deceased from this company either as
a Director or otherwise.
123. It was suggested by the plaintiff widow that the deceased had a kind of transport business. Here
again there is hardly any evidence. Not a scrap of paper was produced to prove the existence of this
business or to show what was the income of the deceased from such business. In fact there was no
reliable evidence at all to show or prove that the deceased had any bank account of his own or what
was the state of that account at any relevant point of time or whether the deceased at all paid any
Income Tax.
124. In that state of evidence the learned trial Judge rightly refused to accept the evidence of the
plaintiff widow that the deceased used to pay Rs. 5000/- a month for family expenses. The trial Judge
finds that the father was well off and had a substantial income of his own and it was impossible for
him to believe that the young son and not the wealthy father was financing the family. The learned trial
Judge rightly points out that no reliable evidence is on the record to prove whether the deceased had
any regular income out of which such a large sum of money could be paid by the deceased for meeting
the family expenses. The learned trial Judge also records the fact that the deceased along with his
father was doing the shipping business, but the learned Judge records that the ability of the deceased to
conduct any business on sound basis has not been proved and there is no evidence on this point on
which reliance could be placed. In fact there is no evidence on record to show what was the education
or technical qualification of the deceased on the basis of which any computation or even a guess of his
income could be made. No doubt it has been said that computation and damage under the Fatal
Accidents Act cannot be accurate as it is a computation for expectation of life and probable chances of
any improved condition of the family and only in that sense it is a guess work. But even then it is not a
wild guess. It is a guess with reference to some working data and some evidence as to the nature and
prospect of actual income of the deceased but nothing is available in evidence in this case.
125. It is also not in evidence whether even after the death of the deceased in this unfortunate air
accident whether the deceased had any insurance on his life, and whether such insurance covers death
and if so what, if any, money has been paid by the Insurance Company to the family of the deceased or
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his heirs or nominees. No evidence has been led by the plaintiffs on this point although it bears on the
question of damage.
126. The cases relied upon are clear on this question. As early as in 1925 in the case of Nani Bala Sen
v. Auckland Jute Co. Ltd., AIR 1925 Cal 893 Page, J., after noticing Section 1 of the Fatal Accidents
Act observed at p. 897 of the report as follows:
"Such an investigation must always be more or less guess work, for it is impossible accurately to
estimate the loss which has been sustained by the death of a husband or of a father. It is certain
however, that the Court ought not to give sympathetic damages, or damages by way of consolation. In
my opinion, in estimating the amount of the decree, to be passed in a case of this nature, the Court
must view the matter broadly. No doubt, it must take into account the chances of life, the chances of
any improved conditions in which the family of the deceased might have passed their days, it must
take into account the standard of living of the family which was dependent upon the deceased, and,
having regard to all the material circumstances, it must do the best it can to estimates what is a fair and
reasonable sum to be awarded."
127. From the above observation it will be clear that damages under the Fatal Accidents Act cannot be
either "sympathetic damages" or "consolation damages". Secondly, such damages must be a kind of an
estimate, however, the guess work may be, on the pecuniary loss that is caused by the death; thirdly all
the material circumstances of family income and dependents should be carefully borne in mind. By
those tests the learned trial Judge observed that there was hardly any proof of damage in this case.
128. Subsequently a Division Bench of this Court in Sm. Jeet Kumari Poddar v. Chittagong
Engineering and Electric Supply Co. Ltd., reported in 51 Cal WN 419: (AIR 1917 Cal 195)
emphasised the point that damages for death under the fatal accident concerned came under two heads,
namely, (1) loss caused to the beneficiaries and (2) loss suffered by the estate of the deceased. This
decision draws the attention to the fact that in India unlike in England, they were both recoverable
under Sections 1 and 2 of the Fatal Accidents Act. It also says that this distinction has unfortunately
been overlooked in some cases in India. The importance of this decision on the question of damage lies
in the principle laid down there that the main criterion in assessing damages under the first head is the
loss of reasonably expected pecuniary benefit to the beneficiaries and the probable earnings and future
135

prospects of the deceased. This Division Bench decision also excludes sympathetic damages or
solatium for the loss of companionship etc. as outside the scope of Fatal Accidents Act.
129. The House of Lords in Taff Vale Rail Co. v. Jenkins, reported in 1913 AC 1 clarifies this position
by saying that it is not a condition precedent to the maintenance of an action under the Fatal Accidents
Act, that the deceased should have been actually earning money or money's worth or contributing to
the support of the plaintiff at or before the date of the death, provided that the plaintiff had a
reasonable expectation of pecuniary benefit from the continuance of the life. How far the principle of
this decision applied is not the question here because there Lord Haldane was discussing the English
Fatal Accidents Act The actual point of the decision, however, in our view, can be correctly applied in
this country and that is clearly stated in the speech of Lord Shaw at p. 9 of that report where his
Lordship observed:
"My Lords, another dictum has been cited--one by the late Lord Morris. His Lordship observed: "The
loss must be a pecuniary loss, actual or reasonably to be expected, and not as a solatium";--had the
sentence stopped there we should all, I presume, have agreed with it; but he proceeded--"and there
should be distinct evidence of pecuniary advantage in existence prior to or at the time of the death".
My Lords, with the utmost respect, I do not think that that is the law."
We are of the opinion that even under our Fatal Accidents Act the loss must be a pecuniary loss,
though it need not be the actual loss and it may be the loss expected by reason of the death. But that
does not certainly mean that the deceased must be found to be actually financing the beneficiaries.
130. We shall cite one more English decision and that is Flint v. Lovell, (1935) 1 K. B. 354 on the
element of expectation of life. A point in that case which weighed with the English Judges was that the
man who met with the terrible accident was an old man of 70 years at the time when the accident took
place.
131. On the next head of damages amounting to Rs. 5000/- the position on evidence is plainly vague,
uncertain and undependable. We have already noticed the pleading on the point and the pleading in the
plaint is that this amount was the cash and kind carried by the deceased Sunil Baran while travelling by
air. According to the evidence of the plaintiff widow in answer to question 52 the deceased passenger
had Rs. 2300/- in cash with him when he left Calcutta in addition to the suits, a silver cigarette case,
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gold ring and a Rolex wrist watch etc. On this point there are two difficulties on the way of the
respondents. There is no proof that the deceased had Rs. 2300/- in cash with him when he got into the
plane at Nagpur for travelling to Madras. There is no proof whether this cash, whether in notes or
rupees were burnt to ashes or not or whether they were stolen or not either before or after the accident.
There is no entry in any books of account to show that the deceased took as much as Rs. 2300/- in cash
in his pocket when he left Calcutta. In any event there is no proof that he had that money when he took
the plane at Nagpur en route to Madras. So both on the point of actual proof on records as well as on
the point of claim the evidence is unsatisfactory.
132. A somewhat similar question arose in Secy. of State v. Gokal Chand, ILR 6 Lah 451: (AIR 1925
Lah 636) where the deceased's death was caused by a collision between the train in which he was
travelling and another train of the same railway administration. In an action under the Fatal Accidents
Act for the pecuniary loss which resulted to members of the deceased's family from his death a claim
was included for Rs. 1,300/- being the value of lost currency notes which the deceased was carrying
with him on the night in question. A Division Bench of the Lahore High Court with Sir Shadi Lal,
Chief Justice presiding, held that the defendant railway would not be liable for loss resulting from the
wrongful act of a third party such as could not naturally be contemplated as likely to spring from the
defendant's conduct. In fact Sit Shadi Lal, C. J., observed at p. 455 (of ILR Lah): (at p. 637 of AIR) of
that report as follows:
"It must be remembered that the evidence in this case does not show who took away the notes. If some
person stole them, while the injured person was lying unconscious or dead, surely the railway cannot
be held liable for the act of the thief. And it has been repeatedly held that the damage is too remote if it
results from the wrongful act of a third party such as could not naturally be contemplated as likely to
spring from the defendant's conduct."
133. The Supreme Court reviewed this question of claim of damages of this nature under the Fatal
Accidents Act in Gobald Motor Service Ltd. v. Veluswami: [1962]1SCR929 where Subba Rao J. at p.
940 (of SCR): (at p. 6 of A.I.R.) lays down the principle as follows:-
"'Therefore the actual extent of the pecuniary loss to the respondents may depend upon data which
cannot be ascertained accurately, but must necessarily be an estimate, or even partly a conjecture.
Shortly stated, the general principle is that the pecuniary loss can be ascertained only by balancing on
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the one hand the loss to the claimants of the future pecuniary benefit and on the other any pecuniary
advantage which from whatever source comes to them by reason of the death, that is, the balance of
loss and gain to a dependant by the death must be ascertained. The burden is certainly on the plaintiffs
to establish the extent of their loss." There in that case before the Supreme Court the learned Judge
indicated how there was actual evidence: the means and status of the deceased, his earning capacity,
the actual yearly expenditure and other relevant facts which are noticed at pp. 940-41 (of SCR): (at p. 6
of AIR). Judged by that test laid down by the Supreme Court, the evidence in the present appeal has
hardly any value or weight.
134. The decision of the Supreme Court is also an authority on the proposition how a claim under
Sections 1 and 2 of the Fatal Accidents Act is to be regarded. The rights of action under Sections 1 and
2 of the Act are quite distinct and independent; and it has been said that if a person taking benefit
under both the sections is the same, he cannot be permitted to recover twice over for the same loss. In
awarding damages under both the heads, there shall not be duplication of the same claim. These
observations may be seen at pp. 945-46 (of SCR): (at p. 8 of AIR) of the report.
135. For reasons stated above and on the authorities discussed this appeal must be allowed. The suit
must be dismissed. We hold that the exemption clause is good, valid and legal. We also hold on the
merits that there was no negligence of the defendant Corporation or of the pilot Captain Cartner.
136. In the circumstances of the case we make no order as to costs.
137. In fairness to the defendant Corporation it must be said that Mr. Mitter, learned Counsel for the
appellant, said without prejudice to the rights of his client, that as a matter of policy the defendant
Airlines Corporation paid a sum of Rupees 20000/- to the representatives of each of the deceased
passengers in this unfortunate air crash. For some reason or other according to him that offer was not
acceptable to the plaintiffs in this case. It is not for us to make any observation on this aspect of the
case, but this Court will only wish that this judgment will not stand in the way of any ex gratia
payment which the Defendant Airlines Corporation makes usually or has made in this case to the
representatives of other deceased person and in making such payment in this case also.
Syed Sadat Abdul Masud, J.
138. I agree.
138

Kedarnath Bhattacharji Vs. Gorie Mahomed; (1886 )ILR 14Cal 64
Judges/Coram: William Comer Petheram, C.J. and Beverley, J.
JUDGMENT
William Comer Petheram, C.J.
1. The questions which are proposed for us in this Reference from the Small Cause Court are, first,
whether the suit as laid by the plaintiff is legally maintainable; and, secondly, whether, upon the facts
stated in the reference, the trustees are entitled to judgment.
2. The facts of the case appear to be these : The plaintiff is a Municipal Commissioner of Howrah and
one of the trustees of the Howrah Town Hall Fund. Some time ago, it was in contemplation to build a
Town Hall in Howrah, provided the necessary funds could be raised, and upon that state of things
being existent, the persons interested set to work to see what subscriptions they could get. When the
subscription list had reached a certain point, the Commissioners, including the plaintiff, entered into a
contract with a contractor for the purpose of building the Town Hall, and plans of the building were
submitted and passed, but as the subscription list increased, the plans increased too, and the original
cost, which was intended to be Rs. 26,000, has swelled up to Rs. 40,000; but for the whole Rs. 40,000
the Commissioners, including the plaintiff, have remained liable to the contractor as much as for the
original contract, because the additions to the building were made by the authority of the
Commissioners and with their sanction. The defendant, on being applied to, subscribed his name in the
book for Rs. 100, and the question is, whether the plaintiff, as one of the persons who made himself
liable under the contract to the contractor for the cost of the building, can sue, on behalf of himself,
and all those in the same interest with him, to recover the amount of the subscription from the
defendant.
3. We think he can. Without reference to his being a trustee or a Municipal Commissioner, we think
that under the provisions of the Code of Civil Procedure he is entitled to bring an action on behalf of
himself and others jointly interested with him. If the action could be maintained on behalf of all, and
there were no other section which would preclude this being done, that would cure any technical defect
in the case.
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4. Then the question is, whether this is a suit which could be maintained by the whole of the persons
who made themselves liable to the contractor if they were all joined.
5. It is clear that there are a great many subscriptions that cannot be recovered. A man for some reason
or other puts his name down for a subscription to some charitable object, for instance, but the amount
of his subscription cannot be recovered from him because there is no consideration.
6. But in this particular case, the state of things is this : Persons were asked to subscribe, knowing the
purpose to which the money was to be applied, and they knew that on the faith of their subscription an
obligation was to be incurred to pay the contractor for the work. Under these circumstances, this kind
of contract arises. The subscriber by subscribing his name says, in effect,--In consideration of your
agreeing to enter into a contract to erect or yourselves erecting this building, I undertake to supply the
money to pay for it up to the amount for which I subscribe my name. That is a perfectly valid contract
and for good consideration; it contains all the essential elements of a contract which can be enforced in
law by the persons to whom the liability is incurred. In our opinion, that is the case here, and therefore
we think that both questions must be answered in the affirmative, because, as I have already said, we
think that there is a contract for good consideration, which can be enforced by the proper party, and we
think that the plaintiff can enforce it, because he can sue on behalf of himself and all persons in the
same interest, and, therefore, we answer both questions in the affirmative, and we consider that the
Judge of the Small Cause Court ought to decree the suit for the amount claimed, and we also think that
the plaintiff ought to get his costs including the costs of this hearing.
140

Doraswamy Iyer Vs. Arunachala Ayyar and Ors.; AIR 1936 Mad 135
Judges/Coram: Cornish, J.
ORDER
Cornish, J.
1. This Civil Revision Petition arises out of a suit in which the trustees of a temple sought to recover a
contribution promised by a subscriber to a subscription list for the repairs of a temple It appears upon
the facts found in the lower Court that the plaintiffs- the present respondents-the trustees entered into a
contract for the necessary repairs in the month of February 1928, and the maistry of the contractor was
supplied with money from village common funds. As the work proceeded more money was required,
and to raise this money subscriptions were invited and a subscription list raised. This was in October.
The present petitioner put himself down in the list for Rs. 125, and it is to recover this sum that the suit
was filed. The lower Court has decreed the suit. The plaint founds the consideration for this promise as
follows : That plaintiffs relying on the promise of the subscriber incurred liabilities in repairing the
temple. The question is, does this amount to a consideration ? The definition of consideration in the
Contract Act is that where at the desire of the promisor the promisee has done or abstained from doing
something, such act or abstinence is called consideration. Therefore, the definition postulates that the
promisee must have acted on something amounting to more than a bare promise. There must be some
bargain between them in respect of which the consideration has been given. In Kedarnath Battacharjee
v. Gorie Mohamed (1887) 14 Cal 64 the position is put thus:
The subscriber by subscribing his name says in effect.... In consideration of your agreeing to enter into
a contract to erect or yourselves erecting this building, I undertake to supply the money to pay for it up
to the amount for which I subscribe by name....
2. And it was observed that that is a perfectly good contract. I think, it cannot now be accepted that the
mere promise to subscribe a sum of money or the entry of such promised sum in a subscription list
furnishes consideration. There must have been some request by the promisor to the promisee to do
something in consideration of the promised subscription. This is the rule to be deduced from the only
other case that I have been able to discover relating to the recovery of a promised subscription on the
basis of a contract. That case is In re Hudson (1885) 54 LJ Ch 811. The promise there was to
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contribute a large sum of money to the Congregational Union for the payment of Chapel debts. The
promisor paid a large instalment of his promised contribution and then died. The Congregational
Union then sought to make the promisor's executors liable. The contention was that on the strength of
the promise the Committee of the Union had incurred liabilities and that this amounted to
consideration. It was held that the claim was unsustainable inasmuch as the promisee had not
undertaken any liability as part of the bargain with the promisor. Pearson, J., in his judgment said:
What is the consideration for the promise which was to make it a contract ? There was no
consideration at all. Mr. Cookson says that there really was a consideration, because the consideration
was the risks and liabilities which the parties were to undertake who composed themselves into a
committee and became the distributors of the fund. In the first place there was no duty between
themselves and Mr. Hudson (the promisor) which they undertook at that time; there was no binding
obligation between themselves and Mr. Hudson.
3. In the present case it is not pleaded nor is there evidence that there was any request by the subscriber
when he put his name in the list for Rs. 125 to the plaintiffs to do the temple repairs or that there was
any undertaking by them to do anything. In my opinion this was a bare promise unsupported by
consideration, and the suit ought to have been dismissed. The petition is allowed with costs
throughout.
142

Masum Ali and Ors. Vs. Abdul Aziz and Ors.; (1914 )ILR 36All 268
Judges/Coram: Henry Richards, C.J. and Pramoda Charan Bannerji, J.
JUDGMENT
Henry Richards, C.J. and Pramoda Charan Bannerji, J.
1. This appeal arises out of a suit brought by the plaintiffs against the heirs of Munshi Abdul Karim.
The plaintiffs are the members of the Islam Local Agency Committee, Agra. It appears that in the year
1907 a movement was set on foot to collect money for repairing and re-constructing a mosque known
as Masjid Hammam Alawardi Khan. The Local Agency Committee themselves sanctioned a
subscription of Rs. 3,000; besides this amount Rs. 100 -were paid in cash at that time by Hakim Shafi-
ul-lah; Rs. 500 were promised by Munshi Abdul Karim; and another sum of Rs. 3,000 was promised
by Munshi Jan Mohammad. Munshi Abdul Karim was appointed treasurer. The Local Agency
Committee handed over their contribution of Rs. 3,000 to Munshi Abdul Karim and he also received
the donation of Rs. 100 from Hakim Shafi-ul-lah, Munshi Jan Muhammad gave a cheque for Rs. 500,
dated the 12th of September, 1907. On the 29th of September, 1907, the cheque was presented for
payment, but it was returned by the bank with a note that the endorsement was not regular. It was
again presented on the 12th of January, 1909, when, the bank returned the cheque with a note that it
was out of date, Munshi Abdul Karim died on the 20th of April, 1909. The present suit was instituted
against his heirs on the 14th of April, 1910. Munshi Jan Muhammad died in May 1910. The defendants
do not dispute the right of the plaintiffs to recover the sum of Rs. 3,100; they have admitted this part,
of the plaintiffs' claim all along. It is admitted on both sides that nothing has been done to carry out the
repairs and re-construction of a part of the mosque. Defence is, however, taken to two items, viz. the
Rs. 500, represented by the cheque of Munshi Jan Muhammad and the subscription of the deceased
Munshi Abdul Karim. The court of first instance granted a decree for the subscription promised by
Munshi Abdul Karim, but dismissed the suit in so far as it related to the claim for Rs. 500, the
subscription of Munshi Jan Muhammad, The lower appellate court granted a decree for the entire
claim. It appears to us that the suit cannot be maintained in respect of either item. With regard to the
subscription of Munshi Abdul Karim, this was a mere gratuitous promise on his part. Under the
circumstances of the present case it is admitted that if the promise had been made by an outsider it
could not have been enforced. We cannot see that it makes any difference that Munshi Abdul Karim
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was a himself the treasurer. There is no evidence that he ever set aside a sum of Rs. 500 to meet his
promised subscription. As to the other item, viz. the amount of Munshi Jan Muhammad's cheque, we
see great difficulty in holding that a suit could have been brought against Munshi Abdul Karim in
respect of this cheque during his life-time. His undertaking of the office of treasurer was purely
gratuitous. He might at any time have refused to go on with the work. It is said that he must be
regarded as the agent of the committee, and that if he was the agent he was guilty of gross negligence
and accordingly would have been liable for any loss the Committee sustained. In our opinion Munshi
Abdul Karim cannot be said to have been an agent of the committee: even if he was, it is very doubtful
that he could have been held guilty of gross negligence. He had presented the cheque for payment, the
mistake in the endorsement was a very natural one and the delay in re-presenting the cheque or getting
a duplicate from the drawer may well be explained by the delay which took place in carrying out the
proposed work. In our opinion, under the circumstances of the present case Munshi Abdul Karim
could not have been sued in his life-time. It is quite clear that if no suit lay against Munshi Abdul
Karim in his lifetime, no suit could be brought after his death against his heirs. The result is that we
allow the appeal to this extent that we vary the decree of the court below by dismissing the claim in
respect of the two items of Rs. 600 each. The appellants will get their costs of this appeal, In the court
below the parties will pay and receive coats in proportion to failure and success.
144

Nawab Khwaja Muhammad Khan vs. Nawab Husaini Begam; 1910 (12) BOMLR 638
Judges/Coram: Malcolm Martin Macnaghten, Andrew David Collins, A. Wilson and Ameer Ali,
JJ.
JUDGMENT
Ameer Ali, J.
1. The suit which has given rise to this appeal was brought by the plaintiff, a Mahomedan lady, against
the defendant, her father-in-law, to recover arrears of certain allowance, called Kharch-i-pandan, under
the terms of an agreement executed by him on the 25th October, 1877, prior to and in consideration of
her marriage with his son Rustam Ali Khan, both she and her future husband being minors at the time.
2. The agreement in question recites that the marriage was fixed for the 2nd November, 1877, and that
"therefore" the defendant declared of his own free will and accord that he " shall continue to pay Rs.
500 per month in perpetuity " to the plaintiff for " her betel-leaf expenses, etc., from the date of the
marriage, i.e., from the date of her reception, " out of the income of certain properties therein
specifically described, which he then proceeded to charge for the payment of the allowance.
3. Owing to the minority of the plaintiff, her " reception " into the conjugal domicile to which
reference is made in the agreement does not appear to have taken place until 1883. The husband and
wife lived together until 1896, when, owing to differences, she left her husband's home, and has since
resided more or less continuously at Moradabad.
4. The defendant admitted the execution of the document on which the suit is brought, but disclaimed
liability principally on two grounds, viz., (I) that the plaintiff was no party to the agreement, and was
consequently not entitled to maintain the action, and (2) that she had forfeited her right to the
allowance thereunder by her misconduct and refusal to live with her husband.
5. Evidence of a sort was produced to establish the allegations of misconduct, but the Subordinate
Judge considered that it was not "legally proved." In another place he expresses himself thus:
"Although unchastity is not duly proved, yet 1 have no hesitation in holding that plaintiff's character is
not free from suspicion." Their Lordships cannot help considering an opinion of this kind regarding a
serious charge as unsatisfactory. Either the allegation of unchastity was established or it was" not; if
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the evidence was not sufficient or not reliable, there was an end of the charge so far as the particular
matter in issue was concerned, and it was hardly proper to give expression to what the Judge calls
"suspicion."
6. The Subordinate Judge, however, came to the conclusion that the plaintiff's refusal to live with her
husband was satisfactorily proved, and, holding that on that ground she was not entitled to the
allowance, he dismissed the suit.
7. The plaintiff thereupon appealed to the High Court, where the argument seems to have been
confined solely to the question of the plaintiff's right to maintain the action, as the learned Judges
observe that neither side called their attention to the evidence on the record. They hold that she had a
clear right to sue under the agreement, and they accordingly reversed the order of the first Court and
decreed the plaintiff's claim.
8. The defendant has appealed to His Majesty in Council, and two main objections have been urged on
his behalf to the judgment and decree of the High Court.
9. First, it is contended, on the authority of Tweddle v. Atkinson (1861) 1 B. & S. 393, that as the
plaintiff was no party to the agreement, she cannot take advantage of its provisions. With reference to
this it is enough to say that the case relied upon was an action of assumpsit, and that the rule of
common law on the basis of which it was dismissed is not, in their Lordships' opinion, applicable to
the facts and circumstances of the present case. Here the agreement executed by the defendant
specifically charges Immovable property for the allowance which he binds himself to pay to the
plaintiff j she is the only person beneficially entitled under it. In their Lordships' judgment, although no
party to the document, she is clearly entitled to proceed in equity to enforce her claim.
10. Their Lordships desire to observe that in India and among communities circumstanced as the
Mahomedans, among whom marriages are contracted for minors by parents and guardians, it might
occasion serious injustice if the common-law doctrine was applied to agreements or arrangements
entered into in connection with such contracts.
11. It has, however, been urged with some force that the allowance for which the defendant made
himself liable signifies money paid to a wife when she lives with her husband, that it is analogous in its
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nature to the English pin-money, over the " application of which the husband has a control, and that, as
the plaintiff has left her husband's home and refused to live with him, she has forfeited her right to it.
12. Kharch-i-pandan, which literally means " betel-box expenses," is a personal allowance, as their
Lordships understand, to the wife customary among Mahomedan families of rank, especially in upper
India, fixed either before or after the marriage, and varying according to the means and position of the
parties. When they are minors, as is frequently the case, the arrangement is made between the
respective parents and guardians. Although there is some analogy between this allowance and the pin-
money in the English system, it appears to stand on a different legal footing, arising from difference in
social institutions. Pin-money, though meant for the personal expenses of the wife, has been described
as " a fund which she may be made to spend during the convertor by the intercession and advice and at
the instance of the husband." Their Lordships are not aware that any obligation of that nature is
attached to the allowance called Kharch-i-pandan. Ordinarily, of course, the money would be received
and spent in the conjugal domicile, but the husband has hardly any control over the wife's application
of the allowance, either in her adornment or in the consumption of the article from which it derives its
name.
13. By the agreement on which the present suit is based the defendant binds himself unreservedly to
pay to the plaintiff the fixed allowance; there is no condition that it should be paid only whilst the wife
is living in the husband's home, or that his liability should cease whatever the circumstances under
which she happens to leave it.
14. The only condition relates to the time when, and the circumstances under which, his liability would
begin. That is fixed with her first entry into her husband's home when, under the Mahomedan Law, the
respective matrimonial rights and obligations come into existence. The reason that no other reservation
was made at the time is obvious. The plaintiff was closely related to the ruler of the native state of
Rampur; and the defendant executed the agreement in order to make a suitable provision for a lady of
her position. The contingency that has since arisen could not have been contemplated by the defendant.
15. The plaintiff herself was examined as a witness for the ' defence. She states in her evidence that she
has frequently been visited by her husband since she left his home. Neither he nor the defendant has
come forward to contradict her statements. Nor does any step appear to have been taken on the
husband's part to sue for restitution of conjugal rights,, which the Civil Law of India permits. On the
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whole their Lordships are of opinion that the judgment and decree of the High Court are correct and
ought to be affirmed.
16. Their Lordships will therefore humbly advise His Majesty that the appeal be dismissed.
17. The appellant will pay the costs.
148

Dhurmodas Ghose Vs. Mohori Bibee and Anr.; (1903 ) ILR 30P.C. 539
Judges/Coram: Macnaghten, Davey, Lindley, Ford North, A. Scoble and A. Wilson, JJ.
JUDGMENT
Ford North, J.
1. On July 20, 1895, the respondent, Dharmodas Ghose, executed a mortgage in favour of Brahmo
Dutt, a money-lender carrying on business at Calcutta and elsewhere, to secure the repayment of Rs.
20,000 at 12 per cent, interest on some houses belonging to the respondent. The amount actually
advanced is in dispute. At that time the respondent was an infant; and he did not attain twenty-one
until the month of September following. Throughout the transaction Brahmo Dutt was absent from
Calcutta, and the whole business was carried through for him by his attorney, Kedar Nath Mitter, the
money being found by Dedraj, the local manager of Brahmo Dutt. While considering the proposed
advance, Kedar Nath received information that the respondent was still a minor; and on July 15, 1895,
the following letter was written and sent to him by Bhupendra Nath Bose, an attorney:
Dear Sir, I am instructed by S.M. Jogendranundinee Dasi, the mother and guardian appointed by the
High Court under its letters patent of the person and property of Babu Dharmodas Ghose, that a
mortgage of the properties of the said Babu Dharmodas Ghose is being prepared from your office. I am
instructed to give you notice, which I hereby do, that the said Babu Dharmodas Ghose is still an infant
under the age of twenty-one, and any one lending money to him will do so at his own risk and peril.
2. Kedar Nath positively denied the receipt of any such letter; but the Court of first instance and the
Appellate Court both held that he did personally receive it on July 15; and the evidence is conclusive
upon the point.
3. On the day on which the mortgage was executed, Kedar Nath got the infant to sign a long
declaration, which he had prepared for him, containing a statement that he came of age on June 17; and
that Babu Dedraj and Brahmo Dutt, relying on his assurance that he had attained his majority, had
agreed to advance to him Rs. 20,000. There is conflicting evidence as to the time when and
circumstances under which that declaration was obtained; but it is unnecessary to go into this, as both
Courts below have held that Kedar Nath did not act upon, and was not misled by, that statement, and
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was fully aware at the time the mortgage was executed of the minority of the respondent. It may be
added here that Kedar Nath was the attorney and agent of Brahmo Dutt, and says in his evidence that
he got the declaration for the greater security of his "client." The infant had not any separate legal
adviser.
4. On September 10, 1895, the infant, by his mother and guardian as next friend, commenced this
action against Brahmo Dutt, stating that he was under age when he executed the mortgage, and praying
for a declaration that it was void and inoperative, and should be delivered up to be cancelled.
5. The defendant, Brahmo Dutt, put in a defence that the plaintiff was of full age when he executed the
mortgage that neither he nor Kedar Nath had any notice that the plaintiff was then an infant, that, even
if he was a minor, the declaration as to his age was fraudulently made to deceive the defendant, and
disentitled the plaintiff to any relief; and that in any case the Court should not grant the plaintiff any
relief without making him repay the moneys advanced.
6. By a further statement the defendant alleged that the plaintiff had subsequently ratified the
mortgage; but this case wholly failed, and is not the subject of appeal.
7. Jenkins J., who presided in the Court of first instance, found the facts as above stated, and granted
the relief asked. And the Appellate Court dismissed the appeal from him. Subsequently to the
institution of the present appeal Brahmo Dutt died, and this appeal has been prosecuted by his
executors.
8. The first of the appellants' reasons in support of the present appeal is that the Courts below were
wrong in holding that the knowledge of Kedar Nath must be imputed to the defendant. In their
Lordships' opinion they were obviously right. The defendant was absent from Calcutta, and personally
did not take any part in the transaction. It was entirely in charge of Kedar Nath, whose full authority to
act as he did is not disputed. He stood in the place of the defendant for the purposes of this mortgage;
and his acts and knowledge were the acts and knowledge of his principal. It was contended that
Dedraj, the defendant's gomastha, was the real representative in Calcutta of the defendant, and that he
had no knowledge of the plaintiff's minority. But there is nothing in this. He no doubt made the
advance out of the defendant's funds. But he says in his evidence that "Kedar Babu was acting on
behalf of my master from the beginning in this matter "; and a little further on he adds that before the
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registration of the mortgage he did not communicate with his master on the subject of the minority.
But he did know that there was a question raised as to the plaintiff's age; and he says, "I left all matters
regarding the minority in the hands of Kedar Babu."
9. The appellants' counsel contended that the plaintiff is estopped by Section 115 of the Indian
Evidence Act (I. of 1872) from setting up that he was an infant when he executed the mortgage. The
section is as follows: "Estoppel. When one person has by his declaration act or omission intentionally
caused or permitted another person to believe a thing to be true, and to act upon such belief, neither he
nor his representative shall be allowed in any suit or proceeding between himself and such person or
his representative to deny the truth of that thing."
10. The Courts below seem to have decided that this section does not apply to infants; but their
Lordships do not think it necessary to deal with that question now. They consider it clear that the
section does not apply to a case like the present, where the statement relied upon is made to a person
who knows the real facts and is not misled by the untrue statement. There can be no estoppel where the
truth of the matter is known to both parties, and their Lordships hold, in accordance with English
authorities, that a false representation, made to a person who knows it to be false, is not such a fraud as
to take away the privilege of infancy: Nelson v. Stocker. 1 De G. & J. 458. The same principle is
recognised in the explanation to Section 19 of the Indian Contract Act, in which it is said that a fraud
or misrepresentation which did not cause the consent to a contract of the party on whom such fraud
was practised, or to whom such misrepresentation was made, does not render a contract voidable.
11. The point most pressed, however, on behalf of the appellants was that the Courts ought not to have
decreed in the respondent's favour without ordering him to repay to the appellants the sum of Rs.
10,500, said to have been paid to him as part of the consideration for the mortgage. And in support of
this contention Section 64 of the Contract Act (IX. of 1872) was relied on:
Section 64. When a person at whose option a contract is voidable rescinds it, the other party thereto
need not perform any promise therein contained of which he is promisor. The party rescinding a
voidable contract shall, if he have received any benefit thereunder from another party to such contract,
restore such benefit, so far as may be, to the person from whom it was received.
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12. Both Courts below held that they were bound by authority to treat the contracts of infants as
voidable only, and not void; but that this section only refers to contracts made by persons competent to
contract, and therefore not to infants.
13. The general current of decision in India certainly is that ever since the passing of the Indian
Contract Act (IX. of 1872) the contracts of infants are voidable only. This conclusion, however, has
not been arrived at without vigorous protests by various judges from time to time; nor indeed without
decisions to the contrary effect. Under these circumstances, their Lordships consider themselves at
liberty to act on their own view of the law as declared by the Contract Act, and they have thought it
right to have the case reargued before them upon this point. They do not consider it necessary to
examine in detail the numerous decisions above referred to, as in their opinion the whole question
turns upon what is the true construction of the Contract Act itself. It is necessary, therefore, to consider
carefully the terms of that Act; but before doing so it may be convenient to refer to the Transfer of
Property Act (IV. of 1882), Section 7 of which provides that every person competent to contract and
entitled to transferable property....is competent to transfer such property...in the circumstances, to the
extent, and in the manner allowed and prescribed by any law for the time being in force. That is the
Act under which the present mortgage was made, and it is merely dealing with persons competent to
contract; and Section 4 of that Act provides that the chapters and sections of that Act which relate to
contracts are to be taken as part of the Indian Contract Act, 1872. The present case, therefore, falls
within the provisions of the latter Act.
14. Then, to turn to the Contract Act, Section 2 provides: (e) Every promise and every set of promises,
forming the consideration for each other, is an agreement, (g) An agreement not enforceable by law is
said to be void, (h) An agreement enforceable by law is a contract, (i) An agreement which is
enforceable by law at the option of one or more of the parties thereto, but not at the option of the other
or others, is a voidable contract.
15. Section 10 provides: "All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void."
16. Then Section 11 is most important, as defining who are meant by "persons competent to contract";
it is as follows: "Every person is competent to contract who is of the age of majority according to the
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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." Looking at these sections, their Lordships are satisfied that the Act makes
it essential that all contracting parties should be "competent to contract," and expressly provides that a
person who by reason of infancy is incompetent to contract cannot make a contract within the meaning
of the Act. This is clearly borne out by later sections in the Act. Section 68 provides that, "If a person
incapable of entering into a contract, or any one whom 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 incapable person." It is beyond question
that an infant falls within the class of persons here referred to as incapable of entering into a contract;
and it is clear from the Act that he is not to be liable even for necessaries, and that no demand in
respect thereof is enforceable against him by law, though a statutory claim is created against his
property. Under Sections 183 and 184 no person under the age of majority can employ or be an agent.
Again, under Sections 247 and 248, although a person under majority may be admitted to the benefits
of a partnership, he cannot be made personally liable for any of its obligations; although he may on
attaining majority accept those obligations if he thinks fit to do so. The question whether a contract is
void or voidable presupposes the existence of a contract within the meaning of the Act, and cannot
arise in the case of an infant. Their Lordships are, therefore, of opinion that in the present case there is
not any such voidable contract as is dealt with in Section 64.
17. A new point was raised here by the appellants' counsel, founded on Section 65 of the Contract Act,
a section not referred to in the Courts below, or in the cases of the appellants or respondent. It is
sufficient to say that this section, like Section 64, starts from the basis of there being an agreement or
contract between competent parties, and has no application to a case in which there never was, and
never could have been, any contract.
18. It was further argued that the preamble of the Act showed that the Act was only intended to define
and amend certain parts of the law relating to contracts, and that contracts by infants were left outside
the Act. If this were so, it does not appear how it would help the appellants. But in their Lordships'
opinion the Act, so far as it goes, is exhaustive and imperative, and does provide in clear language that
an infant is not a person competent to bind himself by a contract of this description.
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19. Another enactment relied upon as a reason why the mortgage money should be returned is Section
41. of the Specific Relief Act (I. of 1877), which is as follows: "Section 41. On adjudging the
cancellation of an instrument the Court may require the party to whom such relief is granted to make
any compensation to the other which justice may require." Section 38 provides in similar terms for a
case of rescission of a contract. These sections, no doubt, do give a discretion to the Court; but the
Court of first instance, and subsequently the Appellate Court, in the exercise of such discretion, came
to the conclusion that under the circumstances of this case justice did not require them to order the
return by the respondent of money advanced to him with full knowledge of his infancy, and their
Lordships see no reason for interfering with the discretion so exercised.
20. It was also contended that one who seeks equity must do equity. But this is the last point over
again, and does not require further notice except by referring to a recent decision of the Court of
Appeal in Thurstan v. Nottingham Permanent Benefit Building Society [1902] 1 Ch. 1, since affirmed
by the House of Lords. [1903] A.C. 6 In that case a female infant obtained from the society of which
she was a member part of the purchase-money of some property she purchased; and the society also
agreed to make her advances to complete certain buildings thereon. They made the advances, and took
from her a mortgage for the amount. On attaining twenty-one she brought the action to have the
mortgage declared void under the Infants Relief Act. The Court held that, as regards the purchase-
money paid to the vendor, the society was entitled to stand in his place and had a lien upon the
property, but that the mortgage must be declared void, and that the society was not entitled to any
repayment of the advances. Dealing with this part of their claim Romer L.J. says [1902] 1 Ch. at p. 13:
"The short answer is that a Court of Equity cannot say that it is equitable to compel a person to pay any
moneys in respect of a transaction which as against that person the Legislature has declared to be
void." So here.
21. Their Lordships observe that the construction which they have put upon the Contract Act seems to
be in accordance with the old Hindu Law as declared in the laws of Menu, ch. viii. 163; and
Colebrooke's Dig. liii. 2, vol. ii. p. 181; although there are no doubt decisions of some weight that
before the Indian Contract Act an infant's contract was voidable only in accordance with English law
as it then stood.
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22. The appeal, therefore, holly fails; and their Lordships will humbly advise His Majesty that it
should be dismissed. The appellants must pay the costs of the appeal.
155

Khan Gul and Anr. Vs. Lakha Singh and Anr.; AIR 1928 Lah 609
JUDGMENT
Shadi Lal, C.J.
1. The questions, which have been formulated for decision by the Full Bench, are in these terms:
(1) Whether a minor, who, by falsely representing himself to be a major, has induced a person to enter
into a contract, is estopped from pleading his minority to avoid the contract.
(2) Whether a party, who, when a minor, has entered into a contract by means of a false representation
as to his age, whether he be defendant or plaintiff, in a subsequent litigation, refuse to perform the
contract and at the same time retain the benefit he may have derived therefrom.
2. As regards the minor's capacity to enter into a contract, there was some uncertainty prior to 1903 as
to whether a minor's contract was void or voidable. But all doubt on the subject has been dispelled by
the judgment of their Lordships of the Privy Council in Mohori Bibee v. Dharmodas Ghose [1903] 30
Cal. 539, which declares that a person who, by reason of infancy is, as laid down by Section 11,
Contract Act, incompetent to contract, cannot make a contract within the meaning of the Act. The
transaction entered cannot be recognized by law.
3. The question arises whether an infant is precluded by the rule of estoppel from showing the
invalidity of a transaction of this description. Now, the doctrine of estoppel is embodied in Section
115, Evidence Act, which runs as follows:
When one person has, by his declaration, act or omission, intentionally caused or permitted another
person to believe a thing to be true and to act upon such belief, neither he nor his representative shall
be allowed, in any suit or proceeding between himself and such person or his representative, to deny
the truth of that thing.
4. There is a conflict of judicial opinion as to whether an infant comes within the ambit of the section;
the Bombay High Court holding that an infant is not excepted by the language of the section, vide
Ganesh Lal v. Bapu [1897] 21 Bom. 198; Dadasaheb Dasrathrao v. Bai Nahani [1917] 41 Bom. 480
and Jasraj Bastimal v. Sadasiv Mahadev Walekar A.I.R. 1923 Bom 169; while the Calcutta High Court
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has adopted the opposite view: vide Dhurmo Dass Ghose v. Brahmo Datt [1898] 25 Cal. 616 which
view was endorsed on appeal by a Division Bench of the same Court in Brahmo Dutt v. Dhurmo Dass
Ghose [1899] 26 Cal. 381. In the latter Calcutta case Maclean, C.J., sought to get over the
comprehensive language of Section 115 by holding that the term "person" in that section applies to
"one who is of full age and competent to enter into a contract." It will be observed that the expression
"person" is used twice in that section, and it is clear that if in the first portion of the section it means a
person sui juris, it must have the same meaning when used again in the same section. The
interpretation placed upon the word "person" by the Calcutta High Court would, no doubt, help the
minor in so far as he would be able to repel the plea of estoppel when it is urged against him; but he
must, at the same time, forego the benefit accruing from the doctrine of estoppel and cannot invoke the
plea for his own advantage. If the word "person" means only a person competent to enter into a
contract, then the section cannot be used to the advantage of the minor any more than to his detriment;
in other words the doctrine of estoppel, as enacted by Section 115, must be treated as non-existent in
so far a person under disability is concerned.
5. That a minor cannot set up the plea of estoppel as against an adult is obviously an absurd result.
Now, it is a cardinal rule governing the interpretation of statutes that when the language of the
legislature admits of two constructions, the Court should not adopt a construction which would lead to
an absurdity or obvious injustice. But I do not think that there is any ambiguity in the term "person." In
construing statutes, and indeed all written instruments, it is the duty of the Court to adhere to the
grammatical and ordinary sense of the words; and the expression "person," when used in its ordinary
sense, includes every person whether sui juris or under a contractual disability. As pointed out above,
the same word is used again in Section 115, and there can he no doubt that it cannot, in that connexion,
bear any restricted meaning. Indeed the term "person" is to be found also in Section 116, which deals
with the estoppel of a tenant as against his landlord, and in numerous other sections of the Evidence
Act, e.g., Sections 5, 8, 10, 112, 118, 122 and 139; and a perusal of those sections leaves no doubt that
it is intended to include minors as well as other persons under disability.
6. I must, therefore, hold that the language of Section 115 is comprehensive enough to include a minor;
and if the matter rested there, I would say that an infant, who has induced another person to deal with
him by falsely representing himself as of full age, should not be allowed to deny the truth of his
representation. But the rule of estoppel is a rule of evidence and must be read along with and subject to
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the provisions of other laws. The law of estoppel is a general law applicable to all persons, while the
law of contract relating to capacity to enter into a contract is directed towards a special object; and it is
a well established principle that, where a general intention is expressed by the legislature, and also a
particular intention, which is incompatible with the general one, particular intention is considered an
exception to the general one: per Best, C.J. in Churchill v. Crease 5 Bing 177. This rule applies
whether the general and special provisions are contained in the same statute or different statutes. Now,
when the law of contract lays down that a minor shall not be liable upon a contract entered into by
him, he should not be made liable upon the same contract by virtue of the general rule of estoppel. I do
not go so far as to say that the language of Section 115, would, if given its full scope, render absolutely
nugatory the law declaring the incapacity of a minor to make a contract; for there may be instances in
which a contract though entered into with a minor has not been induced by any misrepresentation
made by him and no question of estoppel can arise in such cases. There can, however, be no doubt that
the rule of estoppel would take away in many cases the protection which the legislature has
deliberately created for the benefit of the minors, and would make them liable on a transaction which
has no existence in the eye of the law. The Court should struggle against repugnancy and should
construe an enactment as far as possible in accordance with the terms of the other statute which it does
not expressly modify or repeal.
7. Now, both the statutes can stand together, if we apply the general rule of estoppel, as enacted by
Section 115, Evidence Act, subject to the special law imposing disability upon the contractual capacity
of an infant. This construction which recognizes an exception to the general rule, avoids all
repugnancy and does not lead to any absurdity or injustice.
8. It is to be observed that, so far as the English law is concerned, there is no authority for the
proposition that a contract, which is void under the statute on the ground of infancy, can be enforced
simply because it has been entered into on the faith of a false representation as to age which the minor
is precluded from denying. In the case of Levene v. Brougham [1909] 25 T.L.R. 265, the plea of
estoppel was raised against the minor but was rejected by the Court of appeal. It must be remembered
that, as observed by their Lordships of the Privy Council in Sarat Chunder Dey v. Gopal Chunder Laha
[1893] 20 Cal. 296, Section 115, Evidence Act, has not enacted as law in India anything different from
the law of England on the subject of estoppel and the English decisions are therefore, relevant to the
discussion of the subject before as.
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9. In India the rule against the application of the doctrine of estoppel to a contract void on the ground
of infancy has been adopted, not only by the Calcutta High Court, but also by the High Courts at
Madras, Allahabad and Patna: Vide Vaikuntarama Pillai v. Authimoolam Chettiar [1915] 38 Mad.
1071, Jagar Nath Singh v. Lalta Pershad [1909] 31 All. 21 and Ganganand Singh v. Rameshwar Singh
A.I.R. 1927 Pat. 271. A Division Bench of the Lahore High Court has however, favoured the view
taken by the Bombay High Court in Wasinda Ram v. Sita Ram [1920] 1 Lah. 389. I am not aware of
any judgment of the Privy Council which gives expression to the considered view of their Lordships
on the subject. In the case of Mohoree Bibee v. Dharmodas Ghose [1903] 30 Cal. 539, which was an
appeal from the judgment of the Calcutta High Court in Brahmo Datt v. Dhurmoo Dass Ghose [1899]
26 Cal. 381 their Lordships refrained from expressing their opinion and disposed of the question by
making the following observations:
The Courts below seem to have decided that this section (Section 115) does not apply to infants but
their Lordships do not think it necessary to deal with that question now. They consider it clear that the
section does not apply to a case like the present, where the statement relied upon is made to a person
who knows the real facts and is not misled by the untrue statement.
10. Nor is there anything in the judgment in Mahomed Syedol Ariffin v. Yeoh Ooi Gark A.I.R. 1916
P.C. 242, which can be treated even as an obiter dictum on the subject of estoppel. That case was heard
by the Privy Council on an appeal from the Supreme Court of the Straits Settlements and dealt with the
Strait Settlements Ordinance (3 of 1893), which is in similar terms to the Indian Evidence Act. It was
sought to establish the liability of the infant for damages on the ground of a fraudulent statement, but
their Lordships held that no fraud had been established. It is clear that no case of estoppel was either
set up or decided in that case.
11. It will be seen from the foregoing discussion that not only the English law, but also the balance of
the judicial authority in India, is decidedly in favour of the rule that where an infant has induced a
person to contract with him by means of a false representation that he was of full age, he is not
estopped from pleading his infancy in avoidance of the contract and, though Section 115, Evidence
Act is general in its terms, I consider for the reasons, which I have already given, that it must be read
subject to the provisions of the Contract Act, declaring a transaction entered into by a minor to be void.
My answer to the first question referred to us is, therefore, in the negative.
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12. Coming now to the second question: I am clear that when a contract has been induced by a false
representation made by an infant as to his age, he is liable neither on the contract nor in tort, if the tort
is directly connected with the contract and is the means of effecting it and parcel of the same
transaction: The Liverpool Adelphi Loan Association v. Fairthurst [1854] 9 Ex. 422. It is true that
infancy does not constitute a valid defence to an action on tort, but the tort, which can sustain an action
for damages must be independent of the contract and must not be another name for the breach of the
contract. No person can evade the law conferring immunity upon an infant from performing a
contractual obligation by converting the contract into a tort for the purpose of charging the infant. As
observed by Byles, J., in Burnard v. Haggie [1863] 32 L.J.C.P. 189, one cannot make an infant liable
for the breach of a contract by changing the form of action to one ex delicto.
13. The Court has to look at the substance, and not at the form, of the action; and if it finds that the
action is in reality an action ex contractu but disguised as an action ex delicto, it would decline to
enforce the claim. Indeed, it has been repeatedly held in England that when an infant has induced a
person to contract with him by making a false statement that he was of full age, the infant is not
answerable either for the breach of the contract or for damages arising from the tort committed by him.
14. But a false representation by an infant that he was of full age gives rise to an equitable liability.
The Court, while relieving him from the consequences of the contract may in the exercise of its
equitable jurisdiction restore the parties to the position which they occupied before the date of the
contract. If the infant is in possession of any property which he has obtained by fraud, he can be
compelled to restore it to his former owner. The matter is, however, debatable: if the benefit acquired
by him consists of money which is not earmarked, has the Court of equity authority to make him liable
for the payment, to the defrauded person, of a sum equal to the amount of which the latter has been
deprived by the former? The equitable jurisdiction is founded upon the desire of the Court to do justice
to both the parties by restoring them to the status quoante, and there is no real difference between
restoring the property and refunding the money except that the property can be identified but cash
cannot be traced.
15. The doctrine of restitution finds expression in Section 41, Specific Relief Act. Suppose, A, an
infant, executes an instrument of mortgage in favour of B for Rs. 1,000 borrowed by B by making a
false representation as to his age. This instrument is void, and Section 39, which expressly applies, not
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only to a voidable but also to a void, instrument, allows A to move the Court to adjudge it to be void
and order it to be delivered up and cancelled. Then cornea Section 41, by which it is provided that on
adjudging the cancellation of the instrument the Court may require A, to whom such relief is granted,
to make any compensation to B which justice may require. It is beyond question that under this section
the Court has the discretion to impose terms upon A and to compel him to pay Rs. 1,000 as
compensation to B. The statute nowhere says that pecuniary compensation should not be allowed,
when the award thereof would be tantamount to a repayment of the money borrowed on the strength of
a void transaction. Indeed, the Courts in India have ordered the minor to refund the money received by
him before allowing him to recover the property sold or mortgaged to the other party.
16. In Jagar Nath Singh v. Lalta Pershad [1909] 31 All. 21 the minor, who, by making fraudulent
representation as to his age, had induced the defendant to purchase property from him, was held liable
in equity to restore to the purchaser the benefit he had obtained before he could recover possession of
the property sold. The same rule was followed in Balak Ram v. Dadu [1910] 76 P.R. 1910, where the
plaintiff was directed to refund the purchase money as a condition precedent to his obtaining
possession of the property. In Saral Chand Mitter v. Mohan Bibi [1898] 25 Cal. 371, the minor was
required to refund the money borrowed by him on the foot of a mortgage.
17. It is true that in the case of Mohori Bibee v. Dharmodas Ghose [1903] 30 Cal. 539 restitution was
not allowed, but the party, who had lent the money to the minor, was aware of the minority; and their
Lordships of the Privy Council, while recognizing that Section 41 does give a discretion to the Court,
did not see any reason for interfering with the discretion of the lower Courts which, on the facts of the
case, had declined to direct the return of the money.
18. There are some English cases in which an infant repudiating a transaction was held liable in equity
to return the benefit he had obtained by reason of his fraud. In re King Ex Parte, The Unity Joint Stock
Mutual Banking Association [1858] 3 G. & J. 63, a person, who had lent money to an infant on the
faith of a fraudulent representation as to age, was held entitled to prove in his bankruptcy. Lord Justice
Knight Bruce, while deciding that in equity the liability of the borrower had been established, made the
following pertinent observations:
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The question is whether in the view of a Court of equity, according to the sense of decisions not now
to be disputed, he has made himself liable to pay the debt whatever, be his liability or nonliability at
law. In my opinion we are compelled to say that he has.
19. Cowern v. Nield [1912] 2 K.B. 419 was a case in which it was decided that an infant trader, who
had entered into a contract for the sale of goods and failed to deliver them after receiving their price,
was not liable on the contract, but that: if the plaintiff can prove that the defendant obtained his money
by fraud, the action can be maintained.
20. The Court of appeal accordingly ordered a new trial: in order 'that the plaintiff may have an
opportunity of proving if he can, that his money was obtained from him by the defendant by fraud.
21. In Stocke v. Wilson [1913] K.B. 235 an infant, who had obtained furniture from the plaintiff by
falsely stating himself to be of age, and had sold part of it for #.30 was directed to pay this amount as
part of the relief granted to the plaintiff.
22. A different view was, however, taken by the Court of appeal in R. Leslie Ltd. v. Sheill [1914] 3
K.B. 607. In that case an action for the recovery of advances made to an infant on the faith of his
fraudulent representation as to his age was dismissed, because the cause of action was held in
substance ex contractu. The learned Judges of the Court of appeal distinguished the judgment in The
Unity Joint Stock Mutual Banking Association [1858] 3 G. & J. 63 on the ground that it expressed the
law in bankruptcy and did not lay down a doctrine of general application. With all respect, I am unable
to follow the distinction. Either the liability to return the benefit obtained by fraud exists or it does not
exist. If it does not, then the mere fact that the quondam infant has been subsequently adjudged a
bankrupt cannot bring it into existence. If, on the other hand, the infant is in equity liable to return his
ill-gotten gains his liability holds good, even if he is not subsequently adjudged to be an insolvent. It
must be remembered that the relief springs, not from the circumstance that the borrower is adjudicated
a bankrupt, which may be a pure accident, but from the rule of equity that a person should not be
allowed to take advantage of his own fraud. It would be sheer injustice if an infant should retain, not
only the property which he has agreed to sell or mortgage, but also the money which he has obtained
by perpetrating fraud. As stated by Lord Kenyan in Jennings v. Rundall [1799] 8 T.R. 335, the
protection given by law to the infant "was to be used as a shield and not as a sword." It must be
remembered that, while in India all contracts made by an infant are void, there is no such general rule
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in England. For instance, a contract for necessaries is not affected by the Infants Belief Act, 1874, and
can be validly entered into by an infant. There should, therefore, be greater scope in India than in
England for the application of the equitable doctrine of restitution.
23. It is, however, argued that this jurisdiction can be exercised only when the minor invokes the aid of
the Court as a plaintiff. If he asks the Court to cancel a transaction brought about by his own fraud, he
cannot complain if the Court does justice to both the parties; and, while granting him the relief the
Court compels him, at the same time, to return the advantage which he has acquired in pursuance of
the void transaction. But if the minor happens to occupy the position of a defendant in an action
involving the cancellation of the transaction of the above description, he should not, it is urged, be
required to make restitution.
24. It is difficult to understand why the granting of an equitable remedy should depend upon a mere
accident, namely, whether it is the minor or his adversary who has taken the initiative in bringing the
transaction before the Court. The material circumstances in both the cases are exactly the same. A
contract has been entered into with an infant and, as it is an invalid transaction, it must be cancelled.
The Court, however, finds Ghat the infant has, by practising fraud upon the opposite party, received
property or money; and that justice requires that he should not retain the benefit derived by him from a
transaction which has been declared to be ineffectual against him. The transaction has been wiped out.
It is only fair that both the parties should revert to their original position. These considerations are, in
no way, affected by the circumstance that one party and not the other, has moved the Court in the first
instance. There is neither principle nor justice which would warrant a discrimination.
25. The equitable jurisdiction of the Court to order restitution rests purely upon the principle of justice,
and that principle is no more applicable to a case in which he is a defendant. But when we come to the
case law, we find it in an unsatisfactory state. The decisions of the High Courts in India show that
when the minor succeeds in an action 'brought by him, he is ordinarily required to restore the benefit
obtained by him by committing fraud. The same unanimity is not, however, found in cases in which he
occupies the role of a defendant. In some cases of this character restitution has been allowed, e.g.,
Saral Chand Mitter v. Mohun Bibi [1898] 25 Cal. 371, but there are several cases in which relief has
not been granted against frauds committed by minors when they were defendants. The language of
Sections 39 and 41, Specific Belief Act, no doubt shows that the jurisdiction conferred thereby is to be
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exercised when the minor himself invokes the aid of the Court. The doctrine of restitution is not,
however, confined to the cases covered by that section. That doctrine rests, upon the salutary principle
that an infant cannot be allowed by a Court of equity to take advantage of his own fraud. It is possible
that, though the Court ordinarily imposes terms upon an infant guilty of fraud if he seeks its aid as a
plaintiff, it may decline to exercise its equitable jurisdiction if he happens to be a defendant. All that
can reasonably be said is that the Court, in deciding whether relief against fraud practised by an infant
should or should not be granted, will consider, along with other circumstances of the case, the fact that
the infant is a defendant and not a plaintiff in the case. But there is no warrant either in principle or in
equity for the general rule that the relief shall never be granted in a case where the infant happens to be
a defendant.
26. No such distinction seems to have been drawn in the English cases. Indeed, Stocks v. Wilson
[1913] K.B. 235 was a case in which the infant was the defendant, and yet he was held liable to refund
to the plaintiff, the price of the furniture received from the latter. Similarly in Cowern v. Nield [1912]
2 K.B. 419 the action was brought against the infant but it was never suggested that the circumstance
of his being a defendant should make any difference in his liability.
27. The exact form which the relief should take must depend upon the peculiar circumstances of each
case, but the contract or any stipulation therein should never be enforced. The remedy by way of
restitution may sometimes involve the payment of a sum of money equal to that borrowed under the
void contract. The grant of such relief is not, however, an enforcement of the contract, but a restoration
of the state of affairs as they existed before the formation of the contract. The Court, while giving this
relief, has not to look at the contract or to give effect to any of the stipulations contained therein.
Indeed, the relief is granted, not because there is a contract which should be enforced, but because the
transaction being void does not exist and the parties should revert to the condition in which they were
before the transaction. This is not a performance of the contract but a negation of it. For example, the
contract may provide for the payment of interest at a certain rate, but the Court does not give effect to
such stipulation or to any other term of the contract. The defrauded party gets, not the remedy on the
contract, but the relief in equity against fraud. The mere fact that the result of granting the relief is
similar to that flowing from the performance of one or more of the terms of the contract cannot
constitute an adequate ground for refusing the relief, if the Court considers that justice requires that it
should be granted. As stated by Knight Bruce, V.C., in Stikeman v. Daivson [1881] 1 G. & S 90 in
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what cases in particular a Court of "equity will thus exert itself is not easy to determine". If the infant
has obtained property by fraud the Court will require him to restore it to its owner. In other cases, his
estate or he, after attaining majority, may be held liable for the return of the pecuniary advantage
acquired by him by fraud.
28. For the aforesaid reasons my answer to the second question is that an infant though not liable under
the contract, may in equity, be required to return the benefit he has received by making a false
representation as to his age.
Broadway, J.
29. I concur with the learned Chief Justice.
Dalip Singh, J.
30. I concur with the learned Chief Justice.
Harrison, J.
31. On the first question of whether a minor who has made a false representation as to his age is
estopped from pleading his minority, I agree with the learned Chief Justice in holding that he is not
estopped from doing so.
32. On the second question it appears to me that deplorable as the result may be the minor cannot be
compelled to make restitution where the result of his misrepresentation has been the passing of money
as opposed to goods. In the first place the contract is void and has no legal existence. Doubtless an
action in tort can succeed, if it be shown that the tort is independent of the contract. Great reliance has
been placed on Cowern v. Nield [1912] 2 K.B. 419, but all that this authority lays down is: that if it
can be established that there has been an independent tort the action will succeed. That case was sent
back for a new trial in order that the plaintiff might have an opportunity of proving, if he could, that his
money was obtained from him by fraud, but the judgment has been relied on by counsel for the
proposition that where a contract has arisen as the direct consequence of a fraudulent statement, an
action may still succeed on the basis of that fraud. It appears to me that what is laid down is precisely
the contrary proposition, and that unless and until the fraud can be dissociated from the contract, the
plaintiff's suit must fail. In this case there can, I think, be no doubt that the substance of the cause of
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action is contractual. Had the fraud or misstatement of the defendant not led to a contract, we would
have heard no more about it The only reality in the tort was the fact that it was the origin or the cause
of the void contract. In consequence of the misrepresentation a contract was made and it is, therefore,
equally true to say that had there been no tort, there would have been no contract and that had there
been no contract, there would have been no tort, for there would merely have been an infructuous
attempt to deceive as opposed to a successful fraud. It follows that the suit is not based upon a tort and
Cowern v. Nield [1912] 2 K.B. 419 does not help us. The question remains of whether the defendant
can be denied the right of pleading that the contract is void except upon definite terms, which would
obviously be that he should restore the benefit he has received in consequence of his dishonesty. To
quote from the judgment of Lord Sumner in Leslie Ltd. v. Sheill [1914] 3 K.B. 607:
It is perhaps a pity that no exception was made where, as here, the infant's wickedness was at least
equal to that of the person who innocently contracted with him, but so it is. It was thought necessary to
safeguard the weakness of infants at large, even though here and there a juvenile knave slipped
through.
33. In the following paragraph it is explained that to a claim for return of the principal money paid to
the infant under the contract that failed there are at least two answers: the first the infancy itself being
at common law the answer before 1874. I take it that in India this is the answer still. Section 41,
Specific Belief Act, is invoked and relied upon as affording an analogy for ordering restoration. This
runs as follows:
On adjudging the cancellation of an instrument the Court may require the party to whom such relief is
granted to make any compensation to the other which justice may require.
34. In the first place there is no question of the cancellation of an instrument but the assertion of the
fact that the contract was void from the start and had no legal existence. In the second place, Section
41, Specific Belief Act, appears to me merely to enunciate and give effect to the well-known principle
that he who seeks equity must do equity. In this case the infant asks for no equitable relief, but on the
contrary he pleads the substantive law and states the self-evident fact that the contract on which the
suit is based had no existence. Whatever may be the consequences where an infant seeks an equitable
relief, I do not think the analogy has been established and I do not think that Section 41, Specific
Belief Act, throws any light upon or affords any assistance to the decision of the present question. I
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realize how deplorable it is that a dishonest infant should be able to keep what he has obtained by his
dishonesty, but the matter appears to be one for the legislature, and I am of opinion that until and
unless the legislature sees fit to move, no suit of this nature, being in its essence contractual, can lead
to an order for restitution by the infant on the ground of his having dishonestly induced the plaintiff to
contract with him and to pay him money.
Tek Chand, J.
35. This reference to the Full Bench gives rise to the following three points, which it will be
convenient to deal with separately:
(i) Is a party, who, when a minor, has induced another to enter into a contract with him by falsely
representing himself to be of age, estopped from plea-ling his minority in avoidance of the contract?
(ii) In the event of the answer to the first question being in the negative, can he avoid the contract and
at the same time retain the benefit derived by him therefrom?
(iii) Will the answer to (i) be affected by the circumstance that he is a plaintiff or a defendant in the
action in which this question arises?
36. I shall take up (i) first. It was contended by the learned Counsel for the appellant that this question
is concluded in his favour in consequence of the decisions of their Lordships of the Privy Council in
Mohori Bibi v. Dharmodass [1903] 30 Cal. 539 and Mahomed Syedol Ariffin v. Yeoh Ooi Gark A.I.R.
1916 P.C. 242. An examination of these cases, however, shows that this contention is baseless. It is no-
doubt true that in Mohori Bibee's case [1903] 30 Cal. 539 the question was raised before Jenkins, J.,
who dealt with the case as the Court of first instance on the original side of the Calcutta High Court in
Dharmo Dass Ghose v. Brahmo Butt [1898] 25 Cal. 616 and on appeal three Judges of that Court
discussed it at great length: Brahmo Butt v. Bharmo Bass [1899] 26 Cal. 381. But on the matter going
up before the Judicial Committee this question did not arise, as their Lordships found on the facts that
the party dealing with the minor had not been misled by the alleged misrepresentation made by the
minor. It was found on the evidence that at the time when the contract was entered into the representee
in that case had full knowledge of the fact that the representor was in reality a minor and it was
accordingly held that there could be no estoppel where the truth of the matter was known to both
parties. The real question decided in that case was that having regard to the provisions of Section 11,
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Contract Act, a contract entered into by a minor was void and not merely voidable as had been hitherto
erroneously held in a number of cases in India.
37. The question appears to have been argued before their Lordships in Mahomed Syedol Ariffin v.
Yeoh Ooi Gark A.I.R. 1916 P.C. 242 which was an appeal from the Straits Settlements, where the
statute in force is identical in terms with Section 115, Evidence Act. But the actual decision, in that
case also proceeded on a different point, their Lordships finding on the facts that the representation
which was alleged to have been made by the minor could not be justly characterized as fraudulent.
There is, however, a remark in the judgment of Lord Shaw to the effect that the plaintiff's case, based
on the minor representing himself to be of age: would have failed on the principle recently given effect
to in the case of Leslie Ltd. v. Shiell [1914] 3 K.B. 607.
38. The remark is clearly in the nature of an obiter dictum and though entitled to great respect cannot
be said to be decisive of the matter.
39. The question is, therefore, not directly covered by any authoritative pronouncement of their
Lordships of' the Privy Council and it is open to us to come to our own conclusion on it. It is admitted
that the matter has to be decided in reference to Section 11, Contract Act, and Section 115, Evidence
Act. As already pointed out the former section has been authoritatively interpreted in Mohori Bibee's
case [1903] 30 Cal. 539 as meaning that a contract entered into by a minor is void. There can,
therefore, be no room for controversy on that point. The difficulty, however, arises when, in an action
brought in respect of such a transaction, the opposite party urges that the plea that the contract was
void ought not to be heard as the transaction had been brought about by the minor representing himself
to be of age and on that misrepresentation the opposite party has parted with his money or property. In
other words the question is what is the effect on such a case of Section 115, Evidence Act, which runs
as follows: When one person has, by his declaration, act or omission, intentionally caused or permitted
another person to believe a thing to be true and to act upon such belief neither he nor his representative
shall be allowed, in any suit or proceeding between himself and such person or his representative, to
deny the truth of that thing.
40. The question has arisen in several cases in India, but as pointed out by the learned Judges of the
Division Bench there is a serious conflict of judicial opinion on it. It is, therefore, necessary to review
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the leading Indian cases on the subject so as to properly appreciate the reasons in support of the two
rival views.
41. Beginning with our own Court, we find that the rulings, though few in number, are not uniform. In
Wasinda Ram v. Sita Ram [1920] 1 Lah. 389 the plaintiff sued to recover the amount due on a bond
which the defendant had, during minority, executed falsely representing himself to be of age. Chevis,
Offg. C.J., who delivered the principal judgment, held that Section 115, Evidence Act, applied to the
case and that the defendant could not be heard to plead his minority to escape from the consequences
of the transaction-which he had himself brought about by false representations. He definitely dissented
from the view of the Calcutta High Court (which I shall presently discuss) that the word "person" in
the first line of Section 115 must be interpreted as meaning a person sui juris and does not include a
minor. LeRossignol, J., in agreeing with his learned colleague, thus expressed himself:
It is true that a contract made with an infant is no contract, but is void ab initio, but that is not a matter
of which Courts must take cognizance suo motu, and if Section 115, Evidence Act, prohibits the tender
of the plea (and I see no reason to suppose that it does not) then the plea may not be tendered.
42. The question next arose in Harji Mal v. Abdul Halim [1920] 60 I.C. 267 before LeRossignol, J.,
sitting singly. The learned Judge reiterated his former opinion and upholding the plea of estoppel
decreed the suit on a promissory note on which the defendant had, during minority, obtained a loan
falsely representing himself to be of age. A contrary view was, however, taken two years later by Moti
Sagar, J., (also sitting in Single Bench) in Kapura v. Arjun Singh: A.I.R. 1923 Lah. 511, where a minor
had sued to set aside a sale executed by him during minority which it was found he had persuaded the
vendee to enter into on a fraudulent misrepresentation that he was sui juris. The learned Judge refused
to follow Wasinda Ram v. Sita Ram [1920] 1 Lah. 389, being of the opinion that the authority of that
ruling had been considerably shaken if not altogether annihilated by the remarks of their Lordships of
the Privy Council in Mahomed Syedol Ariffin v. Yeoh Ooi Gark A.I.R. 1916 P.C. 242 where Leslie v.
Sheill [1914] 3 K.B. 607 had been approved. He accordingly held that the plaintiff was not estopped
from pleading the invalidity of the contract by reason of his minority, even though he had himself
induced the contract by false representation.
43. The view taken in Wasinda Ram v. Sita Ram [1920] 1 Lah. 389, is in accord with that which had
been uniformly accepted as correct by the Bombay High Court. The first case of that Court which
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needs notice is Ganesh Lala v. Bapu [1897] 21 Bom. 198, where Jardine and Ranade, JJ. held that
Section 115, Evidence Act, made no exception in the case of infants and that an infant who had
represented himself to be of full age and had sold property to the defendant by falsely representing
himself to be of full age was estopped from subsequently pleading that the contract was void by reason
of his minority and that he could not maintain his suit to set aside the sale on that ground. This ruling
was followed in Dadasaheb Dasrath Rao v. Nahani [1917J 41 Bom. 480, where Beaman and Heaton,
JJ. definitely dissented from the Calcutta view that a minor was not a "person" within the
contemplation of Section 115, Evidence Act. At p. 483 it was remarked that the rulings to the contrary:
reveal a constant confusion of thought between what is true estoppel and what may be that effect of
fraudulent misrepresentation by a minor.... We are not, however, concerned with any considerations
proper to the latter point, Estoppel is a law of allegation and proof and if we are right in our
interpretation of Section 115 then defendant 2, being a "person" within the contemplation of that
section and having by direct declaration intentionally caused the plaintiff to believe that he was a
major, is precluded absolutely from denying the truth of that assertion, that is to say, he might not
plead-much less prove-that at the time the conveyance was executed he was in fact a minor. The point
is not, as seems too often to be assumed, what would be the effect upon such a transaction of minority
as a fact, but it is this that if the law of estoppel be correctly and strictly enforced the Court is not to
know that defendant 2 was in fact a minor at all. The whole trial must proceed upon the footing of that
being true which he represented and caused the plaintiff to believe to be true, viz., that he was a major.
Fraudulent misrepresentation is upon a totally different footing. In the large majority of cases of
fraudulent misrepresentation it is the party who has suffered by it who desires the truth to be known
and to obtain relief on that basis. That of course is a doctrine wholly outside the law of estoppel proper
and should never be confused with it.
44. In Jasraj Bastimal v. Sadashiv Mahadev A.I.R. 1923 Bom 169, the plaintiff sued on a promissory
note on which he had advanced money to the defendant who was under age at the time, but who had
fraudulently represented himself to be a major. The plea of minority was not allowed to be urged and
the defendant was held to be estopped, it being laid down that the fact that the present suit was for
recovery of money and did not relate to immovable property, as Dadasaheb Dasrath Rao v. Bai Nahani
[1917J 41 Bom. 480, did not make any difference, the rules of evidence being exactly the same with
regard to suits relating to promissory notes. The principle of these rulings has also been accepted by
the Bombay Court is Fazul Bhoy Jaffar v. Credit Bank of India Ltd. [1915] 39 Bom. 331, and
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Gurushiddswami v. P.D. Narendra [1920] 44 Bom. 175, though the actual decision in each of those
cases proceeded on other points. It will thus be seen that the Bombay High Court has given full effect
to the plea of estoppel, and has refused to put a narrow interpretation on the word "person" in Section
115 so as to exclude from its connotation all persons described under the Contract Act to be
incompetent to contract.
45. This view has not, however, found favour in Calcutta. The first case of that Court which requires
notice is Dhanmull v. Ram Chunder Ghose [1897] 24 Cal. 265 where Petheram, C.J., and Prinsep and
Pigot, JJ., held that a suit to recover money advanced as a loan to an infant upon his false
representation that he was of age could not be maintained against him there being no obligation
binding upon him, which could be enforced upon the contract either at law or in equity. It was
remarked that; no doubt an infant will not be allowed to take advantage of his own fraud and may be
compelled to make specific restitution, when that is possible, of anything he has obtained by deceit.
But this does not come within either principle. If we, as a Court of equity as well as of law, were to
allow the plaintiff to recover in this suit, it would amount to restraining a defendant from setting up the
plea of infancy in an action on a contract by reason of his having made a fraudulent misrepresentation
dans locum contractui; and in no case has this ever been done.
46. It may be noted that though the loan in question had been secured on a mortgage, it was admitted at
the Bar on behalf of both parties that the plaintiff was not entitled to a mortgage decree, and the
dispute was confined to the right of the promisee to obtain a personal decree only. It is also noteworthy
that the case was decided in 1890, but its publication was prohibited by order of one of the Judges
constituting the Bench and it did not find its way in the Reports till 1897.
47. Next we come to the case of Saral Chand Mitter v. Mohun Bibi [1898] 25 Cal. 616 which was first
heard by Jenkins, J., on the original side, whose judgment is printed at pp. 372 to 386 of the report.
That was a suit to obtain a decree on a mortgage, which had been effected on the false representation
made by the defendant that he was of age. It was pleaded by the defendant that notwithstanding his
fraud, infancy was a complete answer to the claim. Jenkins, J. in, an exhaustive judgment held that the
disability of the defendant could not be successfully used in defence of fraud. He accordingly passed a
decree for the sum due recoverable only from the mortgage property. The learned Judge distinguished
the case of Dhanmull v. Ram Chand Ghose [1897] 24 Cal. 265 on the ground that the only question
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before the Court in that case was the right of the mortgagee to obtain a personal decree and that his
right to enforce the mortgage by foreclosure or sale had not been considered. It may also be mentioned
that the learned Judge started with the assumption (which was in accord with the view then prevailing
in Calcutta) that a contract entered into by a minor was not void but merely voidable. It is doubtful if
the decision would have been the same, if the contract had been treated as void, which must now be
the case in view of the Privy Council decision in Mohori Bibee v. Dharmodas [1903] 30 Cal. 539. The
judgment of Jenkins, J., was appealed against and affirmed by Maclean, C.J., and Macpherson and
Trevelyan, JJ., who doubted the correctness of Dhanmull v. Ram Chand Ghose [1897] 24 Cal. 265 and
held; that in cases of fraud by an infant the protection which the law throws around him is taken away;
in other words, that the defence of infants cannot be successfully pleaded in defence of a fraud
perpetrated by the infant.
48. The question arose again before the same learned Judge (Jenkins, J.) presiding over the original
side of the Court in Dharmo Dass Ghose v. Brahmo Dutt [1898] 25 Cal. 616, to which reference has
already been made. There the plaintiff sued to have a mortgage-deed executed by him cancelled on the
ground that at the time of its execution he was a minor. In reply the defendant mortgagee pleaded that
the loan was induced by a fraudulent misrepresentation as to his age, made by him to the defendant's
attorney. It was, however, found as a fact that the said attorney had been made aware of the plaintiff's
minority before the transaction was completed. No question of estoppel, therefore, really arose in the
case. The learned Judge, however, proceeded to consider the point which had been raised before him
that fraud and deceit were not necessary to the success of the defendant's plea of infancy and which
was supported by Certain remarks in Ganesh Lala v. Bapu [1897] 21 Bom. 198. Dissenting from this
view he held that the general law of estoppel as enacted by Section 115, Evidence Act, would not
apply to an infant unless he had practised fraud operating to deceive, in which case the Court
administering equitable principles will deprive a fraudulent minor of the benefit of a plea of infancy.
As no fraud had been established in the case, the suit was decreed. The mortgagee's appeal was heard
by Maclean, Prinsep and Ameer Ali, JJ., Brahmo Dut v. Dhurmo Dass [1899] 26 Cal. 381, who upheld
the finding of fact of the trial judge that the defendant-appellant's attorney was not misled by the
alleged representation by the plaintiff-respondent as to his age. The learned Judges, however,
proceeded to consider the plea of estoppel and laid down the proposition that Section 115, Evidence
Act, had no application to contracts by infants. At p. 88 the learned Chief Justice remarked: The term
"person" in Section 115 is amply satisfied by holding it to apply to one who is of full age and
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competent to enter into a contract, and I cannot bring myself to think that it could have been the
intention of the legislature by such a general expression, to institute such a grave change in the law of
estoppel in relation to minors.
49. The point was further developed by Ameer Ali, J., at p. 394, in the following words: To hold that
an infant may be estopped in regard to contracts by conduct or misrepresentation would be practically
to sweep away all the limitations the law has imposed on the capacity to contract; and a person
labouring under disability could be enabled to enlarge by his own act his legal capacity to contract. In
the Liverpool Adelphi Loan Association v. Fairhurst (20), it was held that a person under a disability
to contract was not, liable upon the contract, nor for a wrong arising out of or directly connected with
the contract, and which is the means of effecting it and parcel of the same transaction. The same
principle was followed in Bartlett v. Welles [1862] B. & S 386. It follows, therefore, that when the
present law declares that an infant shall not be liable upon a contract, or in respect of a fraud in
connexion with a contract, he cannot be made liable upon the same contract by means of an estoppel
under Section 115.
50. As pointed out already this case went on appeal before the Privy Council in Mohori Bibi v.
Dharma Das Ghose [1903] 30 Cal. 539 and was decided against the plaintiff on the ground that he
knew the truth of the matter and consequently no question of estoppel really arose. At p. 545 Sir Ford
North specifically stated that in view of this finding their Lordships did not think it necessary to deal
with the question as to whether Section 115 applied to infants or not.
51. In Surendra Nath Roy v. Krishna Sakhi Dasi MANU/WB/0589/1910 : 15 C.W.N. 239 the vendor,
while over 18 but below 21 years of age and being 'himself aware that his minority had been extended
by reason of an order under Section 7, Guardians and Wards Act, had sold the property to the
plaintiffs, who were not aware of that fact. Caspers and N.E. Chatterjee, JJ., remanded the case for
enquiry, whether the vendee was in fact deceived and whether there was misrepresentation and legal
fraud on the vendor's part. They expressed the view that if such misrepresentation and fraud was in fact
established, the quondam minor would be estopped from taking advantage of his minority to show that
the conveyance by him was inoperative. But in the absence of such fraud he cannot be held liable. In
Ram Charan Das v. Joy Ram Mejhi MANU/WB/0459/1912 : 17 C.W.N. 10 the point was again raised
but not definitely decided, though Mukerji, J., expressed the opinion that the proposition that there can
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never be an estoppel against an infant, is too broadly stated and requires qualifications in the cases of
fraud. The last Calcutta case is Golam Abdur v. Hem Chandra 20 C.W.N. 418, in which on the finding
that the representation by the minor was not fraudulent, N.R. Chatterjee and Newbould, JJ., repelled
the plea of estoppel and held that: the law of estoppel must be read subject to other laws such as the
Indian Contract Act and that a minor cannot be made liable upon a contract by means of an estoppel
under Section 115, Evidence Act.
52. In view of their finding that the representation in that case was not fraudulent they did not think it
necessary to decide whether a man can be estopped when the minor intended to deceive the opposite
party and the latter was in fact deceived.
53. It will thus be seen that the rulings of the Calcutta Court on this point are not uniform. The balance
of authority, how ever, appears to be in favour of the view that while generally speaking the plea of
estoppel cannot prevail against a minor he may be estopped in cases where the representation made by
him was fraudulent and has in fact resulted in defrauding the representee. It must, however, be borne in
mind, as has been pointed out already, that the only considered decisions of that Court, in which this
conclusion was arrived at, were given at a time when it was erroneously believed that a minor's
contract was voidable and not void.
54. At Allahabad the question appears to have been first considered in Jagar Nath Singh v. Lalta
Prasad [1909] 31 All. 21, where Banerji, J., held that: the law of estoppel can only be applied subject
to other provisions of law, and therefore, when, as held by the Privy Council, a contract by a minor is
void under the provisions of the Contract Act, the law of estoppel cannot be invoked in aid to validate
that which is void under the law.
55. He, however, held that on equitable grounds the quondam minor must restore the benefit he has
derived as a result of his fraudulent representation. But the learned Judge took care to point out that the
liability to restitution attached to the minor, not on the ground of estoppel, but because "an infant shall
not take advantage of his own fraud." The other member of the Bench, Richards, J., however, took a
different view of the facts and held that the representation in question was not fraudulent. Another
Bench of this Court (Richards and Tudball, JJ.) in Kanhaiya Lal v. Babu Ram [1911] 8 A.L.J. 1058
held that in a suit brought for recovery of money on a promissory note, the defendant was competent to
plead his infancy although he had misrepresented his age to the plaintiff at the time of the execution of
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the promissory note. The same view was taken by Karamat Husain and Chamier, JJ. in Kanhaya v.
Girdhari Lal [1912] 9 A.L.J. 103 and by Richards, C.J. and Banerji, J., in Dhara Singh v. Gyan Chand
[1918] 16 A.L.J. 441, though in this latter case the High Court refused to set aside the decree against
the minor on the ground that the case had come up before it on the revision side.
56. The first Madras case which needs notice is Vaikunta Rama Pillai v. Authimoolam Chettiar [1915]
38 Mad. 1071, where, after citing with approval an obiter dictum to the same effect in Arumugam
Chetti v. Durasinga Tevar [1914] 37 Mad. 38, it was held that the plain statutory provision that a minor
is incompetent to incur a contractual debt cannot be overruled by an estoppel. Again in Raghavayya v.
Subbayya [1918] 7 M.L.W. 124 Courts-Trotter and Seshagiri Ayyar, JJ., held that a sale-deed executed
by a minor is liable to be cancelled by him after attaining majority, but that the Court before granting
him possession can put him on terms. Reference was made to Leslie v. Shiell [1914] 3 K.B. 607 and
Mahomed Syedol Ariffin v. Yeoh Ooi Gark A.I.R. 1916 P.C. 242; and the decision in Dadasaheb
Dasiathrao v. Bai Nahani [1917) 41 Bom. 480 was dissented from. The same view was taken in
Guruswamy Pantulu v. Budhkaran Lal [1919] 10 M.L.W. 225 though the point is not discussed in any
detail. The latest Madras case is Venkataramayya v. Punnayya A.I.R. 1926 Mad. 607, where Reilly, J.
followed, though not without hesitation, the previous rulings of the Court and repelled the plea of
estoppel, but directed the quondam minor to refund the consideration retained by him.
57. The same view has also found favour with the Rangoon and Patna High Courts. See Maung Tin v.
Ma Lun A.I.R. 1927 Rang. 108 and Ganganand Singh v. Ramashwar Singh A.I.R. 1927 Pat. 271. In
the latter case, Das J., held (Adami, J. concurring) that a minor is not bound in law by a contract into
which he had entered, even if he induced the other party to enter into it by a fraudulent
misrepresentation that he was of age; but where the infant had obtained an advantage by falsely stating
himself to be of full age, equity would restore his ill-gotten gains and release the party deceived from
obligations or acts induced by the fraud. In order to create this liability, however, the representation
must be express and fraudulent and will not be constituted so by mere inference suggested by or drawn
from the infant's conduct.
58. The Sindh Judicial Commissioner's Court at Karachi for a time followed the decisions of the
Bombay High Court and up held the plea of estoppel in several cases: see Sobhanmal Pohumal v.
Bachal [1916] 9 S.L.R. 214 and Lunidomal Khiloomal v. Ghanumal Jamna Das [1920] 14 S.L.R. 104.
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But a Full Bench of that Court has recently taken the contrary view in Mt. Hari v. Roshan A.I.R. 1923
Sind 5, and has held that Section 115 is inapplicable to such a case.
59. The above review of the authorities shows that the consensus of judicial opinion in India is
decidedly against giving effect to the plea of estoppel in such cases. This has been definitely ruled in
Allahabad, Madras, Patna, Rangoon and Karachi; and the Calcutta. High Court, while taking the same
view on the general question, has in some decisions qualified the proposition by holding that the minor
may be estopped where the representation was fraudulent and the representee had in fact been
deceived. In our own Court the rulings are not uniform, but the latest decision is in accord with the
view taken by the majority of the other Courts. In the Bombay High Court, however, the contrary
opinion still holds good, according to which the quondam minor is debarred from setting up the
minority in avoidance of the contract. Now I may say at once that I have no hesitation in accepting the
reason given by Beaman, J., in Dadasaheb Dasrathrao v. Bai Nahani [1917] 41 Bom. 480, for
dissenting from the view taken by Maclean, C.J., and the other Judges of the Calcutta High Court in
Brahmo Dutt v. Dharmo Das Ghose [1899] 26 Cal. 381 that the word "person" in Section 115 must be
taken to have been used as meaning only a person sui juris. In my opinion neither the context nor the
general scheme of the Evidence Act nor the established canon of interpretation of statutes warrants
such a restricted meaning being put on the word. In the absence of there being anything in the
definition clauses or other parts of the Act to indicate that a technical meaning has been imposed on
the word, it must be taken to cannot what it does in ordinary plain English. Secondly in S.. 115 itself
the word "person" is found twice--at one place in reference to the representor (or the person of
incidence as he is called by American lawyers) and at the other in reference to the representee (or the
person of inference). Now it is not suggested that the legislature intended to use the same word in two
different senses in the same section. If, therefore it has the same meaning in both places, and is to be
taken to mean only a person sui juris, the startling result will follow that even in those cases in which
the minor is the person of inference (representee) and has acted to his detriment on the belief of the
representations made to him by an adult, he shall not be allowed to take advantage of the doctrine of
changed situations and shall be debarred from putting forward the plea of estoppel against the opposite
party. So far as I am aware such a contention has never been put forward and cannot possibly be
accepted as correct. Then again we find the word "person" in several other sections of the Act, e.g.,
Sections 8, 10, 112, 116, 118, 122 etc, and it is conceded that in none of them it can be given a
restricted meaning so as to exclude minors. This being so, the well-settled rule of construction must be
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applied that the same words are to be prima facie construed in the same sense in different parts of the
same statute: per Chitty, J., in Spencer v. Metropolitan Board of Works [1883] 22 Ch. D. 142. I am,
therefore, of opinion that Section 115 cannot be held to be inapplicable on this ground.
60. Nor am I prepared to accept the argument which seems to have appealed to the learned Judicial
Commissioners of Sind in the Full Bench case, above cited, to the effect that as under Section 115 the
representor must intentionally cause or permit another person to believe a certain thing to be true and
to act upon such belief, and as it is only a person of mature judgment who can be supposed to have
such an intention the section cannot apply to a minor. It will be sufficient to say that this construction
is opposed to the decision of their Lordships of the Privy Council in Sarat Chander Dev v. Gopal
Chander Laha [1893] 20 Cal. 296, where it was held that the term "intentionally" has been advisedly
used in the Indian Act for the purpose of declaring the law in India to be precisely the same as the law
of England, according to which it is not the real intention of the representor which matters, but what
has to be seen is whether he has so conducted himself that a reasonable man would take the
representation to be true end believe that it was meant that he should act upon it.
61. This brings us to the remaining but really substantial point, viz, whether the specific provision of
the substantive law (Section 11, Contract Act), which declares a minor's contract to be void, can be
rendered nugatory by a general provision embodying the rule of estoppel found in a procedural Code
like the Evidence Act. In order to find a satisfactory answer to this question two fundamental
principles must be borne in mind. The first is embodied in the great maxim generalia specialibus non
derogant, which has frequently been applied to resolve the apparent conflict between provisions of the
same statute or of different statutes. In such cases wherever there is a particular enactment and a
general enactment and the latter, taken at its most comprehensive sense, would overrule the former, the
particular statute must be operative: Pretty v. Solly [1857] 26 Beav 606 and its provisions must be read
as excepted out of the general: Dryden v. Overseers of Putney [1876] 1 Ex. D. 223 and Taylor v.
Corporation of Oldham [1877] 4 Ch. D. 395. The second is that where a particular act is declared to be
void and unlawful by statute a party cannot by representation, any more than by other means, raise
against him an estoppel so as to create a state of things, which he is under a legal disability from
creating. As pointed out by vice-Chancellor Bacon in Barrow's case [1880] 14 Ch. D. 432:
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The doctrine of estoppel cannot be applied to an Act of parliament. Estoppel only applies to a contract
inter parties, and it is not competent to the parties to a contract to estop themselves or anybody else in
the face of an Act of Parliament...I am of opinion that as between the parties to this contract there was
no estoppel, they contracted to do a thing which in the result it was unlawful to do.
62. On the same principle it has been held that a corporate body cannot be estopped from denying that
they have entered into a contract, which it was ultra vires for them to make: see Canterbury
Corporation v. Cooper [1909] 100 L.T. 597.
63. In this connexion I think it is legitimate to seek guidance from the English law, for though in India
the law on the subject of estoppel has been codified, it has been held by their Lordships of the Privy
Council in Sarat Chunder Dev v. Gopal Chandar Lala [1893] 20 Cal. 296 that the law enacted in
Section 115 relating to estoppel doer not differ from the English law on the subject. In Levene v.
Brougham [1909] 25 T.L.R. 265 it has been held by the Court of appeal that such a contract being void
under the Infants Relief Act, the defendant was not estopped from relying on the statute by the fact that
he had made a misrepresentation as to his age. Then there is the much cited case of Leslie v. Shiell
[1914] 3 K.B. 607 where, however, the question of estoppel was not raised or discussed, it being
assumed that a suit to enforce the contract as such would not lie and the real points raised and decided
were that in such a case an action delicto for damages on the basis of deceit will not lie, nor can the
creditor recover from the defendant the amount as money "had and received" by him for the plaintiff's
benefit. The Court of appeal, reaffirming the rule laid down in numerous cases that an infant is not
answerable ex delicto, as the tort is directly connected with the contract, which the infant is entitled to
avoid. Therefore, this case also supports, though indirectly, the conclusion arrived at in Levene v.
Brougham [1909] 25 T.L.R. 265 and is of particular value as having been approved by the Privy
Council in the obiter dictum in Mahomed Syedol Arrifin v. Yeoh Ooi Gark A.I.R. 1916 P.C. 242
already referred to.
64. I am, therefore, of opinion that both on principle and authority, the first question referred to the
Full Bench must be answered in the negative and it must be held that the minor is not estopped from
pleading his minority in avoidance of the contract. I wish, however, to remark that while this is my
well considered opinion on the point I have arrived at it after a great deal of hesitation, for I find that
there exist weighty considerations for the opposite view which has in support of it the high authority of
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eminent Judges in England, India and America and of several learned authors who have made a special
study of the subject. In view of this serious divergence of opinion on the subject, I venture to think that
it is high time for the legislature to intervene and set the controversy at rest as has been done in several
States in America: see American Cyclopedia of Law in Procedure, vol. 32, p. 611 and Curpus Juris
vol. 81, p. 1005, et seq. The question is frequently arising and in the absence of an authoritative
pronouncement by their Lordships of the Privy Council there does not appear to be much chance of
unanimity of judicial opinion on it.
65. The next question to be decided resolves itself into two parts:
(a) Whether the quondam minor can avoid the contract and at the same time retain the benefit derived
by him therefrom; and,
(b) whether the matter is in any way affected by the circumstances that he is a plaintiff or a defendant
in the action in which the question arises.
66. On both these points again there is considerable conflict of judicial opinion though, speaking for
myself, I do not feel the same difficulty here as I do on the first question. It has been argued for the
appellant that the contract being void and the Court being incompetent to enforce it or to grant relief in
an action ex delicto arising from the deceit practised by the minor, it follows as a matter of course that
it has no jurisdiction to order restitution or repayment of the consideration for this would be doing the
same thing in another garb. In my opinion this argument is fallacious and ought to be rejected. In
ordering restitution the Court is not enforcing a void contract but is restoring the parties to the status
quo ante. The necessary consequence of the declaration that the contract is void is to wipe it off
entirely out of consideration, to treat it as if it never had any existence, and the Court, while granting
the minor this relief is not powerless to adjust the equities between the parties and can make the
fraudulent minor restore what he has obtained by the very contract which he is now seeking
successfully to avoid. This is in accord with equity, justice and good conscience and appears to have
been recognized for a long time by the Courts in England. It is no doubt true that there are dicta in
several English decisions that this jurisdiction to make restitution in integrum is limited to those cases
only in which it is possible to compel the minor to restore the property in specie which he had obtained
by fraud and that the Courts, while holding a contract to be void, cannot order him to refund the money
which he has received under it. It is not, however, necessary to discuss the decisions which bear on the
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point and which it is not always easy to reconcile as in India jurisdiction of Courts to require a party at
whose instance an instrument has been adjudged to be void to make any compensation to the other
party, which justice may require, has been expressly recognized by the legislature in Sections 39 and
41, Specific Relief Act. It will be noticed that this power to grant compensation is not confined to
those cases only in which the instruments related to transfer of property, nor is the mode in which
compensation is to be given defined. The discretion of the Courts in the matter seems to be absolutely
unfettered. They might, therefore, in appropriate cases, while adjudging a deed, executed by a minor to
be void, order refunds of the monetary consideration received by him under the contract and in
addition make him restore any other benefit which he has derived therefrom.
67. It is no doubt true that Sections 39 and 41 relate to those cases only in which the minor is the
plaintiff; but that does not affect the question of jurisdiction of the Courts to grant equitable relief,
either by way of restitution of the property in specie or by refund of the money with or without
interest. Of course, whether compensation is to be granted at all and if so to what extent and in what
form are matters to be determined by the Courts in each particular case according to its peculiar facts
and circumstances. But it does not seem to me to be open to doubt that the Courts in this country
possess the powers to compel the fraudulent minor to restore the benefit derived by him from a void
contract. This was recognized by Chief Court in Balak Ram v. Dadu [1910] 76 P.R. 1910 and, so far as
I am aware, has been accepted all along as correct law: see also Kupura v. Hardit Singh, A.I.R. 1923
Lah. 510. 'The same view has been taken at Allahabad: see Jagan Nath Singh v. Lalta Parsad [1909] 31
All. 21, and Lila Dhar v. Piarey Lal A.I.R. 1921 All. 326, at Madras in Vikuntarama Pillai v.
Authimoolam Chettiar [1915] 38 Mad. 1071, and Raghavyya v. Subhayya [1918] 7 M.L.W. 124, at
Patna in Ganganand Singh v. Rameshwar Singh A.I.R. 1927 Pat. 271; and by the High Court of
Calcutta in Saral Chand Mitter v. Mohun Bibi [1898] 25 Cal. 616.
68. It remains now to notice the subsidiary question whether the power of the Court to order restitution
is limited to those cases only in which it has been moved by the minor himself; whether before or after
attaining majority, or whether the Court can grant relief also when he is the defendant. On this
question again the authorities are not uniform, but after giving the matter my fullest consideration I am
of opinion that there is no justification for making such a distinction. It is no doubt true that Section
41, Specific Relief Act, relates to those cases only where the minor is the plaintiff, but its terms are not
exhaustive and I fail to see why the equitable jurisdiction of the Court should be affected by the fact
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that the minor comes before it as a defendant. The Court exercises this power to do complete justice
between the parties by restoring them to the position which they occupied before the' void contract was
entered into and the mere circumstance, that the minor is arrayed before it on one side or the other,
ought not to make any difference.
69. For the foregoing reasons my answer to the reference is:
(1) That in the circumstances stated in the question the quondam minor is not estopped from pleading
his minority in avoidance of the contract.
(2) that he cannot in subsequent litigation refuse to perform the contract and at the same time retain the
benefit which he had derived therefrom.
(3) It makes no difference whether in such litigation he is the plaintiff or the defendant.
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Ajudhia Prasad and Ors. v. Chandan Lal and Ors.; AIR 1937 All 610
Judges/Coram: Shah Mohammad Sulaiman, C.J., Thom and Bennet, JJ.
JUDGMENT
Shah Mohammad Sulaiman, C.J.
1. This is a second appeal arising out of a suit for sale on the basis of a mortgage deed dated 15th
October 1925 executed by the defendants in favour of the plaintiffs. The defendants pleaded that they
were minors at the time of the mortgage deed, a certificated guardian having been appointed for them,
and also pleaded that there was no necessity for contracting the debt. In the rejoinder the plaintiffs
denied that the defendants were minors and also asserted that the defendants were liable to pay the
amount under Section 68, Contract Act. The issues framed by the trial Court related to the minority of
the defendants, the object of the debt and its proper attestation and consideration. The trial Court found
that the defendants were more than 18 years of age but under 21 years, and that there was no evidence
of representation either by the defendants or their father Sital Prasad. The Court held that the plaintiffs
could not recover the amount under Section 68, Contract Act. The lower appellate Court held that the
defendants were in fact minors, being under 21 years of age, and also held that the marriage expenses
for which the money was said to have been advanced were not "necessaries," and therefore Section 68
had no application. But it held that the respondents and their father not only concealed the fact that
there was already a guardian appointed for the minors, but the father even went to the length of
declaring before the Sub-Registrar that his younger son was over 18, and that the dishonest
suppression of the fact that the executants were under his own guardianship indicated to the plaintiffs
that they were dealing with persons competent to contract, and then remarked: "Thus in my opinion
there was a fraudulent misrepresentation made by or on behalf of the respondents."
2. Following the ruling of the Full Bench of the Lahore High Court in Khan Gul v. Lakkha Singh
A.I.R. 1928 Lah. 609, it decreed the claim for the recovery of the amount with interest at the
contractual rate and future interest and in default for sale of the mortgaged property. Two of us before
whom this appeal came up for disposal have referred the following question of law to this Full Bench:
Where money has been borrowed by two minors under a mortgage deed at a time when they were
minors, more than 18 years but less than 21 years of age, under a fraudulent concealment of the fact
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that the executants were minors because a guardian had been appointed for them under the Guardians
and Wards Act, can the mortgagee in a suit brought against them get a decree for the principal money
under Section 65, Contract Act or under any other equitable principle, and can he also get a decree for
sale of the mortgaged property.
3. In the meantime the Bench also called for a finding on another point which will be disposed of by
the Division Bench separately. The majority of the learned Judges of the Lahore Full Bench based
their decision on a supposed rule of equity and not on any particular section of any Act. But in the
course of the arguments before us the plaintiff's claim has been based on various alternative grounds
which it may be convenient to take up seriatim : It is first argued that the case is covered by Section
65, Contract Act. No doubt the Contract Act draws a distinction between an agreement and a contract.
Under Section 2(g) an agreement not enforceable by law is void, while under (h) an agreement
endorsable by law is a contract. Section 65 deals with agreements discovered to be void and contracts
which become void. A possible view might have been that Section 65 applies even to minors and that
they can in every case, whether there is mistake, misrepresentation, fraud or not be ordered to restore
any advantage that has been received or make compensation for it to the person from whom the minors
received it. This would result in a suit being decreed for recovery of money received by a minor on a
bond or promissory note even though the contract itself is void. The other view is that the Con. tract
Act deals with agreements which may be void on the ground, for instance, that they are opposed to
public policy or prohibited by law or they may be void because one of the parties thereto is not
competent to contract, and Section 65 was really intended to deal with agreements which from their
very nature were void and were either discovered to be void later or became void, and not agreements
made by persons who were altogether incompetent to enter into an agreement, and the agreement was
therefore a nullity from the very beginning. There is no section which in so many terms says that an
agreement by a minor is void. Indeed, it was held in some earlier cases that it was only voidable see
Saral Chand Mitter v. Mohun Bibi (1898) 25 Cal. 371 .
4. The question directly arose before their Lordships of the Privy Council in the leading case in Mohori
Bibee v. Dharmodas Ghose (1903) 30 Cal. 539. In that case the plaintiff had brought a suit for a
declaration through his next friend that a mortgage deed executed by him was void and inoperative and
should be cancelled because he was a minor at the time of its execution. The plaintiff had attained the
age of 18 years but had not attained the age of 21 and a certificated guardian had been appointed for
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him. The defendant had taken a long declaration in writing from the plaintiff as to his age and had
advanced a large sum of money to him on that assurance. The defendant's agent Kedar Nath was aware
of the fact that the minor was under 21 years of age but apparently the mortgagee himself was
personally not. Their Lordships first held that the knowledge of the agent must be imputed to the
defendant and then repelled the contention that the plaintiff minor was estopped by Section 115,
Evidence Act, from setting up his minority on the ground that the defendant must be deemed to have
known the real facts and so was not misled by the untrue statement. The point was next pressed before
their Lordships of the Privy Council that before decreeing the plaintiff's claim he should be ordered to
repay to the defendant the sum which had been paid to him. Their Lordships accordingly ordered that
this point should be re-argued before them. It was on this account that their Lordships took up the
consideration of Section 64, Contract Act, and after examination of Sections 2, 10 and 11 held that the
Contract Act makes it essential that all contracting parties should be competent to contract and that a
person who by reason of his infancy is incompetent to contract cannot make a contract within the
meaning of the Act. Their Lordships then referred to Section 68, Contract Act, and pointed out that
under the Indian Law even for the necessaries supplied to a minor he is not made personally liable for
them, but that the only statutory right that is created is against his property. Their Lordships also
examined Sections 183, 184, 247 and 248 in order to emphasize the position of a minor and then
remarked:
The question whether a contract is void or voidable presupposes the existence of a contract within the
meaning of the Act, and cannot arise in the case of an infant. Their Lordships are therefore of the
opinion that in the present case there is not any such voidable contract as is dealt with in Section 64.
5. Their Lordships distinctly held that the agreement made by a minor was void and not only voidable,
thereby overruling the previous rulings of the Calcutta High Court. The learned Counsel for the
defendants then relied on Section 65, Contract Act. With regard to this plea their Lordships made the
following observation:
A new point was raised here by the appellants' counsel founded on Section 65, Contract Act, a section
not referred to in the Courts below, or in the cases of the appellants or respondent. It is sufficient to say
that this section, like Section 64, starts from the basis of there being an agreement or contract between
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competent parties; and has no application to a case in which there never was and never could have
been any contract.
It was further argued that the Preamble of the Act showed that the Act was only intended to define and
amend certain parts of the law relating to contracts, and that contracts by infants were left outside the
Act. If this were so, it does not appear how it would help the appellants. But in their Lordships' opinion
the Act so far as it goes is exhaustive and imperative; and does provide in dear language that an infant
is not a person competent to bind himself by a contract of this description.
6. Their Lordships then proceeded to consider Sections 41 and 38, Specific Relief Act. As the minor
himself was the plaintiff, their Lordships remarked that these sections no doubt gave a discretion to the
Court, but the Courts below in the exercise of their discretion had come to the conclusion that as the
defendant had knowledge of the infancy, justice did not require an order for the return of the money.
Their Lordships saw no reason for interfering with the discretion so exercised. Their Lordships then
took up the rule of equity that a person who seeks equity must do equity, and referred to the decision
of the Court of appeal in (1902) 1 Ch 1, which was affirmed by the House of Lords in Thurstan v.
Nottingham permanent benefit Building Society (1902) 1 Ch. 1. There the Society had advanced to a
female infant the purchase money of some property she purchased and had also agreed to make her
advances to complete certain buildings thereon. On attainment of majority she brought an action to
have the mortgage declared void. It was held that:
The mortgage must be declared void and that the Society was not entitled to any repayment of the
advances.
7. In that particular case, however, the Society had in fact obtained possession of the building; it was,
therefore, held that the Society was entitled to have a lien upon the property. Their Lordships quoted
the dictum of Lord Romer:
The short answer is that a Court of equity cannot say that it is equitable to compel a person to pay any
monies in respect of a transaction which, as against that person the Legislature has declared to be void.
8. This case meets many of the points which have been urged on behalf of the plaintiffs. Their
Lordships distinctly held that both Sections 64 and 65 presuppose the existence of a contract within the
meaning of the Act which is either void or becomes void, and that they have no application to the case
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where one of the parties was incompetent by reason of his minority. As regards Section 65, their
Lordships distinctly said:
This section (Section 65) starts from the basis of there being an agreement or contract between
competent parties; and has no application to a case in which there never was, and never could have
been, any contract.
9. Where, therefore, one of the parties is a minor and is incapable of contracting so that there never is
and can never be a contract, Section 65 can have no application to such a case as that section starts
from the basis of there being an agreement of contract between competent parties. This is as clear a
pronouncement as can be, and it is impossible to whittle down its effect either by suggesting that it was
not necessary in that case to go into that question or that their Lordships meant to refer to only a
portion of Section 65, namely, "where the contract becomes void" and not to the portion "where the
agreement is discovered to be void", in laying down its inapplicability. The clear rule laid down is that
neither Section 64 nor Section 65 deals with a case where a party is incompetent to enter into a
contract at all, and that in such a case, therefore, there would be no question of ordering him to restore
the advantage which he has received or to make compensation for what he has received.
10. The rule so laid down has, of course, been followed unanimously by all the High Courts in India
for the last 35 years. The learned Counsel for the respondents has not been able to show a single case
of any High Court in India where Section 65 has been applied against a minor and a decree passed
against him when he is a defendant on the ground that his contract had been void. Indeed, if such a
view were to prevail, the result would be that all agreements by minors would have to be enforced
indirectly against them, no matter whether there had been any mistake, misrepresentation or fraud or
not; and a decree passed for restoration of the money advanced to a minor would be almost the
enforcement of his liability to pay. And the decree would have to be a personal decree. This would
amount to nullifying the effect of the protection which the Legislature has given to minors. It would
make a minor personally liable for restoration of the advantage and payment of compensation,
although Section 68, which provides for the special case of liability for necessaries, confines such
liability to the minor's property and exempts his person. If we were to enforce directly the supposed
liability of the minor to restore the advantage, a wide door would be opened for mischief, and persons
would be free to deal with minors with the full confidence that even if the worst comes to the worst,
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they would get back full compensation for what they were risking. Such an inter, predation of the
section would involve drastic consequences, which could not have been the intention of the
Legislature. It may be noted that the Contract Act has been amended since 1923 from time to time and
various amendments have been introduced. The Legislature must be deemed to have been aware of the
inter, predation put on Section 65 by the Lordships of the Privy Council, which was followed loyally
and consistently by all the High Courts in India. The fact that it has not thought fit to amend the
section is an indication that the Legislature has seen nothing in this interpretation to disapprove of.
Even the learned Judges of Lahore in the Full Bench case Khan Gul Lakkha Singh A.I.R. 1928 Lah.
609, which is the sheet anchor of the plaintiffs, did not think it proper to rely on Section 65 of the Act,
although they took pains to discover a ground for decreeing the claim. Indeed it appears that the
learned Counsel at the Bar did not even venture to urge that Section 65 was applicable.
11. In Kamta Prasad v. Sheo Gopal Lal (1904) 26 All 342, a Bench of this Court following the ruling
in Mohori Bibee v. Dharmodas Ghose (1903) 30 Cal. 539 held that Sections 64 and 65, Contract Act,
apply only to contracts between competent parties and are not applicable to a case where there is not
and could not have been any contract at all. There too, in the absence of any material to show that
justice required the return of the amount, the learned Judges did not think it fit to impose any such
condition on the plaintiff who had been a minor as could have been done under Section 41, Specific
Relief Act. In Kanhai Lal v. Babu Ram (1911) 8 A.L.J. 1058 a Bench of this Court held that Sections
64 and 65, Contract Act, did not apply nor did Section 41, Specific Relief Act, apply to a case where
the suit was brought against a defendant minor on a promissory note executed by him, although he had
misrepresented his age to the plaintiff. Again in Kanhayalal v. Girdhari Lal (1912) 9 A.L.J. 103, a suit
on a promissory note against a defendant who had represented himself to be of full age was dis.
missed. In Doulatuddin v. Dhaniram Chhutia A.I.R. 1917 Cal 566, there was a suit for specific
performance and, in the alternative, for refund of the amount against a person who had been a lunatic
at the time of the contract. It was held that Section 65 had no application to such a case nor would the
Court act under Section 38 or Section 41, Specific Relief Act. It was held further that it was not
equitable to compel him to pay the amount when he had been a lunatic.
12. In Radhey Shiam v. Bihari Lal A.I.R. 1919 All. 453, it was held that a minor cannot be made to
repay money which he has spent merely because he received it under a contract induced by his fraud
and the English case in Lesley Ltd. v. Shiell (1914) 3 K.B. 607 was followed. The learned Judges
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agreed with the observations made in Lesley Ltd. v. Shiell (1914) 3 K.B. 607 which had been
approved by their Lordships of the Privy Council, but they considered it fair to add (lest it be supposed
that their decision conveyed any reflection upon the defendant) that no fraud had been really alleged or
proved. That observation which was made to clear the character of the defendant did not in any way
detract from the value of the ruling which was given. In Bindeshri Bakhsh Singh v. Chandika Prasad
MANU/UP/0349/1926 : AIR1927All242 , it was held by a Division Bench of this Court that a person
who had executed a bond whilst a minor could not, unless he had attained majority, by executing a
second bond of similar purport, ratify or confirm the former bond because the minor's contract was
void. The case in Gregson v. Raja Sri Aditya Deb (1899) 17 Cal. 223 which was a case of a
disqualified proprietor whose transactions were voidable, was distinguished. In view of these
authorities it is impossible to hold that Section 65 can be availed of by the plaintiffs against the
defendants. The second ground urged is that there is some sort of estoppel against the minors in view
of the appellate Court's guarded finding that there was a fraudulent representation made by or on
behalf of the defendants. But when the contract itself was void the plea of estoppel must fail. No
estoppel can be pleaded against a statute. If the Contract Act declares that the contract by a minor is
void nothing can prevent the minor from pleading that such a con. tract is void on the ground of his
minority. In Mohori Bibee v. Dharmodas Ghose (1903) 30 Cal. 539 it was not necessary for their
Lordships to decide the question of estoppel, as there could be none when the defendant had been
constructively aware of the minority. But their Lordships, as already pointed out, quoted the remark of
Romer, L.J. that a Court of equity cannot say that it is equitable to compel a person to pay any monies
in respect of a transaction which as against that person the Legislature has declared to be void. In
Thurstan v. Nottingham Permanent Benefit Building Society (1902) 1 Ch. 1 , it had been observed by
the House of Lords that:
The money...was really an advance to this lady during her minority and secondly she was not liable for
the repayment of it and the mortgage which she granted for the repayment of that money was
ineffectual as an obligation.
13. The previous English cases were reviewed by Lord Sumner in Lesley Ltd. v. Shiell (1914) 3 K.B.
607, who observed at p. 619:
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There is no fiduciary relation : the money was aid over in order to be used as the defendant's own and
he has so used it and, I suppose, spent it. There is no question of tracing it, no possibility of restoring
the very thing got by fraud, nothing but compulsion through a personal judgment to pay an equivalent
sum out of his present or future resources, in a word nothing but a judgment in debt to repay the loan. I
think this would be nothing but enforcing a void contract. So far as I can find, the Court of Chancery
never would have enforced any liability under circumstances like the present, any more than a Court of
law would have done so, and I think that no ground can be found for the present judgment, which
would be an answer to the Infants' Relief Act.
14. Kennedy, L.J. at p. 621 remarked:
Be that as it may, I am certainly of opinion that in the present case, where the defendant is an infant,
the cause of action is in substance ex contractu and is so directly connected with the contract of loan
that the action would be an 'indirect way of enforcing that contract.
15. He further observed:
There is no case in which I can find that a Court of Equity has given judgment against an infant in
circumstances like the present, that is to say, in which it has interfered on the ground of the fraud of the
infant, whereby he induced the making of the contract of loan, to order the infant to pay the plaintiff a
sum equal to the sum borrowed under the void contract, and so, in effect, to the amount of the principal
lent : to give validity as against the infant to a void contract.
16. Lawrence, J. remarked:
It would be a simple thing for those who prey upon infants to obtain from them materials which could
be used to support a charge of fraud as easy as obtaining the usual promissory note. The result would
be that the infant would have both to establish his infancy and to face a charge of fraud.
17. A distinction was drawn in the case where the infant requires as a plaintiff the assistance of any
Court which would be refused until he made good his fraudulent representation. This opinion was
approved of by their Lordships of the Privy Council in Mahomed Syedol Arffin v. Yeoh Ooi Gark
A.I.R. 1916 P.C. 242, , where their Lordships observed:
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A case of fraud by the appellant on the subject of his age was set up, but it cannot be doubted that the
principle recently given effect to in the case of R. Lesley v. Shiell (1914) 3 K.B. 607 would apply, and
such a case would fail.
18. This was a clear approval of the rule laid down in Lesley Ltd. v. Shiell (1914) 3 K.B. 607 although
their Lordships thought it fit to add that the statement made by the minor as to his age that he believed
that he was over 21 years of age could not be justly criticised as fraudulent. That observation was
obviously made in the interest of the defendant so as to dear his character, and in no way affects the
approval expressed by their Lordships of the rule laid down in Lesley Ltd. v. Shiell (1914) 3 K.B. 607.
More recently in Sadiq Ali Khan v. Jai Kishori A.I.R. 1928 P.C. 152 two minors had executed a
mortgage deed for whom a certificated guardian Qasim Ali had been appointed. It was found that
Qasim Ali Khan by concealing the guardianship proceedings from the mortgagee and passing off the
minors as majors of 18 or upwards had induced the mortgagee to furnish the money which he then
required and had thus committed a fraud on him. In spite of that their Lordships allowed the appeal
and dismissed the plaintiff's suit against the minors holding:
The fact of minority being established at the date of the execution by the mortgagors of the deed
founded on is sufficient for the decision of the case; such a deed executed by minors being admittedly
a nullity according to Indian law, and incapable of founding a plea of estoppel.
19. On no other ground could the plaintiff succeed in that case. The rules of equity that can be applied
are well, recognized rules which have been accepted in England. It is hardly open to an Indian Court to
invent a new rule of equity for the first time contrary to the principles of the English law. If the law in
England is clear and there is no statutory enactment to the contrary in India, one should hesitate to
introduce any supposed rule of equity in conflict with that law. In Gaurishankar Balmukund v.
Chinnumiya A.I.R. 1918 P.C. 168, a judgment-debtor had executed a mortgage of some property
during the period of the Collector's management when he had no power to make the mortgage under
Section 325-A, Civil P.C. (Act 14 of 1882). Their Lordships observed with regard to the argument that
the mortgage was inoperative in respect of the residue as follows:
The limitation suggested is that there still remained in the judgment-debtor a power to mortgage the
property so as to become operative over any residue that might arise to the latter after the Collector's
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regime had ended. It is a fact that the Collector's regime has now ended, but it is also the fact that
pending his regime, namely on 22nd July 1892, the mortgage which is now founded upon was granted.
20. Although the regime had ended and the in competency had ceased to exist, their Lordships held:
In short the sole point in this appeal is whether a declaration by statute that a judgment-debtor shall be
incompetent to mortgage his property is or is not to be read in the exact and plain sense which the
words imply.
21. Their Lordships dismissed the plaintiff's appeal and did not give him any compensation. Cases like
Jagar Nath Singh v. Lalta Prasad (1909) 31 All. 21, where the plaintiff minor himself seeks relief for
cancellation of a document or rescission of a contract are of course to be distinguished because there
he is seeking equity and must do equity. In such cases Courts have always imposed the condition upon
him to restore the benefit. The case in Harnath Kunwar v. Indar Bahadur Singh A.I.R. 1922 P.C. 403 is
easily distinguishable, as that was a case of a transfer of an expectancy and was therefore not a
saleable property under Section 6, T.P. Act. It was not a case where the transferor was incompetent by
reason of minority from transferring it, but was one where the transfer was inoperative because he had
no interest capable of transfer. Section 65, Contract Act, therefore clearly applies to such a case, as no
question of in competency on the ground of minority at all arose. Similarly Gregson v. Raja Sri Aditya
Deb (1899) 17 Cal. 223 was a case of a disqualified proprietor who after having emerged from a state
of disability took up and carried on transactions while he was under disability in such a way as to bind
himself to the whole. The defendant had done that and more than that, for not only had he taken, and
retained the benefit of the plaintiff's payment but he had afterwards exacted from the plaintiff a part of
the consideration which was to move from him. It was on those findings that their Lordships held that
the defendant was bound by the contract (p. 231).
22. The majority of the learned Judges in the Full Bench case of the Lahore High Court Khan Gul
Lakkha Singh A.I.R. 1928 Lah. 609, have based the decision exclusively on principles of equity. Sir
Shadi Lal, C.J. conceded that the transaction entered into by the minor was absolutely void and could
not be recognized by law as had been laid down in Mohori Bibee v. Dharmodas Ghose (1903) 30 Cal.
539. The learned Chief Justice considered that in Mahomed Syedol Arffin v. Yeoh Ooi Gark A.I.R.
1916 P.C. 242, there was nothing which can even be-treated as an obiter dictum on the subject of
estoppel and that as their Lordships had held that no fraud had been established, it was clear that no
191

case of estoppel was either set up or decided in that case. With great respect, the learned Chief Justice
apparently omitted to note that their Lordships of the Privy Council had expressed their clear approval
of the ruling in Lesley Ltd. v. Shiell (1914) 3 K.B. 607 and laid down that a case of fraud would fail.
The further finding that no fraud had been established was by way of an addition obviously to clear up
the defendant's character. The rule laid down by their, Lordships cannot be disposed of on the
supposition that the question did not arise as no fraud-had been established. The learned Chief Justice
conceded that when a contract had been induced by a false representation; made by an infant as to his
age, he was; liable neither on the contract nor in tort because tort which can sustain an action for
damages must be independent of the contract and no person can evade the law conferring immunity
upon an infant by converting the contract into a tort for the; purpose of charging the infant. Where I an
action in reality is an action ex contractu but disguised as an action ex delicto, it cannot be enforced.
The learned Chief Justice considered several English cases which had been decided before Lesley Ltd.
v. Shiell (1914) 3 K.B. 607. But the decision of the Court of appeal should be considered to be the
latest pronouncement.
23. The learned Chief Justice remarked that he was unable to follow the distinction pointed out in
Lesley Ltd. v. Shiell (1914) 3 K.B. 607 and thought that there was no real difference between restoring
property and refunding money, except that the property can be identified, but cash cannot be traced.
That there is a clear difference is well recognized in England. Where a contract of transfer of property
is void, and such property can be traced, the property belongs to the promise and can be followed.
There is every equity in his favour for restoring the property to him. But where the property is not
traceable and the only way to grant compensation would be by granting a money decree against the
minor, decreeing the claim would be almost tantamount to enforcing the minor's pecuniary liability
under the contract which is void. The distinction is too obvious to be ignored. The learned Chief
Justice has distinguished the case of Mohori Bibee v. Dharmodas Ghose (1903) 30 Cal. 539, where
restitution was not allowed on the ground that the party who had lent the money to the minor was
aware of the minority. But that part of the judgment of their Lordships was with reference to a claim
by the minor under the Specific Relief Act, in which cases the Court would have a discretion to impose
terms before granting the decree. It would absolutely have no application to the converse case where
the defendant is being sued and is not himself asking for any relief. I regret I am unable to appreciate
the applicability of the remark of Lord Kenyon quoted by the learned Chief Justice that the protection
given by law to the infant "was to be used as a shield and not as a sword". Surely when the defendant
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is being sued and sets up the plea of minority, he is not using his minority as a sword, but is merely
using it as a shield. I am unable to agree that because such a ' defence would deprive a creditor of his
money, the defendant infant is using his minority as a sword.
24. In the same way I am, with great respect, quite unable to agree with the view propounded in that
case that the equitable jurisdiction of the Court to order restitution is no more applicable to a case to
which the minor is a plaintiff than to an action in which he is a defendant; apparently the entire basis of
the judgment is that as there is authority for imposing conditions on a minor to refund the
consideration when he is suing as plaintiff for the rescission or cancellation of his void contract, there
is an equal justification for passing a decree for money against him when he is being sued by his
creditor, though he is a defendant. With utmost respect, I would say that such a view would be
contrary to the great preponderance of authority both in England and in India and would ignore the
well recognized distinction between the position of a minor when suing as a plaintiff and when he is
being sued as a defendant. Tek Chand, J. also held that the minor is not estopped from pleading his
minority in avoidance of the contract, but on the other question he agreed with the learned Chief
Justice. The learned Judge conceded that there are dicta in several English decisions that this
jurisdiction to make restitution in integrum is limited to those cases only in which it is possible to
compel the minor to restore the property in specie which he had obtained by fraud, and that the Courts,
while holding a contract to be void, cannot order him to refund the money which he has received under
it. He has also conceded that Sections 39 and 41, Specific Relief Act, relate to those cases only in
which the minor is the plaintiff, and ultimately concluded that there was no justification for making' a
distinction between the cases where the minor is the plaintiff and where he is the defendant. Two other
learned Judges merely agreed with the learned Chief Justice. Harrison, J. delivered a dissenting
judgment and pointed out that Cowern v. Neild (1912) 2 K.B. 419, is authority for the proposition that
unless and until the fraud can be dissociated from the contract, the plaintiff's suit must fail. He quoted
the remark made by Lord Sumner in Lesley Ltd. v. Shiell (1914) 3 K.B. 607:
It was thought necessary to safeguard the weakness of infants at large, even though here and there a
juvenile knave slipped through.
25. The learned Judge rightly pointed out that Section 41, Specific Relief Act, had no application
because in a suit against an infant there is no question of the cancellation of an instrument and when
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the minor is a plaintiff, there is a well known principle that he who seeks equity must do equity, and
therefore held that no suit of this nature, being in its essence contractual, can lead to an order for
restitution by the infant on the ground of his having dishonestly induced the plaintiff to contract with
him and to pay him money. The view of the learned dissenting Judge is in accordance with the
opinions expressed in numerous cases. To pass a decree against a minor enforcing his pecuniary
liability would, while holding that the contract is void and unenforceable, at the same time be passing a
decree against him on the footing that he had entered into the contract and has not carried out its terms.
There is no rule of equity, justice and good conscience which entitles a Court to enforce a void
contract of a minor against him under the cloak of equitable doctrine.
26. Lastly it has been suggested that the mortgage transaction may be upheld under Section 43, T.P.
Act, particularly because that section has been amended and the words fraudulently or" have been
added before the words erroneously represents." But the section can have no application to a case
where there has been no transfer at all. In the first place, it is doubtful whether the words authorized to
transfer" can mean "competent to transfer." The section refers to "transfer" because it says such
transfer shall...operate", which would imply that there must be a transfer and not a void transaction. In
any case, it is quite obvious that the section refers to a transfer made by an unauthorized person who
subsequently acquires interest in the property transferred. A minor, though he may not be competent to
transfer his property, possesses an interest in his property, which may be transferred by his guardian
under certain circumstances. When he attains majority he does not subsequently acquire any interest in
his property; the interest has remained vested in him all along. The section, therefore, can have no
application to the case where a minor has made a mortgage during his minority and a suit is brought to
enforce the mortgage against him after he has attained majority. The section is based on the principle
of estoppel, which cannot be pleaded against a statute so as to prejudice a minor who enjoys the
protection of the law. It was observed in Barrow's case In re Stapleford Colliery Co. (1880) 14 Ch. D.
49 by Bacon, V.C.:
But the doctrine of estoppel cannot be applied to an Act of Parliament. Estoppel only applies to a
contract inter partes, and it is not competent to parties to a contract to estop themselves or anybody
else in the face of an Act of Parliament.
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27. It follows that the mortgage deed cannot be enforced on any such ground. I would allow the appeal
and dismiss the suit.
Thom, J.
28. I concur.
Bennet, J.
29. I agree with the judgment of the learned Chief Justice.
195

Raghunath Prasad Vs. Sarju Prasad; 1924 (26)BOMLR 595
Judges/Coram: Louis Addin Kershaw, Carson, John Edge, Ameer Ali and Lawrence Jenkins,
JJ.
JUDGMENT
Shaw, J.
1. This is an appeal from a decree, dated November 9, 1920, of the High Court of Judicature at Patna,
which varied a decree, dated September 25, 1917, of the Subordinate Judge of Arrah.
2. The suit is for recovery of the amount of principal and interest due by the appellant to the
respondents (the plaintiffs) under a mortgage of late May 27, 1910. The Subordinate Judge gave
decree in the mortgage suit but only allowed simple interest. The High Court allowed compound
interest.
3. The substantial question raised on the appeal is whether the appellant, in the circumstances proved
in the case, fell within the protective provisions of Section 2 of the Indian Contract (Amendment) Act,
1899. It may be convenient to set that section out in full:--
2. Section 16 of the Indian Contract Act, 1872, is hereby repealed, and the following is substituted
therefore, namely:--
16.--(1) A contract is said to be induced by 'undue influence' where the relations subsisting between
the parties are such that one of the parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed
to be in a position to dominate the will of another:--
(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation
to the other; or
(b) where he makes a contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness, or mental or bodily distress.
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(3) Where a person who is in a position to dominate the will of another, enters into a contract with him,
and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the
burden of proving that such contract was not induced by undue influence shall lie upon the person in a
position to dominate the will of the other. Nothing in this sub-section shall affect the provisions of
Section 111 of the of the Indian Evidence Act, 1872.
4. It is in the view of the Board by that section that the question arising between these parties falls to
be settled, and not by reference to the legislation of other countries, e. g., the English Moneylenders
Act. The statute to be here construed is the Indian Contract Act as amended. It is accompanied with
danger to invoke as authority in an Indian case expressions which merely connote the principles which
underlie a particular English statute, and form a guide to its interpretation. As will be seen this general
observation is required by reason of the citation of certain authorities alluded to in the judgment of the
Subordinate Judge and referred to in the argument before their Lordships' Board.
5. The appellant is a member of a joint undivided family owning a property of considerable value,
including inter alia, 186 villages, assessed to revenue for about Rs. 17,000 annum.
6. The mortgage is dated May 27, 1910. It is for the sum of Rs. 9,999 borrowed from the plaintiffs.
The rate of interest is covered by the following provision:--
I, the declarant, do promise that I shall pay interest on the said debt at the rate of 2 per cent, per
mensem on the 30th Jeth of each year. In case of non-payment of the annual interest, the interest will
be taken as principal and interest will run thereon at the rate of 2 per cent, par mensem, that is, interest
will be calculated on the principle of compound interest.
7. There can be no question that these terms were high: if payment was not made the sum due on the
mortgage would speedily mount up. By the decree of the High Court which was pronounced on
November 9, 1920, it is seen that the original debt of Rs. 10,000 had reached, with interest and costs
calculated up to May 8, 1921, more than a lac of rupees, viz., Rs. 1,12,885. In eleven years the
stipulation for interest at 24 per cent, compound had magnified the sum covered by the mortgage more
than eleven fold. It is upon these facts, coupled with one other about to be mentioned, that the
appellant takes his stand.
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8. The statement in the defence admits that at the time of the execution of the mortgage the defendant
was owner of one half of a valuable joint family property. The owner of the other half was his father.
Father and son had quarrelled. Serious allegations are made by the son against the father; whereas it
appears that the father had instituted criminal proceedings against the son. Shortly before the date of
the mortgage the defendant had borrowed Rs. 1,000 from the plaintiffs so as to enable him to defend
himself in these criminal proceedings. It is alleged that they caused him great mental distress, and that
he required more money to conduct his litigations. That is the story.
9. Evidence was taken in the case. It is sufficient to say that the defendants gave no evidence at all. It is
quite plain that no Court can accept a story thus unproved by its author as establishing a case either of
mental distress or of undue influence under the Indian Contract Act. The only case which the appellant
has is the case derived from the contents of the mortgage itself.
10. It is argued with force that these are unconscionable, and that it is the duty of the Court in India to
step in either to rescind the contract or to rectify the bargain. It was the latter course which was argued
for in the present case. In support of this argument much reliance was placed upon the judgment
pronounced by Lord Davey in Dhanipal Das v. Raja Maneshar Bakhsh Singh. (1906) L.R. 33 IndAp
118, 9 Bom. L.R. 304.
11. Before, however, addressing themselves to the authorities cited their Lordships think it desirable to
make clear their views upon, in particular, Sub-section 3 of Section 16 of the Indian Contract Act as
amended. By this sub-section three matters are dealt with. In the first place the relations between the
parties to each other must he such that one is in a position to dominate the will of the other. Once that
position is substantiated the second stage has been reached, viz., the issue whether the contract has
been induced by undue influence. Upon the determination of this issue a third point emerges, which is
that of the onus probandi. The burden of proving that the contract was not induced by undue influence
is to lie upon the person who was in a position to dominate the will of the other.
12. Error is almost sure to arise if the order of these propositions be changed. The unconscionableness
of the bargain is not the first thing to be considered. The first thing to be considered is the relations of
these parties. Were they such as to put one in a position to dominate the will of the other? Having this
distinction and order in view the authorities appear to their Lordships to be easily properly interpreted.
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13. In the judgment of this Board in Dhanipal Das v. Raja Maneshar Bakhsh Singh (1906) L.R. 33
IndAp 118. the outstanding effect was that the borrower who mortgaged the estate was actually, at the
date of the transaction, under the control of the Court of Wards. He was treated, to use the language of
Lord Davey, as "under a peculiar disability" and placed in a position of helplessness, and the lender
was proved to have been aware of that and, therefore, in a position to dominate the borrower's will.
Lord Davey thus expressed the Board's view (p. 126):--
Their Lordships are of opinion that although the respondent was left free to contract debt, yet he was
under a peculiar disability and placed in a position of helplessness by the fact of his estate being under
the control of the Court of Wards, and they must assume that Auseri Lal, who had known the
respondent for some fifty years, was aware of it. They are therefore of opinion that the position of the
parties was such that Auseri Lal was 'in a position to dominate the will' of the respondent within the
meaning of the amended Section 16 of the Indian Contract Act. It remains to be seen whether Auseri
Lal used that position to obtain an unfair advantage over the respondent.
14. This case was followed in terms in the case of Maneshar Bakhsh Singh v. Shadi Lal (1909) L.R. 36
IndAp 96; in which the bond in suit was given by a talukdar in Oudh without the knowledge and
consent of the Court of Wards after his estate had been placed under it. In these circumstances the
former case was followed, and Lord Collins expressed the opinion of the Board to be that they are
satisfied that in this case also the borrower was placed in such a condition of helplessness that the
lender was 'in a position to dominate his will,' and that he used that position to obtain an unfair
advantage over the appellant.
15. It is sufficient to say that the borrower in the present case was sui juris, had the full power of
bargaining and of burdening his estate, that his estate was not under the Court of Wards and that he lay
under no disability. With regard to his helplessness nothing whatsoever is proved in the case except the
bare fact that he being a man of wealth as owner of one-half of certain joint family property wished to
obtain and did obtain certain monies on loan. The only relation between the parties that was proved
was simply that they were lender and borrower.
16. It is an entire mistake to represent the decisions of this Board as being wanting in light upon the
last mentioned case. For in Sundar Koer v. Sham Krishen (1906) L.R. 34 I. A, 9, the exact point was
referred to by Lord Davey in the course of the judgment read by him (p. 16):--
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There is no evidence of any actual exercise of undue influence by the mortgagees or of any special
circumstances from which an inference of undue influence could be legitimately drawn, except that the
mortgagor was in urgent need of money. The learned counsel for the appellant argued that the
mortgagees wore thereby placed in a position 'to dominate the will' of the mortgagor, and cited a recent
decision of this Board--Dhanipal Das v. Raja Maneshar Bakhsh Singh. In that case, however, the
borrower was ' a disqualified proprietor ' under the Oudh Land Revenue Act, 1870, and his estate was
under the management of the Court of Wards, and it was on that ground that their Lordships held that
the borrower was under a peculiar disability, and the position of the parties was such that the lender
was ' in a position to dominate his will.' There is nothing of that kind in the present case, and their
Lordships are not prepared to hold that urgent need of money on the part of the borrower will of itself
place the parties in that position.
17. This precisely fits the situation of these parties. It has not been proved,--it might be said that it has
not even been attempted to be proved,--that the lender was in a position to dominate the will of the
borrower.
18. In these circumstances, even though the bargain had been unconscionable (and it has the
appearance of being so) a remedy under the Indian Contract Act does not come into view until the
initial fact of a position to dominate the will has been established. Once that fact is established, then
the unconscionable nature of the bargain and the burden of proof on the issue of undue influence come
into operation. In the present case, for the reasons stated, these stages are not reached.
19. Their Lordships think it right to observe that the judgment now pronounced is not in accord with
the principles laid down by the Appellate Civil Court of Calcutta in Abdul Majeed v. Khirode Chandra
Pal I.L.R. (1914) Cal. 690. that "where there is ample security, the exaction of excessive and usurious
interest, in itself raises a presumption of undue influence which it requires very little evidence to
substantiate." Their Lordships think this decision to be wrong. There is no such presumption until the
question has first been settled as to the lender being in a position to dominate the borrower's will. Their
Lordships are further of opinion with reference to the citation of Smuel v. Newbold [1906] A.C. 461.,
that that case does not form any authority in the construction of the Indian Contract Act. The case was
determined under the Moneylenders Act, 1900, as it expressly bears. The issue was thus stated by Lord
Macnaghten (p. 468):--
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It seems to me that the construction of the Moneylenders Act, 1900, is plain enough, and that the
evidence before your Lordships is more than sufficient to show that this case is within the mischief
which the Act was designed to remedy.
20. In the view of the Board cases of that character form no precedent for a decision of the present
appeal which is rested on another and very differently worded statute.
21. Their Lordships are of opinion that the decree of the High Court should be varied by allowing
compound interest on the principal at the rate of two per cent, per mensem from the date of the
execution of the bond until September 25, 1917, and thereafter simple interest at the rate of six per
cent, per annum up to the date of realization, and that in other respects the decree of the High Court
should be affirmed, and they will humbly advise His Majesty accordingly.
22. The appellants will pay the costs of the appeal.
201

Subhas Chandra Das Mushib vs. Ganga Prosad Das Mushib and Ors.; (AIR 1967 SC 878)
Judges/Coram: G.K. Mitter, J.M. Shelat and K.N. Wanchoo, JJ.
JUDGMENT
G.K. Mitter, J.
1. This is an appeal from a judgment and decree of the High Court of Calcutta on a certificate granted
by it reversing a decision of the Subordinate Judge of Bankura dismissing the plaintiff's suit for
declaring that a deed of settlement (Nirupan Patra) executed by the plaintiff's father and the plaintiff's
sister in favour of the plaintiff's brother's son registered on July 22, 1944 in respect of properties
situate in village Lokepur was fraudulent, collusive and invalid and for cancellation of the said
document. The Judges of the High Court proceeded on the basis that in the circumstances of the case
and in view of the relationship of the parties the trial court should have made a presumption that the
donee had influence over the donor and should have asked for proof from the respondents before the
High Court that the gift was the spontaneous act of the donor acting under circumstances which
enabled him to exercise an independent will and which would justify the court in holding that the gift
was the result of a free exercise of the donor's will. The High Court went on to presume from the great
age of the donor that his intelligence or understanding must have deteriorated with advancing years
and consequently it was for the court to presume that he was under the influence of his younger son at
the date of the gift. It was contended before us by the learned Additional Solicitor-General appearing
for the appellant that the judgment of the High Court had proceeded on an entirely erroneous basis and
that there was no sufficient pleading of undue influence nor was there any evidence adduced at the trial
to make out a case of undue influence and in the vital issue raised before the learned Subordinate
Judge the expression "undue influence" was not even used.
2. The main facts which have come out in the evidence are as follows. The plaintiff's father, Prasanna
Kumar, owned certain lands in two villages, namely, Parbatipur and Lokepur, holding an eight annas
share in each. The exact valuation of the properties is not known, but it would not be wrong to assume
that the Lokepur properties, the subject-matter of the suit, were the more valuable ones. Prasanna
Kumar died in January or February, 1948 when he was about 90 years of age. He had two sons,
namely, Ganga Prosad, the plaintiff, and Balaram, the second defendant in the suit, besides a daughter
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Swarnalata, and an only grandson Subhas Chandra, who was the first defendant in the suit. Ganga
Prosad had no son. He had served in the Medical School at Bankura from 1932 to 1934. Thereafter he
worked as a contractor for one year. From November 1944 to 1948 he served in Searsole Raj Estate.
The family consisted of Prasanna and his wife, their two sons and their wives, besides the grand-son
Subhas Chandra and Prasanna's daughter Swarnalata who became a widow in her childhood and was
residing with her parents. It appears that Balaram always lived with his father and was never employed
elsewhere. According to the plaintiff's own evidence he was looking after the property of his father so
long as he was at Bankura. The Lokepur properties were put to auction in execution of a decree for
arrears of rent and were purchased by Prasanna benami in the name of Swarnalata. The deed of gift
shows that the transaction was entered into out of natural love and affection of the donor for the donee
and for the respect and reverence which the grand-son bore to the grand-father. There is no direct
evidence as to whether the plaintiff was present in Bankura at the time when this deed was computed
and registered. It is the plaintiff's case that he was not. The suit was filed in 1952, more than eight
years after the date of the transaction and more than four years after the death of Prasanna. There is a
considerable body of evidence that in between 1944 and 1948 a number of settlements of different
plots of land in village Lokepur had been effected by Balaram acting as the natural guardian of his son
Subhas Chandra and in all of them the Nirupan Patra had been recited and in each case Prasanna had
signed as an attesting witness. These settlements were made jointly with the other co-sharers of
Prasanna. In 1947 the Municipal Commissioners of Bankura filed a suit against Prasanna for recovery
of arrears of taxes. Prasanna filed his written statement in that suit stating that he had no interest in the
property. After Prasanna's death the Municipal Commissioners did not serve the plaintiff with a writ of
summons in the suit but obtained a decree only against Balaram ex parte. The plaintiff attended the
funeral ceremony of his father in 1948, but he alleges that he never came to know of any of the
settlements of land in Lokepur after 1944. He admitted never having paid any rent to the superior
landlords and stated that he came to know about the deed of settlement some two years before the
institution of the suit from his cousins none of whom were called as witnesses.
3. We may now proceed to consider what are the essential ingredients of undue influence and how a
plaintiff who seeks relief on this ground should proceed to prove his case and when the defendant is
called upon to show that the contract or gift was not induced by undue influence. The instant case is
one of gift but it is well settled that the law as to undue influence is the same in the case of a gift inter
vivos as in the case of a contract.
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4. Under s. 16(1) of the Indian Contract Act a contract is said to be induced by undue influence where
the relations subsisting between the parties are such that one of the parties is in a position to dominate
the will of the other and uses that position to obtain an unfair advantage over the other. This shows that
the court trying a case of undue influence must consider two things to start with, namely, (1) are the
relations between the donor and the donee such that the donee is in a position to dominate the will of
the donor and (2) has the donee used that position to obtain an unfair advantage over the donor ?
5. Sub-section (2) of the section is illustrative as to when a person is to considered to be in a position to

dominate the will of another. These are inter alia (a) where the donee holds a real or apparent authority
over the donor or where he stands in a fiduciary relation to the donor or (b) where he makes a contract
with a person whose mental capacity is temporarily or permanently affected by reason of age, illness,
or mental or bodily distress.
6. Sub-section (3) of the section throws the burden of proving that a contract was not induced by undue
influence on the person benefiting by it when two factors are found against him, namely that he is in a
position to dominate the will of another and the transaction appears on the face of it or on the evidence
adduced to be unconscionable.
7. The three stages for consideration of a case of undue influence were expounded in the case of
Ragunath Prasad v. Sarju Prasad and others 51 I.A. 101 in the following words :-
"In the first place the relations between the parties to each other must be such that one is in a position
to dominate the will of the other. Once that position is substantiated the second stage has been reached
- namely, the issue whether the contract has been induced by undue influence. Upon the determination
of this issue a third point emerges, which is that of the onus probandi. If the transaction appears to be
unconscionable, then the burden of proving that the contract was not induced by undue influence is to
be upon the person who was in a position to dominate the will of the other.
Error is almost sure to arise if the order of these propositions be changed. The unconscionableness of
the bargain is not the first thing to be considered. The first thing to be considered is the relations of
these parties. Were they such as to put one in a position to dominate the will of the other ?"
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8. It must also be noted that merely because the parties were nearly related to each other no
presumption of undue influence can arise. As was pointed out by the Judicial Committee of the Privy
Council in Poosathurai v. Kappanna Chettiar and others 47 I.A. p. 1 :-
"It is a mistake (of which there are a good many traces in these proceedings) to treat undue influence
as having been established by a proof of the relations of the parties having been such that the one
naturally relied upon the other for advice, and the other was in a position to dominate the will of the
first in giving it. Up to that point "influence" alone has been made out. Such influence may be used
wisely, judiciously and helpfully. But whether by the law of India or the law of England, more than
mere influence must be proved so as to render influence, in the language of the law, "undue".
9. The law in India as to undue influence as embodied in s. 16 of the Contract Act is based on the
English Common Law as noted in the judgments of this Court in Ladli Prasad Jaiswal v. Karnal
Distillery Co. Ltd. and ors MANU/SC/0061/1962 : [1964]1SCR270 . According to Halsbury's Laws of
England, Third Edition, Vol. 17 p. 673, Art. 1298, "where there is no relationship shown to exist from
which undue influence is presumed, that influence must be proved". Article 1299, P. 674 of the same
volume shows that "there is no presumption of imposition or fraud merely because a donor is old or of
weak character". The nature of relations from the existence of which undue influence is presumed is
considered at pages 678 to 681 of the same volume. The learned author notes at p. 679 that "there is no
presumption of undue influence in the case of a gift to a son, grandson, or son-in-law, although made
during the donor's illness and a few days before his death". Generally speaking the relation of solicitor
and client, trustee and cestui que trust, spiritual adviser and devotee, medical attendant and patient,
parent and child are those in which such a presumption arises. Section 16(2) of the Contract Act shows
that such a situation can arise wherever the donee stands in a fiduciary relationship to the donor or
holds a real or apparent authority over him.
10. Before, however, a court is called upon to examine whether undue influence was exercised or not,
it must scrutinise the pleadings to find out that such a case has been made out and that full particulars
of undue influence have been given as in the case of fraud. See Order 6, Rule 4 of the Code of Civil
Procedure. This aspect of the pleading was also given great stress in the case of (Ladli Prasad Jaiswal
[1964]1SCR270 above referred to. In that case it was observed at p. 295) :
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"A vague or general plea can never serve this purpose; the party pleading must therefore be required to
plead the precise nature of the influence exercised, the manner of use of the influence, and the unfair
advantage obtained by the other."
11. In the light of the above, it appears to us that there was no sufficient pleading of undue influence at
all in the plaint. The relevant portion of paragraph 4 of the plaint is as follows :-
"The plaintiff's father along with defendant No. 3 (the sister) on the advice of defendant No. 2 (the
brother Balaram) without the knowledge of the plaintiff got a collusive Nirupan Patra executed
regarding the said property on the 6th Sraban 1351 B.S. corresponding to 22nd July, 1944 in the name
of the defendant No. 1 son of defendant No. 2 and had it registered - and the plaintiff recently on 13th
June, 1952 last, has come to know of the same through reports from the people... Moreover, the
plaintiff's father being 90 years old at the time of execution of the said Nirupan Patra and being subject
to senile decay in consequence thereof, he was devoid of the power of discrimination between good
and evil. Hence he not having sound disposing mind had no power to execute the said deed of Nirupan
Patra in favour of the defendant No. 1 being in possession of his senses and he did not execute the
same in good faith voluntarily and out of his free will. The plaintiff recently on 13th June 1952 last
came to learn that defendant No. 2 taking advantage of the absence of the plaintiff and exercising
undue influence upon him and having won over the defendant No. 3 also by holding out temptation
and by misleading and exercising undue influence upon her got the said fraudulent deed of Nirupan
Patra executed in favour of the defendant No. 1, his son living in joint mess with him."
12. It will at once be noted from the above that the two portions of the extracts from paragraph 4 are in
conflict with each other. According to the first portion the plaintiff's father Prasanna colluded with his
sister on the advice of his brother to execute the deed of gift. The word "collusion" means a secret
agreement for illegal purposes or a conspiracy. The use of the word "collusion" suggests that Prasanna
knew what he was about and that he did it secretly or fraudulently with the object of depriving the
plaintiff. According to the second portion of the extract, Prasanna, because of his old age, was subject
to senile decay and could not discriminate between good and evil. This hardly fits in with the case of
collusion which implies that a man does something evil designedly. There is no suggestion in this
paragraph of the plaint that Prasanna was under the domination of Balaram and that Balaram exercised
his power over Prasanna to get the document executed and registered by Prasanna. It will be
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remembered that nominally the property stood in the name of the sister who was also a party to the
document and according to the extract quoted above Balaram had exercised undue influence over her
also.
13. The above allegations were generally denied in the written statements of the 1st and the 2nd
defendants. It was asserted in paragraph 12 of the written statement of the first defendant that
"Prasanna Kumar Mushib was a man endowed with particular wisdom and knowledge of worldly
affairs and was a man of independent spirit and had a fertile brain. It was not possible for anyone to
exercise any influence upon him... Up to the time of his death he himself was active and strong and
had a sound brain also... Of his own accord in good faith and considering the surrounding
circumstances and defendant No. 1 being a bright jewel of the family and out of profound affection for
him, he voluntarily, in good faith and being urged by his affection towards this defendant has made a
gift of the properties in suit to this defendant by way of family settlement."
14. The only issue out of seven which were framed by the learned Subordinate Judge at the trial of the
suit which has any bearing on this point is issue No. 5. This reads :-
"Is the deed of gift by the grandfather to defendant No. 1 valid and true : If so, is the suit maintainable
without setting aside the deed of gift ?"
15. It will be noted at once that even the expression "undue influence" was not used in the issue. There
was no issue as to whether the grandfather was a person of unsound mind and whether he was under
the domination of the second defendant.
16. At the trial several witnesses were examined by the plaintiff for the purpose of showing that
Prasanna was a person of unsound mind at the time when when he executed the deed of gift. We have
been taken through the evidence on this point and we fully agree with the judgment of the learned
Subordinate Judge who was "unable to hold that Prasanna was a man of unsound mind when he
executed Ex. G or that he was not aware of the fact of transfer". The plaintiff's only statement in
examination in chief was that his father was not of sound mind for 10 or 12 years from before his
death. Is it to be believed that he did not know about the Nirupan Patra until four years after the death
of his father ? This statement of his can hardly be true because the Nirupan Patra does not stand by
itself, but was given effect to in several deeds of settlement which came out in evidence at the trial.
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There was evidence before the Subordinate Judge to show that Prasanna had filed a written statement
in money suit No. 217 of 1948 filed by the Municipal Commissioners of Bankura, that he was not in
possession of the holding. The learned Subordinate Judge, in our opinion, rightly came to the
conclusion that the document of settlement executed after the deed of gift and Prasanna's written
statement in the suit by the Municipal Commissioners showed that Prasanna was fully aware of the
fact that he had transferred the property to defendant No. 1.
17. Unfortunately, however, the learned Judges of the High Court accepted the contention put forward
on behalf of the plaintiff-appellant that the onus was upon the contesting defendants to prove that the
deed in question was intelligently executed by Prasanna with full knowledge of its contents. The
learned Judges referred to the circumstances, (a) the deed of gift was a complete departure from the
course of normal inheritance, (b) Prasanna was a very old man at the time of the alleged deed of gift
and (c) the plaintiff was away from the family house at or about this time and concluded therefrom that
"these being the circumstances under which the deed was executed, the court below should have made
a presumption that the donee had influence over the donor and the court below should have asked for
proof from the respondents that the gift was the spontaneous act of the donor acting under
circumstances which enabled him to exercise an independent will and which would justify the court in
holding that the gift was the result of a free exercise of the donor's will. They further went on to add :-
"This aged man was becoming older from day to day and we may take it for granted that his
intelligence or understanding did not improve with age but it must have deteriorated with the
advancing years. If, therefore, the Court can presume, as it should presume, that he was under the
influence of his younger son at the date of the gift then the Court will also presume that this influence
must have continued till the death of Prasanna."
18. It will be noted that the High Court did not come to a finding that Balaram was in a position to
dominate the will of his father (Subhas his son being only about 14 years of age at the date of the deed
of gift). Nor did the High Court find that the transaction was an unconscionable one. The learned
Judges made presumptions which mere neither warranted by law nor supported by facts. Indeed, it
appears to us that the learned Judges reached the third stage referred to in the case of Raghu Nath
Prasad v. Sarju Prasad (51 I.A. 101 completely overlooking the first two stages.
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19. A case very similar to the instant one came up for consideration before the Judicial Committee of
the Privy Council in Ismail Mussaiee Mookerdum v. Hafiz Boo 33 I.A. 88. There one Khaja Boo, a
Mahomedan woman, who died at the age of 90 years entered into the impugned transactions when she
was nearly 80. At that time she had an only son, the plaintiff in the suit, and the defendant respondent,
her daughter. It came out in evidence that she was on terms of bitter hostility with her son and much
litigation had taken place between them. The daughter was a married woman whose husband resided in
Rangoon, but she herself was living with her mother at Rander. The result of the impugned
transactions was that the daughter Hafiz Boo became possessed of nearly the whole of her mother's
Rangoon properties or their proceeds. The son alleged in the paint that at the time of the occurrence the
mother was suffering from dementia and was not in a fit state of mind to execute contracts or to
manage her affairs and was until July 1888 (she having died in the year 1900) residing with the
daughter and was completely under her domination and control. Before the learned Trial Judge a large
mass of evidence was given directed to the question of Khaja Boo's mental capacity in 1889. The
learned Judge found that the plaintiff had failed to show that his mother was of unsound mind in 1889.
The Court of Appeal came to the same conclusion. The learned Trial Judge, however, came to the
conclusion that Khaja Boo at the period in question was entirely under the control and domination of
her daughter and that the latter had unscrupulously used her power over her mother in order to get her
mother's property into her own hands and that the whole proceedings ought to be avoided on the
ground of undue influence. This finding was, however, reversed in appeal.
20. The Judicial Committee took the view that the question of undue influence was never properly
before the court at all. No such case was set up in the pleadings. The nearest approach to it was in the
passage of the plaint already cited in which it was said that Khaja Boo was entirely under the
domination and control of her daughter; but that is only said incidentally in connection with the
allegation of mental incapacity which allegation formed the real case of the plaintiff. And accordingly
when the issues were settled there was a clear issue as to Khaja Boo being of unsound mind in 1889,
but none with regard to undue influence.
21. The Board therefore concluded that the question of undue influence was dismissed and considered
not upon evidence given with reference to that question, but upon evidence called for a totally different
purpose.
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22. It will be noted that in this case no issue was raised of Prasanna having been of unsound mind at
the date of the deed of gift and, as already noted, no issue was raised on undue influence at all. It is
true that some evidence was adduced on the point as to whether Prasanna was of sound mind in the
year 1944, but that was wholly negatived by the learned Subordinate Judge and his finding was not
upset in appeal except by way of presumption which does not arise in law.
23. It is pertinent also to note the observation of the Judicial Committee in the above case at p. 94 :-
"The mere relation of daughter to mother, of course, in itself suggests nothing in the way of special
influence or control. The evidence seems to their Lordships quite insufficient to establish any general
case of domination on the part of the daughter, and subjection of the mother, such as to lead to a
presumption against any transaction between the two. With regard to the actual transactions in
question, there is no evidence whatever of undue influence brought to bear upon them."
24. The same remarks may justly be made of the pleading and the evidence adduced in this case.
25. There was practically no evidence about the domination of Balaram over Prasanna at the time of
the execution of the deed of gift or even thereafter. Prasanna, according to the evidence, seems to have
been a person who was taking an active interest in the management of the property even shortly before
his death. The circumstances obtaining in the family in the year 1944 do not show that the impugned
transaction was of such a nature as to shock ones conscience. The plaintiff had no son. For a good
many years before 1944 he had been making a living elsewhere. According to his own admission in
cross-examination, he owned a jungle in his own right (the area being given by the defendant as 80
bighas) and was therefore possessed of separate property in which his brother or nephew had no
interest. There were other joint properties in the village of Parbatipur which were not the subject-
matter of the deed of gift. It may be that they were not as valuable as the Lokepur properties. The
circumstance that a grand-father made a gift of a portion of his properties to his only grandson a few
years before his death is not on the face of it an unconscionable transaction. Moreover, we cannot lose
sight of the fact that if Balaram was exercising undue influence over his father he did not go to the
length of having the deed of gift in his own name. In this he was certainly acting very unwisely
because it was not out of the range of possibility that Subhas after attaining majority might have
nothing to do with his father.
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26. Once we come to the conclusion that the presumptions made by the learned Judges of the High
Court were not warranted by law and that they did not take a view of the evidence adduced at the trial
different from that of the Subordinate Judge on the facts of this case we must hold that the whole
approach of the learned Judges of the High Court was wrong and as such their decision cannot be
upheld.
27. The learned Additional Solicitor-General also wanted to argue that the suit was defective, because
the plaintiff was out of possession and had not asked for a decree for possession in his plaint as he was
bound to do if he was asking for a declaration of title to the property. It is to be noted that we did not
think it necessary to go into this question and did not allow him to place the evidence on this point
before us as we were of the view that the case of undue influence had not been sufficiently alleged
either on the pleadings or substantiated on the evidence adduced.
28. The result is that the appeal is allowed, the judgment and decree of the High Court set aside and
that of the trial court restored. The respondents must pay to the appellant costs throughout.
29. Appeal allowed.
211

Lakshmi Amma and Ors. vs. Talengalanarayana Bhatta and Ors.; (1970)3SCC159
Judges/Coram: A.N. Grover, J.C. Shah and K.S. Hegde, JJ.
JUDGMENT
A.N. Grover, J.
1. This is an appeal by special leave from a judgment and decree of the Kerala High Court whereby the
appeal preferred by respondent No. 1 herein was allowed and the suit was dismissed. The following
pedigree table will be helpful in understanding the facts:
2. The suit out of which the appeal has arisen was instituted in the name of Narasimha Bhatta who was
stated to be of weak intellect by his next friend and daughter Adithiamma for a declaration that the will
dated September 30, 1955 said to have been executed by him was invalid and also for the cancellation
of the deed of settlement dated December 13, 1955, which had also been executed by Narasimha
Bhatta in favour of the first respondent and for other incidental reliefs.
The case as laid in the plaint was that the plaintiff, who was of advanced age, was suffering from
diabetes for a long time and his physical and mental condition was very weak. Respondent No. 1 was
at first unsuccessful in getting a will executed by him by which he bequeathed almost all his properties
to the said respondent. In December 1955 he was taken to Mangalore by respondent No. 1 and there
the latter managed to get executed Ext. B-3 by him. By this deed of settlement the entire properties
which were considerable were given to respondent No. 1, the plaintiff reserving only a life interest for
himself besides making some provision for the maintenance of his wife Lakshmi Amma . Respondent
No. 1 was able to obtain benefits under the settlement deed for himself owing to the weak intellect and
old age of the plaintiff. A declaration was thus claimed that the will and the settlement deed was null
and void and were not binding on the plaintiff. Respondent No. 1 contested the suit. He denied the
existence of the will and maintained that the deed of settlement was not executed under undue
influence or when the plaintiff was in a weak state of mind.
3. A number of issues were framed on the pleadings of the parties. The trial Court by its judgment
dated March 31, 1959, decreed the suit holding that the will was invalid and that the deed of settlement
Ext. B-3 was also invalid. It was held that the plaintiff was a person of weak intellect and was not in a
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position to take care of himself and manage his affairs properly on the date of the execution of the
aforesaid documents. The respondent preferred an appeal to the High Court. After hearing the parties
the High Court directed that the evidence of three persons, two of whom were doctors and the third
was a document writer, should be recorded by the trial Court and the record submitted to it. After the
receipt of the record the appeal was again heard. During the pendency of the appeal the plaintiff died
on October 8, 1959 and his widow Lakshmi Amma and two daughters, Adithiamma and
Parameshwariamma were impleaded as legal representatives by an order dated November 30, 1959.
The High Court reversed the judgment of the Court below holding that the gift contained in Ext. B-3
was a spontaneous act of the plaintiff and he had exercised an independent will in the matter of its
execution.
4. It appears that before the High Court the decision of the trial Court relating to the will was not
challenged. At any rate since the will was never produced the sole question which we are called upon
to decide is whether the deed of settlement Ext. B-3 was executed in circumstances which rendered it
invalid and void. It was stated in this document that on September 30, 1955 a will had been executed
by the executant but he considered it advisable to execute a settlement deed in respect of his
immovable and movable properties and also for the discharge of his debts etc. This, it was stated, was
being done in supersession of the will. It was stated that respondent No. 1 had been nursing the
executant and looking after him and therefore he was conferring full rights over his properties on him
subject to the certain conditions. He was to have full right to enjoy the said properties and collect their
income till his lifetime. After his death Narayana Bhatta was entitled to take possession of his
properties and get the pattas executed in his name and he was to have absolute and (sic) was to be
maintained by Narayana Bhatta. If she found it inconvenient to live with him he was to pay to her
annually till her death two candies of Areca which was to be the first charge on the properties. If he
failed to give arecanuts on the due dates he was to pay the price thereof at the prevailing market rate
together with Interest @ 51/2 % per annum. Certain debts were mentioned which were intended to be
paid off by the executant but if that was not done Narayana Bhatta was to discharge them. The
following portion of the deed may be reproduced:
Besides, only the right of enjoying the properties till my lifetime and collecting their income and using
the same for my-self, I have no other right, title or interest whatsoever over the properties. I have no
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right to cancel this deed for any other reason, and such tight also I have completely lost and to this
intent this deed of settlement has been executed by me out of my free will and pleasure.
5. The first noticeable feature is that the deed of settlement on the face of it was an unnatural and
unconscionable document. Narasimha Bhatta made negligible provision for his wife who was his third
wife, the first two having died before he married her. She was left mainly to the mercy of respondent
No. 1. Admittedly there was a residential house and no provision was made regarding her right to
reside in that house till her death. Apparently there was no reason why he should have left nothing to
his two daughters or to his other grand-children and given his entire estate to only one grandson
namely respondent No. 1.
6. The circumstances leading to the execution of the deed may next be considered. It is common
ground that Narasimha Bhatta was in his seventies at the time of its execution. He was suffering from
diabetes which had rendered him weak in body. He was living in his house in a village called
Sodankur. He was taken in a taxi accompanied by his wife by respondent No. 1 to Mangalore. There
he was got admitted into Ramakrishna Nursing Home where he remained from December 10 to
December 18, 1955. An application was made to the Joint Sub-registrar, Mangalore, for registering the
document at the Nursing Home on December 15, 1955, apparently on the ground that Narasimha
Bhatta was not in a fit condition to go to the office of the Registrar. The deed of settlement was then
(sic) joint Sub-Registrar on that very day between 5 and 6 p. m. and the registration proceedings took
place there. It was subsequently registered in the book kept by the Joint Sub-Registrar on December
16, 1955.
7. According to the trial Court Upendra Naik D. W. 5 was the brain behind respondent No. 1 in the
matter of getting Ext. B-3 executed and registered which contained disposition in favour of respondent
No. 1. Upendra Naik was an attesting witness and according to him and respondent No. 1 it was
Narasimha Bhatta himself who gave the instructions to draft the document; a draft was prepared which
was read over to him and Ext. B-8 was written only after the draft had been approved by him and that
respondent No. 1 was not even present at the time the draft was prepared or the document was
registered. The scribe had originally not been examined in the trial Court. Under the directions of the
High Court his statement was recorded on July 12, 1961. According to him no draft: was prepared and
that he wrote out the document Ext. B-3 at his own house. He put his own signature also as an attesting
214

witness at his own house. He deposed that he wrote out the document Ext. B-3 on December 13, 1955,
when certain documents of title were handed over to him. Respondent No. 1 and another person
Adakala Ramayya Naik who was his friend came to him and it was Ramayya Naik who asked him to
write out Ext. B-3. He further stated that he met Narasimha Bhatta only on the date of the registration
and not on the date when he wrote out Ext. B-3. He had known Narasimha Bhatta from a' long time
and used to write out documents for him. He stated that normally he consulted the person on whose
behalf the document was to be written but in this particular case Ramayya Naik told him that
Narasimha Bhatta was in the Nursing Home and that Naik himself would give instructions for
preparing the document.
8. It would, therefore, appear that Narasimha Bhatta was not even consulted by the scribe nor was any
draft made with his approval which was given to the scribe from which he prepared the document Ext.
B-3. The trial Judge did not place any reliance and in our opinion rightly on the evidence of K. Shaik
Ummar, D. W. 4, the Joint Sub-Registrar of Mangalore. His statement has not impressed us as reliable.
He said that the wife of Narasimha Bhatta, Namely, Lakshmi Amma was present during the
proceedings for registration and she raised no objection to the document being registered. He admitted
that the hands of the executor were trembling at the time he appended signature. There had been a
number of complaints against him and with regard to one of them it was stated by him "I was Sub-
Registrar, Kasaragod between 1946 and 1948, at the time I registered a deed authorising adoption. It
was an authority given by Mr. K.P. Subba Rao to his wife. It was registered at the residence of the
executant in the evening hours. A little earlier the same day I had attended another house registration at
Kumbla about 8 or 10 miles from here. To go there one has to cross a river also. There was a
complaint against me that Subba Rao's registration took place at night at a time when he was
unconscious. I do not know whether the said Subba Rao died the next day. The District Registrar held
an enquiry in the matter".
9. We may next advert to the evidence of Lakshmi Amma the wife of Narasimha Bhatta who was also
present at the Nursing Home at the time of the execution of document Ext. B-3. According to her
statement in the beginning of 1955 Narasimha Bhatta who was suffering from diabetes had a fall after
which his left arm and left leg could not be moved by him. His mental faculties were also affected.
Since then his condition was getting worse. Five or six months before e fell down respondent No. 1
managed to get a will executed by him in which the dispositions were mainly in his favour. When the
215

will was executed Narasimha Bhatta was not in a condition in which he could understand what he was
doing. As regards the registration proceedings in the Nursing Home, she stated, that it was the first
respondent who gave the document into the hands of an officer who asked Narasimha Bhatta to sign
the document and also to affix his thumb impression. Narasimha Bhatta looked scared but respondent
No. 1 shouted "sign this and give your thumb impression grand-father". According to her she protested
against the document being executed in this manner but respondent No. 1 told her to keep quite. In
spite of a length) cross-examination nothing was brought out to show why this lady who is the
grandmother of Respondent No. 1 and who would be expected to be impartial in the dispute between
her children and grandchildren should perjure herself and make a false statement It is true that she
would be interested, to a certain extent, in getting the document cancelled or set aside but we see no
reason to brush aside her statement with regard to the condition of Narasimha Bhatta at the time the
document was executed and the circumstances in which it was got registered. It may be mentioned that
the trial Court also relied on her evidence. We do not find any cogent or convincing reasons in the
judgment of the High Court for disbelieving Lakshmi Amma nor are we satisfied that the reasons
given for accepting the evidence of Upendra Naik D. W. 5 and discarding the testimony of the Scribe
C. W. 1 are satisfactory. It is also difficult to comprehend how the High Court thought that the terms of
Ext. B-3 were not unconscionable enough as to raise a fair amount of suspicion in the matter. In view
of the unnatural character of the dispositions made in Ext. B-3 coupled with the other facts and
circumstances mentioned above the burden shifted to respondent No. 1 to establish that Ext. B-3 was
executed by Narasimha Bhatta voluntarily and without any external pressure or influence while he was
not of infirm mind and was fully aware of the dispositions or gifts which he was making in favour of
respondent No. 1.
10. On behalf of respondent No. I main reliance has been placed on the evidence of certain doctors
who were the attesting witnesses. The first was Dr. K.P. Ganesan D. W. 1. He was a highly qualified
doctor and according to his statement he was taken to the house of Narasimha Bhatta in the village
(Sodhankur) to examine him accompanied by Dr. Vishwanath Shetty. It was stated by Dr. Ganesan
that he was not suffering from partial paralysis and was able to understand the -questions put to him.
This was towards the end of 1955. He examined him again in the Nursing Home at Man galore where
he found him mentally healthy. He had also attested the document Ext. B-3. He could not produce any
record of the examination made by him nor was any record of the Nursing Home produced at the trial.
He admitted that he had never attested any document like Ext. B-8 before and he attested the same at
216

the request of respondent No. 1. He admitted that he did not conduct any examination of Narasimha
Bhatta with a view to discovering his capacity to execute the document nor did he know the contents
of the documents. The impression he got was that it was a will. The evidence of Dr. Ganesan was not
accepted by the trial Court in view of the discrepancy between his statement and that of Dr. U.P.
Mallayya D. W. 7 as also the lack of responsibility shown by the doctor in attesting a will or a
document of the nature of Ext. B-3 in the manner enjoined by certain books on medical jurisprudence
and in particular Taylor's Medical Jurisprudence. The view of the trial Court was that these doctors had
not given any satisfactory explanation as to why they did not properly examine the mental condition of
Narasimha Bhatta at the time he executed the document and that they had merely done the attestation
and had never cared to ascertain whether the signature had been subscribed by the executant while he
was of a sound disposing mind. Now Dr. Ganesan was a consulting physician of the Nursing Home.
He was quite guarded in his statement relating to the mental condition of Narasimha Bhatta because he
stated that when he first examined him towards the end of 1955 in the village which was only a short
time before he was taken to Mangalore Nursing Home he found him mentally alright to the best of his
knowledge. He further stated that there was no reason to suspect any mental deformity in the executant
at the time he attested the document. Dr. M. Subraya Prabhu C. W. 2 who was working as a doctor in
the Nursing Home in 1955 deposed that case sheets were maintained in the hospital and that the case
sheet relating to Narasimha Bhatta had been taken by Dr. U.P. Mallayya at the time the latter was
examined as a witness. According to Dr. Prabhu Narasimha Bhatta would sometimes answer questions
put to him and sometimes his wife used to answer the questions put by the doctor. The case sheets, if
produced, would have shown what were the exact ailments from which Narasimha Bhatta was
suffering when he was in the Nursing Home and what treatment was given to him under the directions
of Dr. Ganesan who maintained that his suspicion was that a liver abscess had ruptured into the lung
due to dysentery. In the absence of the record of the Nursing Home or any other record we find it
difficult to accept what Dr. Ganesan has stated about the mental condition of Narasimha Bhatta at the
time when the document Ext. B-3 was executed and registered. Dr. U.P, Malayya's evidence was also
not believed by the trial Court and after going through his evidence we are not satisfied that his
statement could be relied upon with regard to the true condition, physical as well as mental, of
Narasimha Bhatta at the time Ext. B-3 was executed.
11. On behalf of the plaintiff certain doctors were produced. The trial Court had, while deciding the
question whether the suit should be permitted to proceed in forma pauperis, recorded an order on
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March 15, 1957. , In those proceedings Dr. Kambli had been examined as a witness. That doctor
treated Narasimha Bhatta from March 6, 1956 to March 12, 1956 and he had issued a certificate Ext.
A-1 wherein it was stated that Narasimha Bhatta was in a weak condition and was subject to loss of
memory attended by mental derangement and dotage. The observation of the trial Court itself was that
when Narasimha Bhatta, under its directions, was brought to the Court on March 11, 1957, he looked
blank and did not answer when the Court asked him what his name was. According to what Narasimha
Bhatta stated he was 25 or 30 years of age, at that time. He could not tell the name of, his wife' and he
was bodily carried by two persons to the judge's chamber. It was, therefore, found that he was a person
of weak mind and was incapable of making his own decisions and conducting his affairs. It may be
that the condition of Narasimha Bhatta on March 11, 1957 may not throw much light on what his
condition was in December 1955 but the evidence of Dr. Kambli who had examined him only a couple
of months after the execution of the document shows that Narasimha Bhatta was suffering from
various symptoms which are to be found in a case of advanced senility particularly when a person is
also suffering from a disease like diabetes - a wasting disease.
12. We are satisfied that Narasimha Bhatta who was of advanced age and was in a state of senility and
who was suffering from diabetes and other ailments was taken by respondent No. 1 who had gone to
reside in the house at Sodhankur village a little earlier in a taxi along with Lakshmi Amma to the
Nursing Home in Mangalore where he was got admitted as a patient. No draft was prepared with the
approval or under the directions of Narasimha Bhatta nor were any instructions given by him to the
Scribe in the matter of drawing up of the document Ext. B-3. An application was also made to the Joint
Sub-Registrar, Mangalore for registering the document at the Nursing Home by someone whose name
has not been disclosed nor has the application been produced to enable the Court to find out the
reasons for which a prayer was made that the registration be done at the Nursing Home. Lakshmi
Amma the wife of Narasimha Bhatta who was the only other close relation present has stated in
categorical terms that the document was got executed by using pressure on Narasimha Bhatta while he
was of an infirm mind and was not in a fit condition to realize what he was doing. The hospital record
was not produced nor did the doctor who attended on Narasimha Bhatta at the Nursing Home produce
any authentic data or record to support their testimony. Even the will was not produced by respondent
No. 1 presumably because it must have contained recitals about the weak state of health of Narasimha
Bhatta. The dispositions which were made by Ext. B-3, as already pointed out before, were altogether
unnatural and no Valid reason or explanation has been given why Narasimha Bhatta should have given
218

everything to respondent 1 and even deprived himself of the right to deal with the property as an owner
during his lifetime. All these facts and circumstances raised a grave suspicion as to the genuineness of
the execution of the document Ext. B-3 and it was for respondent No. 1 to dispel the same. In our
opinion he has entirely failed to do so with the result that the appeal must succeed and it is allowed
with costs in this Court. The decree of the High Court is set aside and that of the trial Court restored.
219

Tarsem Singh vs. Sukhminder Singh; (1998)3SCC 471
Judges/Coram: Saiyed Saghir Ahmad and M. Jagannadha Rao, JJ.
ORDER
Judgement pronounced by Saiyed Saghir Ahmad, J.
1. Delay condoned.
2. The defendant is the petitioner in this Special Leave Petition before us.
3. The petitioner, who owned 48 Canals 11 marlas of agricultural land in village Panjetha, Tehsil and
District Patiala, entered into a contract for sale of that land with the respondent on 20.5.1988 @ Rs.
24,000 per acre. At the time of the execution of the agreement, an amount of Rs. 77,000/- was paid to
the petitioner as earnest money. Since the petitioner did not execute the sale deed in favour of the
respondent in terms of the agreement although the respondent was ready and willing to perform his
part of the contract, the latter, namely, the respondent filed the suit for Specific Performance against
the petitioner which was decreed by the trial court. The decree was modified in appeal by the
Additional District Judge who was of the opinion that the parties to the agreement, namely, the
petitioner and respondent both suffered from a mistake of fact as to the area of the land which was
proposed to be sold as also the price (sale-consideration) whether it was to be paid at the rate of per
"Bigha" or per "Canal". The Lower Appellate Court also found that the respondent was not ready and
willing to perform his part of the contract. Consequently, the decree for Specific Performance was not
passed but a decree for refund of the earnest money of Rs. 77,000 was passed against the petitioner.
This was upheld by the High Court.
4. Learned counsel for the petitioner has contended that since the Lower Appellate Court has recorded
a finding that the respondent was not ready and willing to perform his part of the contract inasmuch as
the balance of the sale consideration was not offered by him to the petitioner, the Lower Appellate
Court as also the High Court, which upheld the judgment of the Lower Appellate Court, were in error
in passing a decree for return of the amount of earnest money particularly as the parties had expressly
stipulated in the agreement for sale that if the sale deed was not obtained by the respondent on
220

payment of the balance amount of sale consideration, the amount of earnest money, advanced by the
respondent, shall stand forfeited.
5. In order to decide this question, we have to proceed on certain admitted facts which are to the effect
that there was an agreement for sale between the parties concerning agricultural land measuring 48
Canals 11 marlas which was proposed to be sold at the rate of Rs. 24,000 per bigha or Canal and that
an amount of Rs. 77,000 was paid as earnest money. The sale deed was to be obtained on or before
15.10.1988 by offering the balance of the sale consideration to the petitioner before the sub-Registrar,
Patiala. There was a stipulation in the agreement that if the respondent failed to pay the balance
amount of sale consideration, the earnest money shall stand forfeited.
6. During the pendency of the appeal before the Additional District Judge, respondent made certain
amendments in the plaint which have been set out in the judgment of the Lower Appellate Court as
under:-
"(a) He corrected the area of the suit land as 48 bighas 11 biswas, instead of 48 Canals 11 biswas.
(b) In para 3 of the plaint, he corrected the figure of Rs. 1,56,150 to Rs. 2,35,750.
(c) He also added following para 3A to the amended plaint:-
"The land is mortgaged with Canara Bank by the defendant for Rs. 20,000. The defendant be directed
to deposit the due amount to the Canara Bank or the plaintiff be authorised to retain the mortgage
money."
(d) He also added the following lines to para 9 of the plaint:-"
The plaintiff met Tarsem Singh in the month of September, 1988 and offered him the money with
request to get the sale deed registered in his favour but he refused to do so."
(e) He also added the following lines to para 19 of the plaint:-
"The value of the suit for the purpose of court fee and jurisdiction is Rs. 2,40,000 on which a court fee
stamps of Rs. 4,686 is fixed."
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7. The Lower Appellate Court also recorded additional evidence. Thereafter, the Lower Appellate
Court proceeded to record the findings as under:-
"24. It is rightly submitted by the learned counsel for the appellant that the case of the appellant is
hoisted twice over with his own petard. If the total price of the land agreed to be sold was Rs. 2,35,750
as per amended plaint, then from the original plaint and evidence of the respondent in the trial court, it
is clear that he was never ready and willing to pay the full sale price of Rs. 2,35,750 to the appellant
for the land in contract and that what he was ready and willing to pay at all material points of time
before he filed application for amendment of the plaint in this court, was only Rs. 1,56,150.
25. Of course, with the advantage of hind sight and as a clever but clumsy after though Sukhminder
Singh respondent PW1 stated in this court on 30.4.1993 that when he attended the office of the Sub
Registrar for execution of the sale deed on 30.4.1993 he was having Rs. one lac in his possession.
However it does not redeem his suit for specific performance because for the reasons already stated, it
is abundantly clear that till before filing the application for amendment of the plaint, in this court, the
respondent was only willing to pay the total sale price Rs. 1,56,150 to the appellant and not the full
sale consideration of Rs. 2,35,750. Therefore in the peculiar facts and circumstances of the case, it
would be difficult to hold that he had throughout been ready and willing to perform his part of the
contract.
26. An other forensic cross which the respondent must bear is that even from his original pleadings and
the amended pleadings, it is clear that both the parties were under a mistake of fact in so far as the area
of land agreed to be sold was concerned. As luck would have it, none of them was sure whether it was
48 Canals 11 marlas, or 48 bighas 11 biswas. Therefore, the contract became void under Section 22 of
the Contract Act. Besides this where the description, area & Ors particulars of the property are not
absolutely definite, precise, certain and exact, no decree for specific performance of sale can be
passed."
The Lower Appellate Court further proceeded to say as under:-
"On the analysis presented above it is absolutely clear that the parties were never ad-idem as to the
exact area of the land agreed to be sold."
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8. It was on account of the above findings that the decree for return of the earnest money of Rs. 77,000
paid to the petitioner was passed particularly as the petitioner was found to be under a legal obligation
to return that amount together with interest at the rate of 6% per annum from the date of contract till
the date of actual refund.
9. The findings that the parties were suffering from a mistake of fact as to the area and the rate at
which the property was agreed to be sold has been upheld by the High Court which summarily
dismissed the Second Appeal filed by the petitioner questioning the finding of the courts below.
10. What is the effect and impact of "Mistake of Fact" on the agreement in question may now be
examined.
11. 'Contract' is a bilateral transaction between two or more than two parties. Every contract has to
pass through several stages beginning with the stage of negotiation during which the parties discuss
and negotiate proposals and counter-proposals as also the consideration resulting finally in the
acceptance of the proposal. The proposal when accepted gives rise to an agreement. It is at this stage
that the agreement is reduced into writing and a formal document is executed on which parties affix
their signatures or thumb impression so as to be bound by the terms of the agreement set out in that
document. Such an agreement has to be lawful as the definition of contract, as set out in Section 2(h)
provides that "an agreement enforceable by law is a contract". Section 2(g) sets out that "an agreement
not enforceable by law is said to be void".
12. Before we proceed to consider what are lawful agreements or what are voidable or void contracts,
we may point out that it is not necessary under law that every contract must be in writing. There can be
an equally binding contract between the parties on the basis of oral agreement unless there is a law
which requires the agreement to be in writing.
Section 10 of the Contract Act provides as under:-
"10. What agreements are contracts.- All agreements are contracts if they are made by the free consent
of parties competent to contract for a lawful consideration and with a lawful object and are not hereby
expressly declared to be void.
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Nothing herein contained shall affect any law in force in India and not hereby expressly repealed, by
which any contract is required to be made in writing or in the presence of witnesses, or any law
relating to the registration of documents."
The essentials of contract set out in Section 10 above are:-
(1) Free consent of the parties
(2) Competence of parties to contract
(3) Lawful consideration
(4) Lawful object
13. Competence to contract is set out in Section 11 which provides that every person is competent to
contract who is of the age of majority and who is of sound mind and is not disqualified from
contracting by any law to which he is subject. Section 12 provides that a person will be treated to be of
sound mind if, at the time when he makes the contract, he is capable of understanding it and forming a
rational judgment as to its effect upon his interests.
14. "Consent" and "Free Consent", with which we are really concerned in this appeal, are defined in
Section 13 and 14 of the Act as under:-
"13. Two or more persons are said to consent when they agree upon the same thing in the same sense."
"14. Consent is said to be free when it is not caused by-
(1) coercion, as defined in Section 15,
(2) or undue influence, as defined in Section 16, or
(3) fraud, as defined in Section 17, or
(4) misrepresentation, as defined in Section 18,
(5) or mistake subject to the provisions of sections 20, 21 and 22.
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15. Consent is said to be so caused when it would not have been given but for the existence of such
coercion, undue influence, fraud, misrepresentation or mistake."
16. Section 15, 16, 17 and 18 define "Coercion", "undue Influence", "Fraud" and "Misrepresentation".
17. Section 19 provides that when consent to an agreement is caused by coercion, fraud or
misrepresentation, such agreement is voidable at the option of the party whose consent was so caused.
So also is the agreement to which consent of a party was obtained by undue influence.
18. Section 20 of the Act lays down as under:-
"20. Agreement void where both parties are under mistake as to matter of fact. - 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.
Explanation. - An erroneous opinion as to the value of the thing which forms the subject-matter of the
agreement, is not to be deemed a mistake as to a matter of fact."
19. This Section provides that an agreement would be void if both the parties to the agreement were
under a mistake as to a matter of fact essential to the agreement. The mistake has to be mutual and in
order that the agreement be treated as void, both the parties must be shown to be suffering from
mistake of fact. Unilateral mistake is outside the scope of this Section.
20. The other requirement is that the mistake, apart from being mutual, should be in respect of a matter
which is essential to the agreement.
21. Learned counsel for the petitioner contended that a mistake of fact with regard to the "price" or the
"area" would not be a matter essential to the agreement, at least in the instant case, as the only dispute
between the parties was with regard to the price of the land, whether the price to be paid for the area
calculated in terms of "bighas" or "Canals".
22. "Bigha" and "Canal" are different units of measurement. In the Northern part of the country, the
land is measured in some states either in terms of "bighas" or in terms of "Canals". Both convey
different impressions regarding area of the land. The finding of the Lower Appellate Court is to the
effect that the parties were not ad-idem with respect to the unit of measurement. While the defendant
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intended to sell it in terms of "Canals", the plaintiff intended to purchase it in terms of "bighas".
Therefore, the dispute was not with regard to the unit of measurement only. Since these units relate to
the area of the land, it was really a dispute with regard to the area of the land which was the subject
matter of agreement for sale, or, to put it differently, how much area of the land was agreed to be sold,
was in dispute between the parties and it was with regard to the area of the land that the parties were
suffering from a mutual mistake. The area of the land was as much essential to the agreement as the
price which, incidentally, was to be calculated on the basis of the area. The contention of the learned
counsel that the "mistake" with which the parties were suffering, did not relate to a matter essential to
the agreement cannot be accepted.
23. Learned counsel for the petitioner has contended that Lower Appellate Court or the High Court
were not justified in passing a decree for the refund of Rs. 77,000 which was paid as earnest money to
the petitioner as there was a specific stipulation in the agreement for sale that if the respondent did not
perform his part of the contract and did not obtain the sale deed after paying the balance amount of
sale consideration within the time specified in the agreement, the earnest money would stand forfeited.
It is contended that since the respondent did not offer the balance amount of sale consideration and did
not obtain the sale deed in terms of the agreement, the amount of earnest money was rightly forfeited
and a decree for its refund could not have been legally passed.
24. Learned counsel for the petitioner has invited our attention to Section 73 and 74 of the Contract
Act which, in our opinion, are of no aid to the petitioner.
25. Section 73 stipulates a valid and binding contract between the parties. It deals with one of the
remedies available for the breach of contract. It is provided that where a party sustains a loss on
account of breach of contract, he is entitled to receive, from the party who has broken the contract,
compensation for such loss or damage.
26. Under Section 74 of the Act, however, the parties to the agreement stipulate either a particular
amount which is to be paid in case of breach or an amount may be mentioned to be paid by way of
penalty. The party complaining of the breach is entitled, whether or not actual damage or loss is
proved to have been caused, to receive from the party who has committed the breach of contract,
compensation not exceeding the amount mentioned in the agreement or the penalty stipulated therein.
But this Section also contemplates a valid and binding agreement between the parties. Since the
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stipulation for forfeiture of the earnest money is part of the contract, it is necessary for the enforcement
of that stipulation, that the contract between the parties is valid. If the forfeiture Clause is contained in
an agreement which is void on account of the fact that the parties were not ad-idem and were suffering
from mistake of fact in respect of a matter which was essential to the contract, it cannot be enforced as
the agreement itself is void under Section 20 of the Contract Act. A void agreement cannot be split up.
None of the parties to the agreement can be permitted to seek enforcement of a part only of the
contract through a court of law. If the agreement is void, all its terms are void and none of the terms,
except in certain known exceptions, specially where the Clause is treated to constitute a separate and
independent agreement, severable from the main agreement, can be enforced separately and
independently.
27. Since, in the instant case, it has been found as a fact by the courts below that the agreement in
question was void from its inception as the parties suffered from mutual mistake with regard to the
area and price of the plots of land agreed to be sold, the forfeiture Clause would, for that reason, be
also void and, therefore, the petitioner could not legally forfeit the amount and seek the enforcement of
forfeiture clause, even by way of defence, in a suit instituted for Specific Performance by the
respondent.
28. We may also refer to Section 65 of the Contract Act with, minus the illustrations, is as follows:-
"65. Obligation of person who has received advantage under void agreement or contract that becomes
void.-When an agreement is discovered to be void, or when a contract becomes void, any person who
has received any advantage under such agreement or contract is bound to restore it, or to make
compensation for it, to the person from whom he received it."
29. This Section, which is based on equitable doctrine, provides for the restitution of any benefit
received under a void agreement or contract and, therefore, mandates that any "person" which
obviously would include a party to the agreement, who has received any advantage under an
agreement which is discovered to be void or under a contract which becomes void, has to restore such
advantage or to pay compensation for it, to the person from whom he received that advantage or
benefit.
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30. Learned counsel for the appellant has contended that Section 65 would apply to a situation where
the agreement is "discovered to be void" or where the contract "becomes void" and not to an
agreement which is void from its inception. This argument cannot be allowed to prevail.
31. Mutual consent, which should also be a free consent, as defined in Section 13 and 14 of the Act, is
the sine qua non of a valid agreement. One of the essential elements which go to constitute a free
consent is that a thing is understood in the same sense by a party as is understood by the other party. It
may often be that the parties may realise, after having entered into the agreement or after having
signed the contract, that one of the matters which was essential to the agreement, was not understood
by them in the same sense and that both of them were carrying totally different impressions of that
matter at the time of entering into the agreement or executing the document. Such realisation would
have the effect of invalidating the agreement under Section 20 of the Act. On such realisation, it can be
legitimately said that the agreement was "discovered to be void". The words "discovered to be void",
therefore, comprehend a situation in which the parties were suffering from a mistake of fact from the
very beginning but had not realised, at the time of entering into the agreement or signing of the
document, that they were suffering from any such mistake and had, therefore, acted bona fide on such
agreement. The agreement in such a case would be void from its inception, though discovered to be so
at a much later stage.
32. The Privy Council in Thakurain Harnath Kuar Thakur Indar Bahadur Singh, MANU/PR/0057/1922
: AIR (1922) PC 403 = ILR (1922) 45 All. 179 = MANU/PR/0057/1922 : 27 CWN 949 = 44 MLJ 489,
while considering the provisions of Section 65 held that:-
"The Section deals with (a) agreements and (b) contracts. The distinction between them is apparent
from Section 2. By Clause (e) every promise and every set of promises forming the consideration for
each other is an agreement, and by Clause (h) an agreement enforceable by law is a contract. Section
65, therefore, deals with (a) agreements enforceable by law and (b) with agreements not so
enforceable. By Clause (g) an agreement not enforceable by law is said to be void.
An agreement, therefore, discovered to be void is one discovered to be not enforceable by law and, on
the language of the Section would include an agreement that was void in that sense from its inception
as distinct from a contract that becomes void."
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33. This case before the Privy Council also related to sale of certain villages for which some money
had been paid in advance. The sale was found to be inoperative as there was a misapprehension as to
the rights of the transferor in the villages which he purported to sell and that the true nature of those
rights was discovered much later. In this background, the Privy Council held the agreement to have
been "discovered to be void". The Privy Council, therefore, passed a decree for compensation in
favour of the vendee and in assessing that compensation, the sum of money, which was advanced, was
included in the amount of compensation decreed with 6% interest payable from the date of suit.
34. To the same effect is an old decision of the Calcutta High Court in Ram Chandra Misra & Ors V.
Ganesh Chandra Gangopadhya & Ors, AIR (1917) Cal 786, in which it was held that an agreement
entered into under a mistake and misapprehension as to the relative and respective rights of the parties
thereto is liable to be set aside as having proceeded upon a common mistake. In this case, there was an
agreement for lease of the mogoli brahmatter rights of the defendants in certain plots of land. Both the
parties were under the impression that the brahmatter rights carried with them the mineral rights. It
was subsequently discovered that brahmatter rights did not carry mineral rights. The High Court held
that the agreement became void under Section 20 of the Contract Act as soon as the mistake was
discovered and, therefore, the plaintiffs were entitled to refund of money advanced under a contract
which was subsequently discovered to be void.
35. We may point out that there are many facets of this question, as for example (and there are many
more examples), the agreement being void for any of the reasons set out in Section 23 and 24, in which
case even the refund of the amount already paid under that agreement may not be ordered. But, as
pointed out above, we are dealing only with a matter in which one party had received an advantage
under an agreement which was "discovered to be void" on account of Section 20 of the Act. It is to this
limited extent that we say that, on the principle contained in Section 65 of the Act, the petitioner
having received Rs. 77,000 as earnest money from the respondent in pursuance of that agreement, is
bound to refund the said amount to the respondent. A decree for refund of this amount was, therefore,
rightly passed by the Lower Appellate Court.
36. For the reasons stated above, we see no force in this Special Leave Petition which is dismissed.
229

Gherulal Parakh vs. Mahadeodas Maiya and Ors. (AIR 1959 SC 781)
Judges/Coram: A.K. Sarkar, K. Subba Rao and T.K. Thommen, JJ.
JUDGMENT
K. Subba Rao, J.
1. This appeal filed against the judgment of the High Court of Judicature at Calcutta raises the question
of the legality of a partnership to carry on business in wagering contracts.
2. The facts lie in a small compass. They, omitting those not germane to the controversy before us, are
as follows: The appellant, Gherulal Parakh, and the first respondent, Mahadeodas Maiya, managers of
two joint families entered into a partnership to carry on wagering contracts with two firms of Hapur,
namely, Messrs. Mulchand Gulzarimull and Baldeosahay Surajmull. It was agreed between the
partners that the said contracts would be made in the name of the respondents on behalf of the firm and
that the profit and loss resulting from the transactions would be borne by them in equal shares. In
implementation of the said agreement, the first respondent entered into 32 contracts with Mulchand
and 49 contracts with Baldeosahay and the net result of all these transactions was a loss, with the result
that the first respondent had to pay to the Hapur merchants the entire amount due to them. As the
appellant denied his liability to bear his share of the loss, the first respondent along with his sons filed
O.S. No. 18 of 1937 in the Court of the Subordinate Judge, Darjeeling, for the recovery of half of the
loss incurred in the transactions with Mulchand. In the plaint he reserved his right to claim any further
amount in respect of transactions with Mulchand that might be found due to him after the accounts
were finally settled with him. That suit was referred to arbitration and on the basis of the award, the
Subordinate Judge made a decree in favour of the first respondent and his sons for a sum of Rs. 3,375.
After the final accounts were settled between the first respondent and the two merchants of Hapur and
after the amounts due to them were paid, the first respondent instituted a suit, out of which the present
appeal arises, in the Court of the Subordinate Judge, Darjeeling, for the recovery of a sum of Rs. 5,300
with interest thereon. Subsequently the plaint was amended and by the amended plaint the respondents
asked for the same relief on the basis that the firm had been dissolved. The appellant and his sons, inter
alia, pleaded in defence that the agreement between the parties to enter into wagering contracts was
unlawful under s. 23 of the Contract Act, that as the partnership was not registered, the suit was barred
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under s. 69(1) of the Partnership Act and that in any event the suit was barred under O. 2, Rule 2 of the
Code of Civil Procedure. The learned Subordinate Judge found that the agreement between the parties
was to enter into wagering contracts depending upon the rise and fall of the market and that the said
agreement was void as the said object was forbidden by law and opposed to public policy. He also
found that the claim in respect of the transactions with Mulchand so far as it was not included in the
earlier suit was not barred under O. 2, Rule 2, Code of Civil Procedure, as the cause of action in
respect of that part of the claim did not arise at the time the said suit was filed. He further found that
the partnership was between the two joint families of the appellant and the first respondent
respectively, that there could not be in law such a partnership and that therefore s. 69 of the Partnership
Act was not applicable. In the result, he dismissed the suit with costs.
3. On appeal, the learned Judges of the High Court held that the partnership was not between the two
joint families but was only between the two managers of the said families and therefore it was valid.
They found that the partnership to do business was only for a single venture with each one of the two
merchants of Hapur and for a single season and that the said partnership was dissolved after the season
was over and therefore the suit for accounts of the dissolved firm was not hit by the provisions of sub-
sections (1) and (2) of s. 69 of the Partnership Act. They further found that the object of the partners
was to deal in differences and that though the said transactions, being in the nature of wager, were void
under s. 30 of the Indian Contract Act, the object was not unlawful within the meaning of s. 23 of the
said Act.
4. In regard to the claim, the learned Judges found that there was no satisfactory evidence as regards
the payment by the first respondent on account of loss incurred in the contracts with Mulchand but it
was established that he paid a sum of Rs. 7,615 on account of loss in the contracts entered into with
Baldeosahay. In the result, the High Court gave a decree to the first respondent for a sum of Rs. 3,807-
8-0 and disallowed interest thereon for the reason that as the suit in substance was one for accounts of
a dissolved firm, there was no liability in the circumstances of the case to pay interest. In the result, the
High Court gave a decree in favour of the first respondent for the said amount together with another
small item and dismissed the suit as regards "the plaintiffs other than the first respondent and the
defendants other than the appellant".
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5. Before we consider the questions of law raised in the case, it would be convenient at the outset to
dispose of questions of fact raised by either party. The learned Counsel for the appellant contends that
the finding of the learned Judges of the High Court that the partnership stood dissolved after the season
was over was not supported by the pleadings or the evidence adduced in the case. In the plaint as
originally drafted and presented to the Court, there was no express reference to the fact that the
business was dissolved and no relief was asked for accounts of the dissolved firm. But the plaint
discloses that the parties jointly entered into contracts with two merchants between March 23, 1937,
and June 17, 1937, & that the plaintiffs obtained complete accounts of profit and loss on the aforesaid
transactions from the said merchants after June 17, 1937, & that they issued a notice to the defendants
to pay them a sum of Rs. 4,146-4-3, being half of the total payments made by them on account of the
said contracts and that the defendants denied their liability. The suit was filed for recovery of the said
amount. The defendant filed a written-statement on June 12, 1940, but did not raise the plea based on
s. 69 of the Partnership Act. He filed an additional written-statement on November 9, 1941, expressly
setting up the plea. Thereafter the plaintiffs prayed for the amendment of the plaint by adding the
following to the plaint as paragraph 10 :
"That even Section 69 of the Indian Partnership Act is not a bar to the present suit as the joint business
referred to above was dissolved and in this suit the Court is required only to go into the accounts of the
said joint business".
6. On August 14, 1942, the defendant filed a further additional written-statement alleging that the
allegations in paragraph 2 were not true and that as no date of the alleged dissolution had been
mentioned in the plaint, the plaintiffs' case based on the said alleged dissolution was not maintainable.
It would be seen from the aforesaid pleadings that though an express allegation of the fact of
dissolution of the partnership was only made by an amendment on November 17, 1941, the plaint as
originally presented contained all the facts sustaining the said plea. The defendants in their written-
statement, inter alia, denied that there was any partnership to enter into forward contracts with the said
two merchants and that therefore consistent with their case they did not specifically deny the said facts.
The said facts, except in regard to the question whether the partnership was between the two families
or only between the two managers of the families on which there was difference of view between the
Court of the Subordinate Judge and the High Court, were concurrently found by both the Courts. It
follows from the said findings that the partnership was only in respect of forward contracts with two
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specified individuals and for a particular season. But it is said that the said findings were not based on
any evidence in the case. It is true that the documents did not clearly indicate any period limiting the
operation of the partnership, but from the attitude adopted by the defendants in the earlier suit ending
in an award and that adopted in the present pleadings, the nature of the transactions and the conduct of
the parties, no other conclusion was possible than that arrived at by the High Court. If so, s. 42 of the
Partnership Act directly applies to this case. Under that section in the absence of a contract to the
contrary, a firm is dissolved, if it is constituted to carry out one or more adventures or undertakings, by
completion thereof. In this case, the partnership was constituted to carry out contracts with specified
persons during a particular season and as the said contracts were closed, the partnership was dissolved.
7. At this stage a point raised by the learned Counsel for the respondents may conveniently be disposed
of. The learned Counsel contends that neither the learned Subordinate Judge nor the learned Judges of
the High Court found that the first respondent entered into any wagering transactions with either of the
two merchants of Hapur and therefore no question of illegality arises in this case. The law on the
subject is well-settled and does not call for any citation of cases. To constitute a wagering contract
there must be proof that the contract was entered into upon terms that the performance of the contract
should not be demanded, but only the difference in prices should be paid. There should be common
intention between the parties to the wager that they should not demand delivery of the goods but
should take only the difference in prices on the happening of an event. Relying upon the said legal
position, it is contended that there is no evidence in the case to establish that there was a common
intention between the first respondent and the Hapur merchants not to take delivery of possession but
only to gamble in difference in prices. This argument, if we may say so, is not really germane to the
question raised in this case. The suit was filed on the basis of a dissolved partnership for accounts. The
defendants contended that the object of the partnership was to carry on wagering transactions, i.e., only
to gamble in differences without any intention to give or take delivery of goods. The Courts, on the
evidence, both direct and circumstantial, came to the conclusion that the partnership agreement was
entered into with the object of carrying on wagering transactions wherein there was no intention to ask
for or to take delivery of goods but only to deal with differences. That is a concurrent finding of fact,
and, following the usual practice of this Court, we must accept it. We, therefore, proceed on the basis
that the appellant and the first respondent entered into a partnership for carrying on wagering
transactions and the claim related only to the loss incurred in respect of those transactions.
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8. Now we come to the main and substantial point in the case. The problem presented, with its
different facts, is whether the said agreement of partnership is unlawful within the meaning of s. 23 of
the Indian Contract Act. Section 23 of the said Act, omitting portions unnecessary for the present
purpose, reads as follows:
"The consideration or object of an agreement is lawful, unless
- It is forbidden by law, or
. . . the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every
agreement of which the object or consideration is unlawful is void."
9. Under this section, the object of an agreement, whether it is of partnership or otherwise, is unlawful
if it is forbidden by law or the Court regards it as immoral or opposed to public policy and in such
cases the agreement itself is void.
10. The learned Counsel for the appellant advances his argument under three sub-heads : (i) the object
is forbidden by law, (ii) it is opposed to public policy, and (iii) it is immoral. We shall consider each
one of them separately.
11. Re. (i) - forbidden by law : Under s. 30 of the Indian Contract Act, agreements by way of wager
are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or
entrusted to any person to abide the result of any game or other uncertain event on which any wager is
made. Sir William Anson's definition of "wager" as a promise to give money or money's worth upon
the determination or ascertainment of an uncertain event accurately brings out the concept of wager
declared void by s. 30 of the Contract Act. As a contract which provides for payment of differences
only without any intention on the part of either of the parties to give or take delivery of the goods is
admittedly a wager within the meaning of s. 30 of the Contract Act, the argument proceeds, such a
transaction, being void under the said section, is also forbidden by law within the meaning of s. 23 of
the Contract Act. The question, shortly stated, is whether what is void can be equated with what is
forbidden by law. This argument is not a new one, but has been raised in England as well as in India
and has uniformly been rejected. In England the law relating to gaming and wagering contracts is
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contained in the Gaming Acts of 1845 and 1892. As the decisions turned upon the relevant provisions
of the said Acts, it would help to appreciate them better if the relevant sections of the two Acts were
read at this stage :
Section 18 of the Gaming Act, 1845 :
"Contracts by way of gaming to be void, and wagers or sums deposited with stakeholders not to be
recoverable at law - Saving for subscriptions for prizes -.............. All contracts or agreements, whether
by parole or in writing, by way of gaming or wagering, shall be null and void; and...... no suit shall be
brought or maintained in any court of law and equity for recovering any sum of money or valuable
thing alleged to be won upon any wager, or which shall have been deposited in the hands of any person
to abide the event on which any wager shall have been made : Provided always, that this enactment
shall not be deemed to apply to any subscription or contribution, or agreement to subscribe or
contribute, for or towards any plate, prize or sum of money to be awarded to the winner or winners of
any lawful game, sport, pastime or exercise."
12. Section 1 of the Gaming Act, 1892 :
"Promises to repay sums paid under contracts void by 8 & 9 Vict. c. 109 to be null and void. - Any
promise, express or implied, to pay any person any sum of money paid by him under or in respect of
any contract or agreement rendered null and void by the Gaming Act, 1845, or to pay any sum of
money by way of commission, fee, reward, or otherwise in respect of any such contract, or of any
services in relation thereto or in connexion therewith, shall be null and void, and no action shall be
brought or maintained to recover any such sum of money."
13. While the Act of 1845 declared all kinds of wagers or games null and void, it only prohibited the
recovery of money or valuable thing won upon any wager or deposited with stakeholders. On the other
hand, the Act of 1892 further declared that moneys paid under or in respect of wagering contracts dealt
with by the Act of 1845 are not recoverable and no commission or reward in respect of any wager can
be claimed in a court of law by agents employed to bet on behalf of their principals. The law of
England till the passing of the Act of 1892 was analogous to that in India and the English law on the
subject governing a similar situation would be of considerable help in deciding the present case. Sir
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William Anson in his book "On Law of Contracts" succinctly states the legal position thus, at page 205
:
".............. the law may either actually forbid an agreement to be made, or it may merely say that if it is
made the Courts will not enforce it. In the former case it is illegal, in the latter only void; but inasmuch
as illegal contracts are also void, though void contracts are not necessarily illegal, the distinction is for
most purposes not important, and even judges seem sometimes to treat the two terms as inter-
changeable."
14. The learned author proceeds to apply the said general principles to wagers and observes, at page
212, thus :
"Wagers being only void, no taint of illegality attached to a transaction, whereby one man employed
another to make bets for him; the ordinary rules which govern the relation of employer and employed
applied in such a case."
15. Pollock and Mulla in their book on Indian Contract define the phrase "forbidden by law" in s. 23
thus, at page 158:
"An Act or undertaking is equally forbidden by law whether it violates a prohibitory enactment of the
Legislature or a principle of unwritten law. But in India, where the criminal law is codified, acts
forbidden by law seem practically to consist of acts punishable under the Penal Code and of acts
prohibited by special legislation, or by regulations or orders made under authority derived from the
Legislature."
16. Some of the decisions, both English and Indian, cited at the Bar which bring out the distinction
between a contract which is forbidden by law and that which is void may now be noticed. In Thacker
v. Hardy I.L.R (1878) Q.B. 685, the plaintiff, a broker, who was employed by the defendant to
speculate for him upon the stock Exchange, entered into contracts on behalf of the defendant with a
third party upon which he (the plaintiff) became personally liable. He sued the defendant for indemnity
against the liability incurred by him and for commission as broker. The Court held that the plaintiff
was entitled to recover notwithstanding the provisions of 8 & 9 Vict. c. 109, s. 18 (English Gaming
Act, 1845). Lindley, J., observed at page 687 :
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"Now, if gaming and wagering were illegal, I should be of opinion that the illegality of the transactions
in which the plaintiff and the defendant were engaged would have tainted, as between themselves,
whatever the plaintiff had done in furtherance of their illegal designs, and would have precluded him
from claiming, in a court of law, any indemnity from the defendant in respect of the liabilities he had
incurred : Cannan v. Bryce 3 B. & Ald. 179; McKinnell v. Robinson 3 M. W. 434; Lyne v. Siesfeld 1
H. N. 278. But it has been held that although gaming and wagering contracts cannot be enforced, they
are not illegal. Fitch v. Jones 5 E. B. 238 is plain to that effect. Money paid in discharge of a bet is a
good consideration for a bill of exchange: Oulds v. Harrison (10 Ex. 572); and if money be so paid by
a plaintiff at the request of a defendant, it can be recovered by action against him : Knight v. Camber
15 C.B. 562; Jessopp v. Lutwyoho 10 Ex. 614; Rosewarne v. Billing 15 C.B. 316; and it has been held
that a request to pay may be inferred from an authority to bet : Oldham v. Ramsden 44 L.J. 309.
Having regard to these decisions, I cannot hold that the statute above referred to precludes the plaintiff
from maintaining this action."
17. In Read v. Anderson I.L.R (1882) Q.B. 100 where an agent was employed to make a bet in his own
name on behalf of his principal, a similar question arose for consideration. Hawkins, J., states the legal
position at page 104 :
"At common law wagers were not illegal, and before the passing of 8 & 9 Vict. c. 109 actions were
constantly brought and maintained to recover money won upon them. The object of 8 & 9 Vict. c. 109
(passed in 1845) was not to render illegal wagers which up to that time had been lawful, but simply to
make the law no longer available for their enforcement, leaving the parties to them to pay them or not
as their sense of honour might dictate."
18. After citing the provisions of s. 18 of that Act, the learned Judge proceeds to observe thus, at page
105 :
"There is nothing in this language to affect the legality of wagering contracts, they are simply rendered
null and void; and not enforceable by any process of law. A host of authorities have settled this to be
the true effect of the Statute."
19. This judgment of Hawkins, J., was confirmed on appeal (reported in 13 Q.B. 779) on the ground
that the agency became irrevocable on the making of the bet. The judgment of the Court of Appeal
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cannot be considered to be a direct decision on the point. The said principle was affirmed by the Court
of Appeal again in Bridger v. Savage I.L.R (1885) Q.B. 363. There the plaintiff used his agent for the
amount received by him in respect of the winnings from the persons with whom the agent had betted.
Brett, M.R., observed at page 366 :
".......... the defendant has received money which he contracted with the plaintiff to hand over to him
when he had received it. That is a perfectly legal contract; but for the defendant it has been contended
that the statute 8 & 9 Vict. c. 109, s. 18, makes that contract illegal. The answer is that it has been held
by the Courts on several occasions that the statute applies only to the original contract made between
the persons betting, and not to such a contract as was made here between the plaintiff and defendant."
20. Bowen, L.J., says much to the same effect at page 367 :
"Now with respect to the principle involved in this case, it is to be observed that the original contract
of betting is not an illegal one, but only one which is void. If the person who has betted pays his bet, he
does nothing wrong; he only waives a benefit which the statute has given to him, and confers a good
title to the money on the person to whom he pays it. Therefore when the bet is paid the transaction is
completed, and when it is paid to an agent it cannot be contended that it is not a good payment for his
principal......... So much, therefore, for the principle governing this case. As to the authorities, the cases
of Sharp v. Taylor (2 Phil. 801), Johnson v. Lansley 12 C.B. 468, and Beeston v. Beeston I Ex D. 13,
all go to shew that this action is maintainable, and the only authority the other way is that of Beyer v.
Adams 26 L.J. Ch. 841, and that case cannot be supported, and is not law." This case lays down the
correct principle and is supported by earlier authorities. The decision in Partridge v. Mallandaine,
(1886) 18 QBD 276 is to the effect that persons receiving profits from betting systematically carried on
by them are chargeable with income-tax on such profits in respect of a "vocation" under 5 & 6 Vict. c.
35 (the Income Tax Act) Schedule D. Hawkins, J., rejecting the argument that the profession of
bookmakers is not a calling within the meaning of the Income Tax Act, makes the following
observations, at page 278 :
"Mere betting is not illegal. It is perfectly lawful for a man to bet if he likes. He may, however, have a
difficulty in getting the amount of the bets from dishonest persons who make bets and will not pay."
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21. The decision in Hyams v. Stuart King [1908] 2 K.B. 696 deals with the problem of the legality of a
fresh agreement between parties to a wager for consideration. There, two bookmakers had betting
transactions together, which resulted in the defendant giving the plaintiff a cheque for the amount of
bets lost to him. At the request of the defendant, the cheque was held over by the plaintiff for a time,
and part of the amount of the cheque was paid by the defendant. Subsequently a fresh verbal
agreement was come to between the parties, by which, in consideration of the plaintiff holding over the
cheque for a further time and refraining from declaring the defendant a defaulter and thereby injuring
him with his customers, the defendant promised to pay the balance owing in a few days. The balance
was never paid and the plaintiff filed a suit to recover the money on the basis of the fresh verbal
agreement. The Court of Appeal, by a majority, Fletcher Moulton, L.J., dissenting, held that the fresh
verbal agreement was supported by good consideration and therefore the plaintiff was entitled to
recover the amount due to him. At page 705, Sir Gorell Barnes posed the following three questions to
be decided in the case : (1) Whether the new contract was itself one which falls within the provisions
of 8 & 9 Vict. c. 109, s. 18; (2) whether there was any illegality affecting that contract; and (3) whether
that contract was a lawful contract founded on good consideration. Adverting to the second question,
which is relevant to the present case, the President made the following observations at page 707 :
"................ it is to be observed that there was nothing illegal in the strict sense in making the bets.
They were merely void under 8 & 9 Vict. c. 109, and there would have been no illegality in paying
them. There is no doubt whatever about this. There was also nothing illegal in giving the cheque nor
would there have been any illegality in paying it, though the defendants could not have been
compelled by the plaintiff to pay it, because by statute it was to be deemed and taken to have been
made and given for an illegal consideration, and therefore void in the hands of the plaintiff.......... The
statutes do not make the giving or paying of the cheque illegal, and impose no penalty for so doing.
Their effect and intention appear only, so far as material, to be that gaming or wagering contracts
cannot be enforced in a Court of Law or Equity........... ."
22. The view expressed by the President is therefore consistent with the view all along accepted by the
Courts in England. This case raised a new problem, namely, whether a substituted agreement for
consideration between the same parties to the wager could be enforced, and the majority held that it
could be enforced, while Fletcher Moulton, L.J., recorded his dissent. We shall have occasion to notice
the dissenting view of Fletcher Moulton, L.J., at a later stage. The aforesaid decisions establish the
239

proposition that in England a clear distinction is maintained between a contract which is void and that
which is illegal and it has been held that though a wagering contract is void and unenforceable
between parties, it is not illegal and therefore it does not affect the validity of a collateral contract.
23. The same principle has been applied to collateral contracts of partnership also. In Thwaites v.
Coulthwaite (1896) 1 Ch. 496 the question of legality of a partnership of bookmaking and betting was
raised. There the plaintiff and defendant were partners in a bookmakers and betting business, which
was carried on by the defendant; the plaintiff claimed an account of the profits of the partnership, and
the defendant contended that, having regard to the nature of the business, no such relief could be
obtained. Chitty, J., rejected the plea holding that the partnership was valid, for the following reasons,
among others, and stated at page 498 :
"The Gaming Act, 1845 (8 & 9 Vict. c. 109), did not make betting illegal; this statute, as is well
known, merely avoided the wagering contract. A man may make a single bet or many bets; he may
habitually bet; he may carry on a betting or bookmakers business within the statute, provided the
business as carried on by him does not fall within the prohibition of the Betting Act, 1853."
24. In Thomas v. Day (1908) 24 T.L.R. 272, a similar question arose. There the plaintiff claimed an
account and money due under a partnership which he alleged had existed between himself and the
defendant to take an office and carry on a betting business as bookmakers. Darling, J., held that a
partnership to carry on the business of a bookmaker was not recognized by law, that even if there was
such a legal partnership, an action for account would not lie as between the two bookmakers founded
on betting and gambling transactions. This judgment certainly supports the appellant; but the learned
Judge did not take notice of the previous decision on the subject and the subsequent decisions have not
followed it. When a similar objection was raised in Brookman v. Mather (1913) 29 T.L.R. 276, Avery,
J., rejected the plea and gave a decree to the plaintiff. There the plaintiff and the defendant entered into
a partnership to carry on a betting business. Two years thereafter, in 1910, the partnership was
dissolved and a certain amount was found due to the plaintiff from the defendant and the latter gave
the former a promissory note for that amount. A suit was filed for the recovery of the amount payable
under the promissory note. Avery, J., reiterated the principle that betting was not illegal per se. When
the decision in Thomas v. Day (1908) 24 T.L.R. 272 was cited in support of the broad principle that
the betting business could not be recognized as legal in a Court of Justice, the learned Judge pointed
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out that that case was decided without reference to Thwaites v. Coulthwaite (1896) 1 Ch. 496. This
judgment, therefore, corrected the deviation made by Darling, J., in Thomas v. Day (1908) 24 T.L.R.
272 and put the case law in line with earlier precedents.
25. The earlier view was again accepted and followed in Keen v. Price (1914) 2 Ch. 98 where an
action by one of the partners in a bookmakers and betting business against the other for an account of
the partnership dealings was entertained. But the Court gave liberty to the defendant to object to
repaying anything which represented profits in such business. The reason for this apparent conflict
between the two parts of the decision is found in the express terms of the provisions of the Gaming Act
of 1892. Commenting upon Thwaites v. Coulthwaite (1896) 1 Ch. 496 in which Chitty, J., held that
such an action would lie for an account of the profits of the partnership, Sargant, J., pointed out that in
that case the Gaming Act, 1892, was not referred to. At page 101, the learned Judge says :
"Curiously enough, in that case the Gaming Act, 1892, was not referred to, and although the decision
is a good one on the general law, it cannot be regarded as a decision on the Act of 1892."
26. This judgment confirms the principle that a wager is not illegal, but states that after the Gaming
Act, 1892, a claim in respect of that amount even under a collateral agreement is not maintainable.
27. In O'Connor and Ould v. Ralston (1920) 3 K.B. 451, the plaintiff, a firm of bookmakers, filed a suit
claiming from the defendant the amount of five cheques drawn by him upon his bank in payment of
bets which he had lost to them and which had been dishonoured on presentation. Darling, J., held that
as the plaintiffs formed an association for the purpose of carrying on a betting business, the action
would not lie. In coming to that conclusion the learned Judge relied upon the dissenting view of
Fletcher Moulton, L.J., in Hyams v. Stuart King [1908] 2 K.B. 696. We shall consider that decision at
a later stage.
28. The opinion of Darling, J., was not accepted in Jeffrey & Co. v. Bamford [1921] 2 K.B. 351
wherein McCardie, J., held that a partnership for the purpose of carrying on a betting and bookmakers
business is not per se illegal or impossible in law. The learned Judge says at page 356 :
"............ betting or wagering is not illegal at common law....... .
It has been repeatedly pointed out that mere betting on horse races is not illegal".
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29. The learned Judge, after noticing the earlier decisions already considered by us and also some of
the observations of Fletcher Moulton, L.J., came to the conclusion that the partnership was not illegal.
30. We shall now scrutinize the decision in Hill v. William Hill (1949) 2 All. 452. to see whether there
is any substance in the argument of the learned Counsel for the appellant that this decision accepted
the dissenting view of Fletcher Moulton, L.J., in Hyams v. Stuart King [1908] 2 K.B. 696 or the view
of Darling, J., in Thomas v. Day (1908) 24 T.L.R. 272. and O'Connor and Ould v. Ralston (1920) 3
K.B. 451. The facts in that case were : The appellant had betting transactions with the respondents, a
firm of bookmakers. As a result of those transactions, the appellant lost pound 3,635-12-6. As the
appellant was unable to pay the amount, the matter was referred to the committee of Tattersalls, who
decided that the appellant should pay the respondents a sum of pound 635-12-6 within fourteen days
and the balance by monthly installments of pound 100. It was laid down that if the appellant failed to
make those payments, he was liable to be reported to the said committee which would result in his
being warned off Newmarket Heath and posted as defaulter. The appellant informed the respondents
that he was unable to pay the pound 635-12-6 within the prescribed time and offered to send them a
cheque for that sum post-dated October 10, 1946, and to pay the monthly installments of pound 100
thereafter. On the respondents agreeing to that course, the appellant sent a post-dated cheque to them
and also enclosed a letter agreeing to pay the monthly installments. As the post-dated cheque was
dishonoured and the appellant failed to pay the entire amount, the respondents filed a suit claiming the
amount due to them under the subsequent agreement. The respondents contended that the sum the
appellant had promised to pay was not money won upon a wager within the meaning of the second
branch of s. 18, but was money due under a new lawful and enforceable agreement and that even if the
sum was to be regarded as won on a wager, the agreement was outside the scope of the second branch
of s. 18 of the Gaming Act, 1845. The House of Lords by a majority of 4 to 3 held that the agreement
contained a new promise to pay money won upon a wager and that the second branch of s. 18 applied
to all suits brought to recover money alleged to have been won on a wager and therefore the contract
was unenforceable. In coming to that conclusion, Viscount Simon, one of the Judges who expressed
the majority view, agreed with Fletcher Moulton, L.J., in holding that the bond constituted an
agreement to pay money won upon a wager, notwithstanding the new consideration, and was thus
unenforceable under the second limb of s. 18.
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31. In Hyams v. Stuart King [1908] 2 K.B. 696, the facts of which we have already given, the suit was
filed on the basis of a subsequent agreement between the same parties to the wager. The majority of
the Judges held that the subsequent agreement was supported by good consideration, while Fletcher
Moulton, L.J., dissented from that view. The basis for the dissenting view is found at page 712. After
reading s. 18 of the Gaming Act, 1845, the learned Judge proceeded to state :
"In my opinion too little attention has been paid to the distinction between the two parts of this
enactment, and the second part has been treated as being in effect merely a repetition of the first part. I
cannot accept such an interpretation. So far as the actual wagering contract is concerned, the earlier
provision is ample. It makes that contract absolutely void, and it would be idle to enact in addition that
no suit should be brought upon a contract that had thus been rendered void by statute. The language of
the later provision is in my opinion much wider. It provides with complete generality that no action
shall be brought to recover anything alleged to be won upon any wager, without in any way limiting
the application of the provision to the wagering contract itself. In other words, it provides that
wherever the obligation under a contract is or includes the payment of money won upon a wager, the
Courts shall not be used to enforce the performance of that part of the obligation".
32. These observations must be understood in the context of the peculiar facts of that case. The suit
was between the parties to the wager. The question was whether the second part of the concerned
section was comprehensive enough to take in an agreement to recover the money won upon a wager
within the meaning of that part. Fletcher Moulton, L.J., held that the second part was wide and
comprehensive enough to take in such a claim, for the suit was, though on the basis of a substituted
agreement, for the recovery of the money won upon a wager within the meaning of the words of that
part of the section. The second question considered by the learned Judge was whether the defendants'
firm which was an association formed for the purpose of a betting business was a legal partnership
under the English Law. The learned Judge relied upon the Gaming Act, 1892, in holding that it was not
possible under the English law to have any such partnership. At page 718, the learned Judge observed :
"In my opinion no such partnership is possible under English law. Without considering any other
grounds of objection to its existence, the language of the Gaming Act, 1892, appears to me to be
sufficient to establish this proposition. It is essential to the idea of a partnership that each partner is an
agent of the partnership and (subject to the provisions of the partnership deed) has authority to make
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payments on its behalf for partnership purposes, for which he is entitled to claim credit in the
partnership accounts and thus receive, directly or indirectly, repayment. But by the Gaming Act, 1892,
all promises to pay any person any sum of money paid by him in respect of a wagering contract are
null and void. These words are wide enough to nullify the fundamental contract which must be the
basis of a partnership, and therefore in my opinion no such partnership is possible, and the action for
this reason alone was wrongly framed and should have been dismissed with costs".
33. It would be seen from the said observations that Fletcher Moulton, L.J., laid down two propositions
: (i) The second part of s. 18 of the Gaming Act, 1845, was comprehensive enough to take in a claim
for the recovery of money alleged to be won upon a wager though the said claim was based upon a
substituted contract between the same parties; and (ii) by reason of the wide terms of the Gaming Act,
1892, even the fundamental contract, which was the basis of a partnership, was itself a nullity. The
learned Lord Justice did not purport to express any opinion on the effect of a void contract of wager on
a collateral contract. In Hill's case (1921) 2 K.B. 351 the only question that arose was whether the
second part of s. 18 was a bar to the maintainability of a suit under a substituted agreement for the
recovery of money won upon a wager. The majority accepted the view of Fletcher Moulton, L.J., on
the first question. The second question did not arise for consideration in that case. The House of Lords
neither expressly nor by necessary implication purported to hold that collateral contract of either
partnership or agency was illegal; and that the long catena of decisions already referred to by us were
wrongly decided. This judgment does not therefore support the contention of the learned Counsel for
the appellant.
34. The legal position in India is not different. Before the Act for Avoiding Wagers, 1848, the law
relating to wagers that was in force in British India was the common law of England. The Judicial
Committee in Ramloll Thackoorseydass v. Soojumnull Dhondmull (1848) 4 M.I.A. 339 expressly
ruled that the common law of England was in force in India and under that law an action might be
maintained on a wager. The wager dealt with in that case was upon the average price which opium
would fetch at the next Government sale at Calcutta. Lord Campbell in rejecting the plea that the
wager was illegal observed at page 349 :
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"The Statute, 8 & 9 Vict. c. 109, does not extend to India, and although both parties on the record are
Hindoos, no peculiar Hindoo law is alleged to exist upon the subject; therefore this case must be
decided by the common law of England".
35. It is a direct decision on the point now mooted before us and it is in favour of the respondents.
Again the Privy Council considered a similar question in Doolubdass Pettamberdass v. Ramloll
Thackoorseydass and others (1850) 5 M.I.A. 109. There again the wager was upon the price that the
Patna opium would fetch at the next Government sale at Calcutta. There the plaintiff instituted a suit in
the Supreme Court of Bombay in January, 1847, to recover the money won on a wager. After the suit
was filed, Act 21 of 1848 was passed by the Indian Legislature whereunder all agreements whether
made in speaking, writing, or otherwise, by way of gaming or wagering, would be null and void and no
suit would be allowed in any Court of Law or Equity for recovering any sum of money or valuable
thing alleged to be won on any wager. This section was similar in terms to that of s. 18 of the Gaming
Act, 1845. Their Lordships held that the contract was not void and the Act 21 of 1848 would not
invalidate the contracts entered into before the Act came into force. Adverting to the next argument
that under Hindu Law such contracts were void, they restated their view expressed in Ramloll
Thackoorseydass v. Soojumnull Dhondmull (1848) 4 M.I.A. 339:
"Their Lordships have already said that they are not satisfied from the authorities referred to, that such
is the law among the Hindoos.... ."
36. The Judicial Committee again restated the law in similar terms in Raghoonauth Sahoi Chotayloll v.
Manickchund and Kaisreechund (1856) 6 M.I.A. 251. There the Judicial Committee held that a
wagering contract in India upon the average price opium would fetch at a future Government sale, was
legal and enforceable before the passing of the Legislative Act, No. 21 of 1848.
37. The aforesaid three decisions of the Privy Council clearly establish the legal position in India
before the enactment of the Act 21 of 1848, namely, that wagering contracts were governed by the
common law of England and were not void and therefore enforceable in Courts. They also held that the
Hindu Law did not prohibit any such wagers.
38. The same view was expressed by the Indian Courts in cases decided after the enactment of the
Contract Act. An agent who paid the amount of betting lost by him was allowed to recover the same
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from his principal in Pringle v. Jafar Khan MANU/UP/0058/1883 : I.L.R (1883) All. 443. The reason
for that decision is given at page 445 :
"There was nothing illegal in the contract; betting at horse-races could not be said to be illegal in the
sense of tainting any transaction connected with it. This distinction between an agreement which is
only void and one in which the consideration is also unlawful is made in the Contract Act. Section 23
points out in what cases the consideration of an agreement is unlawful, and in such cases the
agreement is also void, that is, not enforceable at law. Section 30 refers to cases in which the
agreement is only void, though the consideration is not necessarily unlawful. There is no reason why
the plaintiff should not recover the sum paid by him.
..... ."
39. In Shibho Mal v. Lachman Das MANU/UP/0045/1901 : I.L.R (1901) All. 165 an agent who paid
the losses on the wagering transactions was allowed to recover the amounts he paid from his principal.
In Beni Madho Das v. Kaunsal Kishor Dhusar MANU/UP/0056/1900 : I.L.R (1900) All. 452 the
plaintiff who lent money to the defendant to enable him to pay off a gambling debt was given a decree
to recover the same from the defendant. Where two partners entered into a contract of wager with a
third party and one partner had satisfied his own and his co-partner's liability under the contract, the
Nagpur High Court, in Md. Gulam Mustafakhan v. Padamsi A.I.R. (1923) Nag. 48. held that the
partner who paid the amount could legally claim the other partner's share of the loss. The learned
Judge reiterated the same principle accepted in the decisions cited supra, when he said at page 49 :
"Section 30 of the Indian Contract Act does not affect agreements or transactions collateral to
wagers...... ."
40. The said decisions were based upon the well-settled principle that a wagering contract was only
void, but not illegal, and therefore a collateral contract could be enforced.
41. Before closing this branch of the discussion, it may be convenient to consider a subsidiary point
raised by the learned Counsel for the appellant that though a contract of partnership was not illegal, in
the matter of accounting, the loss paid by one of the partners on wagering transactions, could not be
taken into consideration. Reliance is placed in support of this contention on Chitty's Contract, p. 495,
para. 908, which reads :
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"Inasmuch as betting is not in itself illegal, the law does not refuse to recognise a partnership formed
for the purpose of betting. Upon the dissolution of such a partnership an account may be ordered. Each
partner has a right to recover his share of the capital subscribed, so far as it has not been spent; but he
cannot claim an account of profits or repayments of amounts advanced by him which have actually
been applied in paying the bets of the partnership."
42. In support of this view, two decisions are cited. They are : Thwaites v. Coulthwaite (1896) 1 Ch.
496 and Saffery v. Mayer I.L.R. (1901) K.B. 11. The first case has already been considered by us.
There, Chitty, J., in giving a decree for account left open the question of the legality of certain
transactions till it arose on the taking of the account. Far from helping the appellant, the observations
and the actual decision in that case support the respondents' contention. The reservation of the question
of particular transactions presumably related only to the transactions prohibited by the Betting Act,
1853. Such of the transactions which were so prohibited by the Betting Act would be illegal and
therefore the contract of partnership could not operate on such transactions. The case of Saffery v.
Mayer I.L.R. (1901) K.B. 11 related to a suit for recovery of money advanced by one person to another
for the purpose of betting on horses on their joint account. The appellate Court held that by reason of
the provisions of the Gaming Act, 1892, the action was not maintainable. This decision clearly turned
upon the provisions of the Gaming Act, 1892. Smith, M.R., observed that the plaintiff paid the money
to the defendant in respect of a contract rendered null and void and therefore it was not recoverable
under the second limb of that section. The other Lord Justices also based their judgments on the
express words of the Gaming Act, 1892. It will be also interesting to note that the Court of Appeal
further pointed out that Chitty, J., in Thwaites' Case (1896) 1 Ch. 496. in deciding in the way he did
omitted to consider the effect of the provisions of the Gaming Act, 1892, on the question of
maintainability of the action before him. The aforesaid passage in Chitty's Contract must be
understood only in the context of the provisions of the Gaming Act, 1892.
43. The aforesaid discussion yields the following results : (1) Under the common law of England a
contract of wager is valid and therefore both the primary contract as well as the collateral agreement in
respect thereof are enforceable; (2) after the enactment of the Gaming Act, 1845, a wager is made void
but not illegal in the sense of being forbidden by law, and thereafter a primary agreement of wager is
void but a collateral agreement is enforceable; (3) there was a conflict on the question whether the
second part of s. 18 of the Gaming Act, 1845, would cover a case for the recovery of money or
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valuable thing alleged to be won upon any wager under a substituted contract between the same parties
: the House of Lords in Hill's Case (1921) 2 K.B. 351 had finally resolved the conflict by holding that
such a claim was not sustainable whether it was made under the original contract of wager between the
parties or under a substituted agreement between them; (4) under the Gaming Act, 1892, in view of its
wide and comprehensive phraseology, even collateral contracts, including partnership agreements, are
not enforceable; (5) s. 30 of the Indian Contract Act is based upon the provisions of s. 18 of the
Gaming Act, 1845, and though a wager is void and unenforceable, it is not forbidden by law and
therefore the object of a collateral agreement is not unlawful under s. 23 of the Contract Act; and (6)
partnership being an agreement within the meaning of s. 23 of the Indian Contract Act, it is not
unlawful, though its object is to carry on wagering transactions. We, therefore, hold that in the present
case the partnership is not unlawful within the meaning of s. 23(A) of the Contract Act.
44. Re. (ii) - Public Policy: The learned Counsel for the appellant contends that the concept of public
policy is very comprehensive and that in India, particularly after independence, its content should be
measured having regard to political, social and economic policies of a welfare State, and the traditions
of this ancient country reflected in Srutis, Smritis and Nibandas. Before adverting to the argument of
the learned Counsel, it would be convenient at the outset to ascertain the meaning of this concept and
to note how the Courts in England and India have applied it to different situations. Cheshire and Fifoot
in their book on "Law of Contract", 3rd Edn., observe at page 280 thus :
"The public interests which it is designed to protect are so comprehensive and heterogeneous, and
opinions as to what is injurious must of necessity vary so greatly with the social and moral convictions,
and at times even with the political views, of different judges, that it forms a treacherous and unstable
ground for legal decision. ........ These questions have agitated the Courts in the past, but the present
state of the law would appear to be reasonably clear. Two observations may be made with some degree
of assurance.
First, although the rules already established by precedent must be moulded to fit the new conditions of
a changing world, it is no longer legitimate for the Courts to invent a new head of public policy. A
judge is not free to speculate upon what, in his opinion, is for the good of the community. He must be
content to apply, either directly or by way of analogy, the principles laid down in previous decisions.
He must expound, not expand, this particular branch of the law.
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Secondly, even though the contract is one which prima facie falls under one of the recognized heads of
public policy, it will not be held illegal unless its harmful qualities are indisputable. The doctrine, as
Lord Atkin remarked in a leading case, "should only be invoked in clear cases in which the harm to the
public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few
judicial minds. ......... In popular language..... the contract should be given the benefit of the doubt".
45. Anson in his Law of Contract states the same rule thus, at p. 216:
"Jessel, M.R., in 1875, stated a principle which is still valid for the Courts, when he said: 'You have
this paramount public policy to consider, that you are not lightly to interfere with the freedom of
contract'; and it is in reconciling freedom of contract with other public interests which are regarded as
of not less importance that the difficulty in these cases arises........
We may say, however, that the policy of the law has, on certain subjects, been worked into a set of
tolerably definite rules. The application of these to particular instances necessarily varies with the
conditions of the times and the progressive development of public opinion and morality, but, as Lord
Wright has said, 'public policy, like any other branch of the Common Law, ought to be, and I think is,
governed by the judicial use of precedents. If it is said that rules of public policy have to be moulded to
suit new conditions of a changing world, that is true; but the same is true of the principles of the
Common Law generally."
46. In Halsbury's Laws of England, 3rd Edn., Vol. 8, the doctrine is stated at p. 130 thus :
"Any agreement which tends to be injurious to the public or against the public good is void as being
contrary to public policy. ...... It seems, however, that this branch of the law will not be extended. The
determination of what is contrary to the so-called policy of the law necessarily varies from time to
time. Many transactions are upheld now which in a former generation would have been avoided as
contrary to the supposed policy of the law. The rule remains, but its application varies with the
principles which for the time being guide public opinion."
47. A few of the leading cases on the subject reflected in the authoritative statements of law by the
various authors may also be useful to demarcate the limits of this illusive concept.
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48. Parke, B., in Egerton v. Brownlow 4 H.L.C. 1, 123; 10 E.R. 359, 408, which is a leading judgment
on the subject, describes the doctrine of public policy thus at p. 123:
"'Public policy' is a vague and unsatisfactory term, and calculated to lead to uncertainly and error,
when applied to the decision of legal rights; it is capable of being understood in different senses; it
may, and does, in its ordinary sense, mean 'political expedience', or that which is best for the common
good of the community; and in that sense there may be every variety of opinion, according to
education, habits, talents, and dispositions of each person, who is to decide whether an act is against
public policy or not. To allow this to be a ground of judicial decision, would lead to the greatest
uncertainly and confusion. It is the province of the statesman, and not the lawyer, to discuss, and of the
Legislature to determine, what is best for the public good, and to provide for it by proper enactments.
It is the province of the judge to expound the law only; the written from the statutes; the unwritten or
common law from the decisions of our predecessors and of our existing Courts, from text writers of
acknowledged authority, and upon the principles to be clearly deduced from them by sound reason and
just inference; not to speculate upon what is the best, in his opinion, for the advantage of the
community. Some of these decisions may have no doubt been founded upon the prevailing and just
opinions of the public good; for instance, the illegality of covenants in restraint of marriage or trade.
They have become a part of the recognised law, and we are therefore bound by them, but we are not
thereby authorised to establish as law everything which we may think for the public good, and prohibit
everything which we think otherwise."
49. In Janson v. Driefontein Consolidated Mines, Ltd. (1902) A.C. 484 an action raised against British
underwriters in respect of insurance of treasures against capture during its transit from a foreign state
to Great Britain was resisted by the underwriters on the ground that the insurance was against public
policy. The House of Lords rejected the plea. Earl of Halsbury, L.C., in his speech made weighty
observations, which may usefully be extracted. The learned Lord says at page 491 :
"In treating of various branches of the law learned persons have analysed the sources of the law, and
have sometimes expressed their opinion that such and such a provision is bad because it is contrary to
public policy; but I deny that any Court can invent a new head of public policy; so a contract for
marriage brokerage, the creation of a perpetuity, a contract in restraint of trade, a gaming or wagering
contract, or, what is relevant here, the assisting of the King's enemies, are all undoubtedly unlawful
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things; and you may say that it is because they are contrary to public policy they are unlawful; but it is
because these things have been either enacted or assumed to be by the common law unlawful, and not
because a judge or Court have a right to declare that such and such things are in his or their view
contrary to public policy. Of course, in the application of the principles here insisted on, it is inevitable
that the particular case must be decided by a judge; he must find the facts, and he must decide whether
the facts so found do or do not come within the principles which I have endeavoured to describe - that
is, a principle of public policy, recognised by the law, which the suggested contract is infringing, or is
supposed to infringe."
50. These observations indicate that the doctrine of public policy is only a branch of common law and
unless the principle of public policy is recognised by that law, Court cannot apply it to invalidate a
contract. Lord Lindley in his speech at p. 507 pointed out that public policy is a very unstable and
dangerous foundation on which to build until made safe by decision. A promise made by one spouse,
after a decree nisi for the dissolution of the marriage has been pronounced, to marry a third person
after the decree has been made absolute is not void as being against public policy : see Fender v. St.
John-Mildmay (1938) A.C. 1. In that case Lord Atkin states the scope of the doctrine thus at p. 12 :
"In popular language, following the wise aphorism of Sir George Jessel cited above, the contract
should be given the benefit of the doubt.
But there is no doubt that the rule exists. In cases where the promise to do something contrary to public
policy which for short I will call a harmful thing, or where the consideration for the promise is the
doing or the promise to do a harmful thing a judge, though he is on slippery ground, at any rate has a
chance of finding a footing. ...... But the doctrine does not extend only to harmful acts, it has to be
applied to harmful tendencies. Here the ground is still less safe and more treacherous".
51. Adverting to the observation of Lord Halsbury in Janson v. Driefontein Consolidated Mines Ltd.
(1902) A.C. 484 Lord Atkin commented thus, at page 11 :
"........... Lord Halsbury indeed appeared to decide that the categories of public policy are closed, and
that the principle could not be invoked anew unless the case could be brought within some principle of
public policy already recognised by the law. I do not find, however, that this view received the express
assent of the other members of the House; and it seems to me, with respect, too rigid. On the other
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hand, it fortifies the serious warning illustrated by the passages cited above that the doctrine should
only be invoked in clear cases in which the harm to the public is substantially incontestable, and does
not depend upon the idiosyncratic inferences of a few judicial minds".
52. Lord Thankerton summarised his view in the following terms, at p. 23 :
"In the first place, there can be little question as to the proper function of the Courts in questions of
public policy. Their duty is to expound, and not to expand, such policy. That does not mean that they
are precluded from applying an existing principle of public policy to a new set of circumstances, where
such circumstances are clearly within the scope of the policy. Such a case might well arise in the case
of safety of the State, for instance. But no such case is suggested here. Further, the Courts must be
watchful not to be influenced by their view of what the principle of public policy, or its limits, should
be".
53. Lord Wright, at p. 38, explains the two senses in which the words "public policy" are used :
"In one sense every rule of law, either common law or equity, which has been laid down by the Courts,
in that course of judicial legislation which has evolved the law of this country, has been based on
considerations of public interest or policy. In that sense Sir George Jessel, M.R., referred to the
paramount public policy that people should fulfil their contracts. But public policy in the narrower
sense means that there are considerations of public interest which require the Courts to depart from
their primary function of enforcing contracts, and exceptionally to refuse to enforce them. Public
policy in this sense is disabling".
54. Then the noble Lord proceeds to lay down the following principles on which a judge should
exercise this peculiar and exceptional jurisdiction : (1) It is clear that public policy is not a branch of
law to be extended; (2) it is the province of the judge to expound the law only; (3) public policy, like
any other branch of the common law, is governed by the judicial use of precedents; and (4) Courts
apply some recognised principles to the new conditions, proceeding by way of analogy and according
to logic and convenience, just as Courts deal with any other rule of the common law. The learned Lord
on the basis of the discussion of case law on the subject observes at p. 40 :
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"It is true that it has been observed that certain rules of public policy have to be moulded to suit new
conditions of a changing world : but that is true of the principles of common law generally. I find it
difficult to conceive that in these days any new head of public policy could be discovered".
55. The observations of the aforesaid Law Lords define the concept of public policy and lay down the
limits of its application in the modern times. In short, they state that the rules of public policy are well-
settled and the function of the Courts is only to expound them and apply them to varying situations.
While Lord Atkin does not accept Lord Halsbury's dictum that the categories of public policy are
closed, he gives a warning that the doctrine should be invoked only in clear cases in which the harm to
the public is substantially incontestable, Lord Thankerton and Lord Wright seem to suggest that the
categories of public policy are well-settled and what the Courts at best can do is only to apply the same
to new set of circumstances. Neither of them excludes the possibility of evolving a new head of public
policy in a changing world, but they could not conceive that under the existing circumstances any such
head could be discovered.
56. Asquith, L.J., in Monkland v. Jack Barclay Ltd. (1951) 1 All 714 restated the law crisply at p. 723 :
"The Courts have again and again said, that where a contract does not fit into one or other of these
pigeon-holes but lies outside this charmed circle, the courts should use extreme reserve in holding a
contract to be void as against public policy, and should only do so when the contract is incontestably
and on any view inimical to the public interest".
57. The Indian cases also adopt the same view. A division bench of the Bombay High Court in
Shrinivas Das Lakshminarayan v. Ram Chandra Ramrattandas MANU/MH/0047/1919 : I.L.R. (1920)
44 Bom. 6. observed at p. 20 :
"It is no doubt open to the Court to hold that the consideration or object of an agreement is unlawful on
the ground that it is opposed to what the Court regards as public policy. This is laid down in section 23
of the Indian Contract Act and in India therefore it cannot be affirmed as a matter of law as was
affirmed by Lord Halsbury in Janson v. Driefontein Consolidated Mines, Limited 1902 A.C. 484 that
no Court can invent a new head of public policy, but the dictum of Lord Davey in the same case that
"public policy is always an unsafe and treacherous ground for legal decision" may be accepted as a
sound cautionary maxim in considering the reasons assigned by the learned Judge for his decision".
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58. The same view is confirmed in Bhagwant Genuji Girme v. Gangabisan Ramgopal I.L.R. 1941
Bom. 71 and Gopi Tihadi v. Gokhei Panda (I.L.R. 1953 Cuttack 558.). The doctrine of public policy
may be summarized thus : Public policy or the policy of the law is an illusive concept; it has been
described as "untrustworthy guide", "variable quality", "uncertain one", "unruly horse", etc.; the
primary duty of a Court of Law is to enforce a promise which the parties have made and to uphold the
sanctity of contracts which form the basis of society, but in certain cases, the Court may relieve them
of their duty on a rule founded on what is called the public policy; for want of better words Lord Atkin
describes that something done contrary to public policy is a harmful thing, but the doctrine is extended
not only to harmful cases but also to harmful tendencies; this doctrine of public policy is only a branch
of common law, and, just like any other branch of common law, it is governed by precedents; the
principles have been crystallized under different heads and though it is permissible for Courts to
expound and apply them to different situations, it should only be invoked in clear and incontestable
cases of harm to the public; though the heads are not closed and though theoretically it may be
permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable
in the interest of stability of society not to make any attempt to discover new heads in these days.
59. This leads us to the question whether in England or in India a definite principle of public policy has
been evolved or recognized invalidating wagers. So far as England is concerned, the passages from
text-books extracted and the decisions discussed in connection with the first point clearly establish that
there has never been such a rule of public policy in that country. Courts under the common law of
England till the year 1845 enforced such contracts even between parties to the transaction. They held
that wagers were not illegal. After the passing of the English Gaming Act, 1845 (8 & 9 Vict. c. 109),
such contracts were declared void. Even so, the Courts held that though a wagering contract was void,
it was not illegal and therefore an agreement collateral to the wagering contract could be enforced.
Only after the enactment of the Gaming Act, 1892 (55 Vict. c. 9), the collateral contracts also became
unenforceable by reason of the express words of that Act. Indeed, in some of the decisions cited supra
the question of public policy was specifically raised and negatived by Courts : See Thacker v. Hardy
I.L.R (1878) Q.B. 685; Hyams v. Stuart King [1908] 2 K.B. 696; and Michael Jeffrey & Company v.
Bamford (1949) 2 All 452. It is therefore abundantly clear that the common law of England did not
recognize any principle of public policy declaring wagering contracts illegal.
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60. The legal position is the same in India. The Indian Courts, both before and after the passing of the
Act 21 of 1848 and also after the enactment of the Contract Act, have held that the wagering contracts
are not illegal and the collateral contracts in respect of them are enforceable. We have already referred
to these in dealing with the first point and we need not cover the ground once again, except to cite a
passage from the decision of the Judicial Committee in Ramloll Thackoorseydass v. Soojumnull
Dhondmull (1848) 4 M.I.A. 339, which is directly in point. Their Lordships in considering the
applicability of the doctrine of public policy to a wagering contract observe at p. 350 :
"We are of opinion, that, although, to a certain degree, it might create a temptation to do what was
wrong, we are not to presume that the parties would commit a crime; and as it did not interfere with
the performance of any duty, and as if the parties were not induced by it to commit a crime, neither the
interests of individuals or of the Government could be affected by it, we cannot say that it is contrary
to public policy."
61. There is not a single decision after the above cited case, which was decided in 1848, up to the
present day wherein the Courts either declared wagering contracts as illegal or refused to enforce any
collateral contract in respect of such wagers, on the ground of public policy. It may, therefore, be
stated without any contradiction that the common law of England in respect of wagers was followed in
India and it has always been held that such contracts, though void after the Act of 1848, were not
illegal. Nor the legislatures of the States excepting Bombay made any attempt to bring the law in India
in line with that obtaining in England after the Gaming Act, 1892. The Contract Act was passed in the
year 1872. At the time of the passing of the Contract Act, there was a Central Act, Act 21 of 1848,
principally based on the English Gaming Act, 1845. There was also the Bombay Wagers (Amendment)
Act, 1865, amending the former Act in terms analogous to those later enacted by the Gaming Act,
1892. Though the Contract Act repealed the Act 21 of 1848, it did not incorporate in it the provisions
similar to those of the Bombay Act; nor was any amendment made subsequent to the passing of the
English Gaming Act, 1892. The legislature must be deemed to have had the knowledge of the state of
law in England, and, therefore, we may assume that it did not think fit to make wagers illegal or to hit
at collateral contracts. The policy of law in India has therefore been to sustain the legality of wagers.
62. The history of the law of gambling in India would also shew that though gaming in certain respects
was controlled, it has never been absolutely prohibited. The following are some of the gambling Acts
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in India : The Public Gambling Act (III of 1867); The Bengal Public Gambling Act (II of 1867); The
Bombay Prevention of Gambling Act (IV of 1887); Madhya Bharat Gambling Act (LI of 1949);
Madhya Pradesh Public Gambling Act; Madras Gaming Act (III of 1930); The Orissa Prevention of
Gambling Act (XVII of 1955); the Punjab Public Gambling Act (III of 1867); the Rajasthan Public
Gambling Ordinance (Ordinance XLVIII of 1949) and the U.P. Public Gambling Act. These Acts do
not prohibit gaming in its entirety, but aim at suppressing gaming in private houses when carried on for
profit or gain of the owner or occupier thereof and also gaming in public. Gaming without
contravening the provisions of the said Acts is legal. Wherever the State intended to declare a
particular form of gaming illegal, it made an express statute to that effect : See s. 29-A of the Indian
Penal Code. In other respects, gaming and wagering are allowed in India. It is also common
knowledge that horse races are allowed throughout India and the State also derives revenue therefrom.
63. The next question posed by the learned Counsel for the appellant is whether under the Hindu Law
it can be said that gambling contracts are held to be illegal. The learned Counsel relies upon the
observations of this Court in The State of Bombay v. R. M. D. Chamarbaugwala
MANU/SC/0019/1957 : [1957]1SCR874 . The question raised in that case was whether the Bombay
Lotteries and Prize Competition Control and Tax (Amendment) Act of 1952 extending the definition
of "prize competition" contained in s. 2(1)(d) of the Bombay Lotteries and Prize Competition Control
and Tax Act of 1948, so as to include prize competition carried on through newspapers printed and
published outside the State, was constitutionally valid. It was contended, inter alia, that the Act
offended the fundamental right of the respondents, who were conducting prize competitions, under
Art. 19(1)(g) of the Constitution and also violated the freedom of inter-State trade under Art. 301
thereof. This Court held that the gambling activities in their very nature and essence were extra
commercium and could not either be trade or commerce within the meaning of the aforesaid provisions
and therefore neither the fundamental right of the respondents under Art. 19(1)(g) or their right to
freedom of inter-State trade under Art. 301 is violated. In that context Das, C.J., has collected all the
Hindu Law texts from Rig Veda, Mahabharata, Manu, Brihaspati, Yagnavalkya, etc., at pp. 922-923. It
is unnecessary to restate them here, but it is clear from those texts that Hindu sacred books condemned
gambling in unambiguous terms. But the question is whether those ancient text-books remain only as
pious wishes of our ancestors or whether they were enforced in the recent centuries. All the branches
of the Hindu Law have not been administered by Courts in India; only questions regarding succession,
inheritance, marriage, and religious usages and institutions are decided according to the Hindu Law,
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except in so far as such law has been altered by legislative enactment. Besides the matters above
referred to, there are certain additional matters to which the Hindu Law is applied to the Hindus, in
some cases by virtue of express legislation and in others on the principle of justice, equity and good
conscience. These matters are adoption, guardianship, family relations, wills, gifts and partition. As to
these matters also the Hindu Law is to be applied subject to such alterations as have been made by
legislative enactments : See Mulla's Hindu Law, para. 3, p. 2. In other respects the ancient Hindu Law
was not enforced in Indian Courts and it may be said that they became obsolete. Admittedly there has
not been a single instance in recorded cases holding gambling or wagering contracts illegal on the
ground that they are contrary to public policy as they offended the principles of ancient Hindu Law. In
the circumstances, we find it difficult to import the tenets of Hindu Law to give a novel content to the
doctrine of public policy in respect of contracts of gambling and wagering.
64. To summarize : The common law of England and that of India have never struck down contracts of
wager on the ground of public policy; indeed they have always been held to be not illegal
notwithstanding the fact that the statute declared them void. Even after the contracts of wager were
declared to be void in England, collateral contracts were enforced till the passing of the Gaming Act of
1892, and in India, except in the State of Bombay, they have been enforced even after the passing of
the Act 21 of 1848, which was substituted by s. 30 of the Contract Act. The moral prohibitions in
Hindu Law texts against gambling were not only not legally enforced but were allowed to fall into
desuetude. In practice, though gambling is controlled in specific matters, it has not been declared
illegal and there is no law declaring wagering illegal. Indeed, some of the gambling practices are a
perennial source of income to the State. In the circumstances it is not possible to hold that there is any
definite head or principle of public policy evolved by Courts or laid down by precedents which would
directly apply to wagering contracts. Even if it is permissible for Courts to evolve a new head of public
policy under extraordinary circumstances giving rise to incontestable harm to the society, we cannot
say that wager is one of such instances of exceptional gravity, for it has been recognized for centuries
and has been tolerated by the public and the State alike. If it has any such tendency, it is for the
legislature to make a law prohibiting such contracts and declaring them illegal and not for this Court to
resort to judicial legislation.
65. Re. Point 3 - Immorality : The argument under this head is rather broadly stated by the learned
Counsel for the appellant. The learned counsel attempts to draw an analogy from the Hindu Law
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relating to the doctrine of pious obligation of sons to discharge their father's debts and contends that
what the Hindu Law considers to be immoral in that context may appropriately be applied to a case
under s. 23 of the Contract Act. Neither any authority is cited nor any legal basis is suggested for
importing the doctrine of Hindu Law into the domain of contracts. Section 23 of the Contract Act is
inspired by the common law of England and it would be more useful to refer to the English Law than
to the Hindu Law texts dealing with a different matter. Anson in his Law of Contracts states at p. 222
thus :
"The only aspect of immorality with which Courts of Law have dealt is sexual immorality........... ."
66. Halsbury in his Laws of England, 3rd Edn., Vol. 8, makes a similar statement, at p. 138 :
"A contract which is made upon an immoral consideration or for an immoral purpose is unenforceable,
and there is no distinction in this respect between immoral and illegal contracts. The immorality here
alluded to is sexual immorality."
67. In the Law of Contract by Cheshire and Fifoot, 3rd Edn., it is stated at p. 279 :
"Although Lord Mansfield laid it down that a contract contra bonos mores is illegal, the law in this
connection gives no extended meaning to morality, but concerns itself only with what is sexually
reprehensible."
In the book on the Indian Contract Act by Pollock and Mulla it is stated at p. 157 :
"The epithet "immoral" points, in legal usage, to conduct or purposes which the State, though
disapproving them, is unable, or not advised, to visit with direct punishment."
68. The learned authors confined its operation to acts which are considered to be immoral according to
the standards of immorality approved by Courts. The case law both in England and India confines the
operation of the doctrine to sexual immorality. To cite only some instances : settlements in
consideration of concubinage, contracts of sale or hire of things to be used in a brothel or by a
prostitute for purposes incidental to her profession, agreements to pay money for future illicit
cohabitation, promises in regard to marriage for consideration, or contracts facilitating divorce are all
held to be void on the ground that the object is immoral.
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69. The word "immoral" is a very comprehensive word. Ordinarily it takes in every aspect of personal
conduct deviating from the standard norms of life. It may also be said that what is repugnant to good
conscience is immoral. Its varying content depends upon time, place and the stage of civilization of a
particular society. In short, no universal standard can be laid down and any law based on such fluid
concept defeats its own purpose. The provisions of s. 23 of the Contract Act indicate the legislative
intention to give it a restricted meaning. Its juxtaposition with an equally illusive concept, public
policy, indicates that it is used in a restricted sense; otherwise there would be overlapping of the two
concepts. In its wide sense what is immoral may be against public policy, for public policy covers
political, social and economic ground of objection. Decided cases and authoritative text-book writers,
therefore, confined it, with every justification, only to sexual immorality. The other limitation imposed
on the word by the statute, namely, "the court regards it as immoral", brings out the idea that it is also a
branch of the common law like the doctrine of public policy, and, therefore, should be confined to the
principles recognized and settled by Courts. Precedents confine the said concept only to sexual
immorality and no case has been brought to our notice where it has been applied to any head other than
sexual immorality. In the circumstances, we cannot evolve a new head so as to bring in wagers within
its fold.
70. Lastly it is contended by the learned Counsel for the appellant that wager is extra-commercium and
therefore there cannot be in law partnership for wager within the meaning of s. 4 of the Partnership
Act; for partnership under that section is relationship between persons who have agreed to share the
profits of a business. Reliance is placed in respect of this contention on the decision of this Court in
The State of Bombay v. R. M. D. Chamarbaugwala. This question was not raised in the pleadings. No
issue was framed in respect of it. No such case was argued before the learned Subordinate Judge or in
the High Court; nor was this point raised in the application for certificate for leave to appeal to the
Supreme Court filed in the High Court. Indeed, the learned Advocate appearing for the appellant in the
High Court stated that his client intended to raise one question only, namely, whether the partnership
formed for the purpose of carrying on a business in differences was illegal within the meaning of s. 23
of the Contract Act. Further this plea was not specifically disclosed in the statement of case filed by
the appellant in this Court. If this contention had been raised at the earliest point of time, it would have
been open to the respondents to ask for a suitable amendment of the plaint to sustain their claim. In the
circumstances, we do not think that we could with justification allow the appellant to raise this new
259

plea for the first time before us, as it would cause irreparable prejudice to the respondents. We express
no opinion on this point.
71. For the foregoing reasons we must hold that the suit partnership was not unlawful within the
meaning of s. 23 of the Indian Contract Act.
72. In the result, the appeal fails and is dismissed with costs.
260

Niranjan Shankar Golikari vs. The Century Spinning and Mfg. Co. Ltd.; AIR 1967 SC 1098
Judges/Coram: J.M. Shelat and R.S. Bachawat, JJ.
JUDGMENT
J.M. Shelat, J.
1. This appeal by Special Leave is against the judgment and order of the High Court of Maharashtra
confirming an order of injunction against the appellant.
2. The respondent company manufactures amongst other things tyre cord yarn at its plant at Kalyan
known as the Century Reyon. Under an agreement dated January 19, 1961 Algemene Kunstzijde Unie
of Holland (hereinafter referred to as AKU) and Vereinigte Clanzstoff Fabrikan AG of West Germany
(hereinafter referred to as VCF) agreed to transfer their technical know-how to the respondent
company to be used exclusively for the respondent company's tyre cord yarn plant at Kalyan in
consideration of 1,40,000 Deutsche Marks payable to them by the respondent company. Clause 4 of
that agreement provided that the Century Rayon should keep secret until the termination of the
agreement and during three years thereafter all technical information, knowledge, know-how,
experience, data and documents passed on by the said AKU and VCF and the Century Rayon should
undertake to enter into corresponding secrecy arrangements with its employees. The respondent
company thereafter invited applications for appointments in its said plant including appointments as
Shift Supervisors. On December 3, 1962 the appellant sent his application stating therein his
qualifications. By its letter dated March 1, 1963 the respondent company offered the appellant the post
of a Shift Supervisor in the said tyre cord division stating that if the appellant were to accept the said
offer he would be required to sign a contract in standard form for a term of five years. On March 5,
1963 the appellant accepted the said offer agreeing to execute the said standard contract. On March 16,
1963 he joined the respondent company and executed on that day the said contract Exhibit 28.
3. Clause 6 of the agreement provided :-
"The employee shall during the period of his employment and any renewal thereof, honestly,
faithfully, diligently and efficiently to the utmost of his power and skill
(a). . .
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(b) devote the whole of his time and energy exclusively to the business and affairs of the company and
shall not engage directly or indirectly in any business or serve whether as principal, agent, partner or
employee or in any other capacity either full time or part time in any business whatsoever other than
that of the company."
4. Clause 9 provided that during the continuance of his employment as well as thereafter the employee
shall keep confidential and prevent divulgence of any and all information, instruments, documents,
etc., of the company that might come to his knowledge. Clause 14 provided that if the company were
to close its business or curtail its activities due to circumstances beyond its control and if it found that
it was no longer possible to employ the employee any further it should have option to terminate his
services by giving him three months' notice or three months' salary in lieu thereof. Clause 17 provided
as follows :-
"In the event of the employee leaving, abandoning or resigning the service of the company in breach of
the terms of the agreement before the expiry of the said period of five years he shall not directly or
indirectly engage in or carry on of his own accord or in partnership with others the business at present
being carried on by the company and he shall not serve in any capacity, whatsoever or be associated
with any person, firm or company carrying on such business for the remainder of the said period and in
addition pay to the company as liquidated damages an amount equal to the salaries the employee
would have received during the period of six months thereafter and shall further reimburse to the
company any amount that the company may have spent on the employee's training."
5. The appellant received training from March to December 1963 and acquired during that training,
knowledge of the technique, processes and the machinery evolved by the said collaborators as also of
certain documents supplied by them to the respondent company which as aforesaid were to be kept
secret and in respect of which the respondent company had undertaken to obtain secrecy undertakings
from its employees. According to the evidence, the appellant as a Shift Supervisor was responsible for
the running of shift work, control of labour and in particular with the specifications given by the said
AKU.
6. No difficulty arose between the appellant and the respondent company until about September, 1964.
The appellant thereafter remained absent from the 6th to the 9th October, 1964 without obtaining leave
therefore. On the 10th October, he took casual leave. On October 12, he applied for 28 days' privilege
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leave form October 14, 1964. Before that was granted he absented himself from the 14th to the 31st
October, 1964. On October 31, he was offered salary for 9 days that he had worked during that month.
On November 7, 1964, he informed the respondent-company that he had resigned from October 31,
1964. The respondent-company by its letter of November 23, 1964, asked him to resume work stating
that his said resignation had not been accepted. On November 28, 1964 the appellant replied that he
had already obtained another employment.
7. It is clear from the evidence that in October he was negotiating with Rajasthan Rayon Company at
Kotah which was also manufacturing tyre cord yarn and got himself employed there at a higher salary
of Rs. 560/- per month than what he was getting from the respondent company. The respondent
company thereupon filed a suit in the Court at Kalyan claiming inter alia an injunction restraining the
appellant from serving in any capacity whatsoever or being associated with any person, firm or
company including the said Rajasthan Rayon till March 15, 1968. The Company also claimed Rs.
2410/- as damages being the salary for six months under Clause 17 of the said agreement and a
perpetual injunction restraining him from divulging any or all information, instruments, documents
reports, trade secrets, manufacturing process, know-how, etc., which may have come to his knowledge.
The appellant, while admitting that he was employed as a Shift Supervisor, denied that he was a
specialist or a technical personnel asserting that his only duty was to supervise and control labour and
to report deviations of temperature etc. He also alleged that the said agreement was unconscionable,
oppressive and executed under coercion and challenged its validity on the ground that it was opposed
to public policy. He challenged in particular clauses 9 and 17 of the said agreement on the ground that
whereas clause 9 was too wide as it was operative not for a fixed period but for life time and included
not only trade secrets but each and every aspect of information, clause 17 precluded him from serving
elsewhere in any capacity whatsoever which meant a restraint on his right to trade to carry on business,
profession or vocation and that such a term was necessary for the protection of the respondent
company's interests as an employer.
8. The Trial Court on a consideration of the evidence led by the parities held : (1) that the respondent
company had established that the appellant had availed himself of the training imparted by the said
AKU in relation to the manufacture of tyre cord yarn, the operation of the spinning machines and that
he was made familiar with their know-how, secrets, techniques and information; (2) that his duties
were not merely to supervise labour or to report deviations of temperature as alleged by him; (3) that
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the said agreement was not void or unenforceable; (4) that he committed breach of the said agreement;
(5) that as a result of the said breach the respondent company suffered loss and inconvenience and was
entitled to damages under clause 17 and lastly that the company was entitled to an injunction. On these
findings the Trial Court passed the following order :
"(1) The injunction is granted against the defendant and he is restrained from getting in the employ of
or being engaged or connected as a Shift Supervisor in the Manufacture of tyre cord yarn or as an
employee under any title discharging substantially the same duties as a Shift Supervisor in Rajasthan
Rayon, Kotah or any other company or firm or individual in any part of India for the term ending 15th
March, 1968.
(2) The defendant is further restrained during the said period and, thereafter, from divulging any of the
secrets, processes or information relating to the manufacture of tyre cord yarn by continuous spinning
process obtained by him in the course of and as a result of his employment with the plaintiffs."
9. It is clear that the injunction restrained the appellant only from serving as a Shift Supervisor and in a
concern manufacturing tyre cord yarn by continuous spinning process or as an employee under any
designation substantially discharging duties of a Shift Supervisor. It was also confined to the period of
the agreement and in any concern in India manufacturing tyre cord yarn.
10. In the appeal filed by him in the High Court, the plea taken by him as to undue influence and
coercion was given up. The High Court, agreeing with the Trial Court, found that the evidence of Dr.
Chalishhazar, Mehta and John Jacob established that the appellant had been imparted training for
about nine months during the course of which information regarding the special processes and details
of the machinery evolved by the said collaborators had been divulged to him. It also found that as a
result of his getting himself employed in the said rival company, not only the benefit of training given
to him at the cost of the respondent company would be lost to it but that the knowledge acquired by
him in regard to the said continuous spinning process intended for the exclusive use of the respondent
company was likely to be made available to the rival company which also was interested in the
continuous spinning process of tyre cord. The High Court further found that though the machinery
employed by the said Rajasthan Rayon might not be the same as that in the respondent company's
plant the know-how which the appellant acquired could be used for ensuring continuous spinning yarn.
The High Court further found that Rajasthan Rayon started production of tyre cord yarn from January,
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1965, that is, two or three months after the appellant joined them along with two other employees of
the respondent company, that the cumulative effect of the evidence was that the appellant had gained
enough knowledge and experience in the specialised continuous spinning process in the tyre cord yarn
division of the respondent company and that it was evident that he left the respondent company's
employment only because the said Rajasthan Rayon promised him a more lucrative employment. The
High Court concluded that it was not difficult to imagine why the appellant's services were considered
useful by his new employers and that the apprehension of the respondent company that his
employment with the rival company was fraught with considerable damage to their interest was well-
founded and justified its prayer for an injunction restraining him from undertaking an employment
with the said rival manufactures.
11. As regards the challenge to the validity of clauses 9 and 17, the High Court held that though the
said agreement was with the respondent company and the company carried on other businesses as well,
the employment was in the business of Century Rayon. The appellant was employed as a Shift
Supervisor in that business only, the training give to him was exclusively for the spinning department
of the tyre cord division and his letter of acceptance was also in relation to the post of a Shift
Supervisor in that department. The High Court therefore concluded that Clauses 9 and 17 related only
to the business in the tyre cord division and therefore restraints contained in those clauses meant
prohibition against divulging information received by the appellant while working in that Division and
that clause 17 also meant a restraint in relation to the work carried on in the said spinning department.
Therefore the inhibitions contained in those clauses were not blanket restrictions as alleged by the
appellant, and that the prohibition in clause 17 operated only in the event of the appellant leaving,
abandoning or resigning his service during the term of and in breach of the said agreement. On this
reasoning it held that clause 17, besides not being general, was a reasonable restriction to protect the
interests of the respondent company particularly as the company had spent considerable amount in
training, secrets of know-how of specialised processes were divulged to him and the foreign
collaborators had agreed to disclose their specialised processes only on the respondent company's
undertaking to obtain corresponding secrecy clauses form its employees and on the guarantee that
those processes would be exclusively used for the business of the respondent company. Furthermore,
Clause 17 did not prohibit the appellant even form seeking similar employment from any other
manufacturer after the contractual period was over. The High Court lastly found that there was no
indication at all that if the appellant was prevented from being employed in a similar capacity
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elsewhere he would be forced to idleness or that such a restraint would compel the appellant to go back
to the company which would indirectly result in specific performance of the contract of personal
service.
12. Counsel for the appellant raised the following three contentions : (1) that the said agreement
constituted a restraint on trade and was therefore opposed to public policy, (2) that in order to be valid
and enforceable the covenant in question should be reasonable in space and time and to the extent
necessary to protect the employers' right of property, and (3) that the injunction to enforce a negative
stipulation can only be granted for the legitimate purpose of safeguarding the trade secrets of the
employer. He argued that these conditions where lacking in the present case and therefore the
respondent company was not entitled to the enforcement of the said stipulation.
13. As to what constitutes restraint of trade is summarised in Halsbury's Laws of England (3rd edition),
Volume 38, at page 15 and onwards. It is a general principle of the Common Law that a person is
entitled to exercise his lawful trade or calling as and when he wills and the law has always regarded
jealously any interference with trade, even at the risk of interference with freedom of contract as it is
public policy to oppose all restraints upon liberty of individual action which are injurious to the
interests of the State. This principle is not confined to restraint of trade in the ordinary meaning of the
word "trade" and includes restraints on the right of being employed. The Court takes a far stricter view
of covenants between master and servant than it does of similar covenants between vendor and
purchaser or in partnership agreements. An employer, for instance, is not entitled to protect himself
against competition on the part of an employee after the employment has ceased but a purchaser of a
business is entitled to protect himself against competition per se on the part of the vendor. This
principle is based on the footing that an employer has no legitimate interest in preventing an employee
after he leaves his service from entering the service of a competitor merely on the ground that he is a
competitor. (Kores Manufacturing Co., Ltd. v. Kolak Manufacturing Co., Ltd. [1959] Ch. 108. The
attitude of the Courts as regards public policy however has not been inflexible. Decisions on public
policy have been subject to change and development with the change in trade and in economic thought
and the general principle once applicable to agreements in restraints of trade have been considerably
modified by later decisions. The rule now is that restraints whether general or partial may be good if
they are reasonable. A restraint upon freedom of contract must be shown to be reasonably necessary
for the purpose of freedom of trade. A restraint reasonably necessary for the protection of the
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covenantee must prevail unless some specific ground of public policy can be clearly established
against it. (E. Underwood & Son, Ltd. v. Barker [1899] 1 Ch. 300 C.A.. A person may be restrained
from carrying on his trade by reason of an agreement voluntarily entered into by him with that object.
In such a case the general principle of freedom of trade must be applied with due regard to the
principle that public policy requires for men of full age and understanding the utmost freedom of
contract and that it is public policy to allow a trader to dispose of his business to successor by whom it
may be efficiently carried on and to afford to an employer an unrestricted choice of able assistants and
the opportunity to instruct them in his trade and its secrets without fear of their becoming his
competitors (Fitch v. Dewes) [1921] 2 A.C. 158. Where an agreement is challenged on the ground of
its being a restraint on trade the onus is upon the party supporting the contract to show that the restraint
is reasonably necessary to protect his interests. Once, this onus is discharged, the onus of showing that
the restraint is nevertheless injurious to the public is upon the party attacking the contract. (See
Cheshire's Law of Contract (6th edition) 328, Mason v. Provident Clothing and Supply Co. Ltd.,
[1913] A.C. 724 and A. G. of Commonwealth of Australia v. Adelaide Steamship Co., Ltd. (1913)
A.C. 781.
14. The Courts however have drawn a distinction between restraints applicable during the term of the
contract of employment and those that apply after its cessation. (Halsbury's Laws of England (3rd
edition), Volume 38, page 31). But in W. H. Milsted & Son, Ltd. v. Hamp [1927] W.N. 233, where the
contract of service was terminable only by notice by the employer, Eve J., held it to be bad as being
wholly one-sided. But where the contract is not assailable on any such ground, a stipulation therein
that the employee shall devote his whole time to the employer, and shall not during the term of the
contract serve any other employer would generally be enforceable. In Gaumont Corporation v.
Alexander [1936] 2 All. E.R. 1686, clause 8 of the agreement provided that :-
"the engagement is an exclusive engagement by the corporation of the entire service of the artiste for
the period mentioned in clause 2 and accordingly the artiste agrees with the corporation that from the
date hereof until the expiration of her said engagement the artiste shall not without receiving the
previous consent of the corporation do any work or perform or render any services whatsoever to any
person firm or company other than the corporation and its sub-lessees."
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15. On a contention that this clause was a restraint of trade, Porter J., held that restrictions placed upon
an employee under a contract of service could take effect during the period of contract and are not in
general against public policy. But the learned Judge at page 1692 observed that a contract would be
thought to be contrary to public policy if there were a restraint, such as a restraint of trade, which
would be unjustifiable for the business of the claimants in the case. He however added that he did not
know of any case, although it was possible, there might be one, where circumstances might arise in
which it would be held that a restraint during the progress of the contract itself was an undue restraint.
He also observed that though for the most part, those who contract with persons and enter into
contracts which one might for this purpose described as contracts of service, have generally imposed
upon them the position that they should occupy themselves solely in the business of these whom they
serve but that it would be a question largely of evidence how far the protection of clauses of that kind
would extend, at any rate during the existence of the contract of service. Therefore, though as a general
rule restraints placed upon an employee are not against public policy, there might, according to the
learned Judge, be cases where a covenant might exceed the requirement of protection of the employer
and the Court might in such cases refuse to enforce such a covenant by injunction. In William
Robinson & Co. Ltd. v. Heuer [1898] 2 Ch. 451, the contract provided that Heuer would not during
this engagement without the previous consent in writing of William Robinson & Co., "carry on or be
engaged directly or indirectly, as principal, agent, servant or otherwise, in any trade, business or
calling, either relating to goods of any description sold or manufactured by the said W. Robinson &
Co., Ltd.,...... or in any other business whatsoever." Lindley, M. R. there observed that there was no
authority whatsoever to show that the said agreement was illegal, that is to say, that it was
unreasonable or went further than was reasonably necessary for the protection of the plaintiffs. It was
confined to the period of the engagement, and meant simply that, "so long as you are in our employ
you shall not work for anybody else or engage in any other business." There was, therefore, according
to him, nothing unreasonable in such an agreement. Applying these observations Branson, J., in
Warner Brothers Pictures v. Nelson [1937] 1 K.B. 209, held a covenant of a similar nature not to be
void. The defendant, a film artist, entered into a contract with the plaintiffs, film producers, for fifty-
two weeks, renewable for a further period of fifty-two weeks at the option of the plaintiffs, whereby
she agreed to render her exclusive service as such artist to the plaintiffs, and by way of negative
stipulation not to render, during the period of the contract, such services to any other person. In breach
of the agreement she entered into a contract to perform as a film artist for a third person. It was held
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that in such a case an injunction would issue through it might be limited to a period and in terms which
the Court in its discretion thought reasonable.
16. A similar distinction has also been drawn by Courts in India and a restraint by which a person
binds himself during the term of his agreement directly or indirectly not to take service with any other
employer or be engaged by a third party has been held not to be void and not against section 27 of the
Contract Act. In Brahmaputra Tea Co., Ltd. v. Scarth I.L.R. 11 Cal. 545, the condition under which the
covenantee was partially restrained from competing after the term of his engagement was over with his
former employer was held to be bad but the condition by which he bound himself during the term of
his agreement, not, directly or indirectly, to compete with his employer was held good. At page 550 of
the report the Court observed that an agreement of service by which a person binds himself during the
term of the agreement not to take service with any one else, or directly or indirectly take part in,
promote or aid any business in direct competition with that of his employer was not hit by section 27.
The Court observed :
"An agreement to serve a person exclusively for a definite term is a lawful agreement, and it is difficult
to see how that can be unlawful which is essential to its fulfilment, and to the due protection of the
interests of the employer, while the agreement is in force."
17. (See also Pragji v. Pranjiwan 5 Bom L.R. 872 and Lalbhai Dalpathbhai & Co. v. Chittaranjan
Chandulal Pandva MANU/GJ/0051/1966 : AIR1966Guj189 ). In Deshpande v. Arbind Mills Co., 48
Bom. L.R. 90 an agreement of service contained both a positive covenant, viz., that the employee shall
devote his whole-time attention to the service of the employers and also a negative covenant
preventing the employee from working elsewhere during the term of the agreement. Relying on Pragji
v. Pranjiwan; 5 L.R. 872 Charlesworth v. MacDonald I.L.R. 23 Bom. 103, Madras Railway Company
v. Rust, I.L.R. 14 Mad. 18 Subba Naidu v. Haji Badsha Sahib I.L.R. 26 Mad. 168 and Burn & Co. v.
MacDonald I.L.R. 36 Cal. 354, as instances where such a negative covenant was enforced, the learned
Judges observed that Illustrations (c) and (d) to section 57 of the Specific Relief Act in terms
recognised such contracts and the existence of negative covenants therein and that therefore the
contention that the existence of such a negative covenant in a service agreement made the agreement
void on the ground that it was in restraint of trade and contrary to section 27 of the Contract Act had
no validity.
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18. Counsel for the appellant, however, relied on Ehrman v. Bartholomew [1898] 1 Ch. 571, as an
illustration where the negative stipulation in the contract was held to be unreasonable and therefore
unenforceable. Clause 3 of the agreement there provided that the employee shall devote the whole of
his time during the usual business hours in the transaction of the business of the firm and shall not in
any manner directly or indirectly engage or employ himself in any other business, or transact any
business with or for any person or persons other than the firm during the continuance of this
agreement. Clause 13 of the agreement further provided that after the termination of the employment
by any means, the employee should not, either on his sole account or jointly with any other person,
directly or indirectly supply any of the then or past customers of the firm with wines, etc., or solicit for
orders any such customers and should not be employed in any capacity whatsoever or be concerned,
engaged or employed in any business or a wine or spirit merchant in which any former partner of the
firm was engaged. Romer, J., held these clauses to be unreasonable on the ground that clause 3 was to
operate for a period of 10 years or for so much of that period as the employer chose and that the word
"business" therein mentioned could not be held limited by the context to a wine merchant's business or
in any similar way. So that the Court, while unable to order the defendant to work for the plaintiffs, is
asked indirectly to make him do so by otherwise compelling him to abstain wholly from business, at
any rate during all usual business hours. The other decision relied on by him was Mason v. Provident
Clothing and Supply Co., Ltd. [1913] A.C. 724 This was a case of a negative covenant not to serve
elsewhere for three years after the termination of the contract. In this case the Court applied the test of
what was reasonable for the protection of the plaintiffs' interest. It was also not a case of the employee
possessing any special talent but that of a mere canvasser. This decision, however, cannot assist us as
the negative covenant therein was to operate after the termination of the contract. Herbert Morris v.
Saxelby [1916] A.C. 688 and Attwood v. Lamont [1920] 3 K. B. 571, are also cases where the
restrictive covenants were to apply after the termination of the employment. In Commercial Plastics
Ltd. v. Vincent 3 All. E.R. 546, also the negative covenant was to operate for a year after the employee
left the employment and the Court held that the restriction was void inasmuch as it went beyond what
was reasonably necessary for the protection of the employer's legitimate interests.
19. These decisions do not fall within the class of cases where the negative covenant operated during
and for the period of employment as in Gaumont Corporation's case [1936] 2 All E.R. 1686 and
Warner Brothers v. Nelson [1937] 1 K.B. 209 where the covenant was held not to be a restraint of
trade or against public policy unless the agreement was wholly one-sided and therefore unconscionable
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as in W. H. Milsted & Son, Ltd. v. Hamp [1927] W.N. 233 or where the negative covenant was such
that an injunction to enforce it would indirectly compel the employee either to idleness or to serve the
employer, a thing which the Court would not order, as in Ehrman v. Bartholomew [1898] 1 Ch. 671.
There is, however, the decision of a Single Judge of the Calcutta High Court in Gopal Paper Mills v.
Malhotra A.I.R. 1262 Cal. 61, a case of breach of a negative covenant during the period of
employment. This decision, in our view, was rightly distinguished by the High Court as the period of
contract there was as much as 20 years and the contract gave the employer an arbitrary power to
terminate the service without notice if the employer decided not to retain the employee during the three
years of apprenticeship or thereafter if the employee failed to perform his duties to the satisfaction of
the employer who had absolute discretion to decide whether the employee did so and the employer's
certificate that he did not, was to be conclusive as between the parties. Such a contract would clearly
fall in the class of contracts held void as being one-sided as in W. H. Milsted & Son, Ltd. v.
Hamp[1927] W.N. 233. The decision in Gopal Paper Mills v. Malhotra A.I.R. 1262 Cal. 61, therefore
cannot further the appellant's case.
20. The result of the above discussion is that considerations against restrictive covenants are different
in cases where the restriction is to apply during the period after the termination of the contract than
those in cases where it is to operate during the period of the contract. Negative covenants operative
during the period of the contract of employment when the employee is bound to serve his employer
exclusively are generally not regarded as restraint of trade and therefore do not fall under section 27 of
the Contract Act. A negative covenant that the employee would not engage himself in a trade or
business or would not get himself employed by any other master for whom he would perform similar
or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is
unconscionable or excessively harsh or unreasonable or one-sided as in the case of W. H. Milsted &
Son, Ltd. [1927] W.N. 233. Both the Trial Court and the High Court have found, and in our view,
rightly, that the negative covenant in the present case restricted as it is to the period of employment
and to work similar or substantially similar to the one carried on by the appellant when he was in the
employ of the respondent company was reasonable and necessary for the protection of the company's
interests and not such as the Court would refuse to enforce. There is therefore no validity in the
contention that the negative covenant contained in clause 17 amounted to a restraint of trade and
therefore against public policy.
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21. The next question is whether the injunction in the terms in which it is framed should have been
granted. There is no doubt that the Courts have a wide discretion to enforce by injunction a negative
covenant. Both the Courts below have concurrently found that the apprehension of the respondent
company that information regarding the special processes and the special machinery imparted to and
acquired by the appellant during the period of training and thereafter might be divulged was justified;
that the information and knowledge disclosed to him during this period was different from the general
knowledge and experience that he might have gained while in the service of the respondent company
and that it was against his disclosing the former to the rival company which required protection. It was
argued however that the terms of clause were too wide and that the court cannot sever the good from
the bad and issue an injunction to the extent that was good. But the rule against severance applies to
cases where the covenant is bad in law and it is in such cases that the court is precluded from severing
the good from the bad. But there is nothing to prevent the court from granting a limited injunction to
the extent that is necessary to protect the employer's interests where the negative stipulation is not
void. There is also nothing to show that if the negative covenant is enforced the appellant would be
driven to idleness or would be compelled to go back to the respondent company. It may be that if he is
not permitted to get himself employed in another similar employment he might perhaps get a lesser
remuneration than the one agreed to by Rajasthan Rayon. But that is no consideration against
enforcing the covenant. The evidence is clear that the appellant has torn the agreement to pieces only
because he was offered a higher remuneration. Obviously he cannot be heard to say that no injunction
should be granted against him to enforce the negative covenant which is not opposed to public policy.
The injunction issued against him is restricted as to time, the nature of employment and as to area and
cannot therefore be said to be too wide or unreasonable or unnecessary for the protection of the
interests of the respondent company.
22. As regards Clause 9 the injunction is to restrain him from divulging any and all information,
instruments, documents, reports, etc., which may have come to his knowledge while he was serving
the respondent company. No serious objection was taken by Mr. Sen against this injunction and
therefore we need say no more about it.
23. The appeal fails and is dismissed with costs.
272

Central Inland Water Transport Corporation Limited and Ors. vs. Brojo Nath Ganguly and
Ors.; (1986)3SCC 156
Judges/Coram: A.N. Sen and D.P. Madon, JJ.
JUDGMENT
D.P. Madon, J.
1. These Appeals by Special Leave granted by this Court raise two questions of considerable
importance to Government companies and their employees including their officers. These questions
are:
- Whether a Government company as defined in Section 617 of the Companies Act, 1956, is "the
State" within the meaning of Article 12 of the Constitution?
- Whether an unconscionable term in a contract of employment is void under Section 23 of the

Indian Contract Act, 1872, as being opposed to public policy and, when such a term is contained in a
contract of employment entered into with a Government company, is also void as infringing Article 14
of the Constitution in case a Government company is "the State" under Article 12 of the Constitution?
2. Although the record of these Appeals is voluminous, the salient facts lie within a narrow compass.
The First Appellant in both these Appeals, namely, the Central Inland Water Transport Corporation
Limited (hereinafter referred to in short as "the Corporation"), was incorporated on February 22, 1967.
The majority of the shares of the Corporation were at all times and still are held by the Union of India
which is the Second Respondent in these Appeals, and the remaining shares were and are held by the
State of West Bengal and the State of Assam. Section 617 of the Companies Act, 1959 (Act No. 1 of
1956), provides as follows :
617. Definition of 'Government Company'. -
For the purposes of this Act Government company means any company in which not less than fifty-
one per cent of the paid-up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by one or more State
273

Governments and includes a company which is a subsidiary of a Government company as thus

defined.
As all the shares of the Corporation are held by different Governments, namely, the Government of
India and the Governments of West Bengal and Assam, the Corporation is not only a Government
company as defined by the said Section 617 but is a company wholly owned by the Central
Government and two State Governments.
3. Clause III(A) of the Memorandum of Association of the Corporation lists the main objects of the
Corporation and Clause III(B) of the Memorandum of Association lists the objects incidental or
ancillary to the main objects. It is unnecessary to reproduce all these objects for according to the
Petitions filed by the Corporation for obtaining Special Leave in these Appeals, it is currently engaged
in carrying out the following activities, namely,
(i) maintaining and running river service with ancillary function of maintenance and operation of river-
site jetty and terminal;.
(ii) constructing vessels of various sizes and descriptions;
(iii) repairing vessels of various sizes and descriptions; and
(iv) undertaking general engineering activities.
4. Article 4 of the Articles of Association of the Corporation provides that the Corporation is a private
company within the meaning of Clause (iii) of Sub-section (1) of Section 3 of the Companies Act and
that no invitation is to be issued to the public to subscribe for any shares in, or debentures or debenture
stock of, the Corporation. Article 51 of the Articles of Association confers upon the President of India
the power to issue from time to time such directions or instructions as he may consider necessary in
regard to the affairs or the conduct of the business of the Corporation or of the Directors thereof. The
said Article also confers upon the President the power to issue such directions or instructions to the
Corporation as to the exercise and performance of its functions in matters involving national security
or public interest. Under the said Article, the Directors of the Corporation are bound to comply with
and give immediate effect to such directions and instructions. Under Article 51A, the President has the
power to call for such returns, accounts and other information with respect to properties and activities
274

of the Corporation as might be required from time to time. Under Article 40, subject to the provisions
of the Companies Act and the directions and instructions issued from time to time by the President
under Article 51, the business of the Corporation is to be managed by the Board of Directors. Under
Article 14(a), subject to the provisions of Section 252 of the Companies Act, the President is to
determine in writing from time to time the number of Directors of the Corporation which, however is
not to be less than two or more than twelve and under Article 14(b), at every annual general meeting of
the Corporation, every Director appointed by the President is to retire but is eligible for re-
appointment. Under Article 15(a), the President has the power at any time and from time to time to
appoint any person as an Additional Director. Under Article 16, the President has the power to remove
any Director appointed by him from office at any time in his absolute discretion. Under Article 17, the
vacancy in the office of a Director appointed by the President caused by retirement, removal,
resignation, death or otherwise, is to be filled by the President by fresh appointment. Article 18
provides that the Directors are not required to hold any share qualification. Under Article 37, the
President may from time to time appoint one of the Directors to the office of the Chairman of the
Board of Directors or to the office of the Managing Director or to both these offices for such time and
at such remuneration as the President may think fit and the President may also from time to time
remove the person or persons so appointed from service and appoint another or others in his or their
place or places. Under Article 41, the Chairman of the Board has the power, on his own motion, and is
bound, when requested by the Managing Director in writing, to reserve for the consideration of the
President the matters relating to the working of the Corporation set out in the said Article. Article 42
lists the matters in respect of which prior approval of the President is required to be obtained. Under
Article 47, the auditor or auditors of the Corporation are to be appointed or re-appointed by the Central
Government on the advice of the Comptroller and Auditor-General of India. The said Article also
confers power upon the Comptroller and Auditor-General of India to direct the manner in which the
accounts of the Corporation are to be audited and to give the auditors instructions in regard to any
matter relating to the performance of their function. Under the said Article, he has also the power to
conduct a supplementary or test audit of the accounts of the Corporation by such person or persons as
he may authorize in that behalf and for the purposes of such audit to require such information or
additional information to be furnished to such person or persons on such matters by such person or
persons as the Comptroller and Auditor-General may, by general or special order, direct.
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5. Under Clause (V) of the Memorandum of Association, the authorized share capital was rupees four
crores. It was raised to rupees ten crores by a special resolution passed at the Annual General Meeting
of the Corporation held on December 30, 1972, and further raised to rupees twenty crores by a special
resolution passed at the Annual General Meeting held on November 5, 1979.
6. The above facts and the provisions aforementioned of the Memorandum of Association and the
Articles of Association clearly show that not only is the Corporation a Government company of which
all the shares were and are owned by the Central Government and two State Governments but is a
Government company which is under the complete control and management of the Central
Government.
7. A company called the "Rivers Steam Navigation Company Limited" was carrying on very much the
same business including the maintenance and running of river service as the Corporation i s doing. A
Scheme of Arrangement was entered into between the said company and the Corporation. The Calcutta
High Court by its order dated May 5, 1967, approved the said Scheme of Arrangement and order the
closure of the said Company and further directed that upon payment to all the creditors of the said
Company, the said Company would stand dissolved without winding up by an order to be obtained
from the High Court and accordingly, upon payment to all the creditors, the said Company was
ordered to be dissolved. The said Scheme of Arrangement provided that the assets and certain
liabilities of the said Company would be taken over by the Corporation. The said Scheme of
Arrangement as approved by the High Court also provided as follows:
a) That the new Company shall take as many of the existing staff or labour as possible and as can be
reasonably taken over by the said transferee Company subject to any valid objection to any individual
employee or employees.
(b) That as to exactly how many can be employed it is left to the said transferee Company's bona fide
discretion.
(c) That those employees who cannot be taken over shall be paid by the transferor Company all
moneys due to them under the law and all legitimate and legal compensations payable to them either
under Industrial Disputes Act or otherwise legally admissible and that such moneys shall be provided
by the Government of India to the existing transferor Company who will pay these dues.
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8. The First Respondent in Civil Appeal No. 4412 of 1985, Brojo Nath Ganguly, was, at the date when
the said Scheme of Arrangement became effective, working in the said Company and his services were
taken over by the Corporation and he was appointed on September 8, 1967, as a Deputy Chief
Accounts Officer. The First Respondent in Civil Appeal No. 4413 of 1985, Tarun Kanti Sengupta, was
also working in the said Company and his services were also taken over by the Corporation and he was
appointed on September 8, 1967, as Chief Engineer on the ship "River Ganga". It is unnecessary to
refer at this stage to the terms and conditions of the letters of appointment issued to these two
Respondents as they have been subsequently superseded by service rules framed by the Corporation
except to state that under the said letters of appointment the age of superannuation was fifty-five years
unless the Corporation agreed to retain them beyond this period. The said letters of appointment also
provided that these Respondents would be subject to the service rules and regulations including the
conduct rules. Service rules were framed by the Corporation for the first time in 1970 and were
replaced by new rules in 1979.
9. We are concerned in these Appeals with the "Central Inland Water Transport Corporation Ltd.
Service Discipline and Appeal Rules" of 1979 framed by the Corporation. These rules will hereinafter
be referred to in short as "the said Rules". The said Rules apply to all employees in the service of the
Corporation in all units in West Bengal, Bihar, Assam or in other State or Union Territory except those
employees who are covered by the Standing Orders under the Industrial Employment (Standing
Orders) Act, 1946, or those employees in respect of whom the Board of Directors has issued separate
orders. Rule 9 of the said Rules deals with termination of employment for acts other than
misdemeanour. The relevant provisions of the said Rule 9 relating to permanent employees are as
follows:
9. TERMINATION OF EMPLOYMENT FOR ACTS OTHER THAN MISDEMEANOUR. -
(i) The employment of a permanent employee shall be subject to termination on three months' notice
on either side. The notice shall be in writing on either side. The Company may pay the equivalent of
three months' basic pay and dearness allowance, if any, in lieu of notice or may deduct a like amount
when the employee has failed to give due notice.
(ii) The services of a permanent employee can be terminated on the grounds of "Services no longer
required in the interest of the Company" without assigning any reason. A permanent employee whose
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services are terminated under this clause shall be paid 15 days' basic pay and dearness allowance for
each completed year of continuous service in the Company as compensation. In addition he will be
entitled to encashment of leave at his credit.
Under Rule 10, an employee is to retire on completion of the age of fifty-eight years though in
exceptional cases and in the interest of the Corporation, an extension may be granted with the prior
approval of the Chairman-cum-Managing Director and the Board of Directors. Rule 11 provides as
follows :
11. RESIGNATION. -
Employees who wish to leave the Company's services must give the Company the same notice as the
Company is required to give them under Rule 9.
Rule 33 provides for suspension of an employee where a disciplinary proceeding against him is
contemplated or is pending or where a case against him in respect of any criminal offence is under
investigation or trial. Rule 34 provides for payment of subsistence allowance during the period of
suspension. Rule 36 sets out the different penalties which can be imposed on an employee for his
misconduct. These penalties are divided into minor and major penalties. Rule 37 is as follows:
37. ACTS OF MISCONDUCT. -
Without prejudice to the general meaning of the term 'misconduct' the Company shall have the right to
terminate the services of any employee at any time without any notice if the employee is found guilty
of any insubordination, intemperance or other misconduct or of any breach of any rules pertaining to
service or conduct or non-performance of his duties.
Rule 38 prescribes the procedure for imposing a major penalty and sets out in detail how a disciplinary
inquiry is to be held. Rule 39 provides for action to be taken by the disciplinary authority on the report
made by the Inquiring Authority. Rule 40 prescribes the procedure to be followed for imposing minor
penalties. Rule 43 provides for a special procedure to be followed in certain cases. This special
procedure consists of dispensing with a disciplinary inquiry altogether. The said Rule 43 provides as
follows:
43. SPECIAL PROCEDURE IN CERTAIN CASES. -
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Notwithstanding anything contained in Rule 38, 39 or 40, the disciplinary authority may impose any of
the penalties specified in Rule 36 in any of the following circumstances :
i) The employee has been convicted on a criminal charge, or on the strength of facts or conclusions
arrived at by a judicial trial; or
ii) where the disciplinary authority is satisfied for reasons to be recorded by it in writing that it is not
reasonably practicable to hold an inquiry in the manner provided in these Rules; or
iii) where the Board is satisfied that in the interest of the security of the Corporation/ Company, it is
not expedient to hold any inquiry in the manner provided in these rules.
Rule 45 provides for an appeal against an order imposing penalty to the appropriate authority specified
in the Schedule to the said Rules and Rule 45-A provides for a review.
10. We are concerned in these Appeals with the validity of Clause (i) of Rule 9 only.
11. So far as Ganguly, the First Respondent in Civil Appeal No. 4412 of 1985, is concerned, he was
promoted to the post of Manager (Finance) in October 1980 and also acted as General Manager
(Finance) from November 1981 to March 1982. On February 16, 1983, a confidential letter was sent to
him by the General Manager (Finance), who is the Third Appellant in Civil Appeal No. 4412 of 1985,
to reply within twenty-four hours to the allegation of negligence in the maintenance of Provident Fund
Accounts. Ganguli made a representation as also gave a detailed reply to the said show cause notice.
Thereafter by a letter dated February 26, 1983, signed by the Chairman-cum-Managing Director of the
Corporation, a notice under Clause (i) of Rule 9 of the said Rules was given to Ganguli terminating his
service with the Corporation with immediate effect. Along with the said letter a cheque for three
months' basic pay and dearness allowance was enclosed.
12. So far as Sengupta, the First Respondent in Civil Appeal No. 4413 of 1985, is concerned, he was
promoted to the post of General Manager (River Services) with effect from January 1, 1980. His name
was enrolled by the Bureau of Public Enterprises and he was called for an interview for the post of
Chairman-cum-Director of the Corporation by the Public Enterprises Selection Board. According to
Sengupta, he could not appear before the Selection Board as he received the letter calling him for the
interview after the date fixed in that behalf. According to Sengupta, the new Chairman-cum-Managing
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Director who was selected at the said interview bore a grudge against him for having competed against
him for the said post and on February 1, 1983, he issued a charge-sheet against Sengupta intimating to
him that a disciplinary inquiry was proposed to be held against him under the said Rules and calling
upon him to file his written statement of defence. By his letter dated February 10, 1983, addressed to
the Chairman-cum-Managing Director, Sengupta denied the charges made against him and asked for
inspection of documents and copies of statements of witnesses mentioned in the said charge-sheet. By
a letter dated February 26, 1983, signed by the Chairman-cum-Managing Director notice was given to
Sengupta under Clause (i) of Rule 9 of the said Rule, terminating his service with the Corporation with
immediate effect. Along with the said letter a cheque for three months' basic pay and dearness
allowance in lieu of notice was enclosed.
13. Both Ganguly and Sengupta filed writ petitions in Calcutta High Court under Article 226 of the
Constitution challenging the termination of their service as also the validity of the said Rule 9(i). In
both these writ petitions rule nisi was issued and an ex parte ad interim order staying the operation of
the said notice of termination was passed by a learned Single Judge of the High Court. The Appellants
before us went in Letters Patent Appeal before a Division Bench of the said High Court against the
said ad interim orders, the appeal in the case of Ganguly being F.M.A.T. No. 1604 of 1983 and in the
case of Sengupta being F.M.A.T. No. 649 of 1983. On January 28, 1985, the Division Bench ordered
in both these Appeals that the said writ petitions should stand transferred to and heard by it along with
the said appeals. The said appeals and writ petitions were thereupon heard together and by a common
judgment delivered on August 9, 1985, the Division Bench held that the Corporation was a State
within the meaning of Article 12 of the Constitution and that the said Rule 9(i) was ultra vires Article
14 of the Constitution. Consequently the Division Bench struck down the said Rule 9(i) as being void.
It also quashed the impugned orders of termination dated February 26, 1983. It is against the said
judgment and orders of the Calcutta High Court that the present Appeals by Special Leave have been
filed.
14. The contentions raised on behalf of the Corporation at the hearing of these Appeals may be thus
summarized:
(1) A Government company stands on a wholly different footing from a statutory corporation for while
a statutory corporation is established by a statute, a Government company is incorporated like any
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other company by obtaining a certificate of incorporation under the Companies Act and, therefore, a
Government company cannot come within the scope of the term "the State" as defined in Article 12 of
the Constitution.
(2) A statutory corporation is usually established in order to create a monopoly in the State in respect
of a particular activity. A Government company is, however, not established for this purpose.
(3) The Corporation does not have the monopoly of inland water transport but is only a trading
company as is shown by the objects clause in its Memorandum of Association.
(4) Assuming a Government company is "the State" within the meaning of Article 12, a contract of
employment entered into by it is like any other contract entered into between two parties and a term in
that contract cannot be struck down under Article 14 of the Constitution on the ground that it is
arbitrary or unreasonable or unconscionable or one-sided or unfair.
At the hearing of these Appeals the Union of India, which is the Second Respondent in these Appeals,
joined in the contentions raised by the Corporation.
15. The arguments advanced on behalf of the contesting Respondents in broad outlines were as
follows:
(1) The definition of the expression "the State" given in Article 12 is wide enough to include within its
scope and reach a Government company.
(2) A State is entitled to carry on any activity, even a trading activity, through any of its
instrumentalities or agencies, whether such instrumentality or agency be one of the Departments of the
Government, a statutory corporation, a statutory authority or a Government company incorporated
under the Companies Act.
(3) Merely because a Government company carries on a trading activity or is authorized to carry on a
trading activity does not mean that it is excluded from the definition of the expression "the State"
contained in Article 12.
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(4) A Government company being "the State" within the meaning of Article 12 is bound to act fairly
and reasonably and if it does not do so, its action can be struck down under Article 14 as being
arbitrary.
(5) A contract of employment stands on a different footing from other contracts. A term in a contract
of employment entered into by a private employer which is unfair, unreasonable and unconscionable is
bad in law. Such a term in a contract of employment entered into by the State is, therefore, also bad in
law and can be struck down under Article 14.
16. During the course of the hearing of these Appeals the Central Inland Water Transport Corporation
Officers' Association made an application for permission to intervene in these Appeals and permission
to intervene was granted to it by this Court. The said Association supported the stand taken by the
contesting Respondents.
17. We will now examine the correctness of the rival submissions advanced at the Bar.
18. The word "State" has different meanings depending upon the context in which it is used. In the
sense of being a polity, it is defined in the Shorter Oxford English Dictionary, Third Edition, Volume
II, page 2005, as "a body of people occupying a defined territory and organized under a sovereign
government". The same dictionary defines the expression "the State" as "the body politic as organized
for supreme civil rule and government; the political organization which is the basis of civil
government; hence, the supreme civil power and government vested in a country or nation". According
to Black's Law Dictionary, Fifth Edition, page 1262, "In its largest sense, a 'state' is a body politic or a
society of men". According to Black, the term "State" may refer "either to the body politic of a nation
(e.g. United States) or to an individual governmental unit of such nation (e.g. California)". In modern
international practice, whether a community is deemed a State or not depends upon the general
recognition accorded to it by the existing group of other States. A State must have a relatively
permanent legal organization, determining its structure and the relative powers of its major governing
bodies or organs. This legal organizational permanence of a State is to be found in its Constitution.
With rare exceptions, such as the United Kingdom, most States now have a written Constitution. The
Constitutional structure of a State may be either unitary, as when it has a single system of government
applicable to all its parts, or federal when it has one system of government operating in certain respects
and in certain matters in all its parts and also separate governments operating in other respects in
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distinct parts of the whole. In such a case the units or sub-divisions having separate governments are
variously called 'states' as in India, U.S.A. and Australia, 'provinces' as in Canada, 'cantons' as in
Switzerland, or designated by other names.
19. Our Constitution is federal in structure. Clause (1) of Article 1 of the Constitution provides that
"India, that is Bharat, shall be a Union of States" and Clause (2) of that Article provides that "The
States and the territories thereof shall be as specified in the First Schedule". The word "States" used in
Article 1 thus refers to the federating units, India itself being a State consisting of these units. The term
"States" is defined variously in some of the other Articles of the Constitution as the context of the
particular Part of the Constitution in which it is used requires. Part VI of the Constitution is headed
"The States" and provides for the form of the three organs of a State, namely, the Executive, the
legislature and the Judiciary. Article 152, which is the opening Article in Part VI of the Constitution,
provides as follows:
152. Definition. -
In this Part, unless the context otherwise requires, the expression 'State' does not include the State of
Jammu and Kashmir.
The State of Jammu and Kashmir is excluded because that State, though one of the States which
constitute the Union of India, had, in pursuance of the provisions of Article 370 of the Constitution
read with the Constitution (Application to Jammu and Kashmir) Order, 1954 (CO. 48), set up a
Constituent Assembly for the internal Constitution of the State and it had framed the Constitution of
Jammu and Kashmir which was adopted and enacted by that Constituent Assembly on November 17,
1965. Article 152 also, therefore, uses the expression "State" as meaning the federating units which
constitute the Union of India. Part XIV of the Constitution deals with services under the Union and the
States. Article 308 provides as follows:
308. Interpretation. -
In this Part, unless the context otherwise requires, the expression 'State' does not include the State of
Jammu and Kashmir.
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This definition read with the other provisions of Part XIV shows that the word "State" applies to the
federating units (other than the State of Jammu and Kashmir for the reason mentioned above) which
together constitute the Union of India because in the other Articles of Part XIV wherever the Union of
India is referred to, it is described as "the Union". Article 366 of the Constitution defines certain
expressions used in the Constitution of India. That Article, however, does not contain any definition of
the term "State". Under Article 367(1), unless the context otherwise requires, the General Clauses Act,
1897 (Act No. X of, 1897), subject to any adaptations and modifications that may be made therein by
the President of India under Article 372 to bring that Act into accord with the provisions of the
Constitution, applies for the interpretation of the Constitution. Clause (58) of Section 3 of the General
Clauses Act defines the term "State" as follows:
(58) 'State' -
(a) as respects any period before the commencement of the Constitution (Seventh Amendment) Act,
1956, shall mean a Part A State, a Part B State or a Part C State, and
(b) as respects any period after such commencement, shall mean a State specified in the First Schedule
to the Constitution and shall include a Union Territory.
This definition, therefore, also confines the term "State" to the federating units which together form the
Union of India.
20. We are concerned in these Appeals with Article 12. Article 12 forms part of Part III of the
Constitution which deals with Fundamental Rights and provides as follows:
12. Definition. -
In this Part, unless the context otherwise requires, 'the State' includes the Government and Parliament
of India and the Government and the Legislature of each of the States and all local or other authorities
within the territory of India or under the control of the Government of India.
The same definition applies to the expression "the State" when used in Part IV of the Constitution
which provides for the Directive Principles of State Policy, for the opening Article of Part IV, namely,
Article 36, provides:
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36. Definition. -
In this Part, unless the context otherwise requires, 'the State' has the same meaning as in Part III.
The expression "local authority" is defined in Clause (31) of Section 3 of the General Clauses Act as
follows:
(31) 'Local authority' shall mean a municipal committee, district board, body of port commissioners or
other authority legally entitled to, or entrusted by the Government with, the control or management of
a municipal or local fund.
Thus, the expression "the State" when used in Parts III and IV of the Constitution is not confined to
only the federating States or the Union of India or even to both. By the express terms of Article 12 the
expression "the State" includes -
(1) the Government of India,
(2) Parliament of India
(3) the Government of each of the States which constitute the Union of India,
(4) the Legislature of each of the States which constitute the Union of India,
(5) all local authorities within the territory of India,
(6) all local authorities under the control of the Government of India,
(7) all other authorities within the territory of India, and
(8) all other authorities under the control of the Government of India.
21. There are three aspects of Article 12 which require to be particularly noticed. These aspects are:
(i) the definition given in Article 12 is not an explanatory and restrictive definition but an extensive
definition,
(ii) it is the definition of the expression "the State" and not of the term "State" or "States", and
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(iii) it is inserted in the Constitution for the purposes of Parts III and IV thereof.
22. As pointed out in Craies on Statute Law, Seventh Edition, page 213, where an interpretation clause
defines a word to mean a particular thing, the definition is explanatory and prima facie restrictive; and
whenever an interpretation clause defines a term to include something, the definition is extensive.
While an explanatory and restrictive definition confines the meaning of the word defined to what is
stated in the interpretation clause, so that wherever the word defined is used in the particular statute in
which that interpretation clause occurs, it will bear only that meaning unless where, as is usually
provided, the subject or context otherwise requires, an extensive definition expands or extends the
meaning of the word defined to include within it what would otherwise not have been comprehended
in it when the word defined is used in its ordinary sense. Article 12 uses the word "includes". It thus
extends the meaning of the expression "the State" so as to include within it also what otherwise may
not have been comprehended by that expression when used in its ordinary legal sense.
23. Article 12 defines the expression "the State" while the other Articles of the Constitution referred to
above, such as Article 152 and Article 308, and Clause (58) of Section 3 of the General Clauses Act
defines the term "State". The deliberate use of the expression "the State" in Article 12 as also in Article
36 would have normally shown that this expression was used to denote the State in its ordinary and
Constitutional sense of an independent or sovereign State and the inclusive clause in Article 12 would
have extended this meaning to include within its scope whatever has been expressly set out in Article
12. The definition of the expression "the State" in Article 12, is however, for the purposes of Parts III
and IV of the Constitution. The contents of these two Parts clearly show that the expression "the State"
in Article 12 as also in Article 36 is not confined to its ordinary and Constitutional sense as extended
by the inclusive portion of Article 12 but is used in the concept of the State in relation to the
Fundamental Rights guaranteed by Part III of the Constitution and the Directive Principles of State
Policy contained in Part IV of the Constitution which Principles are declared by Article 37 to be
fundamental to the governance of the country and enjoins upon the State to apply in making laws.
24. What then does the expression "the State" in the context of Parts III and IV of the Constitution
mean?
25. Men's concept of the State as a polity or a political unit or entity and what the functions of the State
are or should be have changed over the years and particularly in the course of this century. A man
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cannot obstinately cling to the same ideas and concepts all his life. As Emerson said in his essay on
"Self-Reliance", "A foolish consistency is the hobgoblin of little minds". Man is by nature ever
restless, ever discontent, ever seeking something new, ever dissatisfied with what he has. This inherent
trait in the nature of man is reflected in the society in which he lives for a society is a conglomerate of
men who live in it. Just as man by nature is dissatisfied, so is society. Just as man seeks something
new, ever hoping that a change will bring about something better, so does society. Old values, old
ideologies and old systems are thus replaced by new ideologies, a new set of values and a new system,
they in their turn to be replaced by different ideologies, different values and a different system. The
ideas that seem revolutionary become outmoded with the passage of time and the heresies of today
become the dogmas of tomorrow. What proves to be adequate and suited to the needs of a society at a
given time and in particular circumstances turns out to be wholly unsuited and inadequate in different
times and under different circumstances.
26. The story of mankind is punctuated by progress and retrogression. Empires have risen and crashed
into the dust of history. Civilizations have flourished, reached their peak and passed away. In the year
1625, Carew, C.J., while delivering the opinion of the House of Lords in Re the Earldom of Oxford
1625 W.Jo. 96, 101. s.c 1626 (82) E.R. 50, 53, in a dispute relating to the descent of that Earldom, said
:
...and yet time hath his revolution, there must be a period and an end of all temporal things, finis
rerum, an end of names and dignities, and whatsoever is terrene....
The cycle of change and experiment, rise and fall, growth and decay, and of progress and retrogression
recurs endlessly in the history of man and the history of civilization. T.S. Eliot in the First Chorus from
"The Rock" said:
O Perpetual revolution of configured stars, O Perpetual recurrence of determined seasons, O world of

spring and autumn, birth and dying! The endless cycle of idea and action, Endless invention, endless
experiment.
27. The law exists to serve the needs of the society which is governed by it. If the law is to play its
allotted role of serving the needs of the society, it must reflect the ideas and ideologies of that society.
It must keep time with the heartbeats of the society and with the needs and aspirations of the people.
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As the society changes, the law cannot remain immutable. The early nineteenth century essayist and
wit, Sydney Smith, said, "When I hear any man talk of an unalterable law, I am convinced that he is an
unalterable fool." The law must, therefore, in a changing society march in tune with the changed ideas
and ideologies.
Legislatures are, however, not best fitted for the role of adapting the law to the necessities of the time,
for the legislative process is too slow and the legislatures often divided by politics, slowed down by
periodic elections and overburdened with myriad other legislative activities. A constitutional document
is even less suited to this task, for the philosophy and the ideologies underlying it must of necessity be
expressed in broad and general terms and the process of amending a Constitution is too cumbersome
and time-consuming to meet the immediate needs. This task must, therefore, of necessity fall upon the
courts because the courts can by the process of judicial interpretation adapt the law to suit the needs of
the society.
28. A large number of authorities were cited before us to show how the courts have interpreted the
expression, "the State" in Article 12. As these authorities are decisions of this Court, we must perforce
go through the whole gamut of them though we may preface an examination of these authorities with
the observation that they only serve to show how the concepts of this Court have changed both with
respect to Article 12 and Article 14 to keep pace with changing ideas and altered circumstances.
Before embarking upon this task we would, however, like to quote the following passage (which has
become a classic) from the opening paragraph of Justice Oliver Wendell Holmes's "The Common
Law" which contains the lectures delivered by him while teaching law at Harvard and which book was
published in 1881 just one year before he was appointed an Associate Justice of the Massachusetts
Supreme Judicial Court:
It is something to show that the consistency of a system requires a particular result, but it is not all. The
life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent
moral and political theories, intuitions of public policy, avowed or unconscious, even the prejudices
which judges share with their fellow-men, have had a good deal more to do than the syllogism in
determining the rules by which men should be governed. The law embodies the story of a nation's
development through many centuries, and it cannot be dealt with as if it contained only the axioms and
corollaries of a book of mathematics. In order to know what it is, we must know what it has been, and
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what it tends to become. We must alternately consult history and existing theories of legislation. But
the most difficult labor will be to understand the combination of the two into new products at every
stage. The substance of the law at any given time pretty nearly corresponds, so far as it goes, with what
is then understood to be convenient; but its form and machinery, and the degree to which it is able to
work out desired results, depend very much upon its past.
29. We will, therefore, briefly sketch the temper of the times in which our Constitution was enacted
and the purposes for which Parts III and IV inserted in our Constitution.
30. The bombs which had rained down upon the cities of Europe, Africa and Asia and the Islands in
the Pacific had changed, and changed dramatically, not only the political but also the sociological,
ideological and economic map of the world. A world reeling from the horrors of the Second World
War and seeking to recover from the trauma caused by its atrocities sought to band all nations into one
Family of Man and for this purpose set up the United Nations Organization in order to save succeeding
generations from the scourge of war which had twice in this century brought untold sorrow to mankind
and in order to reaffirm faith in fundamental human rights, in the dignity and worth of the human
person and in the equal rights, of man and woman and of nations large or small, and thus to give
concrete shape to the dream of philosophers and poets that the war-drums would throb no longer and
the battle-banners would be furled in the Parliament of Man and the Federation of the World. But
much had gone before. There was the signing of the Inter-Allied Declaration of June 12, 1941, at St.
James's Palace in London by the representatives of the United Kingdom, the Commonwealth, General
de Gaulle and the governments in exile of the European countries conquered by Nazi Germany; there
was the Atlantic Charter of August 14, 1941; there was the Declaration of the United Nations signed
on New Year's Day of 1942 at Washington, D.C., by twenty-six nations who were fighting the Axis;
there was the Declaration made at the Moscow Conference in October 1943 and at the Teheran
Conference on December 1, 1943; there was the Dumbarton Oaks Conference held in Washington,
D.C., in August and September 1944; there was the Yalta Conference in February 1945; all these
culminating in the adoption on June 25, 1945, of the Charter of the United Nations in the Opera House
of San Francisco and the affixing of signatures thereon the next day in the auditorium of the Veterans'
Memorial Hall. Thereafter, in pursuance of Article 68 of the Charter of the United States, the
Economic and Social Council set up the Human Rights Commission in 1946. This Commission began
its work in January 1947 under the chairmanship of Mrs. Eleanore Roosevelt, the widow of President
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Franklin D. Roosevelt. The Universal Declaration of Human Rights prepared by the Commission was
adopted by the General Assembly on December 10, 1948, at its session held in the Palais de Chaillot in
Paris. Of the fifty-eight nations represented at that Session, none voted against it, two were absent, and
eight abstained from voting.
31. It was thus in an atmosphere surcharged with human suffering and yet a firm resolve not to
succumb to it that the Constituent Assembly which was set up to frame the Constitution of India
embarked upon its task on December 9, 1946, re-assembled after the midnight of August 14, 1947, as
the sovereign Constituent Assembly for India. After Partition and fresh elections in the new Provinces
of West Bengal and East Punjab, it re-assembled on October 31, 1947, and thereafter on November 26,
1949 adopted and enacted the Constitution of India.
32. Before commencing its work, the Constituent Assembly adopted a Resolution laying down its
objectives:
1. This Constituent Assembly declares its firm and solemn resolve to proclaim India as an Independent
Sovereign Republic and to draw up for her future governance a Constitution;....
4. Wherein all power and authority of the Sovereign Independent India, its constituent parts and organs
of government, are derived from the people; and
5. Wherein shall be guaranteed and secured to all the people of India justice, social, economic and
political: equality of status, of opportunity, and before the law; freedom of thought, expression, belief,
faith, worship, vocation, association, and action, subject to law and public morality; and
6. Wherein adequate safeguards shall be provided for minorities, backward and tribal areas, and
depressed and other backward classes; and
7. Whereby shall be maintained the integrity of the territory of the Republic and its sovereign rights on
land, sea, and air according to justice and the law of civilised nations; and
8. This ancient land attains its rightful and honoured place in the world and makes Its full and willing
contribution to the promotion of world peace and the welfare of mankind.
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33. In its strict legal sense the written Constitution of a country is a document which defines the
regular form or system of its government, containing the rules that directly or indirectly affect the
distribution or exercise of the sovereign power of the State and it is thus mainly concerned with the
creation of the three organs of the State - the executive, the legislature and the judiciary, and the
distribution of governmental power among them and the definition of their mutual relation (See Sri
Sankari Prasad Singh Deo v. Union of India and State of Bihar. Hood Phillips' "Constitutional and
Administrative Law", Sixth Edition, page 11; Dicey's "An Introduction to the Study of the Law of the
Constitution", Tenth Edition, page 23; and Jowitt's Dictionary of English Law, Second Edition,
Volume I, page 430).
34. The framers of our Constitution did not, however, want to frame for the Sovereign Democratic
Republic which was to emerge from their labours a Constitution in the strict legal sense. They were
aware that there were other Constitutions which had given expression to certain ideals as the goal
towards which the country should strive and which had defined the principles considered fundamental
to the governance of the country. They were aware of the events that had culminated in the Charter of
the United Nations. They were aware that the Universal Declaration of Human Rights had been
adopted by the General Assembly of the United Nations, for India was a signatory to it. They were
aware that the Universal Declaration of Human Rights contained certain basic and fundamental rights
appertaining to all men. They were aware that these rights were born of the philosophical speculations
of the Greek and Roman Stoics and nurtured by the jurists of ancient Rome. They were aware that
these rights had found expression in a limited form in the accords entered into between the rulers and
their powerful nobles, as for instance, the accord of 1188 entered into between King Alfonso IX and
the Cortes of Leon, the Magna Carta of 1215 wrested from King John of England by his barons on the
Meadow of Runnymede and to which he was compelled to affix his Great Seal on a small island in the
Thames in Buckinghamshire - still called Magna Carta Island, and the guarantees which King Andrew
II of Hungary was forced to give by his Golden Bull of 1822. They were aware of the international
treaties of the mid seventeenth century for safeguarding the right of religious freedom and the rights of
aliens. They were aware of the full blossoming of the concept of Human Rights in the writings of the "
philosophers" such as Voltaire, Rousseau, Diderot, Rayal, d'Alembert and others, and of the concrete
expression given to it in the various Declarations of Rights of the American Colonies (particularly
Virginia) and in the American Declaration of Independence. They were aware that in 1789, during the
early years of the French Revolution, the French National Assembly had in "The Declaration of the
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Rights of Man and of the Citizen" proclaimed these rights in lofty words and that Revolutionary
France had translated them into practice with bloody deeds. They were aware of the treaties entered
into between various States in the nineteenth century providing protection for religious and other
minorities. They were aware that these rights had at last found universal recognition in the Universal
Declaration of Human Rights. They were aware that the first ten Amendments to the Constitution of
the United States of America contained certain rights akin to Human Rights. They knew that the
Constitution of Eire contained a chapter headed "Fundamental Rights" and another headed "Directive
Principles of State Policy". They were aware that the Constitution of Japan also contained a chapter
headed "Rights and Duties of the People". They were aware that the major traditional functions of the
State have been the defence of its territory and its inhabitants against external aggression, the
maintenance of law and order; the administration of justice, the levying of taxes and the collection of
revenue. They were also aware that increasingly, and particularly in modern times, several States have
assumed numerous and wide-ranging functions, especially in the fields of education, health, social
security, control and maintenance of natural resources and natural assets, transport and communication
services and operation of certain industries considered basic to the economy and growth of the nation.
They were also aware that section 8 of Article 1 of the Constitution of the United States of America
contained "a welfare clause" empowering the federal government to enact laws for the overall general
welfare of the people. They were aware that countries such as the United States, the United Kingdom
and Germany had passed social welfare legislation.
35. The framers of our Constitution were men of vision and ideals, and many of them had suffered in
the cause of freedom. They wanted an idealistic and philosphic base upon which to raise the
administrative superstructure of the Constitution. They, therefore, headed our Constitution with a
preamble which declared India's goal and inserted Parts III and IV in the Constitution.
36. The Preamble to the Constitution, as amended by the Constitution (Forty-second Amendment) Act,
1976, proudly proclaims:
WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN
SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:
JUSTICE, social, economic and political;
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LIBERTY of thought, expression, belief, faith and worship;
EQUALITY of status and of opportunity; and to promote among them all
FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation;
IN OUR CONSTITUENT ASSEMBLY this twenty sixth day of November, 1949, do HEREBY
ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION.
37. Part III of the Constitution gives a Constitutional mandate for certain Human Rights - called
Fundamental Rights in the Constitution - adapted to the needs and requirement of a country only
recently freed from foreign rule and desirous of forging a strong and powerful nation capable of taking
an equal place among the nations of the world. It also provides a Constitutional mode of enforcing
them. Amongst these Rights is the one contained in Article 14 which provides :
14. Equality before law-
The State shall not deny to any person equality before the law or the equal protection of the laws
within the territory of India.
38. Part IV of the Constitution prescribes the Directive Principles of State Policy. These Directive
Principles have not received the same Constitutional mandate for their enforcement as the
Fundamental Rights have done. In the context of the Welfare State which is the goal of our
Constitution, Articles 37 and 38(1) are important. They are as follows:
37. Application of the Principles contained in this Part. -
The provisions contained in this Part shall not be enforceable by any court, but the principles therein
laid down are nevertheless fundamental in the governance of the country and it shall be the duty of the
State to apply these principles in making laws.
38. (1) State to secure a social order for the promotion of welfare of the people. -
(1) The State shall strive to promote the welfare of the people by securing and protecting as effectively
as it may a social order in which justice, social, economic and political, shall inform all the institutions
of the national life.
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Under clause (a) of Article 39, the State is, in particular, to direct its policy towards securing that the
citizens, men and women equally, have the right to an adequate means of livelihood. Article 41 directs
that the State shall, within the limits of its economic capacity and development, make effective
provision for securing the right to work.
39. The difference between Part III and Part IV is that while Part III prohibits the State from doing
certain things (namely, from infringing any of the Fundamental Rights), Part IV enjoins upon the State
to do certain things. This duty, however, is not enforceable in law but none the less the Court cannot
ignore what has been enjoined upon the State by Part IV, and though the Court may not be able
actively to enforce the Directive Principles of State Policy by compelling the State to apply them in the
governance of the country or in the making of laws, the Court can, if the State commits a breach of its
duty by acting contrary to these Directive Principles, prevent it from doing so.
40. In the working of the Constitution it was found that some of the provisions of the Constitution
were not adequate for the needs of the country or for ushering in a Welfare State and the constituent
body empowered in that behalf amended the Constitution several times. By the very first amendment
made in the Constitution, namely, by the Constitution (First Amendment) Act, 1951, Clause (6) of
Article 19 was amended with retrospective effect. Under this amendment, Sub-clause (g) of Clause (1)
of Article 19 which guarantees to all citizens the right to carry on any occupation, trade or business,
was not to prevent the State from making any law relating to the carrying on by the State, or by a
corporation owned or controlled by the State, of any trade, business, industry or service, whether to the
exclusion, complete or partial, of citizens or otherwise. This amendment also validated the operation of
all existing laws in so far as they had made similar provisions. Article 298, as originally enacted,
provided that the executive power of the Union and of each State was to extend, subject to any law
made by the appropriate Legislature, to the grant, sale, disposition or mortgage of any property held
for the purposes of the Union or of such State, as the case may be, and to the purchase or acquisition of
property for those purposes respectively, and to the making of contracts; and it further provided that all
property acquired for the purposes of the Union or of a State was to vest in the Union or in such State,
as the case may be. Article 298 was substituted by the Constitution (Seventh Amendment) Act, 1956.
As substituted, it provides as follows:
298. Bower to carry on trade, etc. -
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The executive power of the Union and of each State shall extend to the carrying on of any trade or
business and to the acquisition, holding and disposal of property and the making of contracts for any
purpose:
Provided that -
(a) the said executive power of the Union shall, in so far as such trade or business or such purpose is
not one with respect to which Parliament may make laws, be subject in each State to legislation by the
State; and
(b) the said executive power of each State shall, in so far as such trade or business or such purpose is
not one with respect to which the State Legislature may make laws, be subject to legislation by
Parliament.
Article 298, as so substituted, therefore, expands the executive power of the Union of India and of each
of the States which collectively constitute the Union to carry on any trade or business. By extending
the executive power of the Union and of each of the States to the carrying on of any trade or business,
Article 298 does not, however, convert either the Union of India or any of the States which collectively
form the Union into a merchant buying and selling goods or carrying on either trading or business
activity, for the executive power of the Union and of the States, whether in the field of trade or
business or in any other field, is always subject to Constitutional limitations and particularly the
provisions relating to Fundamental Rights in Part III of the Constitution and is exerciseable in
accordance with and for the furtherance of the Directive Principles of State Policy prescribed by Part
IV of the Constitution.
41. The State is an abstract entity and it can, therefore, only act through its agencies or
instrumentalities, whether such agency or instrumentality be human or juristic. The trading and
business activities of the State constitute "public enterprise". The structural forms in which the
Government operates in the field of public enterprise are many and varied. These may consist of
Government departments, statutory bodies, statutory corporations, Government companies, etc. In this
context, we can do no better than cite the following passage from "Government Enterprise - A
Comparative Study" by W. Friedmann and J.F. Garner, at page 507:
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The variety of forms in which the various States have, at different times, proceeded to establish public
enterprises is almost infinite, but three main types emerge to which almost every public enterprise
approximates: (1) departmental administration; (2) the joint stock company controlled completely or
partly by public authority; and finally (3) the public corporation proper, as a distinct type of
corporation different from the private law company. Each of these three types will be briefly analysed
in a comparative perspective.
As the tasks of Government multiplied, as a result of defence needs, post-war crises, economic
depressions and new social demands, the framework of civil service administration became
increasingly insufficient for the handling of the new tasks which were often of a specialised and highly
technical character. At the same time, 'bureaucracy' came under a cloud. In Great Britain the late Lord
Hewart had written of 'the new despotism,' and Dr. C.K. Allen of 'bureaucracy triumphant'. In France
the Confederation General du Travail (CGT) had stated in its Programme in 1920 that 'We do not wish
to increase the functions of the State itself nor strengthen a system which would subject the basic
industry to a civil service regime, with all its lack of responsibility and its basic defects, a process
which would subject the forces of production to a fiscal monopoly....'This distrust of government by
civil service, justified or not, was a powerful factor in the development of a policy of public
administration through separate corporations which would operate largely according to business
principles and be separately accountable. In the common law countries, where the Government still
enjoys considerable immunities and privileges in the fields of legal responsibility, taxation, or the
binding force of statutes, other considerations played their part. It seemed necessary to create bodies
which, if they were to compete on fair terms in the economic field, had to be separated and distinct
from the Government as regards immunities and privileges.
42. The immunities and privileges possessed by bodies so set up by the Government in India cannot,
however, be the same as those possessed by similar bodies established in the private sector because the
setting up of such bodies is referable to the executive power of the Government under Article 298 to
carry on any trade or business. As pointed out by Mathew, J., in Sukhdev Singh and Ors. v. Bhagatram
Sardar Singh Raghuvanshi and Anr., "The governing power wherever located must be subject to the
fundamental constitutional limitations". The privileges and immunities of these bodies, therefore, are
subject to Fundamental Rights and exercisable in accordance with and in furtherance of the Directive
Principles of State Policy.
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43. It is in the context of what has been stated above that we will now review the authorities cited at
the Bar. When we consider these authorities, we will see how as Constitutional thinking developed and
the conceptual horizon widened, new vistas, till then shrouded in the mist of conventional legal
phraseology and traditional orthodoxy, opened out to the eye of judicial interpretation, and many
different facets of several Articles of the Constitution, including Article 12 and 14, thitherto
unperceived, became visible. There, however, still remain vistas yet to be opened up, veils beyond
which we today cannot see to be lifted, and doors to which we still have found no key to be unlocked.
44. In Rai Sahib Ram Jawaya Kapur and Ors. v. The State of Punjab, the State of Punjab, which used
to select books published by private publishers for prescribing them as text-books and for this purpose
used to invite offers from publishers and authors, altered that practice and amended the notification in
that behalf so that thereafter only authors were asked to submit their books for approval as text-books.
The validity of this notification was challenged inter alia on the ground that the executive power of a
State under Article 162 extended only to executing the laws passed by the legislature or supervising
the enforcement of such laws. Under Article 162, subject to the provisions of the Constitution, the
executive power of a State extends to the matters with respect to which the Legislature of the State has
power to make laws, namely, the matters enumerated in the State List (List II) in the Seventh Schedule
to the Constitution. Under the proviso to that Article, in any matter with respect to which the
Legislature of a State and Parliament have power to make laws, that is, the matters enumerated in the
Concurrent List (List III) in the Seventh-Schedule to the Constitution, the executive power of the State
is to be subject to, and limited by, the executive power expressly conferred by the Constitution or by
any law made by Parliament upon the Union or authorities thereof. Under Article 154(1), the executive
power of the State is vested in the Governor and is to be exercised by him either directly or through
officers subordinate to him in accordance with the Constitution. The corresponding provisions as
regards the executive power of the Union of India are contained in Article 73 and Article 53(1).
Repelling the above contention, Mukherjea, C.J., who spoke for the Constitution Bench of the Court
observed (at page 230):
A modern State is certainly expected to engage in all activities necessary for the promotion of the
social and economic welfare of the community.
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The following passage (at pages 235-36) from the judgment of the Court in that case with respect to
the meaning of the expression "executive function" is instructive and requires to be reproduced:
It may not be possible to frame an exhaustive definition of what executive function means and implies.
Ordinarily the executive power connotes the residue of governmental functions that remain after
legislative and judicial functions are taken away. The Indian Constitution has not indeed recognised
the doctrine of separation of powers in its absolute rigidity but the functions of the different parts or
branches of the Government have been sufficiently differentiated and consequently it can very well be
said that our Constitution does not contemplate assumption, by one organ or part of the State, of
functions that essentially belong to another. The executive indeed can exercise the powers of
departmental or subordinate legislation when such powers are delegated to it by the legislature. It can
also, when so empowered, exercise judicial functions in a limited way. The executive Government,
however, can never go against the provisions of the Constitution or of any law. This is clear from the
provisions of Article 154 of the Constitution but, as we have already stated, it does not follow from
this that in order to enable the executive to function there oust be a law already in existence and
that the powers of the executive are limited merely to the carrying out of these laws.
45. In Rajasthan State Electricity Board, Jaipur v. Mohan Lal and Ors. a Constitution Bench of this
Court by a majority held that the Electricity Board of Rajasthan constituted under the Electricity
(supply) Act, 1948 (Act No. 54 of 1948) was "the State" as defined in Article 12 because it was "other
authority" within the meaning of that Article. The Court held that the expression "other authority" was
wide enough to include within it every authority created by a statute, on which powers are conferred to
carry out governmental or quasi-governmental functions and functioning within the territory of India
or under the control of the Government of India and the fact that some of the powers conferred may be
for the purpose of carrying on commercial activities is not at all material because under Articles
19(l)(g) and 298 even the State is empowered to carry on any trade or business. The Court further held
that in interpreting the expression "other authority" the principle of ejusdem generis should not be
applied, because, for the application of that rule, there must be distinct genus or category running
through the bodies previously named; and the bodies specially named in Article 12 being the
Executive Government of the Union and the States, the Legislatures of the Union and the States and
local authorities, there is no common genus running through these named bodies, nor could these
bodies be placed in one single category on any rational basis.
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46. Praga Tools Corporation v. C.A. Imanual and Ors. was a case heavily relied upon by the
Appellants. Praga Tools Corporation was a company incorporated under the Companies Act, 1913, and
therefore, a company within the meaning of the Companies Act, 1956. At the material time the Union
of India held fifty-six per cent of the shares of the company and the Government of Andhra Pradesh
held thirty-two per cent of its shares, the balance of twelve per cent shares being held by private
individuals. As being the largest shareholder, the Union of India had the power to nominate the
company's directors. The company had entered into two settlements with its workmen's union. These
settlements were arrived at and recorded in the presence of the Commissioner of Labour.
Subsequently, the company entered into another agreement with the union, the effect of which was to
enable the company, notwithstanding the earlier two settlements, to retrench ninety-two of its
workmen. Some of the affected workmen thereupon filed a writ petition under Article 226 of the
Constitution in the Andhra Pradesh High Court challenging the validity of the subsequent agreement.
A learned Single Judge of the High Court dismissed the petition on merits. In appeal, a Division Bench
of that High Court held that the company being one registered under the Companies Act and not
having any statutory duty or function to perform was not one against which a writ for mandamus or
any other writ could lie. The Division Bench, however, held that though the writ petition was not
maintainable the High Court could grant a declaration in favour of the petitioners that the impugned
agreement was illegal and void and granted the said declaration. In appeal by the company, a two-
Judge Bench of this Court held that the Company being a non-statutory body and one incorporated
under the companies Act there was neither a statutory nor a public duty imposed on it by a statute in
respect of which enforcement could be sought by means of a mandamus. So far as declaration given by
the Division Bench of the High Court was concerned, the Court held (at page 780):
In our view once the writ petition was held to be misconceived on the ground that it could not lie
against a company which was neither a statutory company nor one having public duties or
responsibilities imposed on it by a statute, no relief by way of a declaration as to invalidity of an
impugned agreement between it and its employees could be granted. The High Court in these
circumstances ought to have left the workmen to resort to the remedy available to them under the
Industrial Disputes Act by raising an industrial dispute thereunder.
Though this case was strongly relied upon by the Appellants, we fail to see how it is relevant to the
submissions advanced by the Appellants. The subsequent agreement enabling the company to retrench
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some of its workmen was challenged on the ground that it was in breach of the earlier settlements
entered into between the company and the workmen's union. No question of violation of any of the
Fundamental Rights was at all raised in that case. The only question which fell for determination was
whether a writ of mandamus can issue to compel the performance of the earlier settlements or to
restrain the enforcement of the impugned subsequent agreement and the dispute, therefore, was one
which fell within the scope of the Industrial Disputes Act, 1947 (Act No. 14 of 1947).
47. In State of Bihar v. Union of India and Anr. the State of Bihar filed nine suits under Article 131 in
connection with the delayed delivery of iron and steel materials for the construction work of the
Gandak project. In all these suits the first defendant was the Union of India while the second defendant
in six of these suits was the Hindustan Steel Ltd. and in the remaining three, the Indian Iron and Steel
Company Ltd. This Court held that the specification of the parties in Article 131 was not of an
extensive kind and excluded the idea of a private citizen, a firm or a corporation figuring as a disputant
either alone or even along with a State or with the Government of India in the category of a party to
the dispute under Article 131. The Court further held that the enlarged definition of the expression "the
State" given in Parts III and IV of the Constitution did not apply to Article 131 and, therefore, a body
like the Hindustan Steel Ltd. could not be considered as "a State" for the purpose of Article 131. We
fail to see in what way this decision is at all relevant to the point. The question before the Court in that
case was whether the Hindustan Steel Ltd. or the Indian Iron and Steel Company Ltd. was a State to
enable a suit to be filed against it under Article 131 and not whether either of these companies fell
within the scope of the definition of the expression "the State" in Article 12.
48. Another authority relied upon by the Appellants was S.L. Agarwal v. General Manager, Hindustan
Steel Ltd. The facts of that case and the contentions raised thereunder show that this authority is
equally irrelevant. In that case an employee of the Hindustan Steel Ltd., whose services were
terminated, filed a petition under Article 226 claiming that such termination was wrongful as it was
really by way of punishment as the provisions of Article 311(2) of the Constitution had not been
complied with. This Court held that the protection of Clause (2) of Article 311 was available only to
the categories of persons mentioned in that clause and that though the appellant held a civil post as
opposed to a military post, it was not a civil post under the Union or a State and, therefore, he could
not claim the protection of Article 311(2). The contention which was raised on behalf of the appellant
was that as Hindustan Steel Ltd. was entirely financed by the Government and its management was
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directly the responsibility of the Government, the post was virtually under the Government of India.
This contention was rejected by the Court holding that the company had its independent existence and
by law relating to corporations it was distinct from its members and, therefore, it was not a department
of the Government nor were its employees servants holding posts under the Union. No question arose
in that case whether the company was "the State" within the meaning of Article 12 and all that was
sought to be contended was that it was a department of the Government.
49. In Sabhajit Tewary v. Union of India and Ors. this Court held that the Council of Scientific and
Industrial Research which was a society registered under the Societies Registration Act was not an
authority within the meaning of Article 12 and, therefore, certain letters written by it to the petitioner
with respect to his remuneration could not be challenged as being discriminatory and violative of
Article 14. The contention raised in that case was that the rules governing the said Council showed that
it was really an agent of the Government. This Court rejected the said contention in these words (at
page 617):
This contention is unsound. The Society does not have a statutory character like the Oil and Natural
Gas Commission, or the life Insurance Corporation or Industrial Finance Corporation. It is a society
incorporated in accordance with the provisions of the societies Registration Act. The fact that the
Prime Minister is the President or that the Government appoints nominees to the Governing Body or
that the Government may terminate the membership will not establish anything more than the fact that
the Government takes special care that the promotion, guidance and co-operation of scientific and
industrial research, the institution and financing of specific researches, establishment or development
and assistance to special institutions or departments of the existing institutions for scientific study of
problems affecting particular industry in a trade, the utilisation of the result of the researches
conducted under the auspices of the Council towards the development of industries in the country are
carried out in a responsible manner.
50. We now come to a case of considerable importance, namely, Sukhdev Singh and Ors. v.
Bhagatram Sardar Singh Raghuvanshi and Anr., Two questions fell to be determined in this case,
namely, (i) whether statutory corporations are comprehended within the expression "the State" as
defined in Article 12, and (ii) whether the regulations framed by a statutory corporation in exercise of
the power conferred by the statute creating the corporation have the force of law. The majority of a
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Constitution Bench of this Court answered both these questions in the affirmative. The statutory
corporations before the Court in that case were the Oil and Natural Gas Commission established under
the Oil and Natural Gas Commission Act, 1956, the Life Insurance Corporation established under the
Life Insurance Corporation Act, 1956, and the Industrial Finance Corporation established under the
Industrial Finance Corporation Act, 1948. Ray, C.J., speaking for himself and Chandrachud and Gupta,
JJ., pointed out (at page 634) that "The State undertakes commercial functions in combination with
Governmental functions in a welfare State." The majority held that "the State" as defined in Article 12
comprehends bodies created for the purpose of promoting economic interests of the people and the
circumstance that statutory bodies are required to carry on some activities of the nature of trade or
commerce does not indicate that they must be excluded from the scope of the expression "the State",
for a public authority is a body which has public or statutory duties to perform and which performs
those duties and carries on its transactions for the benefit of the public and not for private profit and by
that fact such an authority is not excluded from making a profit for the public benefit. Mathew, J., in
his concurring judgment held that a finding of State financial support plus an unusual degree of control
over the management and policies might lead one to characterize an operation as State action. The
learned Judge observed (at page 651-52):
Institutions engaged in matters of high public interest or performing public functions are by virtue of
the nature of the function performed government agencies. Activities which are too fundamental to the
society are by definition too important not to be considered government function. This demands the
delineation of a theory which requires government to provide all persons with all fundamentals of life
and the determinations of aspects which are fundamental. The State today has an affirmative duty of
seeing that all essentials of life are made available to all persons. The task of the State today is to make
possible the achievement of a Good life both by removing obstacles in the path of such achievement
and in assisting individual in realizing his ideal of self-perfection. Assuming that indispensable
functions are government functions, the problem remains of defining the line between fundamentals
and non-fundamentals. The analogy of the doctrine of 'business affected with a public interest'
immediately comes to mind.
After referring to the relevant provisions of the Acts under which the above statutory bodies were
established, Mathew, J., continued (at pages 654-5) :
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The fact that these corporations have independent personalities in the eye of law does not mean that
they are not subject to the control of government or that they are not instrumentalities of the
government. These corporations axe instrumentalities or agencies of the state for carrying on
businesses which otherwise would have been run by the state departmentally. If the state had chosen to
carry on these businesses through the medium of government departments, there would have been no
question that actions of these departments would be 'state actions'. Why then should actions of these
corporations be not state actions?....
The ultimate question which is relevant for our purpose is whether such a corporation is an agency or
instrumentality of the government for carrying on a business for the benefit of the public. In other
words, the question is, for whose benefit was the corporation carrying on the business? When it is
seen from the provisions of that Act that on liquidation of the Corporation, its assets should be divided
among the shareholders, namely, the Central and State governments and others, if any, the implication
is clear that the benefit of the accumulated income would go to the Central and State Governments.
Nobody will deny that an agent has a legal personality different from that of the principal. The fact that
the agent is subject to the direction of the principal does not mean that he has no legal personality of
his own. Likewise, merely because a corporation has legal personality of its own, it does not
follow that the corporation cannot be an agent or instrumentality of the state, if it is subject to
control of government in all important matters of policy. No doubt, there might be some distinction
between the nature of control exercised by principal over agent and the control exercised by
government over public corporation. That, I think is only a distinction in degree. The crux of the
matter is that public corporation is a new type of institution which has sprung from the new
social and economic functions of government and that it therefore does not neatly fit into old
legal categories. Instead of forcing it into them, the later should be adapted to the needs of
changing times and conditions.
51. Various aspects of the question which we have to decide were exhaustively considered by this
Court in Ramana Dayaram Shetty v. The International Airport Authority of India and Ors.. In that case
the Court observed (at page 1032), "Today the Government, as a welfare State, _is the regulator and
dispenser of special services and provider of a large number of benefits, including jobs, contracts,
licences, quotas, mineral rights, etc." The question in that case was whether the International Airport
Authority constituted under the International Airports Authority Act, 1971, came within the meaning
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of the expression "The State" in Article 12. Under the said Act, the Authority was a body corporate
having perpetual succession and a common seal and was to consist of a Chairman and certain other
members appointed by the Central Government. The Central Government had the power to terminate
the appointment of or remove any member from the Board. Although the authority had no share capital
of its own, capital needed by it for carrying out its functions was to be provided only by the Central
Government. While considering the question whether such a body corporate was included within the
expression "the State", this Court said (at page 1036) :
A corporation may be created in one of two ways. It may be either established by statute or
incorporated under a law such as the Companies Act 1956 or the Societies Registration Act 1860.
Where a Corporation is wholly controlled by Government not only in its policy making but also in
carrying out the functions entrusted to it by the law establishing it or by the Charter of its
incorporation, there can be no doubt that it would be an instrumentality or agency of Government. But
ordinarily where a corporation is established by statute, it is autonomous in its working, subject only to
a provision, often times made, that it shall be bound by any directions that may be issued from time to
time by Government in respect of policy matters. So also a corporation incorporated under law is
managed by a board of directors or committee of management in accordance with the provisions of the
statute under which it is incorporated. When does such a corporation become an instrumentality or
agency of Government?
After considering various factors and the case law on the subject, the Court thus summed up the
position :
It will thus be seen that there are several factors which may have to be considered in determining
whether a corporation is an agency or instrumentality of Government. We have referred to some of
these factors and they may be summarised as under: Whether there is any financial assistance given by
the State, and if so what is the magnitude of such assistance whether there is any other form of
assistance, given by the State, and if so, whether it is of the usual kind or it is extraordinary, whether
there is any control of the management and policies of the corporation by the State and what is the
nature and extent of such control, whether the corporation enjoys State conferred or State protected
monopoly status and whether the functions carried out by the corporation are public functions closely
related to governmental functions. This particularisation of relevant factors is however not exhaustive
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and by its very nature it cannot be, because with increasing assumption of new tasks, growing
complexities of management and administration and the necessity of continuing adjustment in relations
between the corporation and Government calling for flexibility, adaptability and innovative skills, it is
not possible to make an exhaustive enumeration of the tests which would invariably and in all cases
provide an unfailing answer to the question whether a corporation is governmental instrumentality or
agency. Moreover even amongst these factors which we have described, no one single factor will yield
a satisfactory answer to the question and the court will have to consider the cumulative effect of these
various factors and arrive at its decision on the basis of a particularised inquiry into the facts and
circumstances of each case.
In the course of its judgment, the Court distinguished the case of Praga Tools Corporation as also the
decision in S.L. Agarwal v. General Manager, Hindustan Steel Ltd. in very much the same manner as
we have done. So far as the case of Sabbajit Tewary v. Union of India and Ors. is concerned, the Court
said as follows:
Lastly, we must refer to the decision in Sarabbajit Tewari v. Union of India and Ors. where the
question was whether the Council of Scientific and Industrial Research was an 'authority' within the
meaning of Article 12. The Court no doubt took the view on the basis of facts relevant to the
Constitution and functioning of the Council that it was not an 'authority', but we do not find any
discussion in this case as to what are the features which must be present before a corporation can be
regarded as an 'authority' within the meaning of Article 12. This decision does not lay down any
principle or test for the purpose of determining when a corporation can be said to be an 'authority'. If at
all any test can be gleaned from the decision, it is whether the Corporation is "really an agency of the
Government". The Court seemed to hold on the facts that the Council was not an agency of the
Government and was, therefore, not an 'authority'.
52. In Managing Director, Uttar Pradesh Warehousing Corporation and Anr. v. Vinay Narayan
Vajpayee an employee of the corporation successfully challenged his dismissal from service. The
appellant corporation was established under the Agricultural Produce (Development and Warehousing)
Corporation Act, 1956, and was deemed to be a Warehousing Corporation for a State under the
Warehousing Corporation Act, 1962. In his concurring judgment, Chinnappa Reddy, J.,said (at page
784) :
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I find it very hard indeed to discover any distinction, on principle between a person directly under
the employment of the Government and a person under the employment of an agency or
instrumentality of the Government or a Corporation, set up under a statute or incorporated but
wholly owns by the Government. It is self evident and trite to say that the function of the State has
long since ceased to be confined to the preservation of the public peace, the exaction of taxes and the
defence of its frontiers. It is now the function of the State to secure 'social, economic and political
justice', to preserve 'liberty of thought, expression, belief, faith and worship', and to ensure 'equality of
status and of opportunity'.
53. In Ajay Hasia etc. v. Khalid Mujib Sehravardi and Ors. etc. the Regional Engineering College
which was established and administered and managed by a society registered under the Jammu and
Kashmir Registration of Societies Act, 1898, was held to be "the State" within the meaning of Article
12. In that case the Court said (at page 91):
It is undoubtedly true that the corporation is a distinct juristic entity with a corporate structure of its
own and it carries on its functions on business principles with a certain amount of autonomy which is
necessary as well as useful from the point of view of effective business management, but behind the
formal ownership which is cast in the corporate mould, the reality is very much the deeply pervasive
presence of the Government. It is really the Government which acts through the instrumentality or
agency of the corporation and the juristic veil of corporate personality worn for the purpose of
convenience of management and administration cannot be allowed to obliterate the true nature of the
reality behind which is the Government. Now it is obvious that if a corporation is an
instrumentality or agency of the Government, it must be subject to the same limitations in the
field of constitutional law as the Government itself, though in the eye of the law it would be a
distinct and independent legal entity. If the Government acting through its officers is subject to
certain constitutional limitations, it must follow a fortiorari that the Government acting through the
instrumentality or agency of a corporation should equally be subject to the same limitations.
After referring to various authorities, the court summarized the relevant tests which are to be gathered
from the International Airport Authority of India's case as follows (at pages 96-7):
(1) 'One thing is clear that if the entire share capital of the corporation is held by Government it would
go a long way towards indicating that the corporation is an instrumentality or agency of Government.'
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(2) 'Where the financial assistance of the State is so much as to meet almost entire expenditure of the
corporation, it would afford some indication of the corporation being impregnated with governmental
character.'
(3) 'It may also be a relevant factor. . . whether the corporation enjoys monopoly status which is the
State conferred or State protected.'
(4) 'Existence of deep and pervasive State control may afford an indication that the Corporation is a
State agency or instrumentality.'
(5) 'If the functions of the corporation of public importance and closely related to governmental
functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of
Government'.
54. The right, title and interest of the Burmah Shell Oil Storage and Distributing Company of India
Limited in relation to its undertakings in India were transferred to and vested in the Central
Government under Section 3 of the Burmah Shell (Acquisition of Undertakings in India) Act, 1976.
Thereafter, under Section 7 of the said Act, the right, title, interest and liabilities of the said company
which had become vested in the Central Government, instead of continuing so to vest in it, were
directed to be vested in a Government company, as defined by Section 617 of the Companies Act,
1956, namely, Bharat Petroleum. In Son Prakash Bekhl v. Union of India and Anr. this Court held that
Bharat Petroleum fell within the meaning of the expression "the State" used in Article 12. The
following passage (at pages 124-5) from the judgment in that case is instructive and requires to be
reproduced:
For purposes of the Companies Act, 1956, a government company has a distinct personality which
cannot be confused with the State. Likewise, a statutory corporation constituted to carry on a
commercial or other activity is for many purposes a distinct juristic entity not drowned in the sea of
State, although, in substance, its existence may be but a projection of the State. What we wish to
emphasise is that merely because a company or other legal person has functional and jural
individuality for certain purposes and in certain areas of law, it does not necessarily follow that
for the effective enforcement of fundamental rights under our constitutional scheme, we should not
scan the real character of that entity; and if it is found to be a mere agent or surrogate of the State, in
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fact owned by the State, in truth controlled by the State and in effect an incarnation of the State,
constitutional lawyers must not blink at these facts and frustrate the enforcement of fundamental
rights despite the inclusive definition of Article 12 that any authority controlled by the Government
of India is itself State. Law has many dimensions and fundamental facts must govern the applicability
of fundamental rights in a given situation.
55. At the first blush it may appear that the case of S.S. Dhanoa v. Municipal Corporation, Delhi and
Ors. runs counter to the trend set in the authorities cited above but on a closer scrutiny it turns out not
to be so. The facts in that case were that the Cooperative Store Limited, which was a society registered
under the Bombay Cooperative Societies Act, 1925, had established and was managing Super Bazars
at different places including at Connaught Place in New Delhi. Under Section 23 of the said Act, the
society was a body corporate by the name under which it was registered, with perpetual succession and
a common seal. The Super Bazars were not owned by the Central Government but were owned and
managed by the said society, though pursuant to an agreement executed between the said society and
the Union of India, the Central Government had advanced a loan of rupees forty lakhs to the said
society for establishing and managing Super Bazars and it also held more than ninety-seven per cent of
the shares of the said society. The appellant who was a member of the Indian Administrative Service
was sent on deputation as the General Manager of the Super Bazar at Connaught Place. He along with
other officials of the Super Bazar were prosecuted under the Prevention of Food Adulteration Act,
1954. He raised a preliminary objection before the Metropolitan Magistrate, Delhi, before whom he
was summoned to appear that no cognizance of the alleged offence could be taken by him for want of
sanction under Section 197 of the CrPC, 1973. On his contention being rejected, he appealed to this
Court. Under the said Section 197, when any person who is or was inter alia public servant not
removable from his office save by or with the sanction of the Government is accused of any offence
alleged to have been committed by him while acting or purporting to act in the discharge of his official
duty, no court is to take cognizance of such offence except with the previous sanction in the case of a
person who is employed or, as the case may be, was at the time of commission of the alleged offence
employed, in connection with the affairs of the Union or of the Central Government. As stated in the
opening paragraph of the judgment in the said case, the question before the Court was whether the
appellant was a public servant within the meaning of Clause Twelfth of Section 21 of the Indian Penal
Code for purposes of Section 197 of the CrPC. The relevant provisions of Clause Twelfth of Section
21 are as follows:
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21. Public servant. -
The words 'public servant' denote a person falling under any of the descriptions hereinafter following,
namely:
xxxxxxx
Twelfth. - Every person -
(a) in the service or pay of the Government or remunerated by fees or commission for the performance
of any public duty by the Government;
(b) in the service or pay of a local authority, a corporation established by or under a General,
Provincial or State Act or a Government company as defined in Section 617 of the Companies Act,
1956.
The Court pointed out that Clause Twelfth did not use the words "body corporate" and, therefore, the
question was whether the expression "corporation" contained therein taken in collocation of the words
"established by or under a Central or Provincial or State Act" would bring within its sweep a
cooperative society. The Court said (at page 437):
In our opinion, the expression 'corporation' must, in the context, mean a corporation created by the
legislature and not a body or society brought into existence by an act of a group of individuals. A
cooperative society is, therefore, not a corporation established by or under an Act of the Central or
State Legislature.
The Court then proceeded to point out that a corporation is an artificial being created by law, having a
legal entity entirely separate and distinct from the individuals who compose it, with the capacity of
continuous existence and succession. The Court held that corporations established by or under an Act
of Legislature can only mean a body corporate which owes its existence, and not merely its corporate
status, to the Act. An association of persons constituting themselves into a company under the
Companies Act or a society under the Societies Registration Act owes its existence not to the act of
Legislature but to acts of parties, though it may owe its status as a body corporate to an Act of
Legislature. The observation of the Court in that case with respect to companies were not intended by
it to apply to Government companies as defined in Section 617 of the Companies Act, 1956, for by the
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express terms of Sub-clause (b) of Clause Twelfth of Section 21 of the Indian Penal Code every person
in the service or pay of a Government company as defined in Section 617 of the Companies Act, 1956,
is a public servant. The second part of the question which the Court was called upon to decide in that
case was whether the appellant can be said to be a person who was employed in connection with the
affairs of the Union. The Court held that the Super Bazar was not an instrumentality of the State and,
therefore, it could not be said that the appellant was employed in connection with the affairs of the
Union within the meaning of the Section 197 of the CrPC. This observation was again made with
reference to the argument that the appellant was employed in connection with the affairs of the Union.
He undoubtedly was not employed in connection with the affairs of the Union just as a person
employed in a corporation is not and cannot be said to be holding a civil post under the Union or a
State as held by this Court in S.L. Agarwal v. General Manager, Hindustan Steel Ltd. In S.S. Dhanoa's
case the Court was not called upon to decide and did not decide whether a Government company was
an instrumentality or agency of the State for the purposes of Parts III and IV of the Constitution and
thus, "the State" within the meaning of that expression as used in Article 12 of the Constitution.
56. The Indian Statistical Institute is a society registered under the Societies Registration Act, 1860,
and is governed by the Indian Statistical Institute Act, 1959, under which its control completely vests
in the Union of India. The society is also wholly financed by the Union of India. In B.S. Minhas v.
Indian Statistical Institute and Ors. this Court, following Ajay Hasia's case, held that the said society
was an "authority" within the meaning of Article 12 and hence a writ petition under Article 32 filed
against it was competent and maintainable. In Manmohan Singh Jaitla v. Commissioner, Union
Territory of Chandigarh and Ors. this Court once again following Ajay Hasia's case held that an aided
school which received a Government grant of ninety-five per cent was an "authority" within the
meaning of Article 12 and, therefore, amenable to the writ jurisdiction both of this Court and the High
Court.
57. In Workmen of Hindustan Steel Ltd. and Anr. v. Hindustan Steel Ltd. and Ors. the Court held that
the Hindustan Steel Ltd. was a public sector undertaking and, therefore, was "other authority" within
the meaning of that expression in Article 12.
58. In P.K. Ramachandra Iyer and Ors. v. Union of India and Ors. 1984 (2) S.C.R. 141 once again
following Ajay Hasia's case, the Court held that the Indian Council of Agricultural Research which
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was a society registered under the Societies Registration Act was an instrumentality of the State falling
under the expression 'other authority' within the meaning of Article 12. The said Council was wholly
financed by the Government. Its budget was voted upon as part of the expenses incurred in the
Ministry of Agriculture. The control of the Government of India permeated through all its activities.
Since its inception, it was set up to carry out the recommendations of the Royal Commission on
Agriculture. According to this Court, these facts were sufficient to make the said Council an
instrumentality of the State.
59. In A.L. Kalra v. Project and Equipment Corporation of India Ltd. 1984 (3) S.C.R. 316 the said
corporation was held to be an instrumentality of the Central Government and hence falling within
Article 12. The Project and Equipment Corporation of India Ltd. was a wholly owned subsidiary
company of the State Trading Corporation but was separated in 1976 and thereafter functioned as a
Government of India undertaking. The finding that it was an instrumentality of the Central
Government was, however, based upon concession made by the said corporation.
60. In West Bengal State Electricity Board and Ors. v. Desh Bandhu Ghosh and Ors. the West Bengal
State Electricity Board was held to be an instrumentality of the State.
61. As pointed out earlier, the Corporation which is the First Appellant in these Appeals is not only a
Government company as defined in Section 617 of the Companies Act, 1956, but is wholly owned by
three Governments jointly. It is financed entirely by these three Governments and is completely under
the control of the Central Government, and is managed by the Chairman and Board of Directors
appointed by the Central Government and removable by it. In every respect it is thus a veil behind
which the Central Government operates through the instrumentality of a Government company. The
activities carried on by the Corporation are of vital national importance. The Fifth Five Year Plan
1974-79 states that the "outlay of Rs. 14.73 crores for the next two years includes development of
Rajabagan Dockyard and operation of the Central Inland Water Transport Corporation and operation
of river services on the Ganga." According to the Sixth Five Year Plan, 1980-85, inland water
transport is recognized as the cheapest mode of transport for certain kinds of commodities provided the
points of origin and destination are both located on the water front; that it is one of the most energy
efficient modes of transport and has considerable potential in limited areas which have a net-work of
waterways. This Plan further emphasises that in the North-Eastern Region where other transport
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infrastructure is severely lacking and more expensive, inland water transport has an additional
importance as an instrument of development. The said Plan goes on to state, "In the Central Sector, an
outlay of Rs. 45 crores has been made for IWT. The most important programme relates to the
investment proposal of Central Inland Water Transport Corporation (CIWTC)". The Annual Plan
1984-85 of the Government of India Planning Commission states as follows in paragraph 10.33:
Inland Water Transport
Against the approved outlay of Rs. 12 crores in 1983-84, the revised expenditure in the Central Sector
is estimated at Rs. 10.40 crores. Bulk of the allocation was for the scheme of Central Inland Water
Transport Corporation (CIWTC) for acquisition of vessels, development of Rajabagan Dockyard,
creation of infrastructural facilities etc.
The Annual Report 1984-85 of the Government of India, Ministry of Shipping and Transport, states in
paragraph 6.1.2. as follows:
The Inland Water Transport Directorate is an attached office of this Ministry headed by a Chief
Engineer-cum-Administrator. It has a complement of technical officers who are charged with the
responsibility for planning of techno-economic studies on waterways and conducting hydrographic
surveys. The Directorate has a Regional Office at Patna Two sub-offices of this Regional Office have
also been sanctioned. One of the sub-offices has been set up at Gauhati and arrangements are under
way to set up the other at Varanasi. The Ministry has also under its control a public sector
undertaking, namely, the Central Inland Water Transport Corporation which is the only major
company in inland water transport in the countryy.
As shown by the Statement of Objects and Reasons to the Legislative Bill, which when enacted
became the National Waterway (Allahabad-Halda Stretch of the Ganga-Bhagirathi-Hooghly River)
Act, 1982 (Act No. 49 of 1982), published in the Gazette of India Extraordinary, Part II, Section 2,
dated May 6, 1982, at page 15, the Central Government had set up various committees in view of the
advantages in the mode of inland water transport such as its low cost of transport, energy efficiency,
generation of employment among weaker sections of the community and less pollution. These
committees had recommended that the Central Government should declare certain waterways as
national waterways and assume responsibility for their development. A beginning in respect of this
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matter was thus made by the enactment of the said Act No. 49 of 1982. Under the said Act, the said
stretch was declared to be a national waterway and it was the responsibility of the Central Government
to regulate and develop this national waterway and to secure its efficient utilization for shipping and
navigation. In the Demands for Grant of the Ministry of Shipping and Transport 1985-86 additional
provision was made for an overall increase in Budget Estimates 1985-86 mainly for equity
participation/investment in the Corporation. The activities carried on by the Corporation were thus
described in the said Demands for Grant:
Central Inland Water Transport Corporation - CIWTC runs river services between Calcutta and Assam
and Calcutta and Bangladesh. It undertakes movement of oil from Haldia to Budge-Budge/Paharpur
for the Indian Oil Corporation. It also undertakes lighterage, stevedoring operations, ship building,
ship repairing and other engineering services. To meet cash losses over riverine and engineering
operations, construction of vessel and for purchase of machinery/equipment etc., budget estimates
1985-86 provide Rs. 13.50 crores for loan and Rs.15.41 crores for equity investment in the
Corporation.
Last year Parliament passed the Inland Waterways Authority of India Act, 1985. This Act received the
assent of the President on December 30, 1985. Under this act, an Authority called the Inland
Waterways Authority of India is to be constituted and it is to be a body corporate by the name
aforesaid, having perpetual succession and a common seal, with power, subject to the provisions of the
said Act, to acquire, hold and dispose of property, both movable and immovable, and to contract and to
sue and be sued by the said name. It is to consist of a Chairman, a Vice-Chairman and other persons
not exceeding five. The Chairman, Vice-Chairman and the other persons are to be appointed by the
Central Government. The term of office and other conditions of service of the members of the
Authority are to be prescribed by the rules. The Central Government has also the power to remove any
member of the Authority or to suspend him pending inquiry against him. Under the said act, the
Authority is, in the discharge of its functions and duties, to be bound by such directions on questions of
policy as the Central Government may give in writing to it from time to time.
62. It may be mentioned that neither the said Act nor Act No. 49 of 1982 appears to have been yet
brought into force.
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63. There can thus be no doubt that the Corporation is a Government undertaking in the public sector.
The Corporation itself has considered that it is a Government of India undertaking. The complete
heading of the said Rules is "Central Inland Water Transport Corporation Limited (A Government of
India Undertaking) - Service, Discipline & Appeal Rules - 1979.
64. In the face of so much evidence it is ridiculous to describe the Corporation as a trading company as
the Appellants have attempted to do. What has been set out above is more than sufficient to show that
the activities of the Corporation are of great importance to public interest, concern and welfare, and are
activities of the nature carried on by a modern State and particularly a modern Welfare State.
65. It was, however, submitted on behalf of the Appellants that even though the cases, out of those
referred to above, upon which the Appellants had relied upon were either distinguishable or
inapplicable for determining the question whether a Government company was "the State" or not, the
case of A.L. Kalra v. Project and Equipment Corporation of India Ltd. relied upon by the Respondents
was based upon a concession and there was thus no direct authority on the point in issue. It was further
submitted that all the other cases in which various bodies were held to be "the State" under Article 12
were those which concerned either a statutory authority or a corporation established by a statute.
66. It is true that the decision in A.L. Kalra v. Project and Equipment Corporation of India Ltd. was
based upon a concession made by the respondent corporation but the case of Workmen of Hindustan
Steel Ltd. and Anr. v. Hindustan Steel Ltd. and Ors. was that of a Government company for Hindustan
Steel Limited is a Government company as defined by Section 617 of the Companies Act as pointed
out in Gurugobinda Basu v. Sankari Prasad Ghosal and Ors. The case of the Workmen of Hindustan
Steel Ltd. related to a question whether a disciplinary inquiry was validly dispensed with under
Standing Order No. 32 of the Hindustan Steel Limited. Under that Standing Order, where a workman
had been convicted for a criminal offence in a court of law or where the General Manager was
satisfied, for reasons to be recorded in writing, that it was inexpedient or against the interest of security
to continue to employ the workman, the workman may be removed or dismissed from service without
following the procedure for holding a disciplinary inquiry laid down in Standing Order No. 31. The
order of removal from service of the concerned workman did not set out any reason for the satisfaction
arrived at by the disciplinary authority but merely stated that such authority was satisfied that it was no
longer expedient to employ the particular workman any further and the order then proceeded to
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remove him from the service of the company. In these circumstances, this Court held that the order of
removal from service was bad in law. In the course of its judgment, this Court observed as follows (at
page 560):
It is time for such a public sector undertaking as Hindustan Steel Ltd. to recast S.O. 32 and to bring it
in tune with the philosophy of the Constitution failing which it being other authority and therefore a
State under Article 12 in an appropriate proceeding, the vires of S.O. 32 will have to be examined. It is
not necessary to do so in the present case because even on the terms of S.O. 32 the order made by the
General Manager is unsustainable.
67. The only reason given by the Court for holding that Hindustan Steel Limited was "other authority"
and, therefore, "the State" under Article 12 was the fact that it was a public sector undertaking. In the
entire judgment, there is no other discussion on this point except what is stated in the passage quoted
above. Thus, to the extent that there is no authority of this Court in which the question, namely,
whether a Government company is "the State" within the meaning of Article 12 has been discussed
and decided, the above submission is correct.
68. Does this, therefore, make any difference? There is a basic fallacy vitiating the above submission.
That fallacy lies in the assumption which that submission makes that merely because a point has not
fallen for decision by the Court, it should, therefore, not be decided at any time. Were this assumption
true, the law would have remained static and would have never advanced. The whole process of
judicial interpretation lies in extending or applying by analogy the ratio decidendi of an earlier case to
a subsequent case which differs from it in certain essentials, so as to make the principle laid down in
the earlier case fit in with the new set of circumstances. The sequitur of the above assumption would
be that the Court should tell the suitor that there is no precedent governing his case and, therefore, it
cannot give him any relief. This would be to do gross injustice. Had this not been done, the law would
have never advanced. For instance, had Rylands v. Fletcher 1868 L.R. 3 H.L. 330 not been decided in
the way in which it was, an owner or occupier of land could with impunity have brought and kept on
his land anything likely to do mischief if it escaped and would have himself escaped all liability for the
damage caused by such escape if he had not been negligent. Similarly, but for Donoghue v. Stevenson
1932 A.C. 562 manufacturers would have been immune from liability to the ultimate consumers and
users of their products.
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69. What is the position before us? Is it only one case decided on a concession and another based upon
an assumption that a Government company is "the State" under Article 12?
That is the position in fact but not in substance. As we have seen, authorities constituted under, and
corporations established by, statutes have been held to be instrumentalities and agencies of the
Government in a long catena of decisions of this Court. The observations in several of these decisions,
which have been emphasised by us in the passages extracted from the judgments in those cases, are
general in their nature and take in their sweep all instrumentalities and agencies of the State, whatever
be the form which such instrumentality or agency may have assumed. Particularly relevant in this
connection are the observations of Mathew, J., in Sukhdev Singh and Ors. v. Bhagatram Sardar Singh
Raghuvanshi and Anr., of Bhagwati, J., in the International Airport Authority's case and Ajay Hasia's
case and of Chinnappa Reddy, J., in Uttar Pradesh Warehousing Corporation's case. If there is an
instrumentality or agency of the state which has assumed the garb of a Government company as
defined in Section 617 of the Companies Act, it does not follow that it thereby ceases to be an
instrumentality or agency of the State. For the purposes of Article 12 one must necessarily see through
the corporate veil to ascertain whether behind that veil is the face of an instrumentality or agency of
the State. The Corporation, which is the Appellant in these two Appeals before us, squarely falls
within these observations and it also satisfies the various tests which have been laid down. Merely
because it has so far not the monopoly of inland water transportation is not sufficient to divest it of its
character of an instrumentality or agency of the State. It is nothing but the Government operating
behind a corporate veil, carrying out a governmental activity and governmental functions of vital
public importance. There can thus be no doubt that the Corporation is "the State" within the meaning
of Article 12 of the Constitution.
70. We now turn to the second question which falls for determination in these Appeals, namely,
whether an unconscionable term in a contract of employment entered into with the Corporation, which
is "the State" within the meaning of the expression in Article 12, is void as being violative of Article
14. What is challenged under this head is Clause (i) of Rule 9 of the said Rules. This challenge levelled
by the Respondent in each of these two Appeals succeeded in the High Court.
71. The first point which falls for consideration on this part of the case is whether Rule 9(i) is
unconscionable. In order to ascertain this, we must first examine the facts leading to the making of the
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said Rules and then the setting in which Rule 9(i) occurs. To recapitulate briefly, each of the contesting
Respondents was in the service of the Rivers Steam Navigation Company Limited. Their services were
taken over by the Corporation after the Scheme of Arrangement was sanctioned by the Calcutta High
Court. Under the said Scheme of Arrangement if their services had not been taken over, they would
have been entitled to compensation payable to them, either under the Industrial Disputes Act, 1947, or
otherwise legally admissible, by the said company, and the Government of India was to provide to the
said company the amount of such compensation. Under the letters of appointment issued to these
Respondents, the age of superannuation was fifty-five. Thereafter, Service Rules were framed by the
Corporation in 1970 which were replaced in 1979 by new rules namely, the said Rules. The said Rules
did not apply to employees covered by the Industrial Employment (Standing Orders) Act, 1946, that is,
to workmen, or to those in respect of whom the Board of Directors had issued separate orders. At all
relevant times, these Respondents were employed mainly in a managerial capacity. No separate orders
were issued by the Board of Directors in their case. These Respondents were, therefore, admittedly
governed by the said Rules. Under Rule 10 of the said Rules, they were to retire from the service of the
Corporation on completion of the age of fifty-eight years though in exceptional cases and in the
interest of the Corporation an extension might have been granted to them with the prior approval of the
Chairman-cum-Managing Director and the Board of Directors of the Corporation. The said Rules,
however, provide four different modes in which the services of the Respondents could have been
terminated earlier than the age of superannuation, namely, the completion of the age of fifty-eight
years. These modes are those provided in Rule 9(i), Rule 9(ii), Sub-clause (iv) of Clause (b) of Rule 36
read with Rule 38 and Rule 37. Of these four modes, the first two apply to permanent employees and
the other two apply to all employees. Rule 6 classifies employees as either Permanent or Probationary
or Temporary or Casual or Trainee. Clause (i) of Rule 6 defines the expression "Permanent employee"
as meaning "an employee whose services have been confirmed in writing according to the Recruitment
and Promotion Rules". Under Rule 9(i) which has been extracted above, the employment of a
permanent employee is to be subject to termination on three months' notice in writing on either side. If
the Corporation gives such a notice of termination, it may pay to the employee the equivalent of three
months' basic pay and dearness allowance, if any, in lieu of notice, and where a permanent employee
terminates the employment without giving due notice, the Corporation may deduct a like amount from
the amount due or payable to the employee. Under Rule 11, an employee who wishes to leave the
service of the Corporation by resigning therefrom, is to give to the Corporation the same notice as the
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Corporation is required to give to him under Rule 9, that is, a three months' notice in writing. Under
Rule 9(ii), the services of a permanent employee can be terminated on the ground of "Services no
longer required in the interest of the Company" (that is, the Corporation). In such a case, a permanent
employee whose service is terminated under this clause is to be paid fifteen days' basic pay and
dearness allowance for each completed year of continuous service in the Corporation and he is also to
be entitled to encashment of leave to his credit. Rule 36 prescribes the penalties which can be imposed,
"for good and sufficient reasons and as hereinafter provided" in the said Rules, on an employee for his
misconduct. Clause (a) of Rule 36 sets out the minor penalties and Clause (b) of Rule 36 sets out the
major penalties. Under Sub-clause (iv) of Clause (b) of Rule 36, dismissal from service is a major
penalty. None of the major penalties including the penalty of dismissal is to be imposed except after
holding an inquiry in accordance with the provisions of Rule 38 and until after the inquiring authority,
where it is not itself the disciplinary authority, has forwarded to the disciplinary authority the records
of the inquiry together with its report, and the disciplinary authority has taken its decision as provided
in Rule 39. Rule 40 prescribes the procedure to be followed in imposing minor penalties. Under Rule
43, notwithstanding anything contained in Rules 38, 39 or 40, the disciplinary authority may dispense
with the disciplinary inquiry in the three cases set out in Rule 43 and impose upon an employee either
a major or minor penalty. We have reproduced Rule 43 earlier. Rule 45 provides for an appeal against
an order imposing any of the penalties specified in Rule 36. Under Rule 37, the Corporation has the
right to terminate the service of any employee at any time without any notice if the employee is found
guilty of any insubordination, intemperance or other misconduct or of any breach of any rules
pertaining to service or conduct or non-performance of his duties. The said Rules do not require that
any disciplinary inquiry should be held before terminating an employee's service under Rule 37.
72. Each of the contesting Respondents in these Appeals was asked to submit his written explanation
to the various allegations made against him. Ganguly, the First Respondent in Civil Appeal No. 4412
of 1985, gave a detailed reply to the said show cause notice. Sengupta, the First Respondent in Civil
Appeal No. 4413 of 1985, denied the charges made against him and asked for inspection of the
documents and copies of statements of witnesses mentioned in the charge-sheet served upon him to
enable him to file his written statement. Without holding any inquiry into the allegations made against
them, the services of each of them were terminated by the said letter dated February 26, 1983, under
Rule 9(i). The action was not taken either under Rule 36 or Rule 37 nor was either of them dismissed
after applying to his case Rule 43 and dispensing with he disciplinary inquiry.
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73. It was submitted on behalf of the Appellants that there was nothing unconscionable about Rule
9(i), that Rule 9(i) was not a nudum pactum for it was supported by mutuality inasmuch as it conferred
an equal right upon both parties to terminate the contract of employment, that the grounds which
render an agreement void and unenforceable are set out in the Indian Contract Act, 1872 (Act No. IX
of 1872), that unconsionability was not mentioned in the Indian Contract Act as one of the grounds
which invalidates an agreement, that the power conferred by Rule 9(i) was necessary for the proper
functioning of the administration of the Corporation, that in the case of the Respondents this power
was exercised by the Chairman-cum-Managing Director of the Corporation, and that a person holding
the highest office in the Corporation was not likely to abuse the power conferred by Rule 9(i).
74. The submissions of the contesting Respondents, on the other hand, were that the parties did not
stand on an equal footing and did not enjoy the same bargaining power, that the contract contained in
the service rules was one imposed upon these Respondents, that the power conferred by Rule 9(i) was
arbitrary and uncanalized as it did not set out any guidelines for the exercise of that power and that
even assuming it may not be void as a contract; in any event it offended Article 14 as it conferred an
absolute and arbitrary power upon the Corporation.
75. As the question before us is of the validity of Clause (i) of Rule 9, we will refrain from expressing
any opinion with respect to the validity of Clause (ii) of Rule 9 or Rule 37 or 40 but will confine
ourselves only to Rule 9(i).
76. The said Rule constitute a part of the contract of employment between the Corporation and its
employees to whom the said Rules apply, and they thus form a part of the contract of employment
between the Corporation and each of the two contesting Respondents. The validity of Rule 9(i) would,
therefore, first fall to be tested by the principles of the law of contracts.
77. Under Section 19 of the Indian Contract Act, when consent to an agreement is caused by coercion,
fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose
consent was so caused. It is not the case of either of the contesting Respondents that there was any
coercion brought to bear upon him or that any fraud or misrepresentation had been practised upon him.
Under Section 19A, when consent to an agreement is caused by undue influence, the agreement is a
contract voidable at the option of the party whose consent was so caused and the court may set aside
any such contract either absolutely or if the party who was entitled to avoid it has received any benefit
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thereunder, upon such terms and conditions as to the court may seem just. Sub-section (1) of Section
16 defines "Undue influence" as follows:
16. 'Undue influence' defined. -
(1) A contract is said to be induced by 'undue influence' where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.
The material provisions of Sub-section (2) of Section 16 are as follows :
(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed
to be in a position to dominate the will of another -
(a) where he holds a real or apparent authority over the other ....
We need not trouble ourselves with the other sections of the Indian Contract Act except Sections 23
and 24. Section 23 states that the consideration or object of an agreement is lawful unless inter alia the
Court regards it as opposed to public policy. This section further provides that every agreement of
which the object or consideration is unlawful is void. Under Section 24, if any part of a single
consideration for one or more objects, or any one or any part of any one of several considerations for a
single object is unlawful, the agreement is void. The agreement is, however, not always void in its
entirety for it is well settled that if several distinct promises are made for one and the same lawful
consideration, and one or more of them be such as the law will not enforce, that will not of itself
prevent the rest from being enforceable. The general rule was stated by Willes, J., in Pickering v.
Ilfracombe Ry. Co. 1868 L.R. 3 C.P. 235 as follows:
The general rule is that, where you cannot sever the illegal from the legal part of a covenant, the
contract is altogether void; but where you can sever them, whether the illegality be created by statute
or by the common law, you may reject the bad part and retain the good.
78. Under which head would an unconscionable bargain fall? If it falls under the head of undue
influence, it would be voidable but if it falls under the head of being opposed to public policy, it would
be void. No case of the type before us appears to have fallen for decision under the law of contracts
before any court in India nor has any case on all fours of a court in any other country been pointed out
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to us. The word "unconscionable" is defined in the Shorter Oxford English Dictionary, Third Edition,
Volume II, page 2288, when used with reference to actions etc. as "showing no regard for conscience;
irreconcilable with what is right or reasonable". An unconscionable bargain would, therefore, be one
which is irreconcilable with what is right or reasonable.
79. Although certain types of contracts were illegal or void, as the case may be, at Common Law, for
instance, those contrary to public policy or to commit a legal wrong such as a crime or a tort, the
general rule was of freedom of contract. This rule was given full play in the nineteenth century on the
ground that the parties were the best judges of their own interests, and if they freely and voluntarily
entered into a contract the only function of the court was to enforce it. It was considered immaterial
that one party was economically in a stronger bargaining position than the other; and if such a party
introduced qualifications and exceptions to his liability in clauses which are today known as
"exemption clauses" and the other party accepted them, then full effect would be given to what the
parties agreed. Equity, however, interfered in many cases of harsh or unconscionable bargains, such as,
in the law relating to penalties, forfeitures and mortgages. It also interfered to asset aside harsh or
unconscionable contracts for salvage services rendered to a vessel in distress, or unconscionable
contracts with expectant heirs in which a person, usually a money-lender, gave ready cash to the heir
in return for the property which he expects to inherit and thus to get such property at a gross
undervalue. It also interfered with harsh or unconscionable contracts entered into with poor and
ignorant persons who had not received independent advice (See Chitty on Contracts, Twenty-fifth
Edition, Volume I, paragraphs 4 and 516).
80. Legislation has also interfered in many cases to prevent one party to a contract from taking undue
or unfair advantage of the other. Instances of this type of legislation are usury laws, debt relief laws
and laws regulating the hours of work and conditions of service of workmen and their unfair discharge
from service, and control orders directing a party to sell a particular essential commodity to another.
81. In this connection, it is useful to note what Chitty has to say about the old ideas of freedom of
contract in modern times. The relevant passages are to be found in Chitty on Contracts, Twenty-fifth
Edition, Volume I, in paragraph 4, and are as follows:
These ideas have to a large extent lost their appeal today. 'Freedom of contract,' it has been said, 'is a
reasonable social ideal only to the extent that equality of bargaining power between contracting parties
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can be assumed, and no injury is done to the economic interests of the community at large.' Freedom of
contract is of little value when one party has no alternative between accepting a set of terms proposed
by the other or doing without the goods or services offered. Many contracts entered into by public
utility undertakings and others take the form of a set of terms fixed in advance by one party and not
open to discussion by the other. These are called 'contracts d'adhesion' by French lawyers. Traders
frequently contract, not on individually negotiated terms, but on those contained in a standard form of
contract settled by a trade association. And the terms of an employee's contract of employment may be
determined by agreement between his trade union and his employer, or by a statutory scheme of
employment. Such transactions are nevertheless contracts notwithstanding that freedom of contract is
to a great extent lacking.
Where freedom of contract is absent, the disadvantages to consumers or members of the public have to
some extent been offset by administrative procedures for consultation, and by legislation. Many
statutes introduce terms into contracts which the parties are forbidden to exclude, or declare that
certain provisions in a contract shall be void. And the courts have developed a number of devices for
refusing to implement exemption clauses imposed by the economically stronger party on the weaker,
although they have not recognised in themselves any general power (except by statute) to declare
broadly that an exemption clause will not be enforced unless it is reasonable. Again, more recently,
certain of the judges appear to have recognised the possibility of relief from contractual obligations on
the ground of 'inequality of bargaining power.
What the French call "contracts d'adhesion', the American call "adhesion contracts" or "contracts of
adhesion." An "adhesion contract" is defined in Black's Law Dictionary, Fifth Edition, at page 38, as
follows:
Adhesion contract'. Standardized contract form offered to consumers of goods and services on
essentially 'take it or leave it' basis without affording consumer realistic opportunity to bargain and
under such conditions that consumer cannot obtain desired product or services except by acquiescing
in form contract. Distinctive feature of adhesion contract is that weaker party has no realistic choice as
to its terms. Not every such contract is unconscionable.
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82. The position under the American Law is stated in "Reinstatement of the Law- Second" as adopted
and promulgated by the American Law Institute, Volume II xx which deals with the law of contracts,
in Section 208 at page 107, as follows :
Section 208. Unconscionable Contract or Term
If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to
enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or
may so limit the application of any unconscionable term as to avoid any unconscionable result.
In the Comments given under that section it is stated at page 107:
Like the obligation of good faith and fair dealing (S 205), the policy against unconscionable
contracts or terms applies to a wide variety of types of conduct. The determination that a contract
or term is or is not unconscionable is made in the light of its setting, purpose and effect. Relevant
factors include weaknesses in the contracting process like those involved in more specific rules as to
contractual capacity, fraud and other invalidating causes; the policy also overlaps with rules which
render particular bargains or terms unenforceable on grounds of public policy. Policing against
unconscionable contracts or terms has sometimes been accomplished by adverse construction of
language, by manipulation of the rules of offer and acceptance or by determinations that the clause is
contrary to public policy or to the dominant purpose of the contract'. Uniform Commercial Code $ 2-
302 Comment 1.... A bargain is not unconscionable merely because the parties to it are unequal in
bargaining position, nor even because the inequality results in an allocation of risks to the weaker
party. But gross inequality of bargaining power, together with terms unreasonably favourable to
the stronger party, may confirm indications that the transaction involved elements of deception or
compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did
not in fact assent or appear to assent to the unfair terms.
There is a statute in the United States called the Universal Commercial Code which is applicable to
contracts relating to sales of goods. Though this statutes is inapplicable to contracts not involving sales
of goods, it has proved very influential in, what are called in the United States, "non-sales" cases. It
has many times been used either by analogy or because it was felt to embody a general accepted social
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attitude of fairness going beyond its statutory application to sales of goods. In the Reporter's Note to
the said Section 208, it is stated at page 112:
It is to be emphasized that a contract of adhesion is not unconscionable per se, and that all
unconscionable contracts are not contracts of adhesion. Nonetheless, the more standardized the
agreement and the less a party may bargain meaningfully, the more susceptible the contract or a
term will be to a claim of unconscionability.
The position has been thus summed up by John R. Pedan in "The Law of Unjust Contracts" published
by Butterworths in 1982, at pages 28-29 :
...Unconscionability represents the end of a cycle commencing with the Aristotelian concept of justice
and the Roman law iaesio enormis, which in turn formed the basis for the medieval church's concept of
a just price and condemnation of usury. These philosophies permeated the exercise, during the
seventeenth and eighteenth centuries, of the Chancery court's discretionary powers under which it
upset all kinds of unfair transactions. Subsequently the movement towards economic individualism in
the nineteenth century hardened the exercise of these powers by emphasizing the freedom of the
parties to make their own contract. While the principle of pacta sunt servanda held dominance, the
consensual theory still recognized exceptions where one party was overborne by a fiduciary, or entered
a contract under duress or as the result of fraud. However, these exceptions were limited and had to be
strictly proved.
It is suggested that the judicial and legislative trend during the last 30 years in both civil and common
law jurisdictions has almost brought the wheel full circle. Both courts and parliaments have provided
greater protection for weaker parties from harsh contracts. In several jurisdictions this included a
general power to grant relief from unconscionable contracts, thereby providing a launching point from
which the courts have the opportunity to develop a modern doctrine of unconscionability. American
decisions on Article 2. 302 of the UCC have already gone some distance into this new arena....
The expression "laesio enormous used in the above passage refers to "laesio ultra dimidium vel
enormous which in Roman law meant the injury sustained by one of the parties to an onerous contract
when he had been overreached by the other to the extent of more than one-half of the value of the
subject-matter, as for example, when a vendor had not received half the value of property sold, or the
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purchaser had paid more then double value. The maxim "pacta sunt servanda" referred to in the above
passage means "contracts are to be kept".
83. It would appear from certain recent English cases that the courts in that country have also begun to
recognize the possibility of an unconscionable bargain which could be brought about by economic
duress even between parties who may not in economic terms be situate differently (see, for instance,
Occidental Worldwide Investment Corpn. v. Skibs A/S Avanti 1976 (1) L Rep. 293, North Ocean
Shipping Co. Ltd. v. Hyundai Construction Co. Ltd. 1979 Q.B. 705, Pao On v. Lau Yin Long 1980
A.C. 614 and Universe Tankships of Monrovia v. International Transport Workers Federation 1981 (1)
C.R. 129, reversed in 1981 (2) W.L.R. 803 and the commentary on these cases in Chitty on Contracts,
Twenty-fifth Edition, Volume I, paragraph 486).
84. Another jurisprudential concept of comparatively modern origin which has affected the law of
contracts is the theory of "distributive justice". According to this doctrine, distributive fairness and
justice in the possession of wealth and property can be achieved not only by taxation but also by
regulatory control of private and contractual transactions even though this might involve some
sacrifice of individual liberty. In Lingappa Pochanna Appelwar v. State of Maharashtra and Anr. this
Court, while upholding the constitutionality of the Maharashtra Restoration of Lands to Scheduled
Tribes Act, 1974, said (at page 493) :
The present legislation is a typical illustration of the concept of distributive justice, as modern
jurisprudence know it. Legislators, Judges and administrators are now familiar with the concept of
distributive justice. Our Constitution permits and even directs the State to administer what may be
termed 'distributive justice'. The concept of distributive justice in the sphere of law-making connotes,
inter alia, the removal of economic inequalities and rectifying the injustice resulting from dealings or
transactions between unequals in society. Law should be used as an instrument of distributive justice to
achieve a fair division of wealth among the members of society based upon the principle : 'From each
according to his capacity, to each according to his needs'. Distributive justice comprehends more
than achieving lessening of inequalities by differential taxation, giving debt relief or distribution of
property owned by one to many who have none by imposing ceiling on holdings, both agricultural and
urban, or by direct regulation of contractual transactions by forbidding certain transactions and,
perhaps, by requiring others. It also means that those who have been deprived of their properties by
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unconscionable bargains should be restored their property. All such laws may take the form of forced
redistribution of wealth as a means of achieving a fair division of material resources among the
members of society or there may be legislative control of unfair agreements.
85. When our Constitution states that it is being enacted in order to give to all the citizens of India
"JUSTICE, social, economic and political", when Clause (1) of Article 38 of the Constitution directs
the State to strive to promote the welfare of the people by securing and protecting as effectively as it
may a social order in which social, economic and political justice shall inform all the institutions of the
national life, when Clause (2) of Article 38 directs the State, in particular, to minimize the inequalities
in income, not only amongst individuals but also amongst groups of people residing in different areas
or engaged in different vocations, and when Article 39 directs the State that it shall, in particular, direct
its policy towards securing that the citizens, men and women equally, have the right to an adequate
means of livelihood and that the operation of the economic system does not result in the concentration
of wealth and means of production to the common detriment and that there should be equal pay for
equal work for both men and women, it is the doctrine of distributive justice which is speaking through
these words of the Constitution.
86. Yet another theory which has made its emergence in recent years in the sphere of the law of
contracts is the test of reasonableness or fairness of a clause in a contract where there is inequality of
bargaining power. Lord Denning, M.R., appears to have been the propounder, and perhaps the
originator - at least in England, of this theory. In Gillespie Brothers & Co. Ltd. v. Roy Bowles
Transport Ltd. 1973 (1) Q.B. 400 where the question was whether an indemnity clause in a contract,
on its true construction, relieved the indemnifier from liability arising to the indemnified from his own
negligence, Lord Denning said (at pages 415-6) :
The time may come when this process of 'construing' the contract can be pursued no further. The
words are too clear to permit of it. Are the courts then powerless? Are they to permit the party to
enforce his unreasonable clause, even when it is so unreasonable, or applied so unreasonably, as
to be unconscionable? When it gets to this point, I would say, as I said many years ago:
there is the vigilance of the common law which, while allowing freedom of contract, watches to see
that it is not abused': John lee & Son (Grantham) Ltd. v. Railway Executive 1949 (2) All. E.R. 581,
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584. It will not allow a party to exempt himself from his liability at common law when it would be
quite unconscionable for him to do so.
In the above case the Court of Appeal negatived the defence of the indemnifier that the indemnity
clause did not cover the negligence of the indemnified. It was in Lloyds Bank Ltd. v. Bundy 1974 (3)
All E.R. 757 that Lord Denning first clearly enunciated his theory of "inequality of bargaining power".
He began his discussion on this part of the case by stating (at page 763) :
There are cases in our books in which the courts will set aside a contract, or a transfer of property,
when the parties have not met on equal terms, when the one is so strong in bargaining power and
the other so weak that, as a matter of common fairness, it is not right that the strong should be
allowed to push the weak to the wall. Hitherto those exceptional cases have been treated each as a
separate category in itself. But I think the time has come when we should seek to find a principle to
unite them. I put on one side contracts or transactions which are voidable for fraud or
misrepresentation or mistake. All those are governed by settled principles. I go only to those where
there has been inequality of bargaining power, such as to merit and intervention of the court.
He then referred to various categories of cases and ultimately deduced therefrom a general principle in
these words (at page 765) :
Gathering all together, I would suggest that through all these instances there runs a single thread. They
rest on 'inequality of bargaining power'. By virtue of it, the English law gives relief to one who,
without independent advice, enters into a contract on terms which are very unfair or transfers property
for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by
reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue
influences or pressures brought- to bear on him by or for the benefit of the other. When 1 use the word
'undue' 1 do not mean to suggest that the principle depends on proof of any wrongdoing. The one who
stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the
distress he is bringing to the other. I have also avoided any reference to the will of the one being
'dominated' or 'overcome' by the other. One who is in extreme need may knowingly consent to a
most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not
mean to suggest that every transaction is saved by independent advice. But the absence of it may be
fatal. With these explanations, 1 hope this principle will be found to reconcile the cases.
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87. Though the House of Lords does not yet appear to have unanimously accepted this theory, the
observations of Lord Dip lock in A. Schroeder Music Publishing Co. Ltd. v. Macaulay (Formerly
Instone) 1974 (1) W.L.R. 1308 are a clear pointer towards this direction. In that case a song writer had
entered into an agreement with a music publisher in the standard form whereby the publishers engaged
the song writer's exclusive services during the term of the agreement, which was five years. Under the
said agreement, the song writer assigned to the publisher the full copyright for the whole world in his
musical compositions during the said term. By another term of the said agreement, if the total royalties
during the term of the agreement exceeded # 5,000 the agreement was to stand automatically extended
by a further period of five years. Under the said agreement, the publisher could determine the
agreement at any time by one month's written notice but no corresponding right was given to the song
writer. Further, while the publisher had the right to assign the agreement, the song writer agreed not to
assign his rights without the publisher's prior written consent. The song writer brought an action
claiming, inter alia, a declaration that the agreement was contrary to public policy and void. Plowman,
J., who heard the action granted the declaration which was sought and the Court of Appeal affirmed
his judgment. An appeal filed by the publishers against the judgment of the Court of Appeal was
dismissed by the House of Lords. The Law Lords held that the said agreement was void as it was in
restraint of trade and thus contrary to public policy. In his speech Lord Diplock however, outlined the
theory of reasonableness or fairness of a bargain. The following observations of his on this part of the
case require to be reproduced in extenso (at pages 1315-16) :
My Lords, the contract under consideration in this appeal is one whereby the respondent accepted
restrictions upon the way in which he would exploit his earning power as a song writer for the next ten
years. Because this can be classified as a contract in restraint of trade the restrictions that the
respondent accepted fell within one of those limited categories of contractual promises in respect of
which the courts still retain the power to relieve the promisor of his legal duty to fulfil them. In order
to determine whether this case is one in which that power ought to be exercised, what your Lordships
have in fact been doing has been to assess the relative bargaining power of the publisher and the song
writer at the time the contract was made and to decide whether the publisher had used his superior
bargaining power to exact from the song writer promises that were unfairly onerous to him. Your
Lordships have not been concerned to inquire whether the public have in fact been deprived of the fruit
of the song writer's talents by reason of the restrictions, nor to assess the likelihood that they would be
so deprived in the future if the contract were permitted to run its full course.
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It is, in my view, salutary to acknowledge that in refusing to enforce provisions of a contract whereby
one party agrees for the benefit of the other party to exploit or to refrain from exploiting his own
earning power, the public policy which the court is implementing is not some 19th-century economic
theory about the benefit to the general public of freedom of trade, but the protection of those whose
bargaining power is weak against being forced by those whose bargaining power is stronger to enter
into bargains that are unconscionable. Under the influence of Bentham and of laissez-faire the courts in
the 19th century abandoned the practice of applying the public policy against unconscionable bargains
to contracts generally, as they had Formerly done to any contract considered to be usurious; but the
policy survived in its application to penalty clauses and to relief against forfeiture and also to the
special category of contracts in restraint of trade. If one looks at the reasoning of 19th-century judges
in cases about contracts in restraint of trade one finds lip service paid to current economic theories, but
if one looks at what they said in the light of what they did, one finds that they struck down a bargain if
they thought it was unconscionable as between the parties to it and upheld it if they thought that it was
not.
So I would hold that the question to be answered as respects a contract in restraint of trade of the kind
with which this appeal is concerned is: "Was the bargain fair?" The test of fairness is, no doubt,
whether the restrictions are both reasonably necessary for the protection of the legitimate
interests of the promisee and commensurate with the benefits secured to the promisor under the
contract. For the purpose of this test all the provisions of the contract must be taken into
consideration.
Lord Diplock then proceeded to point out that there are two kinds of standard forms of contracts. The
first is of contracts which contain standard clauses which "have been settled over the years by
negotiation by representatives of the commercial interests involved and have been widely adopted
because experience has shown that they facilitate the conduct of trade". He then proceeded to state, "If
fairness or reasonableness were relevant to their enforceability the fact that they are widely used by
parties whose bargaining power is fairly matched would raise a strong presumption that their terms are
fair and reasonable." Referring to the other kind of standard form of contract Lord Diplock said (at
page 1316) :
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The same presumption, however, does not apply to the other kind of standard form of contract.
This is of comparatively modern origin. It is the result of the concentration of particular kinds of
business in relatively few hands. The ticket cases in the 19th century provide what are probably the
first examples. The terms of this kind of standard form of contract have not been the subject of
negotiation between the parties to it, or approved by any organisation representing the interests of the
weaker party. They have been dictated by that party whose bargaining power, either exercised
alone or in conjunction with others providing similar goods or services, enables him to say: 'If you
want these goods or services at all, these are the only terms on which they are obtainable. Take it or
leave it'.
To be in a position to adopt this attitude towards a party desirous of entering into a contract to obtain
goods of services provides a classic instance of superior bargaining power.
88. The observations of Lord Denning, M.R., in Levison and Anr. v. Patent Steam Carpet Co. Ltd.
1978 (1) Q.B. 69 are also useful and require to be quoted. These observations are as follows (at page
79) :
In such circumstances as here the Law Commission in 1975 recommended that a term which exempts
the stronger party from his ordinary common law liability should not be given effect except when it is
reasonable: see The Law Commission and the Scottish Law Commission Report, Exemption Clauses,
Second Report (1975) (August 5, 1975), Law Com. No. 69 (H.C. 605), pp. 62, 174; and there is a bill
now before Parliament which gives effect to the test of reasonableness. This is a gratifying piece of
law reform: but 1 do not think we need wait for that bill to be passed into law. You never know what
may happen to a bill. Meanwhile the common law has its own principles ready to hand. In Gillespie
Bros. & Co. Ltd. v. Roy Bowles Transport Ltd. 1973 Q.B. 400, I suggested that an exemption or
limitation clause should not be given effect if it was unreasonable, or if it would be unreasonable to
apply it in the circumstances of the case. I see no reason why this should not be applied today, at any
rate in contracts in standard forms where there is inequality of bargaining power.
89. The Bill referred to by Lord Denning in the above passage, when enacted, became the Unfair
Contract Terms Act, 1977. This statute does not apply to all contracts but only to certain classes of
them. It also does not apply to contracts entered into before the date on which it came into force,
namely, February 1, 1978; but subject to this it applies to liability for any loss or damage which is
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suffered on or after that date. It strikes at clauses excluding or restricting liability in certain classes of
contracts and torts and introduces in respect of clauses of this type the test of reasonableness and
prescribes the guidelines for determining their reasonableness. The detailed provisions of this statute
do not concern us but they are worth a study.
90. In Photo Production Ltd. v. Securicor Transport Ltd. 1980 A.C. 827 a case before the Unfair
Contract Terms Act, 1977, was enacted, the House of Lords upheld an exemption clause in a contract
on the defendants' printed form containing standard conditions. The decision appears to proceed on the
ground that the parties were businessmen and did not possess unequal bargaining power. The House of
Lords did not in that case reject the test of reasonableness or fairness of a clause in a contract where
the parties are not equal in bargaining position. On the contrary, the speeches of Lord Wilberforce,
Lord Diplock and Lord Scarman would seem to show that the House of Lords in a fit case would
accept that test. Lord Wilberforce in his speech, after referring to the Unfair Contract Terms Act, 1977,
said (at page 843) :
This Act applies to consumer contracts and those based on standard terms and enables exception
clauses to be applied with regard to what is just and reasonable. It is significant that Parliament
refrained from legislating over the whole field of contract. After this Act, in commercial matters
generally, when the parties are not of unequal bargaining power, and when risks are normally
borne by insurance, not only is the case for judicial intervention undemonstrated, but there is
everything to be said, and this seems to have been Parliament's intention, for leaving the parties free to
apportion the risks as they think fit and for respecting their decisions.
Lord Diplock said (at page 850-51) :
Since the obligations implied by law in a commercial contract are those which, by judicial consensus
over the years or by Parliament in passing a statute, have been regarded as obligations which a
reasonable businessman would realise that he was accepting when he entered into a contract of a
particular kind, the court's view of the reasonableness of any departure from the implied obligations
which would be involved in construing the express words of an exclusion clause in one sense that they
are capable of bearing rather than another, is a relevant consideration in deciding what meaning the
words were intended by the parties to bear.
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Lord Scarman, while agreeing with Lord Wilberforce, described (at page 853) the action out of which
the appeal before the House had arisen as "a commercial dispute between parties well able to look after
themselves" and then added, "In such a situation what the parties agreed (expressly or impliedly) is
what matters; and the duty of the courts is to construe their contract according to its tenor.
91. As seen above, apart from judicial decisions, the United States and the United Kingdom have
statutorily recognized, at least in certain areas of the law of contracts, that there can be
unreasonableness (or lack of fairness, if one prefers that phrase) in a contract or a clause in a contract
where there is inequality of bargaining power between the parties although arising out of
circumstances not within their control or as a result of situations not of their creation. Other legal
systems also permit judicial review of a contractual transaction entered into in similar circumstances.
For example, Section 138(2) of the German Civil Code provides that a transaction is void "when a
person" exploits "the distressed situation, inexperience, lack of judgmental ability, or grave weakness
of will of another to obtain the grant or promise of pecuniary advantages . . . which are obviously
disproportionate to the performance given in return." The position according to the French law is very
much the same.
92. Should then our courts not advance with the times? Should they still continue to cling to outmoded
concepts and outworn ideologies? Should we not adjust our thinking caps to match the fashion of the
day? Should all jurisprudential development pass us by, leaving us floundering in the sloughs of
nineteenth-century theories? Should the strong be permitted to push the weak to the wall? Should they
be allowed to ride roughshod over the weak? Should the courts sit back and watch supinely while the
strong trample under foot the rights of the weak?
We have a Constitution for our country. Our judges are bound by their oath to "uphold the Constitution
and the laws". The Constitution was enacted to secure to all the citizens of this country social and
economic justice. Article 14 of the Constitution guarantees to all persons equality before the law and
the equal protection of the laws.
The principle deducible from the above discussions on this part of the case is in consonance with right
and reason, intended to secure social and economic justice and conforms to the mandate of the great
equality clause in Article 14. This principle is that the courts will not enforce and will, when called
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upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in
a contract, entered into between parties who are not equal in bargaining power.
It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different
situations which can arise in the affairs of men. One can only attempt to give some illustrations. For
instance, the above principle will apply where the inequality of bargaining power is the result of the
great disparity in the economic strength of the contracting parties. It will apply where the inequality is
the result of circumstances, whether of the creation of the parties or not. It will apply to situations in
which the weaker party is in a position in which he can obtain goods or services or means of livelihood
only upon the terms imposed by the stronger party or go without them. It will also apply where a man
has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the
dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however
unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This
principle, however, will not apply where the bargaining power of the contracting parties is equal or
almost equal. This principle may not apply where both parties are businessmen and the contract is a
commercial transaction. In today's complex world of giant corporations with their vast infra-structural
organizations and with the State through its instrumentalities and agencies entering into almost every
branch of industry and commerce, there can be myriad situations which result in unfair and
unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining
power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on
its own facts and circumstances.
93. It is not as if our civil courts have no power under the existing law. Under Section 31(1) of the
Specific Relief Act, 1963 (Act No. 47 of 1963), any person against whom an instrument is void or
voidable, and who has reasonable apprehension that such instrument, if left outstanding, may cause
him serious injury, may sue to have it adjudged void or voidable, and the court may in its discretion, so
adjudge it and order it to be delivered up and cancelled.
94. Is a contract of the type mentioned above to be adjudged voidable or void? If it was induced by
undue influence, then under Section 19A of the Indian Contract Act, it would be voidable. It is,
however, rarely that contracts of the types to which the principle formulated by us above applies are
induced by undue influence as defined by Section 16(1) of the Indian Contract Act, even though at
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times they are between parties one of whom holds a real or apparent authority over the other. In the
vast majority of cases, however, such contracts are entered into by the weaker party under pressure of
circumstances, generally economic, which results in inequality of bargaining power. Such contracts
will not fall within the four corners of the definition of "undue influence" given in Section 16(1).
Further, the majority of such contracts are in a standard or prescribed form or consist of a set of rules.
They are not contracts between individuals containing terms meant for those individuals alone,
Contracts in prescribed or standard forms or which embody a set of rules as part of the contract are
entered into by the party with superior bargaining power with a large number of persons who have far
less bargaining power or no bargaining power at all. Such contracts which affect a large number of
persons or a group or groups of persons, if they are unconscionable, unfair and unreasonable, are
injurious to the public interest. To say that such a contract is only voidable would be to compel each
person with whom the party with superior bargaining power had contracted to go to court to have the
contract adjudged voidable. This would only result in multiplicity of litigation which no court should
encourage and would also not be in the public interest. Such a contract or such a clause in a contract
ought, therefore, to be adjudged void. While the law of contracts in England is mostly judge-made, the
law of contracts in India is enacted in a statute, namely, the Indian Contract Act, 1872. In order that
such a contract should be void, it must fall under one of the relevant sections of the Indian Contract
Act. The only relevant provision in the Indian Contract Act which can apply is Section 23 when it
states that "The consideration or object of an agreement is lawful, unless . . .
the court regards it as . . . opposed to public policy."
95. The Indian Contract Act does not define the expression "public policy" or "opposed to public
policy". From the very nature of things, the expressions "public policy", "opposed to public policy" or
"contrary to public policy" are incapable of precise definition.
Public policy, however, is not the policy of a particular government. It connotes some matter which
concerns the public good and the public interest. The concept of what is for the public good or in the
public interest or what would be injurious or harmful to the public good or the public interest has
varied from time to time. As new concepts take the place of old, transactions which were once
considered against public policy are now being upheld by the courts and similarly where there has
been a well-recognized head of public policy, the courts have not shirked from extending it to new
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transactions and changed circumstances and have at times not even flinched from inventing a new
head of public policy.
There are two schools of thought - "the narrow view" school and "the broad view" school. According
to the former, courts can not create new heads of public policy whereas the latter countenances judicial
law-making in this area. The adherents of "the narrow view" school would not invalidate a contract on
the ground of public policy unless that particular ground had been well-established by authorities.
Hardly ever has the voice of the timorous spoken more clearly and loudly than in these words of Lord
Davey in Janson v. Driefontein Consolidated Mines Limited 1902 A.C. 484"Public policy is always an
unsafe and treacherous ground for legal decision." That was in the year 1902. Seventy-eight years
earlier, Burrough, J., in Richardson v. Mellish 1824 (2) Bing. 229; (s.c.) 130 E.R. 294 and 1824 All
E.R. Rep 258, described public policy as "a very unruly horse, and when once you get astride it you
never know where it will carry you." The Master of the Rolls, Lord Denning, however, was not a man
to shy away from unmanageable horses and in words which conjure up before our eyes the picture of
the young Alexander the Great taming Bucephalus, he said in Enderyby Town Football Club Ltd. v.
Football Association Ltd. 1971 Ch. 591. "With a good man in the saddle, the unruly horse can be kept
in control. It can jump over obstacles." Had the timorous always held the field, not only the doctrine of
public policy but even the Common Law or the principles of Equity would never have evolved. Sir
William Holdsworth in his "History of English Law", Volume III, page 55, has said :
In fact, a body of law like the common law, which has grown up gradually with the growth of the
nation, necessarily acquires some fixed principles, and if it is to maintain these principles it must be
able, on the ground of public policy or some other like ground, to suppress practices which, under ever
new disguises, seek to weaken or negative them.
It is thus clear that the principles governing public policy must be and are capable, on proper occasion,
of expansion or modification. Practices which were considered perfectly normal at one time have
today become obnoxious and oppressive to public conscience. If there is no head of public policy
which covers a case, then the court must in consonance with public conscience and in keeping with
public good and public interest declare such practice to be opposed to public policy. Above all, in
deciding any case which may not be covered by authority our courts have before them the beacon light
of the Preamble to the Constitution. Lacking precedent, the court can always be guided by that light
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and the principles underlying the Fundamental Rights and the Directive Principles enshrined in our
Constitution.
96. The normal rule of Common Law has been that a party who seeks to enforce an agreement which
is opposed to public policy will be non-suited. The case of A. Schroeder Music Publishing Co. Ltd. v.
Macaulay, however, establishes that where a contract is vitiated as being contrary to public policy, the
party adversely affected by it can sue to have it declared void. The case may be different where the
purpose of the contract is illegal or immoral. In Kedar Nath Motani and Ors. v. Prahlad Rai and Ors.
reversing the High Court and restoring the decree passed by the trial court declaring the appellants' title
to the lands in suit and directing the respondents who were the appellants' benamidars to restore
possession, this Court, after discussing the English and Indian law on the subject, said (at page 873):
The correct position in law, in our opinion, is that what one has to see is whether the illegality goes so
much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal
transaction into which he had entered. If the illegality be trivial or venial, as stated by Willistone and
the plaintiff is not required to rest his case upon that illegality, then public policy demands that the
defendant should not be allowed to take advantage of the position. A strict view, of course, must be
taken of the plaintiff's conduct, and he should not be allowed to circumvent the illegality by restoring
to some subterfuge or by misstating the facts. If, however, the matter is clear and the illegality is not
required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the
illegal purpose was achieved, then, unless it be of such a gross nature as to outrage the conscience of
the Court, the plea of the defendant should not prevail.
The types of contracts to which the principle formulated by us above applies are not contracts which
are tainted with illegality but are contracts which contain terms which are so unfair and unreasonable
that they shock the conscience of the court. They are opposed to public policy and require to be
adjudged void.
97. We will now test the validity of Rule 9(i) by applying to it the principle formulated above. Each of
the contesting Respondents was in the service of the Rivers Steam Navigation Company Limited and
on the said Scheme of arrangement being sanctioned by the Calcutta High Court, he was offered
employment in the Corporation which he had accepted. Even had these Respondents not liked to work
for the Corporation, they had not much of a choice because all that they would have got was "all
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legitimate and legal compensation payable to them either under the Industrial Disputes Act or
otherwise legally admissible". These Respondents were not covered by the Industrial Disputes Act for
they were not workmen but were officers of the said company. It is, therefore, difficult to visualize
what compensation they would have been entitled to get unless their contract of employment with their
previous employers contained any provision in that behalf. So far as the original terms of employment
with the Corporation are concerned, they are contained in the letters of appointment issued to the
contesting Respondents. These letters of appointment are in a stereotype form. Under these letters of
appointment, the Corporation could without any previous notice terminate their service, if the
Corporation was satisfied on medical evidence that the employee was unfit and was likely for a
considerable time to continue to be unfit for the discharge of his duties. The Corporation could also
without any previous notice dismiss either of them, if he was guilty of any insubordination,
intemperance or other misconduct, or of any breach of any rules pertaining to his service or conduct or
non-performance of his duties. The above terms are followed by asset of terms under the heading
"Other Conditions". One of these terms stated that "You shall be subject to the service Rules and
regulations including the conduct rules". Undoubtedly, the contesting Respondents accepted
appointment with the Corporation upon these terms. They had, however, no real choice before them.
Had they not accepted the appointments, they would have at the highest received some compensation
which would have been probably meagre and would certainly have exposed themselves to the hazard
of finding another job.
98. It was argued before us on behalf of the contesting Respondents that the term that these
Respondents would be subject to the service rules and regulations including the conduct rules, since it
came under the heading "Other Conditions" which followed the clauses which related to the
termination of service, referred only to service rules and regulations other than those providing for
termination of service and, therefore, Rule 9(i) did not apply to them. It is unnecessary to decide this
question in the view which we are inclined to take with respect to the validity of Rule 9(i).
99. The said Rules as also the earlier rules of 1970 were accepted by the contesting Respondents
without demur. Here again they had no real choice before them. They had risen higher in the hierarchy
of the Corporation. If they had refused to accept the said Rules, it would have resulted in termination
of their service and the consequent anxiety, harassment and uncertainty of finding alternative
employment.
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100. Rule 9(i) confers upon the Corporation the power to terminate the service of a permanent
employee by giving him three months' notice in writing or in lieu thereof to pay him the equivalent of
three months' basic pay and clearness allowance. A similar regulation framed by the West Bengal State
Electricity Board was described by this Court in West Bengal State Electricity Board and Ors. v. Desh
Bandhu Ghosh and Ors. (at page 118) as :
...a naked 'hire and fire' rule, the time for banishing which altogether from employer-employee
relationship is fast approaching. Its only parallel is to be found in the Henry VIII clause so familiar to
administrative lawyers.
As all lawyers may not be familiar with administrative law, we may as well explain that "the Henry
VIII clause" is a provision occasionally found in legislation conferring delegated legislative power,
giving the delegate the power to amend the delegating Act in order to bring that Act into full operation
or otherwise by Order to remove any difficulty, and at times giving power to modify the provisions of
other Acts also. The Committee on Ministers' Powers in its report submitted in 1932 (Cmd. 4060)
pointed out that such a provision had been nicknamed "the Henry VIII clause" because "that King is
regarded popularly as the impersonation of executive autocracy". The Committee's Report (at page 61)
criticised these clauses as a temptation to slipshod work in the preparation of bills and recommended
that such provisions should be used only where they were justified before Parliament on compelling
grounds. Legislation enacted by Parliament in the United Kingdom after 1932 does not show that this
recommendation had any particular effect.
101. No chapter description of Rule 9(i) can be given than to call it "the Henry VIII Clause". It confers
absolute and arbitrary power upon the Corporation. It does not even state who on behalf of the
Corporation is to exercise that power. It was submitted on behalf of the Appellants that it would be the
Board of Directors. The impugned letters of termination, however, do not refer to any resolution or
decision of the Board and even if they did, it would be irrelevant to the validity of Rule 9(i). There are
no guidelines whatever laid down to indicate in what circumstances the power given by Rule 9(i) is to
be exercised by the Corporation. No opportunity whatever of a hearing is at all to be afforded to the
permanent employee whose service is being terminated in the exercise of this power. It was urged that
the Board of Directors would not exercise this power arbitrarily or capriciously as it consists of
responsible and highly placed persons. This submission ignores the fact that however highly placed a
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person may be, he must necessarily possess human frailties. It also overlooks the well-known saying of
Lord Acton, which has now almost become a maxim, in the Appendix to his "Historical Essays and
Studies", that "Power tends to corrupt, and absolute power corrupts absolutely." As we have pointed
out earlier, the said Rules provide for four different modes in which the services of a permanent
employee can be terminated earlier than his attaining the age of superannuation, namely, Rule 9(i),
Rule 9(ii), Sub-clause (iv) of Clause (b) of Rule 36 read with Rule 38 and Rule 37. Under Rule 9(ii)
the termination of service is to be on the ground of "Services no longer required in the interest of the
Company." Sub-clause (iv) of Clause (b) of Rule 36 read with Rule 38 provides for dismissal on the
ground of misconduct. Rule 37 provides for termination of service at any time without any notice if the
employee is found guilty of any of the acts mentioned in that Rule. Rule 9(i) is the only Rule which
does not state in what circumstances the power conferred by that Rule is to be exercised. Thus even
where the Corporation could proceed under Rule 36 and dismiss an employee on the ground of
misconduct after holding a regular disciplinary inquiry, it is free to resort instead to Rule 9(i) in order
to avoid the hassle of an inquiry. Rule 9(i) thus confers an absolute, arbitrary and unguided power
upon the Corporation. It violates one of the two great rules of natural justice - the audi alteram
partemrule. It is not only in cases to which Article 14 applies that the rules of natural justice come into
play. As pointed out in Union of India etc. v. Tulsiram Patel etc., "The principles of natural justice are
not the creation of Article 14. Article 14 is not their begetter but their constitutional guardian." That
case has traced in some detail the origin and development of the concept of principles of natural justice
and of the audi alteram partem rule (at pages 463 - 480). They apply in diverse situations and not only
to cases of State action. As pointed out by 0. Chinnappa Reddy, J., in Swadeshi Cotton Mills v. Union
of India they are implicit in every decision-making function, whether judicial or quasi-judicial or
administrative. Undoubtedly, in certain circumstances the principles of natural justice can be modified
and, in exceptional cases, can even be excluded as pointed out in Tulsiram Patel's case. Rule 9(i),
however, is not covered by any of the situations which would justify the total exclusion of the audi
alteram partem rule.
102. The power conferred by Rule 9(i) is not only arbitrary but is also discriminatory for it enables the
Corporation to discriminate between employee and employee. It can pick up one employee and apply
to him Clause (i) of Rule 9. It can pick up another employee and apply to him Clause (ii) of Rule 9. It
can pick up yet another employee and apply to him Sub-clause (iv) of Clause (b) of Rule 36 read with
Rule 38 and to yet another employee it can apply Rule 37. All this the Corporation can do when the
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same circumstances exist as would justify the Corporation in holding under Rule 38 a regular
disciplinary inquiry into the alleged misconduct of the employee. Both the contesting Respondents
had, in fact, been asked to submit their explanation to the charges made against them. Sengupta had
been informed that a disciplinary inquiry was proposed to be held in his case. The charges made
against both the Respondents were such that a disciplinary inquiry could easily have been held. It was,
however, not held but instead resort was had to Rule 9(i).
103. The Corporation is a large organization. It has offices in various parts of West Bengal, Bihar and
Assam, as shown by the said Rules, and possibly in other States also.
The said Rules form part of the contract of employment between the Corporation and its employees
who are not workmen. These employees had no powerful workmen's Union to support them. They had
no voice in the framing of the said rules they had no choice but to accept the said Rules as part of their
contract of employment. There is gross disparity between the Corporation and its employees, whether
they be workmen or officers. The Corporation can afford to dispense with the services of an officer. It
will find hundreds of others to take his place but an officer cannot afford to lose his job because if he
does so, there are not hundreds of jobs waiting for him. A clause such as Clause (i) of Rule 9 is against
right and reason. It is wholly unconscionable. It has been entered into between parties between whom
there is gross inequality of bargaining power. Rule 9(i) is term of the contract between the Corporation
and all its officers. It affects a large number of persons and it squarely falls within the principle
formulated by us above. Several statutory authorities have a clause similar to Rule 9(1) in their
contracts of employment. As appears from the decided cases, the West Bengal State Electricity Board
and Air India International have it. Several Government companies apart from the Corporation (which
is the First Appellant before us) must be having it. There are 970 Government companies with paid-up
capital of Rs.16,414.9 crores as stated in the written arguments submitted on behalf of the Union of
India. The Government and its agencies and instrumentalities constitute the largest employer in the
country. A clause such as Rule 9(i) in a contract of employment affecting large sections of the public is
harmful and injurious to the public interest for it tends to create a sense of insecurity in the minds of
those to whom it applies and consequently it is against public good. Such a clause, therefore, is
opposed to public policy and being opposed to public policy, it is void under Section 23 of the Indian
Contract act.
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104. It was, however, submitted on behalf of the Appellants that this was a contract entered into by the
Corporation like any other contract entered into by it in the course of its trading activities and the
Court, therefore, ought not to interfere with it. It is not possible for us to equate employees with goods
which can be bought and sold. It is equally not possible for us to equate a contract of employment with
a mercantile transaction between two businessmen and much less to do so when the contract of
employment is between a powerful employer and a weak employee.
105. It was also submitted on behalf of the Appellants that Rule 9(i) was supported by mutuality
inasmuch as it conferred an equal right upon both the parties, for under it just as the employer could
terminate the employee's service by giving him three months' notice or by paying him three months'
basic pay and dearness allowance in lieu thereof, the employee could leave the service by giving three
months' notice and when he failed to give such notice, the Corporation could deduct an equivalent
amount from whatever may be payable to him. It is true that there is mutuality in Clause 9(i) - the
same mutuality as in a contract between the lion and the lamb that both will be free to roam about in
the jungle and each will be at liberty to devour the other. When one considers the unequal position of
the Corporation and its employees, the argument of mutuality becomes laughable.
106. The contesting Respondents could, therefore, have filed a civil suit for a declaration that the
termination of their service was contrary to law on the ground that the said Rule 9(i) was void. In such
a suit, however, they would have got a declaration and possibly damages for wrongful termination of
service but the civil court could not have ordered reinstate ment as it would have amounted to granting
specific performance of a contract of personal service. As the Corporation is "the State", they,
therefore, adopted the far more efficacious remedy of filing a writ petition under Article 226 of the
Constitution.
107. As the Corporation is "the State" within the meaning of Article 12, it was amenable to the writ
jurisdiction of the High Court under Article 226. It is now well-established that an instrumentality or
agency of the State being "the State" under Article 12 of the Constitution is subject to the
Constitutional limitations, and its actions are State actions and must be judged in the light of the
Fundamental Rights guaranteed by Part III of the Constitution (see, for instance, Sukhdev Singh and
Ors. v. Bhagatram Sardar Singh Raghuvanshi and Anr., The International Airport Authority's Case and
Ajay Hasia's Case). The actions of an instrumentality or agency of the State must, therefore, be in
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conformity with Article 14 of the Constitution. The progression of the judicial concept of Article 14
from a prohibition against discriminatory class legislation to an invalidating factor for any
discriminatory or arbitrary State action has been traced in Tulsiram Patel's Case (at pages 473-476).
The principles of natural justice have now come to be recognized as being a part of the Constitutional
guarantee contained in Article 14. In Tulsiram Patel's Case this Court said (at page 476) :
The principles of natural justice have thus come to be recognized as being a part of the guarantee
contained in Article 14 because of the new and dynamic interpretation given by this Court to the
concept of equality which is the subject-matter of that Article. Shortly put, the syllogism runs thus:
violation of a rule of natural justice results in arbitrariness which is the same as discrimination; where
discrimination is the result of State action, it is violation of Article 14; therefore, a violation of a
principle of natural justice by a State action is a violation of Article 14. Article 14, however, is not the
sole repository of the principles of natural justice. What it does is to guarantee that any law or State
action violating them will be struck down. The principles of natural justice, however, apply not only to
legislation and State action but also where any tribunal, authority or body of men, not coming within
the definition of 'State' in Article 12, is charged with the duty of deciding a matter.
108. As pointed out above, Rule 9(i) is both arbitrary and unreasonable and it also wholly ignores and
sets aside the audi alteram partem rule it, therefore, violates Article 14 of the Constitution.
109. On behalf of the Appellants reliance was placed upon the case of Radhakrishna Agarwal and Ors.
v. State of Bihar and Ors. The facts in that case were that a contract, called a "lease", to collect and
exploit Sal seeds from a forest area was entered into between the State of Bihar and the appellants in
that case. Under one of the clauses of the said contract, the rate of royalty could be revised at the
expiry of every three years in consultation with the lessee and was to be binding on the lessee. The
State unilaterally revised the rate of royalty payable by the appellants and thereafter cancelled the
lease. The Patna High Court dismissed the writ petition filed by the appellants and the appellants'
appeal to this Court was also dismissed. In that case it was held that when a State acts purely in its
executive capacity, it is bound by the obligations which dealings of the State with individual citizens
import into every transaction entered into in exercise of its constitutional powers, but this is only at the
time of entry into the field of consideration of persons with whom the Government could contract, and
after the State or its agents have entered into the field of ordinary contract the relations are no longer
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governed by the constitutional provisions but by the legally valid contract which determines rights and
obligations of the parties inter se. The court then added (at page 255) :
No question arises of violation of Article 14 or of any other constitutional provision when the State or
its agents, purporting to act within this field, perform any act. In this sphere, they can only claim rights
conferred upon them by contract and are bound by the terms of the contract only unless some statute
steps in and confers some special statutory power or obligation on the State in the contractual field
which is apart from contract.
110. We fail to see what relevance that decision has to the case before us. Employees of a large
organization form a separate and distinct class and we are unable to equate a contract of employment
in a stereotype form entered into by "The State" with each of such employees with the "lease" executed
in Radhakrishna Agarwal's Case. Further, the contract or the lease between the parties in that case was
a legally valid contract. In that case what the appellants were doing was to complain of a breach of
contract committed by the State of Bihar acting through its officers. The contesting Respondents are
not complaining of any breach of contract but their contention is that Rule 9(i) which is a term of their
contract of employment is void. They are not complaining that the action of termination of their
service is in breach of Rule 9(i). Their complaint is not merely with respect to the State action taken
under Rule 9(i) but also with respect to the action of the State in entering into a contract of
employment with them which contains such a clause or rather forcing upon them a contract of
employment containing such a clause. As we have held earlier, Rule 9(i) is void even under the
ordinary law of contracts.
111. We must now turn to two decisions of the Bombay High Court as each party has relied strongly
upon one of them, namely, S.S. Muley v. J.R.D. Tata and Ors. 1980 Lab. & Ind. Cas 11; (s.c.) 1979 (2)
Ser. L.R. 438 and Manohar P. Kharkhar and Anr. v. Raghuraj and Anr. 1981 (2) Lab. L.J. 459
commonly known as the "Makalu" Case as it related to certain cables which were damaged in an
aircraft named 'Makalu' belonging to Air India International. The decision in Muley's Case was relied
upon by the Respondents while the decision in Makalu's Case was relied upon by the Appellants. Both
the cases related to Regulation 48 of the Air India Employees' Service Regulations framed by Air India
International. Air India International is a corporation established under the Air Corporations Act, 1953
(Act No. 27 of 1953) and it is indisputably "The State" within the meaning of Article 12 of the
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Constitution. Under Clause (a) of the said Regulation 48, the services of a permanent employee can be
terminated "without assigning any reason" by giving him thirty days' notice in writing or pay in lieu of
notice. In both these cases, the services of the concerned employees were terminated under Regulation
48(a). The said Regulations also provided for dismissal of an employee who was found guilty of
misconduct in a disciplinary inquiry held according to the procedure prescribed in the said
Regulations. In Muley's Case a learned Single Judge of the Bombay High Court, Sawant, J., held the
said Regulation 48(a) to be void as infringing Article 14 of the Constitution. In West Bengal State
Electricity Board's Case this Court stated (at page 119), "The learned Judge struck down Regulation
48(a) and we agree with his reasoning and conclusion." The reasoning upon which Sawant, J., reached
his conclusion was that there was no guidance given anywhere in the impugned Regulation for the
exercise of the power conferred by it, that it placed untrammelled power in the hands of the authorities,
that it was an arbitrary power which was conferred and it did not make any difference that it was to be
exercised by high ranking officials. In the Makalu Case a contrary view was taken by a Division Bench
of the Bombay High Court. The Division Bench rightly held that the employees of a statutory
corporation did not enjoy the protection conferred by Article 311(2). It, however, further held that the
phrase "without assigning any reason" used in the said Regulation 48 only meant a disclosure of the
reasons to the employee concerned. After going into the facts which had been pleaded by Air India
International to justify the termination of the service of the petitioners in that case, the Division Bench
held that the impugned orders were justified. It further held that Regulation 48 was not a one-sided
regulation since under Regulation 49 the employee was also permitted to resign without assigning any
reason by giving the notice prescribed therein. The Division Bench applied to the said Regulation 48
the analogy of the ordinary law of master and servant under which no servant can claim any security of
tenure. It also brought in it the analogy of the right to compulsorily retire an employee where a
provision in that behalf is made in the Service Rules. The Division Bench further held that it was
difficult to conceive of any authority, which was "the State" under Article 12 of the Constitution and
bound by the constitutional guarantees contained in Part III of the Constitution, terminating the
services of its employees without reason or arbitrarily. It further held that the existence of relevant
reasons was a sine qua non for exercising the power under Regulation 48. It went on to state that
because of the complexity of modern administration and the unpredictable exigencies which may arise
in the course thereof, it was necessary for an employer to be vested with powers such as those
conferred by Regulation 48. The Division Bench took great pains to discern in some of the sections of
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the Air Corporations Act guidelines for the exercise of the power conferred by Regulation 48.
According to the Division Bench, the choice of Air India International to proceed under Regulation 48
would have to be dictated for the purpose of the needs and exigencies of its administration and if that
power was exercised arbitrarily, the court would strike down the action taken under Regulation 48.
112. We were Invited by Learned Counsel for the Appellants to peruse the judgment in that case and
we did so with increasing astonishment. Though the said judgment bears the date September 18, 1981,
we were unable to make out whether it was a judgment given in the year 1981 or in the year 1881 or
even earlier. We find ourselves wholly unable to agree with the view taken by the Division Bench.
Apart from the factual aspects of the case, as to which we say nothing, we find every single conclusion
reached by the Division Bench and the reasons given in support thereof to be wholly erroneous. The
Division Bench overlooked that it was not dealing with a case of a non-speaking order but with the
validity of a regulation. The meaning given by it to the expression "without assigning any reason" was
wrong and untenable. Starting with this wrong premise, it has gone from one wrong premise to
another. In the light of what we have said earlier about the principles of public policy evolved, and
tested by the principle which we have formulated, the said Regulation 48(a) could never have been
sustained. In West Bengal State Electricity Board's Case, a three-Judge Bench of this Court said as
follows (at page 119) :
The learned Counsel for the appellant relied upon Manohar P. Kharkhar v. Raghuraj to contend that
Regulation 48 of the Air India Employees' Service Regulations was valid. It is difficult to agree with
the reasoning of the Delhi High Court that because of the complexities of modern administration and
the unpredictable exigencies arising in the course of such administration it is necessary for an
employer to be vested with such powers as those under Regulation 48. We prefer the reasoning of
Sawant, J. of the Bombay High Court and that of the Calcutta High Court in the judgment under appeal
to the reasoning of the Delhi High Court.
The mention of the Delhi High Court in the above passage is a slip of the pen, for it was the Bombay
High Court which decided the case. We are in respectful agreement with what has been stated in the
above passage. The Makalu Case was wrongly decided and requires to be overruled. We are, however,
informed that an appeal against that judgment is pending in this Court and rather than overrule it here,
we leave it to the Bench which hears that appeal to reverse it.
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113. We would like to observe here that as the definition of "the State" in Article 12 is for the purposes
of both Part III and Part IV of the Constitution, State actions, including actions of the instrumentalities
and agencies of the State, must not only be in conformity with the Fundamental Rights guaranteed by
Part III but must also be in accordance with the Directive Principles of State Policy prescribed by Part
IV. Clause (a) of Article 39 provides that the State shall, in particular, direct its policy towards
"securing that the citizens, men and women, equally have the right to adequate means of livelihood."
Article 41 requires the State, within the limits of its economic capacity and development, to "make
effective provision for securing the right to work". An adequate means of livelihood cannot be secured
to the citizens by taking away without any reason the means of livelihood. The mode of making
"effective provision for securing the right to work" cannot be by giving employment to a person and
then without any reason throwing him out of employment. The action of an instrumentality or agency
of the State, if it frames a service rule such as Clause (a) of Rule 9 or a rule analogous thereto would,
therefore, not only be violative of Article 14 but would also be contrary to the Directive Principles of
State Policy contained in Clause (a) of Article 39 and in Article 41.
114. The Calcutta High Court was, therefore, right in quashing the impugned orders dated February
26, 1983, terminating the services of the contesting Respondents and directing the Corporation to
reinstate them and to pay them all arrears of salary. The High Court was, however, not right in
declaring Clause (i) of Rule 9 in its entirety as ultra vires Article 14 of the Constitution and in striking
down as being void the whole of that clause. What the Calcutta High Court overlooked was that Rule 9
also confers upon a permanent employee the right to resign from the service of the Corporation. By
entering into a contract of employment a person does not sign a bond of slavery and a permanent
employee can not be deprived of his right to resign. A resignation by an employee would, however,
normally require to be accepted by the employer in order to be effective. It can be that in certain
circumstances an employer would be justified in refusing to accept the employee's resignation as, for
instance, when an employee wants to leave in the middle of a work which is urgent or important and
for the completion of which his presence and participation are necessary. An employer can also refuse
to accept the resignation when there is a disciplinary inquiry pending against the employee. In such a
case, to permit an employee to resign would be to allow him to go away from the service and escape
the consequences of an adverse finding against him in such an inquiry. There can also be other grounds
on which an employer would be justified in not accepting the resignation of an employee. The
Corporation ought to make suitable provisions in that behalf in the said Rules. Therefore, while the
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judgment of the High Court requires to be confirmed, the declaration given by it requires to be suitably
modified.
115. In the result, both these Appeals fail and are dismissed but the order passed by the Calcutta High
Court is modified by substituting for the declaration given by it a declaration that Clause (1) of Rule 9
of the "Service, Discipline & Appeal Rules - 1979" of the Central Inland Water Transport Corporation
Limited is void under Section 23 of the Indian Contract Act, 1872, as being opposed to public policy
and is also ultra vires Article 14 of the Constitution to the extent that it confers upon the Corporation
the right to terminate the employment of a permanent employee by giving him three months' notice in
writing or by paying him the equivalent of three months' basic pay and dearness allowance in lieu of
such notice.
116. By interim orders passed in the Petitions for Special Leave to Appeal filed by the Corporation, we
had granted pending the disposal of those Petitions a stay of the order of the Calcutta High Court in so
far as it directed the reinstatement of the contesting Respondents. At that stage the Corporation had
undertaken to pay to the said Respondents all arrears of salary and had also undertaken to pay
thereafter their salary from month to month before the tenth day of each succeeding month until the
disposal of the said Petitions. We hereby vacate the stay order of reinstatement passed by us and direct
the Corporation forthwith to reinstate the First Respondent in each of these Appeals and to pay to him
within six weeks from today all arrears of salary and allowances payable to him, if any still unpaid.
117. The First Appellant In both these Appeals, namely, the Central Inland Water Transport
Corporation Limited, will pay to the First Respondent in each of these Appeals the costs of the
respective Appeals. The other parties to these Appeals and the Intervener will bear and pay their own
costs of the Appeals.
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Dhurandhar Prasad Singh vs. Jai Prakash University and Ors.; AIR 2001 SC 2552
Judges/Coram: G.B. Pattanaik and B.N. Agrawal, JJ.
JUDGMENT
B.N. Agrawal, J.
1. Leave granted.
2. In this appeal decree holder-appellant has challenged the judgment rendered by Patna High Court
whereby revision application has been allowed, order passed by the executing Court, rejecting
objection under Section 47 of the Code of Civil Procedure (hereinafter referred to as the 'Code') to the
executability of decree passed in title suit No. 115 of 1977, set aside and objection allowed.
3. Plaintiff-appellant filed suit for a declaration that order dated 11th October, 1977, passed by
defendant No. 2 (respondent No.3) who was Secretary of Governing Body, Ganga Singh College,
terminating the services of plaintiff, was illegal. According to the case of the plaintiff disclosed in the
plaint, he was appointed as Routine-cum-Examination Clerk in the said college, which was affiliated to
Bihar University, by Principal of the College on 8.1.1977 which was subsequently approved by the ad
hoc Governing Body. After constitution of the regular Governing Body, defendant No.2 passed an
order terminating the services of plaintiff in contravention of Statutes of Bihar University which
necessitated filing of the present suit. In the said suit, the Governing Body of the College in question
which was defendant No. 1 entered appearance but no written statement was filed and the defendant
absented itself and the suit was fixed for ex parte hearing which was decreed ex parte and the
defendants were permanently restrained from giving effect to the order of termination. As the
judgment debtors refused to comply the directions contained in the decree, the appellant levied
execution. In the said execution case, an objection under Section 47 of the Code was filed on behalf of
Principal of the College as well as the Bihar University objecting to the executability of the decree on
grounds, inter alia, that during the pendency of the suit on 1st October, 1980, the College in question
became the constituent unit of the Bihar University and the erstwhile Governing Body ceased to exist
but the University was not impleaded party in the suit and consequently the decree was not executable
against it inasmuch as the ex parte decree was obtained against the erstwhile management by
suppressing this fact. As subsequently during the pendency of the execution case, Jai Prakash
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University was formed and the college in question thereupon became a constituent unit of the said
University, the same also filed similar objection to the executability of the decree.
4. The executing court allowed the objection and thereafter when the matter was taken to the High
Court in revision, the case was remanded to the executing Court to dispose of the objection afresh after
giving opportunity of adducing evidence to the parties. After remand the parties adduced evidence in
support of their respective cases and the executing Court by its order dated 22nd September, 1997
rejected objection under Section 47 of the Code, against which order when a revision was preferred
before the High Court, the same was allowed, order passed by the executing Court was set aside and
objection under Section 47 of the Code was allowed. Hence, this appeal by Special Leave.
5. Mr. Prabha Shanker Mishra, learned Senior Counsel appearing on behalf of the appellant in support
of the appeal submitted that although the college in question was taken over by the Bihar University as
its constituent unit with all its assets and liabilities and thereby it was a case of devolution of interest
during the pendency of the suit within the meaning of Order 22 Rule 10 of the Code, the High Court
was not justified in holding that the decree cannot be executed against the University on the ground
that it was not made party in the suit inasmuch the decree could have been passed against the erstwhile
management and the University was bound by it as no step whatsoever was taken by the University to
intervene in the matter by seeking leave to continue which alone was entitled for the same. Learned
counsel for the Respondent-University, on the other hand, submitted that under Order 22 Rule 10 of
the Code, it was duty of the plaintiff who was prosecuting the suit to ensure by seeking leave of the
Court, that effective relief is granted to him by bringing the University on record which was a
necessary party. It has been further submitted that decree passed against the previous management
which has ceased to exist is akin to a decree passed against a dead person without bringing his legal
representatives on the record, which is a nullity. Thus, in view of the rival submissions, the following
questions arise for our consideration:-
1. Whether in a case of devolution of interest during the pendency of a suit as postulated under Order
22 Rule 10 of the Code, decree passed against the predecessor-in-interest without bringing the
successor-in-interest on the record would make the decree nullity and the same can be executed against
such a person who was not impleaded as party?
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2. Whether application under Order 22 Rule 10 seeking leave of the Court is required under law to be
filed by that person alone upon whom interest has devolved during the pendency of the suit and by
nobody else?
6. In order to appreciate the points involved, it would be necessary to refer to the provisions of Order
22 of the Code, Rules 3 and 4 whereof prescribe procedure in case of devolution of interest on the
death of a party to a suit. Under these Rules, if a party dies and right to sue survives, the Court on an
application made in that behalf is required to substitute legal representatives of the deceased party for
proceeding with a suit but if such an application is not field within the time prescribed by law, the suit
shall abate so far as the deceased party is concerned. Rule 7 deals with the case of creation of an
interest in a husband on marriage and Rule 8 deals wither case of assignment on the insolvency of a
plaintiff. Rule 10 provides for cases of assignment, creation and devolution of interest during the
pendency of a suit other than those referred to in the foregoing Rules and is based on the principle that
the trial of a suit cannot be brought to an end merely because the interest of a party in the subject
matter of suit is devolution upon another during its pendency but such a suit may be continued with the
leave of the Court by or against the person upon whom such interest has devolved. But, if no such a
step is taken, the suit may be continued with the original party and the person upon whom the interest
has devolved will be bound by and can have the benefit of the decree, as the case may be, unless it is
shown in a properly constituted proceeding that the original party being no longer interested in the
proceeding did not vigorously prosecute or colluded with the adversary resulting in decision adverse to
the party upon whom interest had devolved. The Legislature while enacting Rules 3, 4 and 10 has
made clear-cut distinction. In cases covered by Rules 3 and 4, if right to sue survives and no
application for bringing legal representatives of a deceased party is filed within the time prescribed,
there is automatic abatement of the suit and procedure has been prescribed for setting aside abatement
under Rule 9 on the grounds postulated therein. In cases covered by Rule 10, the Legislature has not
prescribed any such procedure in the event of failure to apply for leave of the court to continue the
proceeding by or against the person upon whom interest has devolved during the pendency of a suit
which shows that the Legislature was conscious of this eventuality and yet has not prescribed that
failure would entail dismissal of the suit as it was intended that the proceeding would continue by or
against the original party although he ceased to have any interest in the subject of dispute in the event
of failure to apply for leave to continue by or against the person upon whom the interest has devolved
for bringing him on the record.
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7. Under Rule 10, Order 22 of the Code, when there has been a devolution of interest during the
pendency of a suit, the suit may, by leave of the Court, be continued by or against persons upon whom
such interest has devolved and this entitles, the person who has acquired an interest in the subject
matter of the litigation by an assignment or creation or devolution of interest pendente lite or suitor or
any other person interested, to apply to the Court for leave to continue the suit. But it does not follow
that it is obligatory upon them to do so. If a party does not ask for leave, he takes the obvious risk that
the suit may not be properly conducted by the Plaintiff on record, and yet, as pointed out by their
Lordships of the Judicial Committee in Moti Lal v. Karab-ud-Din [1898] 25 Cal. 179, he will be
bound by the result of the litigation even though he is not represented at the hearing unless it is shown
that the litigation was not properly conducted by the original party or he colluded wither the adversary.
It is also plain that if the person who has acquired an interest by devolution, obtains leave to carry on
the suit, the suit in his hands is not a new suit, for, as Lord Kingsdown of the Judicial Committee said
in Prannath v. Rookea Begum [1851] 7 M.I.A. 323, a cause of action is not prolonged by mere
transfer of the title. It is the old suit carried on at his instance and he is bound by all proceedings up to
the stage when he obtains leave to carry on the proceedings.
8. The effect of failure to seek leave or bring on record the person upon whom the interest has
devolved during the pendency of the suit was subject matter of consideration before this Court in
various decisions. In the case of Sm.Saila Bala Dassi v. Sm. Nirmala Sundari Dassi and another
[1958]1SCR1287, T.L. Venkatarama Aiyar, J. speaking for himself and on behalf of S.R. Das, C.J. and
A.K. Sarkar and Vivian Bose, JJ. Laid down the law that if a suit is pending when the transfer in
favour of a party was made, that would not affect the result when no application had been made to be
brought on the record in the original court during the pendency of the suit.
9. In the case of Rikhu Dev. Chela Bawa Harjug Dass v. Som Dass (deceased) through his Chela
Shiama Dass, [1976]1SCR487, while considering the effect of devolution of interest within the
meaning of Order 22 Rule 10 of the Code, on the trial of a suit during its pendency, this Court has laid
down the law at page 2160 which runs thus:-
"This rule is based on the principle that trial of a suit cannot be brought to an end merely because the
interest of a party in the subject matter of the suit has devolved upon another during the pendency of
the suit but that suit may be continued against the person acquiring the interest with the leave of the
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Court. When a suit is brought by or against a person in a representative capacity and there is a
devolution of the interest of the representative, the rule that has to be applied is Order 22, Rule 10 and
not Rule 3 or 4, whether the devolution takes place as a consequence of death or for any other reason.
Order 22, Rule 10, is not confined to devolution of interest of a party by death; it also applies if the
head of the mutt or manager of the temple resigns his office or is removed from office. In such a case
the successor to the head of the mutt or to the manager of the temple may be substituted as a party
under this rule."
10. In the case of Kiran Singh and others v. Chaman Paswan and others [1955]1SCR117, question
was raised, when decree passed by a Court is nullity and whether execution of such a decree can be
resisted at the execution stage which would obviously mean by taking an objection under Section 47 of
the Code. Venkatarama Ayyar, J. speaking for himself and on behalf of B.K. Mukherjea, Vivian Bose.
Ghulam Hasan, JJ., observed at page 352 thus.
"It is a fundamental principle well-established that a decree passed by a Court without jurisdiction is a
nullity & that its invalidity could be set up whenever and wherever it is sought to be enforced or relied
upon, even at the stage of execution and even in collateral proceedings."
11. In the case of ittyavira Mathai v. Varkey Varkey and another AIR 1964 S.C. 07, the question
which fell for consideration before this Court was if a Court, having jurisdiction over the parties to the
suit and subject matter thereof passes a decree in a suit which was barred by time, such a decree would
come within the realm of nullity and the Court answered the question in the negative holding that such
a decree cannot be treated to be nullity but at the highest be treated to be an illegal decree. While
laying down the law, the Court stated at page 910 thus:-
"If the suit was barred by time and yet, the court decreed it, the court would be committing an illegality
and therefore the aggrieved party would be entitled to have the decree set aside by preferring an appeal
against it. But it is well settled that a court having jurisdiction over the subject matter of the suit and
over the parties thereto, though bound to decide right may decide wrong; and that even though it
decided wrong it would not be doing something which it has no jurisdiction to do. It had the
jurisdiction over the subject matter and it had the jurisdiction over the party and, therefore, merely
because it made an error in deciding a vital issue in the suit, it cannot be said that it has acted beyond
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its jurisdiction. As has often been said, courts have jurisdiction to decide right or to decide wrong and
even though they decide wrong, the decrees rendered by them cannot be treated as nullities."
12. Again, in the case of Vasudev Dhanjibhai Modi v. Rajabhai Abdul Rehman and others
[1971]1SCR66, the Court was considering scope of objection under Section 47 of the Code in relation
to the executability of a decree and it was laid down that only such a decree can be subject matter of
objection which is nullity and not a decree which is erroneous either in law or on facts. J.C. Shah, J.
speaking for himself and on behalf of K.S. Hegde and A.N. Grover, JJ., laid down the law at pages
1476-77 which runs thus:-
"A Court executing a decree cannot go behind the decree between the parties or their representatives; it
must take the decree according to its tenor, and cannot entertain any objection that the decree was
incorrect in law or on facts. Until it is set aside by an appropriate proceeding in appeal or revision, a
decree even if it be erroneous is still binding between the parties.
When a decree which is a nullity, for instance, where it is passed without bringing the legal
representatives on the record of a person who was dead at the date of the decree, or against a ruling
prince without a certificate, is sought to be executed an objection in that behalf may be raised in a
proceeding for execution. Again, when the decree is made by a Court which has no inherent
jurisdiction to make it, objection as to its validity may be raised in an execution proceeding if the
objection appears on the face of the record: where the objection as to the jurisdiction of the Court to
pass the decree does not appear on the face of the record and requires examination of the questions
raised and decided at the trial or which could have been but have not been raised, the executing Court
will have no jurisdiction to entertain an objection as to the validity of the decree even on the ground of
absence of jurisdiction."
13. In the case of Everest Coal Company (P) Ltd. v. State of Bihar and others. [1978]1SCR571,
this Court held that leave for suing the receiver can be granted even after filing of the suit and held that
the infirmity of not obtaining the leave does not bear upon the jurisdiction of the trial court or the
cause of action but it is peripheral. It also held that if a suit prosecuted without such leave culminates
in a decree, the same is liable to be set aside. These observations do not mean that the decree is nullity.
On the other hand, the observation of the Court at page 15 that "any litigative disturbance of the
Court's possession without its permission amounts to contempt of its authority; and the wages of
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contempt of Court in this jurisdiction may well be voidability of the whole proceeding" would lend
support to the view and such decree is voidable but not void.
14. In the case of Haji Sk.Subhan v. Madhorao, AIR1962SC1230, the question which fell for
consideration of this Court was as to whether an executing Court can refuse to execute a decree on the
ground that the same has become inexecutable on account of the change in law in Madhya Pradesh by
promulgation of M.P. Abolition of Proprietary Rights (Estates, Mahals, Alienated Lands) Act, 1950
and a decree was passed in ignorance of the same. While answering the question in the affirmative, the
Court observed at page 1267 thus:-
"The contention that the Executing Court cannot question the decree and has to execute it as it stands,
is correct, but this principle has no operation in the facts of the present case. The objection of the
appellant is not with respect of the invalidity of the decree or with respect to the decree being wrong.
His objection is based on the effect of the provisions of the Act which has deprived the respondent of
his proprietary rights, including the right to recover possession over the land in suit and under whose
provisions the respondent has obtained the right to remain in possession of it. In these circumstances,
we are of opinion that the executing Court can refuse to execute the decree holding that it has become
inexecutable on account of the change in law and its effect."
15. In the case of Vidya Sagar v. Smt. Sudesh Kumari and others, [1976]2SCR193, an objection
was taken under Section 47 of the Code to the effect that decree passed was incapable of execution
after passing of U.P. Zamindari Abolition and Land Reforms Act, 1950 and the objection was allowed
by the High Court and when the matter was brought to this Court, the order was upheld holding that
decree was incapable of execution by subsequent promulgation of legislation by State Legislature.
16. The expressions 'void and voidable' have been subject matter of consideration before English
Courts times without number. In the case of Durayappah v. Fernando and others [1967] 2 All Eng.
LR 152, the dissolution of municipal council by the minister was challenged. Question had arisen
before the Privy Council as to whether a third party could challenge such a decision. It was held that if
the decision was complete nullity, it could be challenged by anyone, anywhere, The Court observed at
page 158 thus:-
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"The answer must depend essentially on whether the order of the Minister was a complete nullity or
whether it was an order voidable only at the election of the council. If the former, it must follow that
the council is still in office and that, if any councillor, ratepayer or other person having a legitimate
interest in the conduct of the council likes to take the point, they are entitled to ask the court to declare
that the council is still the duly elected council with all the powers and duties conferred on it by the
Municipal Ordinance."
17. In the case of In re McC. (A minor) [1985] 1 AC 528, the House of Lords followed the dictum of
Lord Coke in the Marshal sea Case quoting a passage from the said judgment which was rendered in
1613 where it was laid down that where the whole proceeding is coram non judice which means void
ab initio, the action will lie without any regard to the precept or process. The Court laid down at page
536 thus:-
"Consider two extremes of a very wide spectrum. Jurisdiction meant one thing to Lord Coke in 1613
when he said in the Marshalsea Case (1613) 10 Co. Rep.68b:
'when a court has jurisdiction of the cause, and, proceeds inverse ordinal or erroneously, there the party
who sues, or the officer or minister of the court who executes the precept or process of the court no
action lies against them. But whom the court has not jurisdiction of the cause, there the whole
proceeding is coram non judice, and actions will lie against them without any regard of the precept or
process.."
The Court of the Marshalsea in that case acted without jurisdiction because, its jurisdiction being
limited to members of the King's household, it entertained a suit between two citizens neither of whom
was a member of the King's household. Arising out of those proceedings a party arrested "by process
of the Marshal sea" could maintain an action for false imprisonment against, inter alias, "the Marshal
who directed the execution of the process." This is but an early and perhaps the most quoted example
of the application of a principle illustrated by many later cases where the question whether a court or
other tribunal of limited jurisdiction has acted without jurisdiction (coram non judice) can be
determined by considering whether at the outset of the proceedings that court had jurisdiction to
entertain the proceedings at all. So much is implicit in the Lord Coke's phrase "jurisdiction of the
cause"."
355

18. In another decision, in the case of Director of Public Prosecutions v. Head [1959] AC 83, House
of Lords was considering validity of an order passed by Secretary of the State in appeal preferred
against judgment of acquittal passed in a criminal case. The Court of Criminal Appeal quashed the
conviction on the ground that the aforesaid order of Secretary was null and void and while upholding
the decision of the Court of Criminal Appeal, the House of Lords observed at page 111 thus:-
"This contention seems to me to raise the whole question of void or voidable: for if the original order
was void, it would in law be a nullity. There would be no need for an order to quash it. It would be
automatically null and void without more ado. The continuation orders would be nullities too, because
you cannot continue a nullity. The licence to Miss Henderson would be a nullity. So would all the
dealings with her property under Section 64 of the Act of 1913. None of the orders would be
admissible in evidence. The Secretary of State would, I fancy, be liable in damages for all of the 10
years during which she was unlawfully detained, since it could all be said to flow from his negligent
act, see section 16 of the Mental Treatment Act, 1930.
But if the original order was only voidable, then it would not be automatically void. Something would
have to be done to avoid it. There would have to be an application to the High Court for certiorari to
quash it."
19. This question was examined by Court of Appeal in the case of R. v. Paddington Valuation
Officer and another, Ex Parte Peachey Property Corporation, Ltd. [1965] 2 All Eng. LR 836
where the valuation list was challenged on the ground that the same was void altogether. On these
facts, Lord Denning, M.R. laid down the law observing at page 841 thus:-
"It is necessary to distinguish between two kinds of invalidity. The one kind is where the invalidity is
so grave that the list is a nullity altogether. In which case there is no need for an order to quash it. It is
automatically null and void without more ado. The other kind is when the invalidity does not make the
list void altogether, but only voidable. In that case it stands unless and until it is set aside. In the
present case the valuation list is not, and never has been, a nullity. At most the first respondent-acting
within his jurisdiction-exercised that jurisdiction erroneously. That makes the list voidable and not
void. It remains good until it is set aside."
356

20. De Smith, Woolf and Jowell in their treatise Judicial Review of Administrative Action, Fifth
Edition, paragraph 5-044, has summarised the concept of void and voidable as follows:
"Behind the simple dichotomy of void and voidable acts (invalid and valid until declared to be invalid)
lurk terminological and conceptual problems of excruciating complexity. The problems arose from the
premise that if an act, order or decision is ultra vires in the sense of outside jurisdiction, it was said to
be invalid, or null and void. If it is intra vires it was, of course, valid. If it is flawed by an error
perpetrated within the area of authority or jurisdiction, it was usually said to be voidable; that is, valid
till set aside on appeal or in the past quashed by certiorari for error of law on the face of the record."
21. Clive Lewis in his works Judicial Remedies in Public Law at page 131 has explained the
expressions "void and avoidable" as follows:-
"A challenge to the validity of an act may be by direct action or by way of collateral or indirect
challenge. A direct action is one where the principal purpose of the action is to establish the invalidity.
This will usually be by way of an application for judicial review or by use of any statutory mechanism
for appeal or review. Collateral challenges arise when the invalidity is raised in the course of some
other proceedings, the purpose of which is not to establish invalidity but where questions of validity
become relevant."
22. Thus the expressions "void and voidable" have been subject matter of consideration on
innumerable occasions by courts.
The expression "void" has several facets. One type of void acts, transactions, decrees are those which
are wholly without jurisdiction, ab initio void and for avoiding the same no declaration is necessary,
law does not take any notice of the same and it can be disregarded in collateral proceeding or
otherwise. The other type of void act, e.g., may be transaction against a minor without being
represented by a next friend. Such a transaction is good transaction against the whole world. So far the
minor is concerned, if the decides to avoid the same and succeeds in avoiding it by taking recourse to
appropriate proceeding the transaction becomes void from the very beginning. Another type of void
act may be which is not a nullity but for avoiding the same a declaration has to be made. Voidable act
is that which is a good act unless avoided, e.g., if a suit is filed for a declaration that a document is
fraudulent and/or forged and fabricated, it is voidable as apparent state of affairs is real state of affairs
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and a party who alleges otherwise is obliged to prove it. If it is proved that the document is gorge and
fabricated and a declaration to that effect is given a transaction becomes void from the very beginning.
There may be a voidable transaction which is required to be set aside and the same is avoided from the
day it is so set aside and not any day prior to it. In cases, where legal effect of a document cannot be
taken away without setting aside the same, it cannot be treated to be void but would be obviously
voidable.
23. Under Section 47 of the Code, all questions arising between the parties to the suit in which the
decree was passed or their representatives relating to the execution, discharge or satisfaction of decree
have got to be determined by the court executing the decree and not by a separate suit. The powers of
Court under Section 47 are quite different and much narrower than its powers of appeal, revision or
review. A first appellate Court is not only entitled but obliged under law to go into the questions of
facts as well like trial court apart from questions of law. Powers of second appellate Court under
different statutes like Section 100 of the Code, as it stood before its amendment by Central Act 104 of
1976 with effect from 1.2.1977, could be exercised only on questions of law. Powers under statutes
which hare akin to Section 100 of the Code, as amended and substituted by the aforesaid Central Act,
have been further narrowed down as now in such an appeal only substantial question of law can be
considered. The powers of this Court under Article 136 of the Constitution of India, should not be
exercised simply because substantial question of law arises in a case, but there is further requirement
that such question must be of general public importance and it requires decision of this Court. Powers
of revision under Section 115 of the Code cannot be exercised merely because the order suffers from
legal infirmity or substantial question of law arises, but such an error must suffer with the vice of error
of jurisdiction. Of course, the revisional powers exercisable under the Code of Criminal Procedure and
likewise in similar statutes stand on entirely different footing and much wider as there the court can go
into correctness, legality or propriety of the order and regularity of proceeding of inferior court. It does
not mean that in each and every case the revisional court is obliged to consider question of facts as
well like a first appellate Court, but the court has discretion to consider the same in appropriate cases
whenever it is found expedient and not in each and every case. Discretion, undoubtedly, means judicial
discretion and not whim, caprice or fancy of a Judge. Powers of review cannot be invoked unless it is
shown that there is error apparent on the face of the record in the order sought to be reviewed.
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The exercise of powers under Section 47 of the Code is microscopic and lies in a very narrow
inspection hole. Thus it is plain that executing Court can allow objection under section 47 of the Code
to the executability of the decree if it is found that the same is void ab initio and nullity, apart from the
ground that decree is not capable of execution under law either because the same was passed in
ignorance of such a provision of law or the law was promulgated making a decree inexecutable after
its passing.
In the case on hand, the decree was passed against the governing body of the College which was
defendant without seeking leave of the Court to continue the suit against the University upon whom
the interest of the original defendant devolved and impleading it. Such an omission would not make
the decree void ab initio so as to invoke application of Section 47 of the Code and entail dismissal of
execution. The validity or otherwise of a decree may be challenged by filing a properly constituted suit
or taking any other remedy available under law on the ground that original defendant absented himself
from the proceeding of the suit after appearance as it had no longer any interest in the subject of
dispute or did not purposely take interest in the proceeding or colluded with the adversary or any other
ground permissible under law.
Now we proceed to consider the second question posed, but before doing so, for better appreciation of
the point involved, it would be appropriate to refer to the provisions of Order 22 Rule 10 of the Code
which runs thus:-
"10. Procedure in case of assignment before final order in suit. --(1) In other cases of an
assignment, creation or devolution of any interest during the pendency of a suit, the suit may, by leave
of the Court, be continued by or against the person to or upon whom such interest has come or
devolved.
(2) the attachment of a decree pending an appeal therefrom shall be deemed to be an interest entitling
the person who procured such attachment to the benefit of sub-rule (1)."
Plain language of Rule 10 referred to above does not suggest that leave can be sought by that person
alone upon whom the interest has devolved.
It simply says that the suit may be continued by the person upon whom such an interest has devolved
and this applies in a case where the interest of plaintiff has devolved. Likewise, in a case where interest
359

of defendant has devolved, the suit may be continued against such a person upon whom interest has
devolved, but in either eventuality, for continuance of the suit against the persons upon whom the
interest has devolved during the pendency of the suit, leave of the court has to be obtained.
If it is laid down that leave can be obtained by that person alone upon whom interest of party to the
suit has devolved during its pendency, then there may be preposterous results as such a party might not
be knowing about the litigation and consequently not feasible for him to apply for leave and if a duty is
cast upon him then in such an eventuality he would be bound by the decree even in cases of failure to
apply for leave. As a rule of prudence, initial duty lies upon the plaintiff to apply for leave in case the
factum of devolution was within his knowledge or with due diligence could have been known by him.
The person upon whom the interest has devolved may also apply for such a leave so that his interest
may be properly represented as the original party, if it ceased to have an interest in the subject matter
of dispute by virtue of devolution of interest upon another person, may not take interest therein, in
ordinary course, which is but natural, or by colluding with the other side. If the submission of Shri
Mishra is accepted, a party upon whom interest has devolved, upon his failure to apply for leave,
would be deprived from challenging correctness of the decree by filing a properly constituted suit on
the ground that the original party having lost interest in the subject of dispute, did not properly
prosecute or defend the litigation or, in doing so, colluded with the adversary. Any other party, in our
view, may also seek leave as, for example, where plaintiff filed a suit for partition and during its
pendency he gifted away his undivided interest in the Mitakshara Coparcenary in favour of the
contesting defendant, in that event the contesting defendant upon whom the interest of the original
plaintiff has devolved has no cause of action to prosecute the suit, but if there is any other co-sharer
who is supporting the plaintiff, may have a cause of action to continue with the suit by getting himself
transposed to the category of plaintiff as it is well settled that in a partition suit every defendant is
plaintiff, provided he has cause of action for seeking partition. Thus, we do not find any substance in
this submission of learned counsel appearing on behalf of the appellant and hold that prayer for leave
can be made not only by the person upon whom interest has devolved, but also by the plaintiff or any
other party or person interested.
Thus, in view of the foregoing discussions, we have no difficulty in holding that the High Court was
not justified in allowing objection under Section 47 of the Code.
360

In the result, the appeal is allowed, impugned order passed by the High Court is set aside and that by
the executing Court restored. In the circumstances of the case, we direct that the parties shall bear their
own costs.
361

Satyabrata Ghose vs. Mugneeram Bangur and Comapny and Ors.; AIR 1954 SC 44
Judges/Coram: B.K. Mukherjea, Vivian Bose and N.H. Bhagwati, JJ.
JUDGMENT
B.K. Mukherjea, J.
1. The facts giving rise to this appeal are, for the most part, uncontroverted and the dispute between the
parties centres round the short point as to whether a contract for sale of land to which this litigation
relates, was discharged and came to an end by reason of certain supervening circumstances which
affected the performance of a material part of it.
2. To appreciate the merits of the controversy, it will be necessary to give a brief narrative of the
material facts. The Defendant company, which is the main Respondent in this appeal, is the owner of a
large tract of land situated in the vicinity of the Dhakuria Lakes within Greater Calcutta. The company
started a scheme for development of this land for residential purposes which was described as Lake
Colony Scheme No. 1 and in furtherance of the scheme the entire area was divided into a large number
of plots for the sale of which offers were invited from intending purchasers. The company's plan of
work seemed to be, to enter into agreements with different purchasers for sale of these plots of land
and accept from them only a small portion of the consideration money by way of earnest at the time of
the agreement. The company undertook to construct the toads and drains necessary for making the
lands suitable for building and residential purposes and as soon as they were completed, the purchaser
would be called upon to complete the conveyance by payment of the balance of the consideration
money. Bejoy Krishna Roy, who was Defendant No. 2 in the suit and figures as a pro forma
Respondent in this appeal, was one of such purchasers who entered into a contract with the company
for purchase of a plot of land covered by the scheme. His contract is dated the 5th of August, 1940 and
he paid Rs. 101 as earnest money. In the receipt granted by the vendor for this earnest money, the
terms of the agreement are thus set out:
Received with thanks from Babu Bejoy Krishna Roy of 28, Tollygunge Circular Road, Tollygunge, the
sum of Rs. 101(Rupees one hundred and one only) as earnest money having agreed to sell to him or his
nominee 5 K. more or less in plot No. 76 on 20 and 30ft. Road in Premises No, Lake Colony Scheme
No. 1 Southern Block at the average rate of Rs. 1,000 (Rupees one thousand only) per Cotta.
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The conveyance must be completed within one month from the date of completion of roads on
payment of the balance of the consideration money, time being deemed as the Essence of the Contract.
In case of default this agreement will be considered as cancelled with forfeiture of earnest money.
Mokarari Mourashi.
Terms of payment:-One-third to be paid at the time of registration and the balance within six years
bearing Rs. 6 per cent, interest per annum.
3. On November 30, 1941, the Plaintiff Appellant was made a nominee by the purchaser for purposes
of the contract and although he brought the present suit in the character of a nominee, it has been held
by the trial judge as well as by the lower appellate court, that he was really an assignee of Bejoy
Krishna Roy in respect to the latter's rights under the contract. Some time before this date, there was an
order passed by the Collector, 24 Parganas, on 12th of November, 1941, under Section 79 of the
Defence of India Rules, on the strength of which a portion of the land covered by the scheme was
requisitioned for military purposes. Another part of the land was requisitioned by the Government on
20th of December, 1941; while a third order of requisition, which related to the balance of the land
comprised in the scheme, was passed sometime later. In November, 1943, the company addressed a
letter to Bejoy Krishna Roy informing him of the requisitioning of the lands by the Government and
stating inter alia that a considerable portion of the land appertaining to the scheme was taken
possession of by the Government and there was no knowing how long the Government would retain
possession of the same. The construction of the proposed roads and drains, therefore could not be
taken up during the continuance of the war and possibly for many years after its termination. In these
circumstances, the company decided to treat the agreement for sale with the addressee as cancelled and
give him the option of taking back the earnest money within one month from the receipt of the letter.
There was an offer made in the alternative that in case the purchaser refused to treat the contract as
cancelled, he could, if he liked, complete the conveyance within one month from the receipt of the
letter by paying the balance of the consideration money and take the land in the condition in which it
existed at that time, the company undertaking to construct the roads and the drains as circumstances
might permit, after the termination of the war. The letter ended by saying that in the event of the
addressee not accepting either of the two alternatives, the agreement would be deemed to be cancelled
and the earnest money would stand forfeited. This letter was handed over by Bejoy Krishna to his
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nominee, the Plaintiff, and there was some correspondence after that, between the Plaintiff on the one
hand and the company on the other through their respective lawyers into the details of which it is not
necessary to enter. It is enough to state that the Plaintiff refused to accept either of the two alternatives
offered by the company and stated categorically that the latter was bound by the terms of the
agreement from which it could not, in law, resile. On 18th of January, 1946, the suit, out of which this
appeal arises, was commenced by the Plaintiff against the Defendant company, to which Bejoy
Krishna Roy was made a party Defendant and the prayers in the plaint were for a two-fold declaration,
namely, (1) that the contract dated the 5th of August, 1940, between the first and the second
Defendant, or rather his nominee, the Plaintiff, was still subsisting; and(2)that the Plaintiff was entitled
to a get conveyance executed and registered by the Defendant on payment of the consideration money
mentioned in the agreement and in the manner and under the conditions specified therein.
4. The suit was resisted by the Defendant company who raised a large number of defences in answer to
the Plaintiff's claim, most of which are not relevant for our present purpose. The principal contentions
raised on behalf of the Defendant were that a suit of this description was not maintainable under
Section 42 of the Specific Relief Act and that the Plaintiff had no locus standi to institute the suit. The
most material plea was that the contract of sale stood discharged by frustration as it became impossible
by reason of the supervening events to perform a material part of it. Bejoy Krishna Roy did not file any
written statement and he was examined by the Plaintiff as a witness on his behalf.
5. The trial judge by his judgment dated October 10th 1947, over-ruled all the pleas taken by the
Defendant and decreed the Plaintiff's suit. An appeal taken by the Defendant to the court of the District
Judge of 24-Parganas was dismissed on the 25th February, 1949 and the judgment of the trial court
was affirmed. The Defendant company thereupon preferred a second appeal to the High Court which
was heard by a Division Bench consisting of Das Gupta and Lahiri, JJ. The only question canvassed
before the High Court was, whether the contract of sale was frustrated by reason of the requisition
orders issued by the Government? The learned judges answered this question in the affirmative in
favour of the Defendant and on that ground alone dismissed the Plaintiff's suit. The Plaintiff has now
come before us on the strength of a certificate granted by the High Court under Article 133(1)(c) of the
Constitution of India.
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6. The learned Attorney-General, who appeared in support of the appeal, has put forward a three-fold
contention on behalf of his client. He has contended in the first place that the doctrine of English law
relating to frustration of contract, upon which the learned judges of the High Court based their
decision, has no application to India in view of the statutory provision contained in Section 56 of the
Indian Contract Act. It is argued in the second place, that even if the English law applies, it can have
no application to contracts for sale of land and that is in fact the opinion expressed by the English
Judges themselves. His third and the last argument is that on the admitted facts and circumstances of
this case there was no frustrating event which could be said to have taken away the basis of the
contract or rendered its performance impossible in any sense of the word.
7. The first argument advanced by the learned Attorney-General raises a somewhat debatable point
regarding the true scope and effect of Section 56 of the Indian Contract Act and to what extent, if any,
it incorporates the English rule of frustration of contracts.
8. Section 56 occurs in Chapter IV of the Indian Contract Act which relates to performance of
contracts and it purports to deal with one class of circumstances under which performance of a contract
is excused or dispensed with on the ground of the contract being void. The section stands as follows:
An agreement to do an act impossible in itself is void.
A contract to do an act which after the contract is made, becomes impossible or by reason of some
event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible
or unlawful.
Where one person has promised to do something which he knew, or, with reasonable diligence, might
have known, and which the promisee did not know to be impossible or unlawful, such promisor must
make compensation to such promisee for any loss which such promisee sustains through the non-
performance of the promise.
9. The first paragraph of the section lays down the law in the same way as in England. It speaks of
something which is impossible inherently or by its very nature, and no one can obviously be directed
to perform such an act. The second paragraph enunciates the law relating to discharge of contract by
reason of supervening impossibility or illegality of the act agreed to be done. The wording of this
paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannot
365

derogate from the general words used in the enactment. This much is clear that the word "impossible"
has not been used here in the sense of physical or literal impossibility. The performance of an act may
not be literally impossible but it may be impracticable and unless from the point of view of the object
and purpose which the parties had in view; and if an untoward event or change of circumstances totally
upsets the very foundation upon which the parties rested their bargain, it can very well be said that the
promisor finds it impossible to do the act which he promised to do.
10. Although various theories have been propounded by the judges and jurists in England regarding the
juridical basis of the doctrine of frustration, yet the essential idea upon which the doctrine is based is
that of impossibility of performance of the contract; in fact impossibility and frustration are often used
as interchangeable expressions. The changed circumstances, it is said, make the performance of the
contract impossible and the parties are absolved from the further performance of it as they did not
promise to perform an impossibility. The parties shall be excused, as Lord Loreburn says: (See
Tamplin Steamship Co. Ltd. v. Anglo Mexican Petroleum Products Co. Ltd. L.R. (1916) 2 A.C. 397,
403).
If substantially the whole contract becomes impossible or performance or in other words impracticable
by some cause for which neither was responsible.
11. In Joseph Constantine Steamship Line Limited v. Imperial Smelting Corporation, Ltd. L.R. 1942
A.C. 154 at 168. Viscount Maugham observed that the "doctrine of frustration is only a special case of
the discharge of contract by an impossibility of performance arising after the contract was made." Lord
Porter agreed with this view and rested the doctrine on the same basis. The question was considered
and discussed by a Division Bench of the Nagpur High Court in Kesari Chand v. Governor-General in
Council I.L.R.(1947) 19 9 Nag. 718 and it was held that the doctrine of frustration comes into play
when a contract becomes impossible of performance, after it was made, on account of circumstances
beyond the control of the parties. The doctrine is a special case of impossibility and as such comes
under Section 56 of the Indian Contract Act. We are in entire agreement with this view which is
fortified by a recent pronouncement of this Court in Ganga Saran v. Ram Charan 1951 S.C.J. 799,
where Fazl Ali, J., in speaking about frustration observed in his judgment as follows:
It seems necessary for us to emphasise that so far as the Courts in this country are concerned, they
must look primarily to the law as embodied in Sections 32 and 56 of the Indian Contract Act, 1872.
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12. We hold, therefore, that the doctrine of frustration is really an aspect or part of the law of discharge
of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence
comes within the purview of Section 56 of the Indian Contract, Act. It would be incorrect to say that
Section 56 of the Contract Act applies only to cases of physical impossibility and that where this
section is not applicable, recourse can be had to the principles of English law on the subject of
frustration. It must be held also, that to the extent that the Indian Contract Act deals with a particular
subject, it is exhaustive upon the same and it is permissible to import the principles of English law de
hors these statutory provisions. The decisions of the English Courts possess only a persuasive value
and may be helpful in showing how the Courts in England have decided cases under circumstances
similar to those which have come before our Courts.
13. It seems necessary, however, to clear up some misconception which is likely to arise because of the
complexities of the English law on the subject. The law of frustration in England developed, as is well
known, under the guise of reading implied terms into contracts. The Court implies a term or exception
and treats that as part of the contract. In the case of Taylor v. Cald well (1863) 3 B. & S. 826,
Blackburn, J., first formulated the doctrine in its modern form. The Court there was dealing with a case
where a music-hall in which one of the contracting parties had agreed to give concerts on certain
specified days was accidentally burnt by fire. It was held that such a contract must be regarded as
subject to an implied condition that the parties shall be excused, in case, before breach, performance
becomes impossible from perishing of thing without default of the contractor." Again in Robinson v.
Davison L.R. (1871) 6 Exc. 269 there was a contract between the Plaintiff and the Defendant's wife (as
the agent of her husband) that she should play the piano at a concert to be given by the Plaintiff on a
specified day. On the day in question she was unable to perform through illness. The contract did not
contain any term as to what was to be done in case of her being too ill to perform. In an action against
the Defendant for breach of contract, it was held that the wife's illness and the consequent incapacity
excused her and that the contract was in its nature not absolute but conditional upon her being well
enough to perform. Bramwell, B., pointed out in course of his judgment that in holding that the illness
of the Defendant incapacitated her from performing the agreement the Court was not really engrafting
a new term upon an express contract. It was not that the obligation was absolute in the original
agreement and a new condition was subsequently added to it; the whole question was whether the
original contract was absolute or conditional and having regard to the terms of the bargain, it must be
held to be conditional.
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14. The English law passed through various stages of development since then and the principles
enunciated in the various decided authorities cannot be said to be in any way uniform. In many of the
pronouncements of the highest courts in England the doctrine of frustration was held "to be a device by
which the rules as to absolute contracts are reconciled with a special exception which justice
demands". (Vide Hirji Mulji v. Cheong Yne Steamship Co. Ltd. L.R. 1926 A.C. 497 at 510). The
Court, it is said, cannot claim to exercise a dispensing power or to modify or alter contracts. But when
an unexpected event or change of circumstance occurs, the possibility of which the parties did not
contemplate, the meaning of the contract is taken to be not what the parties actually intended, but what
they as fair and reasonable men would presumably have intended and agreed upon, if having such
possibility in view they had made express provision as to their rights and liabilities in the event of such
occurrence. (Vide Dhal v. Nelson, Donkin & Co L.R. (1881) 6 A.C. 38 at 5). As Lord Wright observed
in Joseph Constantine Steamship Co. v. Imperial Smelting Corporation Ltd. L.R. 1942 A.C. 154 at
185.
In ascertaining the meaning of the contract and its application to the actual occurrences, the Court has
to decide, not what the parties actually intended but what as reasonable men they should have
intended. The Court personifies for this purpose the reasonable man.
Lord Wright clarified the position still further in the later case of Denny, Mott and Dickson Ltd. v.
James B. Fraser & Co. Ltd. L.R. 1944 A.C. 265 at 275, where he made the following observations:
Though it has been constantly said by High Authority, including Lord Summer, that the explanation of
the rule is to be found in the theory that it depends on an implied condition of the contract, that is
really no explanation. It only pushes back the problem a single stage. It leaves the question what is the
reason for implying a term. Nor can I reconcile that theory with the view that the result does not
depend on what the parties might, or would as hard bargainers, have agreed. The doctrine is invented
by the Court in order to supplement the defects of the actual contract.... To my mind the theory of the
implied condition is not really consistent with the true theory of frustration. It has never been acted on
by the Court as a ground of decision, but is merely stated as a theoretical explanation.
15. In the recent case of British Movieto-news Ltd. v. London and District Cinemas Ltd. L.R. (1951) 1
K.B. 190, Denning, L.J., in the Court of Appeal took the view expressed by Lord Wright as stated
above as meaning that "the Court really exercises a qualifying power-a power to qualify the absolute,
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literal or wide terms of the contract-in order to do what is just and reasonable in the new situation".
"The day is gone" the learned Judge went on to say, "when we can excuse an unforeseen injustice by
saying to the sufferer 'it is your own folly, you ought not to have passed that form of words. You ought
to have put in a clause to protect yourself. We no longer credit a party with the foresight of a Prophet
or his lawyer with the draftsmanship of a Chalmers. We realise that they have their limitations and
make allowances accordingly. It is better thus. The old maxim reminds us that he who clings to the
letter clings to the dry and barren shell and misses the truth and substance of the matter. We have of
late paid heed to this warning, and we must pay like heed now".
16. This decision of the Court Appeal was reversed by the House of Lords and Viscount Simon in
course of his judgment expressed disapproval of the way in which the law was stated by Denning, L.J.
It was held that there was no change in the law as a result of which the courts could exercise a wider
power in this regard than they used to do previously.
The principle remains the same" thus observed his Lordship. "Particular applications of it may greatly
vary and the oretical Lawyers may debate whether the rule should be regarded as arising from implied
term or because the basis of the contract no longer exists. In any view, it is a question of construction
as Lord Wright pointed out in Constantine's case L.R. 1942 A.C. 154 at 185 and as has been repeatedly
asserted by other masters of law (2).
17. These differences in the way of formulating legal theories really do not concern us so long as we
have a statutory provision in the Indian Contract Act. In that we have to go by is that of supervening
impossibility or illegality as laid down in Section 56 of the Contract Act, taking the word 'impossible'
in its practical and not literal sense. It must be borne in mind, however, that Section 56 lays down a
rule of positive law and does not leave the matter to be determined according to the intention of the
parties.
18. In the latest decision of the House of Lords referred to above, the Lord Chancellor puts the whole
doctrine upon the principle of construction. But the question of construction may manifest itself in two
totally different ways. In one class of cases the question may simply be, as to what the parties
themselves had actually intended; and whether or not there was a condition in the contract itself,
express or implied, which operated, according to the agreement of the parties themselves, to release
them from their obligations; this would be a question of construction pure and simple and the ordinary
369

rules of construction would have to be applied to find out what the real intention of the parties was.
According to the Indian Contract Act, a promise may be express or implied (vide Section 9. ). In cases,
therefore, where the Court gathers as a matter of construction that the contract itself contained
impliedly or expressly a term, according to which it would stand discharged on the happening of
certain circumstances the dissolution of the contract would take place under the terms of the contract
itself and such cases would be outside the purview of Section 56 altogether. Although in English law
these cases are treated as cases of frustration in India they would be dealt with under, Section 32 of the
Indian Contract Act which deals with contingent contracts or similar other provisions contained in the
Act. In the large majority of cases, however, the doctrine of frustration is applied not on the ground
that the parties themselves agreed to an implied term which operated to release them from the
performance deciding cases in India the only doctrine of the contract. The relief is given by the court
on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract
was frustrated by the intrusion or occurrence of an unexpected event of change of circumstances which
was beyond what was contemplated by the parties at the time when they entered into the agreement.
Here there is no question of finding out an implied term agreed to by the parties embodying a
provision for discharge, because the parties did not think about the matter at all nor could possibly
have any intention regarding it. When such an event or change of circumstance occurs which is so
fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the Court
which can pronounce the contract to be frustrated and at an end. The Court undoubtedly has to
examine the contract and the circumstances under which it was made. The belief, knowledge and
intention of the parties are evidence, but evidence only on which the Court has to form its own
conclusion whether the changed circumstances destroyed altogether the basis of the adventure and its
underlying object (Vide Morgan v. Mansor (1947) 2 All. E.R. 606. This may be called a rule of
construction by English Judges but it is certainly not a principle of giving effect to the intention of the
parties which underlines all rules of construction. This is really a rule of positive law and as such
comes within purview of Section 56 of the Indian Contract Act.
(13) L.R. 1952 A.C. 166 at 184.
19. It must be pointed out here that if the parties do contemplate the possibility of an intervening
circumstance which might affect the performance of the contract, but expressly stipulate that the
contract would stand despite such circumstance, there can be no case of frustration because the basis of
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the contract being to demand performance despite the happening of a particular event, it cannot
disappear when that event happens. As Lord Atkinson said in Matthey v. Curling L.R. (1922) 2 A.C.
110 at 234.
a person who expressly contracts absolutely to do a thing not naturally impossible is not excused for
non-performance because of being prevented by the act of God or the King's enemies...... or vis major.
20. This being the legal position, a contention in the extreme form that the doctrine of frustration as
recognised in English law does not come at all within the purview of Section 56 of the Indian Contract
Act cannot be accepted.
21. The second contention raised by the Attorney-General can be disposed of in few words. It is true
that in England the judicial opinion generally expressed is, that the doctrine of frustration does not
operate in the case of contracts for sale of land (vide Billingdon Estates Co. v. Stonefield Estates, Ltd.
(1951) 1 All. E.R. 853) But the reason underlying this view is that under the English law as soon as
there is a concluded contract by A to sell land to B at certain price, B becomes, in equity, the owner of
the land subject to his obligation to pay the purchase money. On the other hand A in spite of his having
the legal estate holds the same in trust for the purchaser and whatever rights he still retains in the land
are referable to his right to recover and receive the purchase money. The rule of frustration can only
put an end to purely contractual obligations, but it cannot destroy an estate in land which has already
accrued in favour of a contracting party. According to the Indian law, which is embodied in Section 54
of the Transfer of Property Act, a contract for sale of land does not of itself create any interest in the
property which is the subject-matter of the contract. The obligations of the parties to a contract for sale
of land are, therefore, the same as in other ordinary contracts and consequently there is no conceivable
reason why the doctrine of frustration should not be applicable to contracts for sale of land in India.
This contention of the Attorney-General must, therefore, fail.
22. We now come to the last and most important point in this case which raises the question as to
whether, as a result of the requisition orders, under which the lands comprised in the development
scheme of the Defendant company were requisitioned by Government, the contract of sale between the
Defendant company and the Plaintiff's predecessor stood dissolved by frustration or in other words
became impossible of performance.
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23. It is well settled and not disputed before us that if and when there is frustration the dissolution of
the contract occurs automatically. It does not depend, as does recession of the contract on the ground
of repudiation or breach, or on the choice or election of either party. It depends on the effect of what
has actually happened on the possibility of performing the contract Pet Lord Wright in Dnny, Mott &
Dickson, Ltd. v. James B. Fraser & Co., Ltd. L.R. 1944 A.C. 265, 274. What happens generally in
such cases and has happened here is that one party claims that the contract has been frustrated while
the other party denies it. The issue has got to be decided by the Court's ex post facto, on the actual
circumstances of the case L.R. 1944 A.C. 265, 274.
24. We will now proceed to examine the nature and terms of the contract before us and the
circumstances under which was entered into to determine whether or not the disturbing element, which
is alleged to have happened here, has substantially prevented the performance of the contract as a
whole.
25. It may be stated at the outset that the contract before us cannot be looked upon as an ordinary
contract for sale and purchase of a piece of land; it is an integral part of a development scheme started
by the Defendant company and is one of the many contracts that have been entered into by a large
number of persons with the company. The object of the company was undoubtedly to develop a fairly
extensive area which was still undeveloped and make it usable for residential purposes by making
roads and constructing drains through it. The purchaser, on the other hand, wanted the land in regard to
which he entered into the contract to be developed and made ready for building purposes before he
could be called upon to complete the purchase. The most material thing which deserves notice is, that
there is absolutely no time limit within which the roads and drains are to be made. The learned District
Judge of Alipore, who heard the appeal, from the trial Court's judgment found it as a fact, on the
evidence in the record, that there was not even an understanding between the parties on this point. As a
matter of fact, the first acquisition order was passed nearly 15 months after the contract was made and
apparently no work was done by the Defendant company in the mean time. Another important thing
that requires notice in this connection is that the war was already on, when the parties entered into the
contract. Requisition orders for taking temporary possession of lands for war purposes were normal
events during this period. Apart from requisition orders there were other difficulties in doing
construction work at that time because of the scarcity of materials and the various restrictions which
the Government had imposed in respect of them. That there were certain risks and difficulties involved
372

in carrying on operations like these, could not be in the contemplation of the parties at the time when
they entered into the contract, and that is probably the reason why no definite time limit was
mentioned in the contract within which the roads and drains are to be completed. This was left entirely
to the convenience of the company and as a matter of fact the purchaser did not feel concerned about
it. It is against this background that we are to consider to what extent the passing of the requisition
orders affected the performance of the contract in the present case.
26. The company, it must be admitted, had not commenced the development work when the requisition
order was passed in November, 1941. There was no question, therefore, of any work or service being
interrupted for an indefinite period of time. Undoubtedly the commencement of the work was delayed
but was the delay going to be so great and of such a character that it would totally upset the basis of the
bargain and commercial object which the parties had in view ? The requisition orders, it must be
remembered, were, by their very nature, of a temporary character and the requisitioning authority
could, in law, occupy the position of a licensee in regard to the requisitioned property. The order might
continue during the whole period of the war and even for some time after that or it could have been
withdrawn before the war terminated. If there was a definite time limit agreed to by the parties within
which the construction work was to be finished, it could be said with perfect propriety that delay for an
indefinite period would make the performance of the contract impossible within the specified time and
this would seriously affect the object and purpose of the venture. But when there is no time limit
whatsoever in the contract, nor even an understanding between the parties on that point and when
during the war the parties could naturally anticipate restrictions of various kinds which would make
the carrying on of these operations more tardy and difficult than in times of peace, we do not think that
the order of requisition affected the fundamental basis upon which the agreement rested or struck at the
roots of the adventure.
27. The learned Judges of the High Court in deciding the case against the Plaintiff relied entirely on
the time factor. It is true that the parties could not contemplate an absolutely unlimited period of time
to fulfil their contract. They might certainly have in mind a period of time which was reasonable
having regard to the nature and magnitude of the work to be done as well as the conditions of war
prevailing at that time. Das Gupta, J., who delivered the judgment of the High Court, says first of all
that the company had in contemplation a period of time not much exceeding 2 or 3 years as the time
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for performance of the contract ; the purchaser also had the same period of time in contemplation. The
learned Judge records his finding on the point in the following words:
My conclusion on a consideration of the surrounding circumstances of the contract is that the parties
contemplated that the roads and drains would be constructed and the conveyance would be completed
in the not distant future.
28. This finding is inconclusive and goes contrary to what has been held by the District Judge who was
undoubtedly the last Court of facts. In our opinion, having regard to the nature and terms of the
contract, the actual existence of war conditions at the time when it was entered into, the extent of the
work involved in the development scheme and last though not the least the total absence of any
definite period of time agreed to by the parties within which the work was to be completed, it cannot
be said that the requisition order vitally affected the contract or made its performance impossible.
29. Mr. Gupta, who appeared for the Respondent company put forward an alternative argument that
even if the performance of the contract was not made impossible, it certainly became illegal as a result
of the requisition order and consequently the contract became void under Section 56 of the Indian
Contract Act as soon as the requisition order was made. In support of his contention the learned
Counsel placed reliance upon certain provisions of the Defence of India Rules and also upon
illustration (d) to Section 56 of the Contract Act.
374

Alopi Parshad and Sons Ltd. vs. Union of India (UOI); AIR 1960 SC 588
Judges/Coram: J.C. Shah, K.N. Wanchoo and S.K. Das, JJ.
JUDGMENT
J.C. Shah, J.
1. On May 3, 1937, M/s. Alopi Parshad and Sons Ltd., who will hereinafter be referred to as the
Agents, were, under an agreement in writing, appointed by the Governor-General for India in Council,
as from October 1, 1937, agents for purchasing ghee required for the use of the Army personnel. The
Government of India, by clause 12 of the agreement, undertook to pay to the Agents the actual
expenses incurred for purchasing ghee, cost of empty tins, expenses incurred on clearance of
Government tins from the railway, export land-customs duty levied on ghee purchased and exported
from markets situated in Indian States, octroi duty, terminal tax or other local rates on ghee, and
certain other charges incurred by the Agents. The Government also agreed to pay to the Agents at rates
specified in the agreement :
(1) the financing and overhead (mandi) charges incurred in the buying markets.
(2) the cost of establishments and contingencies provided by the Agents on the Government's account
for carrying out the purchase and supply of ghee, and
(3) the buying remuneration.
In consideration of the Government paying to the Agents a sum of rupee one and anna one only per
one hundred pounds nett weight of finally accepted ghee, as combined financing and overhead (mandi)
charges, the Agents by clause 13 undertook to provide the working capital and also to bear the costs,
charges and expenses, including financing and overhead charges incurred by them in buying ghee in
the market.
2. The Agents also undertook, by clause 14, to bear the establishment and contingency charges for the
due performance by them of the terms of the agreement, and the Government agreed to pay in
consideration thereof annas 14 and pies 6 per every hundred pounds of ghee accepted. The
375

Government also agreed to pay to the Agents remuneration for services rendered in purchasing ghee, at
the rate of one rupee per one hundred pounds nett weight of accepted ghee.
3. Pursuant to the agreement, the Agents supplied from time to time ghee to the Government of India,
as required. In September, 1939, the World War II broke out, and there was an enormous increase in
the demand by the Government of ghee. On June 20, 1942, the original agreement was, by mutual
consent, revised, and in respect of the establishment and contingencies, the uniform rate of annas 14
and 6 pies per hundred pounds of accepted ghee, was substituted by a graded scale : for the first 5
thousand tons, the Agents were to be paid at the rate of Re. 0-14-6 per hundred pounds, for the next
five thousand tons, at the rate of annas 8 per hundred pounds, and at the rate of annas 4 per hundred
pounds, for supplies exceeding ten thousand tons. Even in respect of remuneration for services, a
graded scale was substituted : for the first five thousand tons, remuneration was to be paid at the rate of
Re. 1 per hundred pounds, at the rate of annas 8 per hundred pounds, for the next five thousand, and
annas 4 per hundred pounds, for supplies exceeding ten thousand tons. This modification in the rates
became effective from September 11, 1940.
4. By their communication dated December 6, 1943, the Agents demanded that the remuneration,
establishment and contingencies, and mandi and financing charges, be enhanced. In respect of the
buying remuneration, they proposed a 25 per cent increase; in respect of establishment and
contingencies, they proposed an increase of 20 per cent, and in respect of mandi and financing charges,
an increase of 112 per cent. This revision of the rates was claimed on the plea that the existing rates,
fixed in peace time, were "entirely superseded by the totally altered conditions obtaining in war time."
To this letter, no immediate reply was given by the Government of India, and the Agents continued to
supply ghee till May, 1945. On May 17, 1945, the Government of India, purporting to exercise their
option under clause 9 of the agreement, served the Agents with a notice of termination of the
agreement. On May 22, 1945, the Chief Director of Purchases, on behalf of the Government of India,
replied to the letter dated December 6, 1943, and informed the Agents that normally no claim for
revision of rates could be entertained during the currency of the agreement and especially with
retrospective effect, but a claim for ex-gratia compensation to meet any actual loss suffered by an
agent, might be entertained, if the Agents established circumstances justifying such a claim. The Chief
Director of Purchases called upon the Agents to submit the report of their auditors on the agency
accounts, for the ghee supplied, as also a statement in detail, showing the actual expenditure incurred.
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5. The notice dated May 17, 1945, was waived by mutual consent, and under an arrangement dated
May 16, 1946, the Agents agreed to supply five thousand tons of ghee by October 31, 1946, on which
date, the agreement dated May 3, 1937, was to come to an end.
6. By their letter dated July 1, 1946, the Agents claimed that a dispute had arisen under the contract,
and appointed one Nigam to be arbitrator on their behalf to adjudicate upon the dispute, pursuant to
clause 20 of the terms of the agreement dated May 3, 1937, and called upon the Government of India
to appoint their arbitrator. The Government of India, by their letter dated July 10, 1946, nominated one
Rangi Lal to be arbitrator on their behalf. Before the arbitrators, the Agents made their claim under
four heads :
(1) The Agents claimed that the agreement dated June 20, 1942, was not binding upon them, and they
were entitled to Rs. 23,08,372-8-0 being the difference between the buying remuneration,
establishment and contingency charges due under the agreement dated May 3, 1937, and the amount
actually received. The details of this claim were set out in Sch. A.
(2) In the event of the arbitrators holding the agreement dated June 20, 1942, was binding, a revision
of the rates for establishment and contingencies, and an additional amount of Rs. 6,91,600-4-0 at such
revised rates as set out in Sch. B.
(3) Revision of the rates fixed under the agreement dated June 20, 1942, of the mandi charges, and an
additional amount of Rs. 14,47,204-6-3, at the revised rates as set out Sch. C.
(4) Damages for wrongful termination of the agreement in the month of October, 1946, amounting to
Rs. 2,41,235, as set out in Sch. D.
7. The arbitrators did not arrive at any agreed decision, and the dispute was referred to Lala Achru
Ram who was nominated an umpire. The umpire was of the view that the agreement dated June 20,
1942, was valid, and the claim as set out in Sch. A was untenable; that the claims set out in Sch. B and
Sch. C, did not arise out of the agreement, and he had no jurisdiction to adjudicate upon the same; and
that as the claim set out in Sch. D, was outside the scope of the Reference, he was incompetent to give
any finding on that claim.
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8. This Award was filed in the court of the Subordinate Judge, First class, Delhi. The Agents applied to
set aside the Award on the grounds that the umpire was guilty of misconduct in that he failed to give
an adequate opportunity to the Agents to present and substantiate their case before him, and that in
holding that the claims as described in Schedules B, C and D, either did not arise out of the agreement
or were outside the scope of the Reference, the umpire erred. The learned Subordinate Judge held that
the umpire was in error in leaving undetermined claims described in Sch. B and Sch. D, which were
within the scope of the Reference, and that the claim described in Sch. C was properly left undecided
as it was outside the scope of the Reference. He also held that the Award was vitiated on account of
judicial misconduct, because the Agents were not allowed by the umpire sufficient opportunity to
place their case. The learned Subordinate Judge, in that view, proceeded to set aside the Award, but he
declined to supersede the Reference, and left it to the parties to "appoint other arbitrators in view of
clause 20 of the agreement, for settling the dispute."
9. Against the order of the Subordinate Judge, the Union of India appealed to the High Court of East
Punjab. Khosla, J., who heard the appeal, confirmed the order passed by the court of first instance. The
learned Judge agreed with the view of the Subordinate Judge that the umpire had been guilty of
judicial misconduct. The learned Judge observed in his judgment that the claim of the Agents, as
described in Schedules B and C, was not beyond the arbitration agreement. In so observing,
presumably, the learned Judge committed some error. The Subordinate Judge had come to the
conclusion that the claim described in Sch. C, was beyond the arbitration agreement, and no reasons
were given by Khosla, J., for disagreeing with that view.
10. Appeal 31 of 1953 under the Letters Patent, against the judgment of Khosla J., was dismissed by a
Division Bench of the High Court of East Punjab, observing that the claim detailed in Sch. B arose out
of the contract, but that it was unnecessary to decide whether the claim described in Sch. C for an
increase in the financing and overhead mandi charges, was properly ruled out by the umpire.
11. In the meantime, by letter dated August 2, 1952, the Agents called upon the Government of India
to appoint their arbitrator under clause 20 of the agreement dated May 3, 1937, for a fresh adjudication
of the dispute, and intimated that they had again appointed Nigam to be their arbitrator. The
Government of India informed the Agents by their letter dated August 14, 1952, that they had filed an
appeal against the judgment of the Subordinate Judge, Delhi, and in the circumstances, the question of
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appointing an arbitrator, did not arise until the final disposal of the appeal. The Government, however,
without prejudice to their rights, including the right to prosecute the appeal, again appointed Rangi Lal
to be arbitrator on their behalf.
12. After the Appeal under the Letters Patent, was decided by the East Punjab High Court on
December 16, 1953, the arbitrators entered upon the reference. On March 1, 1954, the Agents
submitted their claim, contending that the supplementary agreement dated June 20, 1942, was void and
binding upon them, and that, in any event, on the representations made on December 6, 1943, and from
time to time thereafter, they were assured by the Chief Director of Purchases that the claim made by
them would be favourably considered by the Government of India, and relying on these assurances,
they continued to supply ghee in quantities demanded by the Government after incurring "heavy extra
expenditure". They also claimed that they were constantly demanding an increase in the mandi and
financing charges, but the Chief Director of Purchases, who was duly authorized in that behalf by the
Government, gave repeated verbal assurances that their demands would be satisfied, and requested
them to continue supplies for the successful prosecution of the war. Contending that the Government
of India was estopped from repudiating their claim set out in Schedules B and C, in view of all the
facts and circumstances stated in the petition, the Agents prayed for a declaration that the
supplementary agreement dated June 20, 1942, was void and not binding upon them, and for a decree
for payment of Rs. 27,48,515 within interest at the rate of 6 per cent per annum from March 1, 1954,
and, in the alternative, for a decree for Rs. 25,63,037-7-3, with interest at the rate of 6 per cent per
annum from March 1, 1954, till recovery. This claim of the Agents was resisted by the Government of
India. Inter alia, it was denied that any assurances were given by the Director of Purchases or that the
Agents continued to supply ghee relying upon such alleged assurances. It was asserted that the Agents
continued to supply ghee without insisting upon any modification of the agreement, because they
found, and it must be presumed that they found, it profitable to do so under the terms fixed under the
supplementary contract dated June 20, 1942. The claims made for the additional buying remuneration,
for mandi charges and for establishment and contingency charges, were denied. It was urged that, in
any event, the claim for additional buying remuneration and for mandi charges and for reimbursement
of establishment and contingencies, was not covered by clause 20 of the agreement, under which the
submission to arbitration was made, and the arbitrators had no jurisdiction to adjudicate upon those
claims.
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13. On the claim made by the Agents, and the denial thereof, the arbitrators incorporated the points of
contest in the form of certain issues. On May 2, 1954, the arbitrators made an award rejecting the
primary claim on the view that the supplementary agreement dated June 20, 1942, was for
consideration and the same was valid and binding upon the Agents. On the alternative claim, they
awarded, under the head of establishment and contingencies, Rs. 80,994-12-6, being the actual loss
which, in their view, the Agents had suffered, and Rs. 11,27,965-11-3, in addition to the amounts
received by the Agents from the Government for mandi and financing charges. The arbitrators
accordingly awarded an amount of Rs. 13,03,676-12-6 with future interest from November 15, 1949,
till the date of realization, and costs.
14. The award was filed in the court of the Commercial Subordinate Judge, Delhi, on June 2, 1954.
The Government of India applied under Sections 30 and 33 of the Indian Arbitration Act, to set aside
the award on the grounds that it was invalid, that it had been improperly procured, and that it was
vitiated on account of judicial misconduct of the arbitrators. The Commercial Subordinate Judge held
that the arbitrators had committed an error apparent on the face of the award in ordering the Union to
pay to the Agents additional remuneration and financing and overhead charges, but, in his view,
specific questions having been expressly referred for adjudication to the arbitrators, the award was
binding upon the parties and could not be set aside on the ground of an error apparent on the face
thereof. The learned Judge, accordingly, rejected the application for setting aside the award.
15. Against the order made by the Subordinate Judge, an appeal was preferred by the Union of India to
the High Court of East Punjab at Chandigarh. At the hearing of the appeal, counsel for the Agents
sought to support the award on the plea that certain questions had been specifically referred to the
arbitrators, and it was open to the arbitrators to make the award which they made, on the basis of
quantum meruit. The High Court held that there was no specific reference of any questions of law to
the arbitrators, and the decision of the arbitrators was not conclusive and was open to challenge,
because it was vitiated by errors apparent on the face of the award. The High Court reversed the order
passed by the Subordinate Judge, and set aside the award of the arbitrators, holding that there was no
"legal basis for awarding any compensation" to the Agents for any loss which they might have
sustained. This appeal has been filed with leave of the High Court under clause 133(1)(a) of the
Constitution.
380

16. The extent of the jurisdiction of the court to set aside an award on the ground of an error in making
the award is well-defined. The award of an arbitrator may be set aside on the ground of an error on the
face thereof only when in the award or in any document incorporated with it, as for instance, a note
appended by the arbitrators, stating the reasons for his decision, there is found some legal proposition
which is the basis of the award and which is erroneous - Champsey Bhara and Company v. Jivaraj
Balloo Spinning and Weaving Company, Limited L.R. 50 IndAp 324 If, however, a specific question
is submitted to the arbitrator and he answers it, the fact that the answer involves an erroneous decision
in point of law, does not make the award bad on its face so as to permit of its being set aside - In the
matter of an arbitration between King and Duveen and Others L.R. (1913) 2 K.B.D. 32 and
Government of Kelantan v. Duff Development Company Limited L.R. 1923 A.C. 395
17. Was the reference made by the parties to the arbitrators a specific reference, that is, a reference
inviting the arbitrators to decide certain questions of law submitted to them ? If the reference is of a
specific question of law, even if the award is erroneous, the decision being of arbitrators selected by
the parties to adjudicate upon those questions, the award will bind the parties. In the reference
originally made to the arbitrators by the letter of the Agents on July 1, 1946, and the reply of the
Government dated July 10, 1946, a general reference of the dispute was made in terms of clause 20 of
the agreement. Even though the award made on that reference, was set aside by the Subordinate Judge,
the arbitration was not superseded, and the reference was expressly kept alive, reserving an
opportunity to the parties to appoint fresh arbitrators pursuant to the agreement, for settling the dispute;
and by letters respectively dated August 2, 1952, and August 14, 1952, a general reference was again
made to the arbitrators. Paragraph 14 of the letter written by the Agents on August 2, 1952, evidences
an intention to serve the notice under clause 20 of the agreement.
Issues were undoubtedly raised by the arbitrators, but that was presumably to focus the attention of the
parties on the points arising for adjudication. The Agents had made their claim before the arbitrators,
and the claim and the jurisdiction of the arbitrators to adjudicate upon the claim, were denied. The
arbitrators were by the terms of reference only authorized to adjudicate upon the disputes raised. There
is no foundation for the view that a specific reference, submitting a question of law for the adjudication
of the arbitrators, was made.
381

18. We agree, therefore, with the view of the High Court that the reference made, was a general
reference and not a specific reference on any question of law. The award may, therefore, be set aside if
it be demonstrated to be erroneous on the face of it.
19. The original agreement dated May 3, 1937, was modified by the supplementary agreement dated
June 20, 1942, and the arbitrators have held that the modified agreement was binding upon the Agents.
By the agreement as modified, a graded scale was fixed for the establishment and the contingencies to
be paid to the Agents, and also for the mandi charges and overhead expenses. The arbitrators still
proceeded to award an additional amount for establishment and contingencies and an additional
amount for mandi charges. By clause 14(a), read with clause 12(b)(2) of the agreement, the rate at
which establishment and contingency charges were to be paid, was expressly stipulated, and there is no
dispute that the Government of India have paid to the Agents those charges at the stipulated rate for
ghee actually purchased. The award of the arbitrators shows that the amount actually received from the
Government, totalled Rs. 6,04,700-9-0, whereas, according to the account maintained by the Agents,
they had spent Rs. 6,77,542-0-3. Granting that the Agents had incurred this additional expenditure
under the head 'establishment and contingencies', when the contract expressly stipulated for payment
of charges at rates specified therein, we fail to appreciate on what ground the arbitrators could ignore
the express covenants between the parties, and award to the Agents amounts which the Union of India
had not agreed to pay to the Agents. The award of the arbitrators, awarding additional expenses under
the head of establishment and contingencies, together with interest thereon, is on the face of it
erroneous.
20. Before the arbitrators, a number of arhatias, who supplied ghee to the Agents, appeared and
produced extracts from their books, showing the amounts actually due to them from the latter. Detailed
charts, showing the total amount due under each head of expenditure to each arhatia, were produced.
The arbitrators were satisfied that the statements produced, reflected a general rise in prices and cost of
labour. Taking into consideration the fact that the other persons were buying ghee at rates considerably
in excess of the stipulated rates, the arbitrators held that the Agents were entitled to be reimbursed to
the extent of Rs. 11,27,965-11-3. But the terms of the contract, stipulating the rate at which the
financing and overhead charges were to be paid under clause 13(a) read with clause 12(b), remained
binding so long as the contract was not abandoned or altered by mutual agreement, and the arbitrators
had no authority to award any amount in excess of the amount expressly stipulated to be paid. Mr.
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Chatterjee, on behalf of the Agents, submitted that the circumstances existing at the time when the
terms of the contract were settled, were "entirely displaced" by reason of the commencement of
hostilities in the Second World War, and the terms of the contract agreed upon in the light of
circumstances existing in May, 1937, could not, in view of the turn of events which were never in the
contemplation of the parties, remain binding upon the Agents. This argument is untrue in fact and
unsupportable in law. The contract was modified on June 20, 1942, by mutual consent, and the
modification was made nearly three years after the commencement of the hostilities. The Agents were
fully aware of the altered circumstances at the date when the modified schedule for payment of
overhead charges, contingencies and buying remuneration, was agreed upon. Again, a contract is not
frustrated merely because the circumstances in which the contract was made, are altered.
21. Section 56 of the Indian Contract Act provides that :
"A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some
event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible
or unlawful."
Performance of the contract had not become impossible or unlawful; the contract was in fact
performed by the Agents, and they have received remuneration expressly stipulated to be paid therein.
The Indian Contract Act does not enable a party to a contract to ignore the express covenants thereof,
and to claim payment of consideration for performance of the contract at rates different from the
stipulated rates, on some vague plea of equity.
"The parties to an executory contract are often faced, in the course of carrying it out, with a turn of
events which they did not at all anticipate - a wholly abnormal rise or fall in prices, a sudden
depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself
affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in
the light of the circumstances existing when it was made, shows that they never agreed to be bound in
a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind
at that point - not because the court in its discretion thinks it just and reasonable to qualify the terms of
the contract, but because on its true construction it does not apply in that situation. When it is said that
in such circumstances the court reaches a conclusion which is 'just and reasonable' (Lord Wright in
Constantine Steamship Line Ltd. v. Imperial Smelting Corporation Ltd., 1942 AC 154 at p. 186) or
383

one 'which justice demands' (Lord Sumner in Hirji Mulji v. Cheong Yue Steamship Co. Ltd. (1926)
AC 497 (510), this result is arrived at by putting a just construction upon the contract in accordance
with an 'implication ............. from the presumed common intention of the parties' - speech of Lord
Simon in British Movietonews Ltd. v. London and District Cinemas Ltd. L.R. 1952 A.C. 166.
22. There is no general liberty reserved to the courts to absolve a party from liability to perform his
part of the contract, merely because on account of an uncontemplated turn of events, the performance
of the contract may become onerous. That is the law both in India and in England, and there is, in our
opinion, no general rule to which recourse may be had, as contended by Mr. Chatterjee, relying upon
which a party may ignore the express covenants on account of an uncontemplated turn of events since
the date of contract. Mr. Chatterjee strenuously contended that in England, a rule has in recent years
been evolved which did not attach to contracts the same sanctity which the earlier decisions had
attached, and in support of his contention, he relied upon the observations made in British
Movietonews Ltd. v. London and District Cinemas Ltd., 1951 1 KB 190 at p. 201. In that case,
Denning, L.J., is reported to have observed :
"............. no matter that a contract is framed in words which taken literally or absolutely, cover what
has happened, nevertheless, if the ensuing turn of events was so completely outside the contemplation
of the parties that the court is satisfied that the parties, as reasonable people, cannot have intended that
the contract should apply to the new situation, then the court will read the words of the contract in a
qualified sense; it will restrict them to the circumstances contemplated by the parties; it will not apply
them to the uncontemplated turn of events, but will do therein what is just and reasonable."
But the observations made by Denning, L.J., upon which reliance has been placed, proceeded
substantially upon misapprehension of what was decided in Parkinson & Co. Ld. v. Commissioners of
Works (1949) 2 K.B.D. 632 on which the learned Lord Justice placed considerable reliance. The view
taken by him, was negatived in appeal to the House of Lords in the British Movietonew's case - (1952)
A.C. 166 - already referred to. In India, in the codified law of contracts, there is nothing which justifies
the view that a change of circumstances, "completely outside the contemplation of parties" at the time
when the contract was entered into, will justify a court, while holding the parties bound by the
contract, in departing from the express terms thereof. 1949 2 KB 632 was a case in which on the true
interpretation of a contract, it was held, though it was not so expressly provided, that the profits of a
384

private contractor, who had entered into a contract with the Commissioners of Works to make certain
building constructions and such other additional constructions as may be demanded by the latter, were
restricted to a fixed amount only if the additional quantity of work did not substantially exceed in
value a specified sum. The Court in that case held that a term must be implied in the contract that the
Commissioners should not be entitled to require work materially in excess of the specified sum. In that
case, the Court did not proceed upon any such general principle as was assumed by Denning, L.J., in
1951 1 KB 190
23. We are, therefore, unable to agree with the contention of Mr. Chatterjee that the arbitrators were
justified in ignoring the express terms of the contract prescribing remuneration payable to the Agents,
and in proceeding upon the basis of quantum meruit.
24. Relying upon S. 222 of the Indian Contract Act, by which duty to indemnify the agent against the
consequences of all lawful acts done in exercise of the authority conferred, is imposed upon the
employer, the arbitrators could not award compensation to the agents in excess of the expressly
stipulated consideration. The claim made by the Agents was not for indemnity for consequences of
acts lawfully done by them on behalf of the Government of India; it was a claim for charges incurred
by them in excess of those stipulated. Such a claim was not a claim for indemnity, but a claim for
enhancement of the rate of the agreed consideration. Assuming that the Agents relied upon assurances
alleged to be given by the Director in-charge of Purchases, in the absence of an express covenant
modifying the contract which governed the relations of the Agents with the Government of India,
vague assurances could not modify the contract.
Ghee having been supplied by the Agents under the terms of the contract, the right of the Agents was
to receive remuneration under the terms of that contract. It is difficult to appreciate the argument
advanced by Mr. Chatterjee that the Agents were entitled to claim remuneration at rates substantially
different from the terms stipulated, on the basis of quantum meruit.
Compensation quantum meruit is awarded for work done or services rendered, when the price thereof
is not fixed by a contract. For work done or services rendered pursuant to the terms of a contract,
compensation quantum meruit cannot be awarded where the contract provides for the consideration
payable in that behalf.
385

Quantum meruit is but reasonable compensation awarded on implication of a contract to remunerate,

and an express stipulation governing the relations between the parties under a contract, cannot be
displaced by assuming that the stipulation is not reasonable. It is, therefore, unnecessary to consider
the argument advanced by. Mr. Chatterjee that a claim for compensation on the basis of quantum
meruit, is one which arises out of the agreement within the meaning of clause 20. Granting that a claim
for compensation on the basis of quantum meruit, may be adjudicated by the arbitrators in a reference
made under clause 20 of the agreement, in the circumstances of the case before us, compensation on
that basis could not be claimed.
25. The plea that there was a bar of res judicata by reason of the decision in the Letters Patent Appeal
No. 31 of 1953, has in our judgment, no force. The Subordinate Judge set aside the award on the
ground that there had been judicial misconduct committed by the umpire and also on the view that the
claims made, as described in Schedules B and D, were not outside the competence of the arbitrators.
The High Court in appeal under the Letters Patent, did confirm the order, setting aside the award; but
there was no binding decision between the parties that the claim described in Sch. B, that is, the claim
for establishment and contingency charges, was within the competence of the arbitrators in reference
under clause 20. It may be observed that according to the High Court of East Punjab in the Appeal No.
31 of 1953, under the Letters Patent, it was not necessary to express any opinion whether the claim in
Sch. C was within the competence of the arbitrators, and the claims described in Sch. D does not
appear to have been agitated in the second arbitration proceeding.
26. We, accordingly, agree with the view of the High Court that the Award of the arbitrators was liable
to be set aside because of an error apparent on the face of the award. In this view, the appeal fails and
is dismissed with costs.
386

Punj Sons Pvt. Ltd. vs. Union of India (UOI) and Ors.; AIR 1986 Delhi 158
Judges/Coram: R.N. Aggarwal, J.
ORDER
R.N. Aggarwal, J.
1. The relevant facts for the decision of this suit are that on 1st May 1969 the petitioner-objector
Messrs Punj Sons Private Ltd., New Delhi, entered into a contract with the claimant Union of India for
the supply of 8420 milk containers 20 liters quantity. The containers according to the contract were to
be coated with "hot dip tin coating". On 13th May 1969 the petitioner wrote to the Director General of
Supplies and Disposals for the issue of quota certificate for tin which is to be used for hot dip tin
coating of the milk containers. The petitioner on 2nd June, 1969 addressed a communication to the
Director General of Technical Development for the issue of release orders for procurement of tin
ingots. The petitioner wrote in the letter that they had a contract with the Director General of Supplies
and Disposals for supply of 8420 milk containers of the capacity of 20 litres and for the execution of
the said contract 5 metric (sic) of tin ingots were urgently required for hot dip tin coating of the
containers. The office of the Director General of Supplies and Disposals recommended to the Director
General of Technical Development for the issue of the release orders for the procurement of tin ingots.
The arbitration record shows that thereafter the correspondence continued between the parties but the
Director General of Technical Development or the M.M.T.C did not pass any order for the release of
the tin ingots.
2. On 21st August, 1970 the petitioner wrote to the Director General of Supplies and Disposals that
they understand that the release orders for tin ingots can only be issued to them after a provision to this
effect is made in the A/T by the department and, therefore, requested that the necessary amendment
may be made in the A/T. On 24th September, 1970 the Respondent replied that there was no
stipulation in the A/T for assistance for Procurement of tin ingots and that on an ex gratia basis the
request could be considered provided price reduction is made. The department, further, wrote that the
above was without prejudice to the rights and remedies available to the purchasers under the terms of
the contract.
387

3. On 15th October, 1970 the petitioner replied that in view of the increase in the price of raw
materials as well as labour it is not possible for them to offer any price reduction and pleaded that the
quota certificate for tin ingot may be issued. On 28th November, 1970 the Respondent cancelled the
contract and wrote to the petitioner as follows:
As you have failed to supply the stores against the subject A/T. the same is hereby cancelled at your
risk and expense. The extra cost involved in the repurchase of the store will be intimated to you
separately and you will be liable to pay the same on demand.
This is, however, without prejudice to the rights and remedies of the purchaser under the contract.
4. The relevant facts further are that in December, 1970 a risk purchase tender was floated by the
Respondent. The petitioner submitted their tender and quoted the rate at Rs. 65/- per container.
Another party also made a similar offer. For certain reasons not relevant to the decision of this petition
the tenders were not accepted. The Respondent thereafter again invited tenders and a company by the
name M/s. Can Manufacturing Company Pvt. Ltd., Bombay made an offer at Rs. 70/- per container but
this transaction also did not go through.
5. On 6th December, 1975 the Respondent wrote letter to a number of firms asking the rates on which
they had sold/purchased IK E Containers Milk 0306 - 20 Litres as on 15th September, 1970. Only one
firm that is Delhi Brass & Metal Works on 6th December, 1975 wrote to the Director General of
Supplies and Disposals stating that as on 15th September, 1970 the price was Rs. 90/- per container.
The letter is a little important and it reads as under:
With reference to your letter No. SMH-2/10142/510/11-11-68/III/333 dated 21st November, 1975, we
give below the price of the container milk 20 litres as required by you around 15-9-70.
1. Container Milk 20 Litres. @ Rs. 90 each (Rupees Ninety each).
This is for your information that this is however, without any commitment from our side.
6. On 13th February, 1976, the Respondent claimed a sum of Rs. 3,13,224/- by way of damages from
the petitioner. The said claim was refuted by the petitioner vide their letter dated 24th April, 1976.
388

7. The disputes were referred to the arbitration of Dr. Bakhshish Singh, Additional Legal Adviser to
the Government of India, Ministry of Law. The arbitrator by a non-speaking award awarded a sum of
Rs. 3,13,224/- to the Union of India.
8. The petitioner has challenged the legality and validity of the award mainly on the ground that to
complete the contract the tin ingots were necessary for the hot dip tin coating for the manufacture of
the milk cans and that since the tin ingots were a canalised item and were not available in the market it
was not possible to carry out the contract without the government releasing the required quantity of tin
ingots and that in spite of earnest endeavours made by the petitioner the petitioners were not able to
obtain an order for the release of the required quota of tin ingots from the Director General of
Technical Development or the M.M.T.C. and, therefore, the contract became impossible of
performance and stood frustrated. The petitioner also pleaded that the Respondent/claimant had never
made any risk purchase against the A/T in question and, therefore, had not suffered any loss and,
therefore, there was no question of any award of damages in their favour. It was also contended that,
the assessment of the damages at Rs. 3,13,224/- was without any basis.
9. The claimant-respondent in reply to the objections have pleaded that there was no condition or
stipulation in the tender or the A/T for arranging release order/ import licence for tin ingots. It is
further stated that no understanding was given to the objector in this regard. The Respondent admitted
that the ingots were not available but pleaded that the claimant was not obliged under the contract to
make available the tin ingots. As regards the risk purchase tender submitted by the objector the
claimant admitted that the tender submitted by the objector was the lowest but pleaded that the said
transaction did not go through since the objector did not agree to withdraw some inconvenient terms
and also did not agree to furnish 10% security deposit in advance. The Respondent has stated that fresh
tenders were invited against which the objector firm did not send their tender and the order was placed
on M/s. Can Manufacturing Company Pvt Ltd., Bombay at the rate of Rs. 70/- but since it was not a
valid risk purchase, therefore, the claim of the Respondent for general damages is legal and valid
10. The objector in their rejoinder pleaded that the milk cans were to be manufactured as per
specification No. IND/GS/1182 which stipulated "hot dip tin coating" of the milk cans by using tin
ingots and that the tin ingots were essentially required for the manufacture of the store and this being a
canalised item prior to acceptance of quotation, it could only be issued to the objector by the Mineral
389

& Metal Trading Corporation of India Ltd., only against the recommendation of the Union of India
and/or its department and that since the Respondent failed to obtain the release of the required quantity
of the ingots in favour of the objector it became impossible for the objector to perform the contract as
the objector could not have obtained this material in the open market. The objector further pleaded that
the t in ingots form integral part of the performance of the contract which admittedly could not be
procured by the objector from the open market and unless the claimant got the release orders issued it
was impossible to perform the contract.
11. On the facts stated above and the contentions raised in the pleadings, the crucial question that
requires determination is whether the contract stood frustrated in law. Paragraph 2 of Section 56 of the
Contract Act provides:
Contract to do act afterwards becoming impossible or unlawful.-- A contract to do an act which, alter
the contract is made, becomes impossible, or, by reason of some event which the promisor could not
prevent unlawful becomes void when the act becomes impossible or unlawful.
12. The undisputed facts in the case are that under the contract "hot dip tin coating of the milk cans
was essential. The hot dip tin coating was to be done by using tin ingots. The Union of India in their
reply to the objections as well as in the affidavit of Shri M.A. Khan dated 9th July 1984 have admitted
that tin ingots was not available in the market The objector has categorically stated that the tin ingots
was a canalised item even prior to acceptance of quotation and that the said item could only be issued
to the objector by the Mineral and Metal Trading Corporation of India Ltd. on the recommendation of
the Union of India and/or its department The above assertion of the objector has not been disputed by
the Union of India. The correspondence between the parties to which I have adverted earlier clearly
shows that immediately after the acceptance of the tender the objector had asked the Director General
of Supplies and Disposals to obtain the release of the necessary quota of tin ingots for completing the
contract. Efforts were made by the Director General of Supplies and Disposals to obtain the release of
the required quota of tin ingots but he somehow did not succeed in obtaining the orders of release from
the concerned authority. The objector had requested the Director General of Supplies and Disposals to
make an amendment in the A/T but this was also not done because of the reasons already stated in the
earlier part of the judgment. It was in these conditions that the objector failed to carry out their
obligations under the contract.
390

13. There is thus no manner of doubt that the contract became impossible of performance because of
the non-availability of one of the essential items that is tin ingots, which was essential for the
manufacture and supply of the contracted store. The learned Counsel for the Union of India contended
that there was no condition or stipulation in the agreement regarding the supply of tin ingots by the
claimant and the objector was bound under the contract to supply the contracted store within the
stipulated period. I do not agree in this contention. The parties very well knew at the time of entering
into the contract that tin ingots was required for "hot dip tin coating" of the cans. It is clear from the
record that tin ingots was a canalised item and it could not be procured from the open market without a
release order. In the circumstances, the condition of the supply of tin ingots can be implied from the
nature of the contract. The objector repeatedly asked the Director General of Supplies and Disposals to
obtain the Necessary quota of tin ingots but the Director General or Supplies and Disposals failed to
obtain the release of the necessary quota of tin ingots, it is thus clear that the contract became
impossible of performance because of the non-availability of the tin ingots and this was beyond the
control of the promisor.
14. The contract would be clearly hit by paragraph 2 of Section 56 of the Contract Act.
15. The above view finds support from the case Sannidhi Gundayya v. Illoori Subbaya: AIR 1927 Mad
89. The facts of the said case were that the Defendant therein had contracted with the Plaintiff to
deliver certain bags of rice to him. The contract contemplated delivery by railway wagons. As a war
measure the Government had imposed wagon restrictions and priority certificates all over the
Presidency and this interfered with the free and easy transport of rice. The existence of these
restrictions was well known to all the parties owing to the shortage of wagons on account of the
enforcement of the rules, the Defendant" was not able to perform the contract and he pleaded
impossibility of performance as defence, to the suit A Division Bench of the Madras High Court held:
...the law does not imply an absolute obligation to do what which the law forbids, and the reasonable
view to take of the, contract would be that the seller agreed to supply the promised number of bags of
rice if after using his best endeavours he was able to secure the necessary number of wagons. The
obligation to perform the contract was not therefore absolute, but impliedly conditional
16. For the reasons stated, I am of the view that the contract had become impossible of performance
and, therefore, rendered void The award clearly suffers from the legal infirmity mentioned above.
391

17. Shri Chandhiok, learned Counsel for the objector, next contended that the arbitrator has committed
a serious misconduct in assessing the damages on the basis of a letter dated 6th December, 1975 by
Delhi Brass and Metal Works stating that the price of a 20 litre milk container as on 15-9-1970 was Rs.
90/-each. There seems to be substance in this contention. The contract was cancelled on 28th
November, 1970. Thereafter, the Director General of Supplies and Disposals called for tenders on the
basis of risk purchase. The objector had submitted their tender but this for the reasons already stated
was not accepted Thereafter, fresh tenders were called and a tender at the rate of Rs. 70/- per container
was received but this also did not mature. On 21st November, 1975 the Director General of Supplies
and Disposals adopted a queer method of finding out the rates of supply of the store as on 15-9-1970.
A circular was sent to a number of firms asking for rates of milk containers of the description IK E-
0306 -- 20 litres k on 15-9-1970. Only M/s. Delhi Brass and Metal Works replied on 6th December,
1975 giving the rate as on 15-9-1970 at Rs. 90/-per piece. The firm in the reply added that this was
only for information and it was without any commitment from their side.
18. The above was the only evidence for fixing the damages. The description of the store given in the
circular is IK E-0306. The description of the store given in the A/T is IK F-0306 - 20 litres. The Delhi
Brass and Metal Works produced no evidence of their having purchased or sold milk containers of the
description given in the contract on the alleged date of breach, that is 15th September, 1970. There is
no evidence of any actual transaction, having been conducted by the Delhi Brass and Metal Works
regarding the store in question as on 15th September, 1970. There has been, in my opinion, a serious
misconduct in assessing the damages on the basis of the letter dated 6th December, 1975 written by the
Delhi Brass and Metal Works.
19. The claimant in support of their case had examined Shri Jaishi Ram. Shri Jaishi Ram clearly stated
that the Union of India had suffered no actual loss. There was no repurchase of the contracted stores.
20. For the reasons stated above, I find that the award is bad and legally not sustainable. I allow the
objections and quash the award. I make no order as to costs.
392

Easun Engineering Co. Ltd. vs. The Fertilisers and Chemicals Travancore Ltd. and Ors.; AIR
1991 Mad 158
Judges/Coram: A. Abdul Hadi, J.
ORDER
A. Abdul Hadi, J.
1. The O.P. No. 72/1980 by the Fertilisers and Chemical Travancore Limited, (Division FACT)
Engineering and Design Organization )herein after referred to as FEDO prays for setting aside the
Award (filed into Court in O.P. No. 314/1979 by the Umpire, who passed the same on 12-4-1979 in
favour of the first respondent herein, namely, Easun Engineering Company Ltd., hereinafter referred to
as EASUN) in so far as it has allowed the claims of EASUN and for remitting the matter back to the
Second Respondent-Umpire for reconsideration and making a fresh award in respect of the claims of
FEDO which have been disallowed in the said Award.
2. The abovesaid award was passed in the following circumstances:
FEDO by its purchase order dt. 5-2-1973 and subsequent amendments to it by letters dt. 3-3-1973 and
7-3-1973 entered into contract with EASUN for the supply and installation of eighteen numbers of
Power Transformers etc. But only six transformers were supplied by EASUN and the resultant dispute
that arose between the parties was finally referred to the Second Respondent as Umpire by the Order
passed by this Court on 19-9-1977 in Application No. 2785 of 1977 in C.S. No. 366 of 1975.
3. As per the amended claim filed by EASUN before the second respondent-Umpire, they had claimed
a sum of Rupees 13,07,417/- under Annexure A to their claim, a sum of Rs. 10,30,716/- under
Annexure B to their claim and a sum of Rs. 3,06,000/- under Annexure C to their claim, totalling in all
a sum of Rs. 26,44,243/-. On the other hand, FEDO had made a counter-claim of Rupees 12,33,325-
75.
4. The award states that the abovesaid contract between the parties is a firm price contract and the
prices indicated in the contract are firm without any escalation on any account till the contract is
completely executed and the equipments are delivered at the project site at Cochin. Such delivery of
equipments should commence after ten months from the date of purchase order and shall be completed
393

in the fourteenth month. The time of delivery is the essence of the contract and FEDO is entitled to
liquidated damages for any delay on the part of EASUN. It is also provided that the liquidated damage
would not be applicable in case of delay caused due to "force majeure". It was further provided that if
EASUN failed to conform to fabrication schedule without sufficient cause, FEDO could terminate the
contract and reassign to other suppliers.
5. Fedo terminated the contract by their letters dt. 3-9-1975 and 18-9-1975. It is the case of EASUN
that FEDO has terminated the contract unilaterally without sufficient and justifiable reason in spite of
the fact that EASUN had discharged their contractual obligations and that FEDO has committed
breach of contract. Hence, the above referred to damages were claimed as per Annexures A, B and C
to the claim.
6. On the other hand, FEDO's case is that EASUN had failed to perform the contract as per the
conditions of the purchase order accepted by them, that FEDO had no other alternative excepting to
terminate its contract and that since EASUN has committed breach of the contract, FEDO is entitled to
claim damages from EASUN as mentioned above.
7. According to the contract, the delivery should have commenced on 19-10-1973 and completed by
19-2-1974 and the erection and commissioning completed by 19-6-1974. Admittedly, six numbers out
of 18 were despatched on various dates commencing from 14-6-19974 to 17-3-1975, the value of the
transformers despatched and delivered was about two thirds of the value of the entire transformers,
namely, amount Rupees 17,00,000/- and the rest of the transformers namely, 12 were not supplied,
though out of them 4 were tested in July and Sept., 1974.
8. EASUN contended that they were prevented from supplying, due to force majeure conditions
namely, strikes, power cut and phenomenal increase in the cost of transformer oil due to War
conditions etc. It is not in dispute that there was delay in delivering the transformers. It is also not in
dispute that FEDO had granted extension of time on several requests made by EASUN till 31-3-1975.
That is why, the Umpire has also made it clear in the Award that it is not open to FEDO to depend
upon delays for the termination of the contract prior to 31-3-1975. The Award also points out that it is
significant that FEDO did not claim liquidated damages for the above delay, in their above referred to
counter-claim, probably for the reason that FEDO had condoned the delay and gave extension of time.
The Award also finds that the price increase in transformer oil was so enormous the increase having
394

risen to 400% because due to War conditions in the Middle East and the Ordinance by Government of
India imposing higher Excise duties. So, after analysing the evidence, both documentary and oral, the
Umpire comes to the conclusion that despite the contract being a firm price contract, EASUN was
justified in asking for variation of price in transformer oil, in view of the abovesaid force majeure
conditions. The Umpire also found that under the contract, even though, as stated above, liquidated
damages are provided in favour of FEDO, the relevant clause itself provides that liquidated damages
will not be applicable in case of delay caused due to force majeure conditions. As already pointed out,
FEDO did not claim liquidated damages and the Umpire also points out in the Award that it is strange
FEDO in their written statement white making their counter-claim has not even stated why they were
not claiming liquidated damages, in spite of their contention that the termination of the contract was
due to delay in the performance of contract by EASUN. The Umpire infers the existence of force
majeure condition, also from the abovesaid non-claim of liquidated damages by FEDO.
9. The Award also extracts Clause 18 of the purchase order, which runs as follows:--
"Clause 18: for Majeure: Neither the supplier nor FEDO shall be considered in default in performance
of their obligation under the contract so long as such performance is prevented or delayed because of
strikes, war, hostilities, revolution, civil commotion, epidemics, accidents, fire, wind, flood because of
any law and order proclamation, regulation or ordinance of Government or because of any Act of God
or for any other cause which is beyond the control of the parties affected."
The Umpire agreed with the contention of the EASUN that price in transformer oil was unexpected,
unforeseen and beyond their control, and, therefore, it must be deemed to be a force majeure condition.
He did not concur with the contention of FEDO that even assuming that there was price increase due to
conditions mentioned by EASUN, it would not come within the purview of force majeure clause, as
the said clause would apply only so long as such performance is prevented or delayed and that the said
increase has not "prevented or delayed" the performance of the obligations by EASUN under the
contract. The Umpire came to the said conclusion that because the price increase was not marginal, but
was as much as 400% it was caused due to the abovesaid force majeure conditions. Therefore, the
Umpire concluded in the award the EASUN had not failed to conform to the fabrication schedule
without sufficient cause and FEDO was not justified in terminating the contract unilaterally.
395

10. Then, regarding the quantum of the claim made by EASUN the award disallowed the claim under
Annexure B. So far as Annexure-A claim the Umpire awarded a sum of Rs. 3,68,120/- for the price
variation applicable to the abovesaid six transformers delivered to FEDO in accordance with IEMA
formula (other than the transformer oil), a sum of Rs. 2,36,584/- for the price increase on oil in respect
of the said transformers delivered and a sum of Rs. 1,56,210/- towards 10% retention amount on the
six transformers. It has also awarded interest at the rate of 12% per annum on these amounts from the
date of the claim, namely, 13-11-1976. The award grants also Annexure-C claim of Rupees 1,91,000/-
towards the amount due by FEDO for supplies other than transformers and wages to engineers and
overhead 100%, together with interest at 12% per annum from the date of the claim, namely, 13-11-
1976.
11. Since the breach of contract was held to have been committed by FEDO, FEDO's counter-claim
was disallowed by the Umpire. However, FEDO was held to be entitled to a sum of Rs. 26,961/-
towards the facilities and services rendered by FEDO to EASUN with interest at 12% per annum from
the date of claim, namely, 19-1-1977.
12. While so, the main attack by the learned counsel for FEDO to set aside the award and remit it back
to the Umpire for making an award in respect of FEDO's claim is, that though the Umpire held that the
contract in question was a firm price contract, he committed an error apparent on the face of the record
by applying the price variation in respect of these six transformers supplied.
13. Learned counsel mainly relied on a decision reported in M/s. Alopi Parshad v. Union of India,
MANU/SC/0057/1960 : [1960]2SCR793 . The contract in question in the abovesaid Supreme Court
case was a firm price contract, relating to supply of ghee to the Union of India and the price of ghee
abnormally rose up due to World War-II and the supplier claimed payment at higher than the stipulated
rate on the basis of equity and that was negatived by the Supreme Court. The Supreme Court after
referring to S. 56 of the Contract Act, which provides that (Para 21)- "a contract to do an act which,
after the contract is made, becomes impossible ..... becomes void when the act becomes impossible
....."
no doubt observes that-
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"The Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to
claim payment of consideration for performance of the contract at rates different from the stipulated
rates, on some vague plea of equity."
However, the Supreme Court in the above decision itself points out thus:
"If, on the other hand, a consideration of the terms of the contract in the light of the circumstances
existing when it was made, shows that they never agreed to be bound in a fundamentally different
situation which has now unexpectedly emerged, the contract ceases to bind at that point not because
the Court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because
on its true construction it does not apply in that situation."
It is this latter observation which would apply to the present case. No doubt, here also, the main
grievance of EASUN was the increase in the price of transformer oil subsequent to the contract. But
the increase cannot be described as anything which would be normal in the ordinary trade conditions.
But it was very much abnormal being 400% increase due to certain unexpected War condition. So, it
can be safely concluded that "fundamentally different situation", "unexpectedly emerged" as observed
by the Supreme Court in the abovesaid passage. Therefore, as concluded by the Supreme Court, the
contract ceases to bind the parties at that point, "not because the Court in its discretion thinks it just
and reasonable to qualify the terms of the contract, but because on its true construction it does not
apply in that situation." The actual decision in the abovesaid Supreme Court case turns on its facts,
because the Supreme Court found that there was only a "vague plea of equity" for setting aside the
terms of the contract.
14. Further, dealing with the terms 'impossible' under S. 56 of the Contract Act, the Supreme Court in
Satyabrata v. Mugneeram, AIR1954SC44 observed as follows (Para 9):--
"The word 'impossible' has not been used in the sense of physical or literal impossibility. The
performance of an act may be impracticable and unless from the point of view of the object and which
the parties had in view; and if an untoward event or change of circumstances totally upsets the very
foundation upon which the parties rested their bargain, it can very well be said that the promissor finds
it impossible to do the act which he promised to do". So, in the present case, it can be safely held that
the abovesaid abnormal increase in price due to war condition, is an untoward event or change of
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circumstances which "totally upsets the very foundation upon which parties rested their bargain".
Therefore, EASUN can be said to be finding itself impossible to supply the transformers which it
promised to do. The abovesaid principle laid down in Satyabrata v. Mugneeram, AIR1954SC44 and
also in the English decision Templin Steamship Co. Ltd. v. Anglo Mexican Petroleum Products Co;
Ltd., (1916) 2 AC 397 (A) was followed by the Supreme Court in later decisions also reported in Smt.
Sushila Devi v. Hari Singh, AIR1971SC1756 and Govind Bhai v. Gulam Abbas, [1977]2SCR511 . In
the circumstances, I do not think that there is any error apparent on the face of the record, in the award
passed by the Umpire-Second Respondent.
15. Learned counsel for EASUN also contended that when a specific question of law was referred to
the arbitrator and a decision is given by the arbitrator on that question of law, no party to the
arbitration will be allowed to set it aside even if the point decided by the arbitrator is erroneous in law.
For this proposition, he cited a decision in M/s. Tarapore Ltd. v. Cochin Shipyard Ltd. Cochin,
[1984]3SCR118 . But, in the present case, as rightly contended by the learned counsel for FEDO, no
specific question of law was referred to. The question that was referred to was whether the unilateral
termination of the contract by FEDO was justified and whether EASUN was entitled to make the claim
made by it, in view of the abnormal increase in the price of transformer oil etc. In deciding that
particular question, the Umpire could have decided a point of law incidentally. In such a case, if the
arbitrator commits an error of law apparent on the face of the record, it can be corrected by the Court.
In the decision in [1984]3SCR118 what was specifically referred to the arbitrator was, a pure question
of law, and, in such a situation, the Supreme Court pointed out that even assuming that the decision of
the arbitrator therein was erroneous, it cannot be corrected by the Court, if there is any error of law
apparent on the face of the record. On this point, there can be no dispute. This legal position has been
made clear in very many decisions, including [1984]3SCR118 itself. So, having held that there is no
error apparent on the face of the record, in the award in question, I dismiss this O. P. No. 272/1980,
and, in O.P. No. 314/1979 pass a decree in terms of the said award with interest @ 12% p.a. from the
date of decree till realisation.
16. C. S. No. 336/1975: This Suit is by EASUN against the first defendant FEDO and the second
defendant Indian Bank for (a) declaration that the first defendant is not entitled to call upon the second
defendant to make any payment in pursuance of the guarantee bond dt. 24-1-1973 for Rupees
1,45,165/- unless and until the liability, if any, of the plaintiff in respect of the above referred to
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contract between the plaintiff and the first defendant (which is the subject matter of the abovesaid
arbitration) is proved by the first defendant; (b) for declaring that the plaintiff has not incurred any
liability in respect of the abovesaid contract and (c) for an injunction restraining the second defendant
from making any payment to the first defendant in pursuance of the aforesaid guarantee bond. The
parties had referred the dispute involved in the suit to the abovesaid arbitration. By order dt. 19-9-1977
in Application No. 2785/1977 in the suit, the dispute was referred to the said arbitration by the
abovesaid Umpire and as stated above, the Umpire filed the Award and decree has been passed in
terms of the Award. By virtue of the above referred to the decree of today, in O.P. No. 314 of 1979, no
further order is necessary in this suit C.S. No. 336 of 1975 and the suit is disposed of accordingly.
17. Order accordingly.
399

Hadley and Another v Baxendale and Others; (1854) 9 Exchequer Reports (Welsby, Hurlstone
and Gordon) 341
Judgement
Feb. 23, 1854.—Where two parties have made a contract, which one of them has broken, the
damages which the other party ought to receive in respect of such breach of contract should be such
as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course
of things, from such breach of contract itself, or such as may reasonably be supposed to have been in
the contemplation of both parties at the time they made the contract, as the probable result of the
breach of it.—Where the plaintiffs, the owners of a flour mill, sent a broken iron shaft to an office of
the defendants, who were common carriers, to be conveyed by them, and the defendants' clerk, who
attended at the office, was told that the mill was stopped, that the shaft must be delivered
immediately, and that a special entry, if necessary, must be made to hasten its delivery; and the
delivery of the broken shaft to the consignee, to whom it had been sent by the plaintiffs as a pattern,
by which to make a new shaft, was delayed for an unreasonable time; in consequence of which, the
plaintiffs did not receive the new shaft for some days after the time they ought to have received it,
and they were consequently unable to work their mill from want of the new shaft, and thereby
incurred a loss of profits:—Held, that, under the circumstances, such loss could not be recovered in
an action against the defendants as common carriers.
The first count of the declaration stated, that, before and at the time of the making by the defendants
of the promises hereinafter mentioned, the plaintiffs carried on the business of millers and mealmen
in copartnership, and were proprietors and occupiers of the City Steam-Mills, in the city of
Gloucester, and were possessed of a steam-engine, by means of which they worked the said mills,
and therein cleaned corn, and ground the same into meal, and dressed the same into flour, sharps, and
bran, and a certain portion of the said steam-engine, to wit, the crank shaft of the said steam-engine,
was broken and out of repair, whereby the said steam-engine was prevented from working, and the
plaintiffs were desirous of having a new crank shaft made for the said mill, and had ordered the same
of certain persons trading under the name of W. Joyce & Co., at Greenwich, in the county of Kent,
who had contracted to make the said new shaft for the plaintiffs; but before they could complete the
said new shaft it was necessary that the said broken shaft should be forwarded to their works at
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Greenwich, in order that the said new shaft might be made so as to fit the other parts of the said
engine which was not injured, and so that it might be substituted for the said broken shaft; and the
plaintiffs were desirous of sending the said broken shaft to the said W. Joyce & Co. for the purpose
aforesaid; and the defendants, before and at the time of the making of the said promises, were
common carriers of goods and chattels for hire from Gloucester to Greenwich, and carried on such
business of common carriers, under the name of “Pickford & Co.;” and the plaintiffs, at the request
of the defendants, delivered to them as such carriers the said broken shaft, to be conveyed by the
defendants as such carriers from Gloucester to the said W. Joyce & Co., at Greenwich, and there to
be delivered for the plaintiffs on the second day after the day of such delivery, for reward to the
defendants; and in consideration thereof the defendants then promised the plaintiffs to convey the
said broken shaft from Gloucester to Greenwich, and there on the said second day to deliver the
same to the said W. Joyce & Co. for the plaintiffs. And although such second day elapsed before the
commencement of this suit, yet the defendants did not nor would deliver the said broken shaft at
Greenwich on the said second day, or to the said W. Joyce & Co. on the said second day, but wholly
neglected and refused so to do for the space of seven days after the said shaft was so delivered to
them as aforesaid.
The second count stated, that, the defendants being such carriers as aforesaid, the plaintiffs, at the
request of the defendants, caused to be delivered to them as such carriers the said broken shaft, to be
conveyed by the defendants from Gloucester aforesaid to the said W. Joyce & Co., at Greenwich,
and there to be delivered by the defendants for the plaintiffs, within a reasonable time in that behalf,
for reward to the defendants; and in consideration of the premises in this count mentioned, the
defendants promised the plaintiffs to use due and proper care and diligence in and about the carrying
and conveying the said broken shaft from Gloucester aforesaid to the said W. Joyce & Co., at
Greenwich, and there delivering the same for the plaintiffs in a reasonable time then following for
the carriage, conveyance, and delivery of the said broken shaft as aforesaid; and although such
reasonable time elapsed long before the commencement of this suit, yet the defendants did not nor
would use due or proper care or diligence in or about the carrying or conveying or delivering the said
broken shaft as aforesaid, within such reasonable time as aforesaid, but wholly neglected and refused
so to do; and by reason of the carelessness, negligence, and improper conduct of the defendants, the
said broken shaft was not delivered for the plaintiffs to the said W. Joyce & Co., or at Greenwich,
until the expiration of a long and unreasonable time after the defendants received the same as
401

aforesaid, and after the time when the same should have been delivered for the plaintiffs; and by
reason of the several premises, the completing of the said new shaft was delayed for five days, and
the plaintiffs were prevented from working their said steam-mills, and from cleaning corn, and
grinding the same into meal, and dressing the meal into flour, sharps, or bran, and from carrying on
their said business as millers and mealmen for the space of five days beyond the time that they
otherwise would have been prevented from so doing, and they thereby were unable to supply many
of their customers with flour, sharps, and bran during that period, and were obliged to buy flour to
supply some of their other customers, and lost the means and opportunity of selling flour, sharps, and
bran, and were deprived of gains and profits which otherwise would have accrued to them, and were
unable to employ their workmen, to whom they were compelled to pay wages during that period, and
were otherwise injured, and the plaintiffs claim 300l.
The defendants pleaded non assumpserunt to the first count; and to the second payment of 25l. into
Court in satisfaction of the plaintiffs' claim under that count. The plaintiffs entered a nolle prosequi
as to the first count; and as to the second plea, they replied that the sum paid into Court was not
enough to satisfy the plaintiffs' claim in respect thereof; upon which replication issue was joined.
At the trial before Crompton, J., at the last Gloucester Assizes, it appeared that the plaintiffs carried
on an extensive business as millers at Gloucester; and that, on the 11th of May, their mill was
stopped by a breakage of the crank shaft by which the mill was worked. The steam-engine was
manufactured by Messrs. Joyce & Co., the engineers, at Greenwich, and it became necessary to send
the shaft as a pattern for a new one to Greenwich. The fracture was discovered on the 12th, and on
the 13th the plaintiffs sent one of their servants to the office of the defendants, who are the well-
known carriers trading under the name of Pickford & Co., for the purpose of having the shaft carried
to Greenwich. The plaintiffs' servant told the clerk that the mill was stopped, and that the shaft must
be sent immediately; and in answer to the inquiry when the shaft would be taken, the answer was,
that if it was sent up by twelve o'clock any day, it would be delivered at Greenwich on the following
day. On the following day the shaft was taken by the defendants, before noon, for the purpose of
being conveyed to Greenwich, and the sum of 2l. 4s. was paid for its carriage for the whole distance;
at the same time the defendants' clerk was told that a special entry, if required, should be made to
hasten its delivery. The delivery of the shaft at Greenwich was delayed by some neglect; and the
consequence was, that the plaintiffs did not receive the new shaft for several days after they would
402

otherwise have done, and the working of their mill was thereby delayed, and they thereby lost the
profits they would otherwise have received.
On the part of the defendants, it was objected that these damages were too remote, and that the
defendants were not liable with respect to them. The learned Judge left the case generally to the jury,
who found a verdict with 25l. damages beyond the amount paid into Court.
Whateley, in last Michaelmas Term, obtained a rule nisi for a new trial, on the ground of
misdirection.
Keating and Dowdeswell (Feb. 1) shewed cause. The plaintiffs are entitled to the amount awarded by
the jury as damages. These damages are not too remote, for they are not only the natural and
necessary consequence of the defendants' default, but they are the only loss which the plaintiffs have
actually sustained. The principle upon which damages are assessed is founded upon that of rendering
compensation to the injured party. This important subject is ably treated in Sedgwick on the Measure
of Damages. And this particuler branch of it is discussed in the third chapter, where, after pointing
out the distinction between the civil and the French law, he says (page 64), “It is sometimes said, in
regard to contracts, that the defendant shall be held liable for those damages only which both parties
may fairly be supposed to have at the time contemplated as likely to result from the nature of the
agreement, and this appears to be the rule adopted by the writers upon the civil law.” In a subsequent
passage he says, “In cases of fraud the civil law made a broad distinction” (page 66); and he adds,
that “in such cases the debtor was liable for all the consequences.” It is difficult, however, to see
what the ground of such principle is, and how the ingredient of fraud can affect the question. For
instance, if the defendants had maliciously and fraudulently kept the shaft, it is not easy to see why
they should have been liable for these damages, if they are not to be held so where the delay is
occasioned by their negligence only. In speaking of the rule respecting the breach of a contract to
transport goods to a particular place, and in actions brought on agreements for the sale and delivery
of chattels, the learned author lays it down, that, “In the former case, the difference in value between
the price at the point where the goods are and the place where they were to be delivered, is taken as
the measure of damages, which, in fact, amounts to an allowance of profits; and in the latter case, a
similar result is had by the application of the rule, which gives the vendee the benefit of the rise of
the market price” (page 80). The several cases, English as well as American, are there collected and
403

reviewed. [Parke, B. The sensible rule appears to be that which has been laid down in France, and
which is declared in their code—Code Civil, liv. iii. tit. iii. ss. 1149, 1150, 1151, and which is thus
translated in Sedgwick (page 67): “The damages due to the creditor consist in general of the loss that
he has sustained, and the profit which he has been prevented from acquiring, subject to the
modifications hereinafter contained. The debtor is only liable for the damages foreseen, or which
might have been foreseen, at the time of the execution of the contract, when it is not owing to his
fraud that the agreement has been violated. Even in the case of non-performance of the contract,
resulting from the fraud of the debtor, the damages only comprise so much of the loss sustained by
the creditor, and so much of the profit which he has been prevented from acquiring, as directly and
immediately results from the non-performance of the contract.”] If that rule is to be adopted, there
was ample evidence in the present case of the defendants' knowledge of such a state of things as
would necessarily result in the damage the plaintiffs suffered through the defendants' default. The
authorities are in the plaintiffs' favour upon the general ground. In Nurse v. Barns (1 Sir T. Raym.
77), which was an action for the breach of an agreement for the letting of certain iron mills, the
plaintiff was held entitled to a sum of 500l., awarded by reason of loss of stock laid in, although he
had only paid 10l. by way of consideration. In Borradaile v. Brunton (8 Taunt. 535, 2 B. Moo. 582),
which was an action for the breach of the warranty of a chain cable that it should last two years as a
substitute for a rope cable of sixteen inches, the plaintiff was held entitled to recover for the loss of
the anchor, which was occasioned by the breaking of the cable within the specified time. [Alderson,
B. Why should not the defendant have been liable for the loss of the ship? Parke, B. Sedgwick
doubts the correctness of that report. Martin, B. Take the case of the non-delivery by a carrier of a
delicate piece of machinery, whereby the whole of an extensive mill is thrown out of work for a
considerable time; if the carrier is to be liable for the loss in that case, he might incur damages to the
extent of 10,000l. Parke, B., referred to Everard v. Hopkins (2 Bulst. 332).] These extreme cases, and
the difficulty which consequently exists in the estimation of the true amount of damages, supports
the view for which the plaintiffs contend, that the question is properly for the decision of a jury, and
therefore that this matter could not properly have been withdrawn from their consideration. In
Ingram v. Lawson (6 Bing. N. C. 212) the true principle was acted upon. That was an action for a
libel upon the plaintiff, who was the owner and master of a ship, which he advertised to take
passengers to the East Indies; and the libel imputed that the vessel was not seaworthy, and that Jews
had purchased her to take out convicts. The Court held, that evidence shewing that the plaintiff's
404

profits after the publication of the libel were 1500l below the usual average, was admissible, to
enable the jury to form an opinion as to the nature of the plaintiff's business, and of his general rate
of profit. Here, also, the plaintiffs have not sustained any loss beyond that which was submitted to
the jury. Bodley v. Reynolds (8 Q. B. 779) and Kettle v. Hunt (Bull. N. P. 77) are similar in principle.
In the latter, it was held that the loss of the benefit of trade, which a man suffers by the detention of
his tools, is recoverable as special damage. [Parke, B. Suppose, in the present case, that the shaft had
been lost, what would have been the damage to which the plaintiffs would have been entitled?] The
loss they had sustained during the time they were so deprived of their shaft, or until they could have
obtained a new one. In Black v. Baxendale (1 Exch. 410), by reason of the defendant's omission to
deliver the goods within a reasonable time at Belford, the plaintiff's agent, who had been sent there to
meet the goods, was put to certain additional expenses, and this Court held that such expenses might
be given by the jury as damages. In Brandt v. Bowlby (2 B. & Ald. 932), which was an action of
assumpsit against the defendants, as owners of a certain vessel, for not delivering a cargo of wheat
shipped to the plaintiffs, the cargo reached the port of discharge but was not delivered; the price of
the cargo at the time it reached the port of destination was held to be the true rule of damages. “As
between the parties in this cause,” said Parke, J., “the plaintiffs are entitled to be put in the same
situation as they would have been in, if the cargo had been delivered to their order at the time when it
was delivered to the wrong party; and the sum it would have fetched at that time is the amount of the
loss sustained by the non-performance of the defendants' contract.” The recent decision of this Court,
in Waters v. Towers (8 Ex. 401), seems to be strongly in the plaintiffs' favour. The defendants there
had agreed to fit up the plaintiffs' mill within a reasonable time, but had not completed their contract
within such time; and it was held that the plaintiffs were entitled to recover, by way of damages, the
loss of profit upon a contract they had entered into with third parties, and which they were unable to
fulfil by reason of the defendants' breach of contract. [Parke, B. The defendants there must of
necessity have known that the consequence of their not completing their contract would be to stop
the working of the mill. But how could the defendants here know that any such result would follow?]
There was ample evidence that the defendants knew the purpose for which this shaft was sent, and
that the result of its nondelivery in due time would be the stoppage of the mill; for the defendants'
agent, at their place of business, was told that the mill was then stopped, that the shaft must be
delivered immediately, and that if a special entry was necessary to hasten its delivery, such an entry
should be made. The defendants must, therefore, be held to have contemplated at the time what in
405

fact did follow, as the necessary and natural result of their wrongful act. They also cited Ward v.
Smith (11 Price, 19); and Parke, B., referred to Levy v. Langridge (4 M. & W. 337).
Whateley, Willes, and Phipson, in support of the rule (Feb. 2). It has been contended, on the part of
the plaintiffs, that the damages found by the jury are a matter fit for their consideration; but still the
question remains, in what way ought the jury to have been directed? It has been also urged, that, in
awarding damages, the law gives compensation to the injured individual. But it is clear that complete
compensation is not to be awarded; for instance, the non-payment of a bill of exchange might lead to
the utter ruin of the holder, and yet such damage could not be considered as necessarily resulting
from the breach of contract, so as to entitle the party aggrieved to recover in respect of it. Take the
case of the breach of a contract to supply a rick-cloth, whereby and in consequence of bad weather
the hay, being unprotected, is spoiled, that damage could not be recoverable. Many similar cases
might be added. The true principle to be deduced from the authorities upon this subject is that which
is embodied in the maxim: “In jure non remota causa sed proxima spectatur.” Sedgwick says (page
38), “In regard to the quantum of damages, instead of adhering to the term compensation, it would be
far more accurate to say, in the language of Domat, which we have cited above, ‘that the object is to
discriminate between that portion of the loss which must be borne by the offending party and that
which must be borne by the sufferer.’ The law in fact aims not at the satisfaction but at a division of
the loss.” And the learned author also cites the following passage from Broom's Legal Maxims:
“Every defendant,” says Mr. Broom, “against whom an action is brought experiences some injury or
inconvenience beyond what the costs will compensate him for.” 3 Again, at page 78, after referring to
the case of Flureau v. Thornhill (2 W. Blac. 1078), he says, “Both the English and American Courts
have generally adhered to this denial of profits as any part of the damages to be compensated and
that whether in cases of contract or of tort. So, in a case of illegal capture, Mr. Justice Story rejected
the item of profits on the voyage, and held this general language: ‘Independent, however, of all
authority, I am satisfied upon principle, that an allowance of damages upon the basis of a calculation
of profits is inadmissible. The rule would be in the highest degree unfavourable to the interests of the
community. The subject would be involved in utter uncertainty. The calculation would proceed upon
contingencies, and would require a knowledge of foreign markets to an exactness, in point of time
and value, which would sometimes present embarrassing obstacles; much would depend upon the
length of the voyage, and the season of arrival, much upon the vigilance and activity of the master,
and much upon the momentary demand. After all, it would be a calculation upon conjectures, and not
406

upon facts; such a rule therefore has been rejected by Courts of law in ordinary cases, and instead of
deciding upon the gains or losses of parties in particular cases, a uniform interest has been applied as
the measure of damages for the detention of property.’” There is much force in that admirably
constructed passage. We ought to pay all due homage in this country to the decisions of the
American Courts upon this important subject, to which they appear to have given much careful
consideration. The damages here are too remote. Several of the cases which were principally relied
upon by the plaintiffs are distinguishable. In Waters v. Towers (1 Exch. 401) there was a special
contract to do the work in a particular time, and the damage occasioned by the non-completion of the
contract was that to which the plaintiffs were held to be entitled. In Borradale v. Brunton (8 Taunt.
535) there was a direct engagement that the cable should hold the anchor. So, in the case of taking
away a workman's tools, the natural and necessary consequence is the loss of employment: Bodley v.
Reynolds (8 Q. B. 779). The following cases may be referred to as decisions upon the principle
within which the defendants contend that the present case falls: Jones v. Gooday (8 M. & W. 146),
Walton v. Fothergill (7 Car. & P. 392), Boyce v. Bayliffe (1 Camp. 58) and Archer v. Wil - liams (2
C. & K. 26). The rule, therefore, that the immediate cause is to be regarded in considering the loss, is
applicable here. There was no special contract between these parties. A carrier has a certain duty cast
upon him by law, and that duty is not to be enlarged to an indefinite extent in the absence of a special
contract, or of fraud or malice. The maxim “dolus circuitu non purgatur,” does not apply. The
question as to how far liability may be affected by reason of malice forming one of the elements to
be taken into consideration, was treated of by the Court of Queen's Bench in Lumley v. Gye (2 E. &
B. 216). Here the declaration is founded upon the defendants' duty as common carriers, and indeed
there is no pretence for saying that they entered into a special contract to bear all the consequences of
the non-delivery of the article in question. They were merely bound to carry it safely, and to deliver
it within a reasonable time. The duty of the clerk, who was in attendance at the defendants' office,
was to enter the article, and to take the amount of the carriage; but a mere notice to him, such as was
here given, could not make the defendants, as carriers, liable as upon a special contract. Such
matters, therefore, must be rejected from the consideration of the question. If carriers are to be liable
in such a case as this, the exercise of a sound judgment would not suffice, but they ought to be gifted
also with a spirit of prophecy. “I have always understood,” said Patteson, J., in Kelly v. Partington (5
B. & Ad. 651), “that the special damage must be the natural result of the thing done.” That sentence
presents the true test. The Court of Queen's Bench acted upon that rule in Foxall v. Barnett (2 E. &
407

B. 928). This therefore is a question of law, and the jury ought to have been told that these damages
were too remote; and that, in the absence of the proof of any other damage, the plaintiffs were
entitled to nominal damages only: Tindall v. Bell (11 M. & W. 232). Siordet v. Hall (4 Bing. 607)
and De Vaux v. Salvador (4 A. & E. 420) are instances of cases where the Courts appear to have
gone into the opposite extremes—in the one case of unduly favouring the carrier, in the other of
holding them liable for results which would appear too remote. If the defendants should be held
responsible for the damages awarded by the jury, they would be in a better position if they confined
their business to the conveyance of gold. They cannot be responsible for results which, at the time
the goods are delivered for carriage, are beyond all human foresight. Suppose a manufacturer were to
contract with a coal merchant or mine owner for the delivery of a boat load of coals, no intimation
being given that the coals were required for immediate use, the vendor in that case would not be
liable for the stoppage of the vendee's business for want of the article which he had failed to deliver:
for the vendor has no knowledge that the goods are not to go to the vendee's general stock. Where
the contracting party is shewn to be acquainted with all the consequences that must of necessity
follow from a breach on his part of the contract, it may be reasonable to say that he takes the risk of
such consequences. If, as between vendor and vendee, this species of liability has no existence, a
fortiori the carrier is not to be burthened with it. In cases of personal injury to passengers, the
damage to which the sufferer has been held entitled is the direct and immediate consequence of the
wrongful act.
Cur. adv. vult.
The judgment of the Court was now delivered by
Alderson , B. We think that there ought to be a new trial in this case; but, in so doing, we deem it to
be expedient and necessary to state explicitly the rule which the Judge, at the next trial, ought, in our
opinion, to direct the jury to be governed by when they estimate the damages.
It is, indeed, of the last importance that we should do this; for, if the jury are left without any definite
rule to guide them, it will, in such cases as these, manifestly lead to the greatest injustice. The Courts
have done this on several occasions; and, in Blake v. Midland Railway Company (18 Q. B. 93), the
Court granted a new trial on this very ground, that the rule had not been definitely laid down to the
jury by the learned Judge at Nisi Prius.
408

“There are certain established rules,” this Court says, in Alder v. Keighley (15 M. & W. 117),
“according to which the jury ought to find.” And the Court, in that case, adds: “and here there is a
clear rule, that the amount which would have been received if the contract had been kept, is the
measure of damages if the contract is broken.”
Now we think the proper rule in such a case as the present is this:—Where two parties have made a
contract which one of them has broken, the damages which the other party ought to receive in
respect of such breach of contract should be such as may fairly and reasonably be considered either
arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or
such as may reasonably be supposed to have been in the contemplation of both parties, at the time
they made the contract, as the probable result of the breach of it. Now, if the special circumstances
under which the contract was actually made were communicated by the plaintiffs to the defendants,
and thus known to both parties, the damages resulting from the breach of such a contract, which they
would reasonably contemplate, would be the amount of injury which would ordinarily follow from a
breach of contract under these special circumstances so known and communicated. But, on the other
hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at
the most, could only be supposed to have had in his contemplation the amount of injury which would
arise generally, and in the great multitude of cases not affected by any special circumstances, from
such a breach of contract. For, had the special circumstances been known, the parties might have
specially provided for the breach of contract by special terms as to the damages in that case; and of
this advantage it would be very unjust to deprive them. Now the above principles are those by which
we think the jury ought to be guided in estimating the damages arising out of any breach of contract.
It is said, that other cases such as breaches of contract in the non-payment of money, or in the not
making a good title to land, are to be treated as exceptions from this, and as governed by a
conventional rule. But as, in such cases, both parties must be supposed to be cognisant of that well-
known rule, these cases may, we think, be more properly classed under the rule above enunciated as
to cases under known special circumstances, because there both parties may reasonably be presumed
to contemplate the estimation of the amount of damages according to the conventional rule. Now, in
the present case, if we are to apply the principles above laid down, we find that the only
circumstances here communicated by the plaintiffs to the defendants at the time the contract was
made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were
the millers of that mill. But how do these circumstances shew reasonably that the profits of the mill
409

must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the
third person? Suppose the plaintiffs had another shaft in their possession put up or putting up at the
time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear
that this would be quite consistent with the above circumstances, and yet the unreasonable delay in
the delivery would have no effect upon the intermediate profits of the mill. Or, again, suppose that, at
the time of the delivery to the carrier, the machinery of the mill had been in other respects defective,
then, also, the same results would follow. Here it is true that the shaft was actually sent back to serve
as a model for a new one, and that the want of a new one was the only cause of the stoppage of the
mill, and that the loss of profits really arose from not sending down the new shaft in proper time, and
that this arose from the delay in delivering the broken one to serve as a model. But it is obvious that,
in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under
ordinary circumstances, such consequences would not, in all probability, have occurred; and these
special circumstances were here never communicated by the plaintiffs to the defendants. It follows,
therefore, that the loss of profits here cannot reasonably be considered such a consequence of the
breach of contract as could have been fairly and reasonably contemplated by both the parties when
they made this contract. For such loss would neither have flowed naturally from the breach of this
contract in the great multitude of such cases occurring under ordinary circumstances, nor were the
special circumstances, which, perhaps, would have made it a reasonable and natural consequence of
such breach of contract, communicated to or known by the defendants. The Judge ought, therefore,
to have told the jury, that, upon the facts then before them, they ought not to take the loss of profits
into consideration at all in estimating the damages. There must therefore be a new trial in this case.
Rule absolute.
410

A. K. A. S. Jamal Appellant v. Moolla Dawood, Sons & Co. Respondents; [1916] 1 A.C. 175
Hon’ble Judges/ Coram: Viscount Haldane , Lord Wrenbury , Sir John Edge , and MR. Ameer
Ali.
JUDGEMENT
Under a contract for the sale of shares in a company the measure of damages upon a breach by the
buyer is the difference between the contract price and the market price at the date of the breach, with
an obligation on the part of the seller to mitigate the damages by getting the best price he can upon that
date. If the seller retains the shares after the breach he cannot recover from the buyer any further loss if
the market falls, nor is he liable to have the damages reduced if the market rises.
Sect. 73 of the Indian Contract Act, 1872, is merely declaratory of the common law as to damages.
APPEAL from a judgment and decree of the Chief Court of Lower Burma (July 24, 1913) affirming
the judgment of Ormond J. of that Court.
By six contracts made between April and August, 1911, the respondents bought and the appellant sold,
at various prices, 23,500 shares in the British Burma Petroleum Company, Limited, to be delivered and
paid for on or before December 30, 1911. The contracts contained a clause providing that in default of
payment the seller should have the option to resell the shares. The shares were tendered on December
30, 1911, but the respondents declined to take delivery or pay for them. At the market price for sales
upon that day, namely 4s. 3d. a share, the 23,500 shares would have realized Rs.109,218 less than their
price under the contracts. The appellant gave the respondents written notice of his intention to sell the
shares against them. No sale, however, was made until February 28, 1912; all the shares were sold at
various times between that date and August, 1912. By these sales the appellant realized more than if he
had sold upon December 30, 1911, namely, a sum only Rs.79,862 less than the price under the
contracts.
The facts are more fully stated in the judgment of their Lordships.
In March, 1912, the appellant sued the respondents in the Chief Court for damages for breach of
contract, claiming Rs.109,218. The respondents contended that the appellant was only entitled to
recover Rs.79,862.
411

The suit was tried by Ormond J., who gave judgment for the appellant for Rs.79,862 only on the
ground that the appellant having elected to exercise the right of resale given under the contracts was
bound to give the respondents the benefit of the prices obtained. The Chief Court in its appellate
jurisdiction (Hartnoll, acting Chief Judge, and Young J.), while differing from the above view of
Ormond J., affirmed his decision upon the ground that the respondents were entitled to the benefit of
the prices actually obtained in mitigation of damages.
Oct. 22. Sir Erle Richards, K.C. , and F. J. Coltman , for the appellant. The case is governed by s. 73
of the Indian Contract Act (IX. of 1872), which, however, is merely declaratory of the English
common law as to damages for breach of contract. The measure of damages is the difference in the
market price of the shares at the date of the breach under the contract; the respondents are not entitled
to the benefit of the higher prices obtained when the sales actually took place. Any increase or
decrease in the price after the breach was a matter which only concerned the appellant. The decisions
relied on by the Chief Court, such as Brace v. Calder , were cases with regard to contracts of a
continuing character and are distinguishable. Pott v. Flather, which was referred to, is in the appellant's
favour. The clause in the contracts giving the appellant an option to sell did not affect the appellant's
right to damages, but merely provided a summary method of ascertaining the loss at the date of the
breach. The sales were not in fact made in accordance with the clause. [ Williams Brothers v. Agius
was also referred to.]
F. Dodd , for the respondents. A decision against the respondents would infringe the cardinal rule as to
damages for breach of contract, namely, that the plaintiff is entitled to the damages which he has
suffered by reason of the breach: Wertheim v. Chicoutimi Pulp Co. It was the duty of the appellant to
mitigate the damages, and having by holding the shares obtained higher prices he cannot obtain
damages on the basis of the price at the date of the breach. Further, the appellant had an option under
the contracts to sell and elected to do so. The time at which the sales took place was suspended owing
to negotiations, but they in fact were made under the appellant's notice and he is bound by them. The
Indian Contract Act, 1872 , does not refer expressly to the market price at the date of breach as the
Sale of Goods Act, 1893 , does.
Nov. 3. The judgment of their Lordships was delivered by LORD WRENBURY.
Under six contracts made at various dates between April and August, 1911, the plaintiff (the appellant)
412

was seller to the defendants of certain 23,500 shares at prices amounting in the aggregate to
Rs.184,125.10. The date for delivery was December 30, 1911. The contract notes contained a term
providing that in the event of the buyer not making payment on the settlement day the seller should
have the option of reselling the shares by auction, and any loss arising should be recoverable from the
buyer. In some cases the words ran, “by auction at the Exchange at the next meeting.”
By December 30 the shares had fallen largely in value. On that day the vendor tendered the shares and
asked payment of the price, adding, “Failing compliance with this request by to-day our client will be
forced to sell the said shares by public auction on or about the 2nd proximo, responsible for all losses
sustained thereby.” The purchasers did not pay the sum demanded. They set up a contention that the
seller was indebted to them on another transaction, and they sent cheques for the differential sum of
Rs.75,925.10, and called for a transfer of the shares. On January 2 1912, the seller repudiated the claim
to a set-off, and repeated, “We have now to give you notice that our client intends to resell these shares
and to institute a suit against you for the recovery of any loss which may result from that course.” The
purchasers stopped payment of the cheques, and nothing turns upon the fact that they were given.
Negotiations ensued between the parties which extended to February 26, 1912. On that day the seller,
by his agents, wrote to the purchasers a letter as follows: “We are instructed by Mr. A. K. A. S. Jamal
that he has not hitherto taken any steps to enforce his claim against you for failing to pay for and take
delivery of 23,500 shares in the British Burma Petroleum Company, Limited, at your request, in order
that his claim might, if possible, be settled. It now appears that no active steps are being taken to settle
the matter but that much time is being lost. Our client will therefore now proceed to enforce his rights
by suit unless the sum of Rs.1,09,219.6 is paid to him by way of compensation before the end of this
week. The amount claimed is arrived at by deducting Rs.74,906.4, the value of 23,500 shares at 4s.
3d., from Rs.1,84,125.10, the agreed price of the shares.” The 4s. 3d. a share there mentioned was the
market price of the shares on December 30.
On March 22 the seller commenced a suit to recover Rs.1,09,218.12 as damages for breach measured
by the difference between the contract price of the shares and their market price (4s. 3d. a share) on the
date of the breach, December 30, 1911. This is (with a trifling variance) the same sum and arrived at in
the same way as the Rs.1,09,219.6 mentioned in the letter.
Immediately after the letter of February 26, 1912, namely, on February 28, the seller commenced to
413

make sale of the shares. He sold them all at various dates from February 28 onwards. In one case the
sale was at less than 4s. 3d. (namely, at 4s.). In one case it was at 4s. 3d. In every other case it was at a
higher price.
The decision under appeal is one which gives the purchaser the benefit of the increased prices which
the shares realized, by giving him credit in reduction of the damages for the increased prices in fact
realized over the market price at December 30, the date of the breach. The appellant contends that this
is wrong.
Their Lordships will first deal with the contractual term as to resale. Upon breach by the purchaser his
contractual right to the shares fell to the ground. There arose a right to damages, and the stipulation in
question was in their Lordships' opinion only a stipulation that the seller might, if he thought fit,
liquidate the damages by ascertaining the value of the shares at the date of the breach by an auction
sale as specified. If the seller availed himself of that option he was not selling the purchaser's shares
with a consequential obligation to account to him for the price, but was selling shares belonging to the
seller which the purchaser ought to, but failed to, take up and pay for in order to ascertain what was the
loss arising by reason of the purchaser not completing at the contract price. Their Lordships are unable
to agree with the original judge that the plaintiff's letters of December 30 and January 2 amounted to
an election to take a measure of damages to be arrived at by a resale. Moreover, there never was any
sale by auction under the option. Nothing turns upon this provision as to resale.
The question therefore is the general question and may be stated thus: In a contract for sale of
negotiable securities, is the measure of damages for breach the difference between the contract price
and the market price at the date of the breach—with an obligation on the part of the seller to mitigate
the damages by getting the best price he can at the date of the breach—or is the seller bound to reduce
the damages, if he can, by subsequent sales at better prices? If he is, and if the purchaser is entitled to
the benefit of subsequent sales, it must also be true that he must bear the burden of subsequent losses.
The latter proposition is in their Lordships' opinion impossible, and the former is equally unsound. If
the seller retains the shares after the breach, the speculation as to the way the market will subsequently
go is the speculation of the seller, not of the buyer; the seller cannot recover from the buyer the loss
below the market price at the date of the breach if the market falls, nor is he liable to the purchaser for
the profit if the market rises.
414

It is undoubted law that a plaintiff who sues for damages owes the duty of taking all reasonable steps
to mitigate the loss consequent upon the breach and cannot claim as damages any sum which is due to
his own neglect. But the loss to be ascertained is the loss at the date of the breach. If at that date the
plaintiff could do something or did something which mitigated the damage, he defendant is entitled to
the benefit of it. Staniforth v. Lyall is an illustration of this. But the fact that by reason of the loss of
the contract which the defendant has failed to perform the plaintiff obtains the benefit of another
contract which is of value to him does not entitle the defendant to the benefit of the latter contract:
Yates v. Whyte; Bradburn v. Great Western Railway; Jebsen v. East and West India Dock Co.
The decision in Rodocanachi v. Milburn, that market value at the date of the breach is the decisive
element, was upheld in the House of Lords in Williams Brothers v. Agius . The breach in Rodocanachi
v. Milburn was a breach by the seller to deliver, but in their Lordships' opinion the proposition is
equally true where the breach is committed by the buyer.
The respondents further contend that ss. 73 and 107 of the Indian Contract Act , or one of them, is in
their favour. As regards s. 107 their Lordships are unable to see that it has any application in the
present case. It deals with cases in which a seller has a lien on goods or has stopped them in transitu.
The section follows upon sections dealing with those subject-matters. The present case is not one
which falls under either of those heads. The seller was and remained the legal holder of the shares. As
regards s. 73 it is but declaratory of the right to damages which has been discussed in the course of this
judgment.
Their Lordships find that upon the appeal the officiating Chief Judge rested his judgment on a finding
that the seller reduced his loss by selling the shares at a higher price than obtained at the date of the
breach. This begs the question by assuming that loss means loss generally, not loss at the date of the
breach. The seller's loss at the date of the breach was and remained the difference between contract
price and market price at that date. When the buyer committed this breach the seller remained entitled
to the shares, and became entitled to damages such as the law allows. The first of these two properties,
namely, the shares, he kept for a time and subsequently sold them in a rising market. His pocket
received benefit, but his loss at the date of the breach remained unaffected.
Their Lordships will humbly advise His Majesty that this appeal ought to be allowed, and the orders in
the original Court and in the Appeal Court discharged, and judgment entered for the plaintiff according
415

to his plaint, and that the respondent ought to pay the costs in the Courts below and of this appeal.
416

Karsandas H. Thacker vs. The Saran Engineering Co. Ltd.; AIR 1965 SC 1981
Judges/Coram: Raghubar Dayal and J.R. Mudholkar, JJ.
JUDGMENT
Raghubar Dayal, J.
1. Karsandas H. Thacker, appellant, sued the respondent for the-recovery of Rs. 20,700 for damages
for breach of contract. He alleged that he entered into-a contract with the respondent for the supply of
200 tons of scrap iron in July 1952 through-correspondence, that the respondent did not deliver the
scrap iron and expressed his inability to comply with the contract by its letter dated January 30, 1953.
In the meantime, the appellant had entered into a contract with M/s. Export Corporation, Calcutta for
supplying them 200 tons of scrap iron. On account of the breach of contract by the respondent, the
appellant could not comply with his contract with M/s. Export Corporation which in its turn, purchased
the necessary scrap iron from the open market and obtained from the appellant the difference in the
amount they had to pay and what they would have paid to the appellant in pursuance of the contract.
2. The respondent contested the suit on grounds inter alia that there had been no completed contract
between the parties and that the appellant suffered no damages. The controlled price of scrap iron on
January 30, 1953, was the same as it was in July 1952 when the contract was made. It was further
contended for the defendant that it was not liable to make good the damages the appellant had to pay to
the Export Corporation as the appellant had entered into the contract on the basis of principal to
principal and had not disclosed that he was purchasing scrap iron for the Export Corporation or for the
purpose of export.
3. The trial Court accepted the plaintiff's case that there was a completed contract between the parties,
that the respondent broke the contract and that the appellant was entitled to the damages claimed. It
accordingly decreed the suit. On appeal by the respondent, the High Court reversed the decree. It held
that there had been a completed contract between the parties on October 25, 1952, but held that the
respondent was not responsible for committing breach of contract as it could not perform the contract
on account of the laches of the appellant and that the appellant suffered no damages in view of the
controlled price for scrap iron being the same on January SO, 1953 as it was in July 1952. The result
417

was that the appellant's suit was dismissed. The High Court granted the necessary certificate under
Article 133(l)(a) of the Constitution and that is how the appeal has been presented to this Court.
4. It has been urged for the appellant that the Iron and Steel (Scrap Control) Order, 1943, hereinafter
called the Scrap Control Order, and consequently, the controlled price of scrap iron, applied to cases of
sale of scrap iron for use within the country and did not apply to sales of scrap iron for purposes of
export. We do not find anything in the Defence of India Rules, 1939, under which the Scrap Control
Order was issued in 1943, or in the Essential Supplies (Temporary Powers) Act, 1946, that the Control
Orders would not apply to sales of controlled articles for export. Rule 81 of the Defence of India
Rules, 1939, authorised the Central Government, inter alia, to provide by order for maintaining
supplies and services essential to the life of the community, for the controlling of the prices at which
articles or things of any description whatsoever may be sold and there is nothing to suggest that this
control of prices was to apply only to sales of any articles within the country and not for purposes of
export. Similarly, Section 3(1) of the Essential Supplies (Temporary Powers) Act, 1946, provided that
the Central Government may, by notified order, provide for regulation or prohibition of production,
supply and distribution of any essential commodity and for trade and commerce therein, in so far as it
appears to be necessary and expedient for maintaining or increasing supplies of any essential
commodity or securing its equitable distribution or availability at fair prices.
5. There is nothing in the terms of the Scrap Control Order or the Notification issued under Clause 8
thereof by the Controller at the relevant period, viz., Notification No. S. R. O. 1007 dated 30-6-51, Part
II, Section 3, fixing the controlled price of scrap iron among other things, to exclude from its purview
sale of scrap iron for purposes of export.
6. Reference is made for the appellant to what is stated in a letter from the Iron and Steel Controller,
Government of India, to the appellant in March 1954. Letter Exhibit 6 was in reply to a letter from the
appellant and stated that there was no statutory price for scrap iron meant for export. This statement
might be about the position in March 1954. There is nothing in this letter to show that the statutory
price of scrap iron meant for export was not covered by the Control Order in 1952.
7. Another letter from the Deputy Assistant Iron and Steel Controller to the appellant in August-
September 1954, Exhibit 1 (Y), in reply to a telegram from the appellant, said that the Scrap Control
Order was not applicable to scraps-meant for export and added:
418

"Scraps which are permitted for export are generally collected from uncontrolled sources by the
exporters."
Two things are to be noted. One is that it is not clear from this letter whether the Scrap Control Order
was not applicable to scraps meant for export in 1952 and the other is that some sort of permission
appeared to have been necessary for exporting scrap iron and that scrap iron for export was generally
collected from uncontrolled sources, that is to say, ordinarily the Controller did not authorise purchase
of scrap iron for export from controlled sources.
8. The Notification fixing the prices for the sale of scrap iron was applicable for the prices to be
charged by persons other than controlled sources. It follows that purchases for exports from
uncontrolled sources also offended against the provisions of Clause 8(4) of the Scrap Control Order if
they charged prices higher than those fixed. Clause 8 empowered the Controller, with the approval of
the Central Government, to publish by notification in the Official Gazette, prices for different classes
of scrap. Sub- clause (4) thereof provided that no person could sell or otherwise dispose of and no per
son could acquire any scrap at prices in excess : of those notified or fixed by the Controller under r that
clause.
9. We now deal with the quantum of damages. The appellant claimed damages at an amount equal to
the difference between the price paid by his vendees viz., the Export Corporation, and the price he
would have paid to the respondent for 200 tons of scrap iron. He is not entitled to calculate damages on
this basis, unless he had entered into the contract with the respondent after informing the latter that he
was purchasing the scrap for export, if there was no controlled price applicable to purchases for export.
There is nothing on the record to establish that the defendant was told, before the contract was entered
into, that the appellant was purchasing the scrap iron for ex port. There is nothing about it in the
correspondence which concluded the contract. The first indirect indication of the scrap being required
for export could be had by the respondent late in October 1952 when it was informed that the scrap
iron was to be despatched to the Export Corporation. The respondent could have possibly inferred then
that the scrap iron it was to sell to the appellant was meant for export. Such information to it was
belated. Its liability to damages for breach of contract on the basis of the market price of scrap iron for
export would not depend on its belated know ledge but would depend on its knowledge of the fact at
the time it entered into the contract.
419

10. The appellant stated in para 7 of the plaint that the plaintiff, to the knowledge of the defendant
company, sold the said 200 tons of iron scrap purchased from the defendant to M/s. Export
Corporation who required the -same for shipping purposes. This statement does not refer to the time
when the defendant had the knowledge that the scrap iron was required for shipping purposes. From
the con tents of the correspondence, such knowledge, as already mentioned, could be possibly be had
by the defendant after October 25, 1952. Further, this statement in the plaint refers to the know ledge
of the sale to the Export Corporation and does not directly refer to his knowledge about the scrap iron
being required for export. The respondent, in its written statement, denied the statements in para 7 of
the plaint.
11. In his deposition, the appellant stated that the defendant company knew that he had sold the goods
to the Export Corporation and the Export Corporation wanted the goods for shipping, but in cross-
examination, had to state that he himself had no concern or interest in the business of the Export
Corporation, that he purchased the scrap iron from the defendant company on his own accord and that
he had sold 200 tons of scrap iron to the Export Corporation on October 25, 1952. It is clear there fore
that the respondent company could not have possibly known in July 1952 when the contract was made
that the appellant was purchasing scrap iron for export through the Export Corporation. The appellant
himself stated in cross-examination that he talked of selling to the Export Corporation after the close of
the negotiation with defendant on July 25, 1952.
12. The only other material on which the appellant relies in support of his contention is that he had
purchased to the knowledge of the respondent company scrap iron for export, is the use of the
expression 'very fancy price' in the first letter he had written to the respondent on June 9, 1952. The
letter said:
"We take pleasure to inform you that we are at present purchasing the scrap iron of the following
descriptions at a very fancy price."
and required the respondent to communicate the exact quantity of each of the items mentioned in that
letter, available for sale, together with their lowest price. It is urged that when prices were controlled, a
suggestion to purchase at a very fancy price was a clear indication of the appellant's purchasing the-
various items for purposes of export. The offer to purchase at a very fancy price appears to be very
remote and slender basis for coming to the conclusion that the respondent company must have known
420

that the 'appellant wanted to purchase the items for export. The effect of the Controller's fixing the
prices is only this that nobody can lawfully charge a price higher than the fixed price. The seller is
however at liberty to sell the article at any price lower than the price fixed. It is therefore that the
appellant had asked the respondent to quote their lowest prices. Readiness to pay a very fancy price
could therefore mean a good price within the price limit fixed by the Controller.
13. We are therefore of opinion that the High Court was right in coming to the conclusion that the
defendant respondent did not know that the appellant was purchasing scrap iron for export. The
appellant, on the breach of contract by the respondent, was entitled, under Section 73 of the Contract
Act, to receive compensation for any loss by the damage caused to him which naturally arose in the
usual course of business from such breach or which the parties knew when they made the contract to
be likely to result from the breach of it. Under Section 73 of the Contract Act, such compensation is
not to be given for any remote and indirect loss or damage sustained by reason of the breach. Now, the
loss which could have naturally arisen in the usual course of things from the breach of contract by the
respondent in the present case would be nil. The appellant agreed to purchase scrap iron from the
respondent at Rs. 100 per ton. It may be presumed that he was paying Rs. 70, the controlled price, and
Rs. 30, the balance, for other incidental charges. On account of the non-delivery of scrap iron, he could
have purchased the scrap iron from the market at the same controlled price and similar incidental
charges. This means that he did not stand to pay a higher price than what he was to pay to the
respondent and there fore he could not have suffered any loss on account of the breach of contract by
the respondent. The actual loss, which, according to the appellant, he suffered on account of the breach
of contract by the respondent was the result of his contracting to sell 200 tons of scrap iron for export
to the Export Corporation. It may be assumed that, as stated, the market price of scrap iron for export
on January 30, 1953, was the price paid by the Export Corporation for the purchase of scrap iron that
day. As the parties did not know and could not have known when the contract was made in July 1952
that the scrap iron would be ultimately sold by the appellant to the Export Corporation, the parties
could not have known of the likelihood of the loss actually suffered by the appellant, according to him,
on account of the failure of the respondent to fulfil the contract.
14. Illustration (k) to Section 73 of the Con tract Act is apt for the purpose of this case. According to
that illustration, the person committing breach of contract has to pay to the other party the difference
between the contract price of the articles agreed to be sold and the sum paid by the other party for
421

purchasing another article on account of the default of the first party, but the first party has not to pay
the compensation which the second party had to pay to third parties as he had not been told at the time
of the contract that the second party was making the purchase of the article for delivery to such third
parties.
15. We therefore hold that the High Court was right in holding that the appellant suffered no such
damage which he could recover from the respondent.
16. In view of what we have said above, it is not necessary to discuss whether the correspondence
between the parties in June-July 1952 made out a completed contract or not and whether the appellant
committed breach of contract or not.
17. The result is that the appeal fails and it dismissed with costs.
422

Maula Bux vs. Union of India (UOI); AIR 1970 SC 1955
Judges/Coram: J.C. Shah, Acting C.J., A.N. Grover and V. Ramaswami, JJ.
JUDGMENT
J.C. Shah, Ag. C.J.
1. Maula Bux-hereinafter called 'the plaintiff-entered into a contract No. C/74 with the Government of
India on February 20, 1947, to supply potatoes at the Military Headquarters, U.P. Area, and deposited
an amount of Rs. 10,000 as security for due performance of the contract. He entered into another
contract with Government of India on March 4, 1947 No. C/120 to supply at the same place poultry,
eggs and fish for one year and deposited an amount of Rs. 8,500/- for due performance of the contract.
Clause 8 of the contract ran as follows :
The officer sanctioning the contract may rescind his contract by notice to me/us in writing :-
(i) ...
(ii) ...
(iii) ...
(iv) If I/we decline, neglect or delay to comply with any demand or requisition or in any other way fail
to perform or observe any condition of the contract.
(v) ...
(vi) ...
In case of such rescission, my/our security deposit (or such portion thereof as the officer sanctioning
the contract shall consider fit or adequate) shall stand forfeited and be absolutely at the disposal of
Government, without prejudice to any other remedy or action that the Government may have to take
....
In the case of such rescission, the Government shall be entitled to recover from me/us on demand any
extra expense the Government may be put to in obtaining supplies/services hereby agreed to be
423

supplied, from elsewhere in any manner mentioned in Clause 7(ii) hereof, for the remainder of the
period for which this contract was entered into, without prejudice to any other remedy the Government
may have.
The plaintiff having made persistent default in making "regular and full supplies" of the commodities
agreed to be supplied, the Government of India rescinded the contracts-the first on November 23,
1947, and the second on December 2, 1947, and forfeited the amounts deposited by the plaintiff.
2. The plaintiff commenced an action against the Union of India in the Court of the Civil Judge,
Lucknow, for a decree for Rs. 20,000/- being the amounts deposited with the Government of India for
due performance of the contracts and interest thereon at the rate of 6 per cent, per annum. The Trial
Court decreed the suit. The Court held that the Government of India was justified in rescinding the
contracts, but they could not forfeit the amounts of deposit, for they had not suffered any loss in
consequence of the default committed by the plaintiff. The High Court of Allahabad in appeal
modified the decree, and awarded Rs. 416.25 only with interest at the rate of 3 per cent from the date
of the suit. The plaintiff has appealed to this Court with special lease.
3. The Trial Court found in decreeing the plaintiff's suit that there was no evidence at all to prove that
loss, if any, was suffered by the Government of India in consequence of the plaintiff's default, and on
that account amounts deposited as security were not liable to be forfeited. In the view of the High
Court, to forfeiture of a sum deposited by way of security for due performance of a contract, where the
amount forfeited is not unreasonable, Section 74 of the Contract Act has no application. The Court
observed that the decision of this Court in Fateh Chand v. Balkishan Dass [1964]1SCR515 did not
purport to overrule the previous "trend of authorities" to the effect that earnest money deposited by
way of security for the due performance of a contract does not constitute penalty contemplated under
Section 74 of the Indian Contract Act, that even if it be held that the security deposited in the case was
a stipulation by way of penalty, the Government was entitled to receive from the plaintiff reasonable
compensation not exceeding that amount, whether or not actual damage or loss was proved to have
been caused, and that even in the absence of evidence to prove the actual damage or loss caused to the
Government "there were circumstances in the case with indicated that the amount of Rs. 10,000 in the
case of potato contract and Rs. 8,500/- in the case of poultry contract may be taken as not exceeding
the reasonable compensation for the breach of contract by the plaintiff." The High Court further
424

observed that the contract was for supply of large quantities of potatoes, poultry and fish, which would
not ordinarily be available in the market, and "had to be procured in case of breach of contract
everyday with great inconvenience," and in the circumstances the Court "could take judicial notice of
the fact that 1947-48 was the period when the prices were rising and it would not have been easy to
procure the supplies at the rates contracted for". The High Court concluded :
... taking into consideration the amount of in convenience and the difficulties and the rising rate of
prices, it would not be unfair if in case of such breach for the supply of such huge amounts of potatoes
and poultry, we consider an amount of Rs. 18,500/- by way of damages as being not unreasonable.
4. Under the terms of the agreements the amounts deposited by the plaintiff as security for due
performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part
of the contract. The High Court observed that the deposits so made may be regarded as earnest money.
But that view cannot be accepted. According to Earl Jowitt in "The Dictionary of English Law" at p.
689 : "Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the
like, by giving to the vendor a nominal sum (e.g. a shilling) as a token that the parties are in earnest or
have made up their minds." As observed by the Judicial Committee in Kunwar Chiranjit Singh v. Har
Swarup A.I.R.1926 P.C.1
Earnest money is part of the purchase price when the transaction goes forward : it is forfeited when the
transaction falls through, by reason of the fault or failure of the vendee.
In the present case the deposit was made not of a sum of money by the purchaser to be applied towards
part payment of the price when the contract was completed and till then as evidencing an intention on
the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts
claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be
regarded as earnest money.
5. Section 74 of the Contract Act provides:
When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of
such breach, or if the contract contains any other stipulation by way of penalty, the party complaining
of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby,
425

to receive from the party who has broken the contract reasonable compensation not exceeding the
amount so named or, as the case may be, the penalty stipulated for.
...
There is authority, no doubt coloured by the view which was taken in English cases, that Section 74 of
the Contract Act has no application to cases of deposit for due performance of a contract which is
stipulated to be forfeited for breach : Natesa Aiyar v. Appavu Padayachi I.L.R. [1913] Mad. 178
Singer Manufacturing Company v. Raja Prosad I.L.R.[1909] Cal. 960 Manian Patter v. The Madras
Railway Company I.L.R.[1906] Mad.188 But this view is no longer good law in view of the judgment
of this Court in Fateh Chand's case, This Court observed at p. 526 :
Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i)
where the contract names a sum to be paid in case of breach, and (ii) where the contract contains any
other stipulation by way of penalty....
The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74
reasonable compensation not exceeding the penalty stipulated for.
426

Shri Hanuman Cotton Mills and Ors. vs. Tata Air Craft Limited; (1969 )3SCC 522
Judges/Coram: C.A. Vaidialingam, I.D. Dua and J.M. Shelat, JJ.
JUDGMENT
C.A. Vaidialingam, J.
1. This appeal, by the plaintiffs-appellants, on certificate granted by the Calcutta High Court, is
directed against the judgment and decree of the Division Bench of that Court, dated January 29, 1964
in Appeal from Original Order No. 28 of 1960, affirming the judgment and decree, dated July 16, 1959
of the learned Single Judge in Suit No. 2745 of 1947. The circumstances leading up to the institution
of the said suit may be stated.
2. The appellants, who were dealing also in the purchase of new and second hand machinery, on
coming to know from an advertisement in a Daily that the defendant-respondent was offering for sale
area-scrap, addressed a letter, dated November 6, 1946 to the respondent intimating their desire to
purchase the materials advertised for sale, and stating that one of their representatives would be
contacting them shortly. Obviously the parties must have met and decided about the purchase, as is
seen from the letter, dated November 18, 1946 addressed by the General Manager of the respondent, to
the appellants. That letter refers to a discussion that the parties had on that day and the respondents
confirmed having sold to the appellants the entire lot of area-scrap lying at Paragraph, on the terms and
conditions mentioned in the letter. The material was stated to be in Dump No. 1 near the flight line at
Paragraph and the approximate quantity was 4000 tons of area-scrap, more or less. The letter refers to
the appellants having agreed to pay Rs. 10 lakhs as price of the materials in the said Dump No. 1,
against which the receipt, by cheque, of a sum of Rs. 2,50,000 was acknowledged by the respondent.
There is a further reference to the fact that the appellants had agreed to pay the balance of Rs. 7,50,000
that day itself. The letter also refers to the fact that the price mentioned does not include sales-tax to be
paid by the appellants and to certain other matters, which are not relevant for the purpose of the appeal.
The letter further says: "The company's terms of business apply to this contract and a copy of this is
enclosed herewith". We shall refer to the relevant clauses in the company's terms of business, referred
to in this letter, a little later. It is enough to note, at this stage that those terms of business have been
made part of the terms and conditions governing the contract.
427

3. On the same day, the appellants sent a reply to the respondent, acknowledging the letter. The
appellants said that they noted that the respondent wants to sell the area-scrap as it is and that it wanted
the appellants to pay the full value, viz., the balance of Rs. 7,50,000 at once. The appellants confirmed
the arrangement contained in the respondent's letter; but regarding payment, the appellants said that
they agree to pay the balance amount in two installments viz., Rs. 2,50,000 on or before November 22,
1946 and the balance of Rs. 5,00,000 on or before December 14, 1946. They also further stated that
they shall commence taking delivery after making full payment. The respondent by its letter dated
November 20, 1946 acknowledged the receipt of the appellants' letter dated November 18, 1946
together with the modifications contained therein. But the respondent emphasised that the other terms
and conditions will be as mentioned in its letter of November 18, 1946.
4. On November 22, 1946, the appellants sent a communication, purporting to be in continuation of

their letter dated November 18, 1946. In this letter they state that the transaction has been closed
without inspecting the materials, merely on the assurance of the respondent that the quantity of area-
scrap was about 4,100 tons. The appellants further state that they have since obtained information that
the quantity stated to be available is not on the spot and therefore they cannot do the business. Under
the circumstances, they request the respondent to treat their letter, dated November 18, 1946 as
cancelled and to return the sum of Rs. 2,50,000 already paid by them.
5. The respondent sent several letters to the appellants asking them to pay the balance amount and take
delivery of the goods; but the appellants refused to pay any further amount to the respondent. The,
respondent ultimately forfeited the entire sum of Rs. 2,50,000 which, according to it, was earnest
money and then cancelled the contract.
6. Now that we have referred to the material correspondence that took place between the parties as
well as the final action of the defendant of forfeiting the amount, it is now necessary to advert to
certain clauses in the Company's terms of business which, as mentioned earlier, have been made by the
defendant's letter dated November 18, 1946 as part of the terms and conditions of the contract. We
have also referred to the fact that the appellants in their reply dated November 18, 1946 have accepted
the same.
7. The respondent's terms of business contain various clauses, of which clauses 9 and 10 are relevant
for our purpose. They are:
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9. Deposits
The buyer shall deposit with the Company 25% of the total value of the stores at the time of placing
the order. The deposit shall remain with the Company as earnest money and shall be adjusted in the
final bills, no interest shall be payable to the buyer by the Company on such amounts held as earnest
money.
10. Time and method of payment.
(a) The buyer shall, before actual delivery is taken or the stores despatched under conditions, pay the
full value of the stores for which his offer has been accepted less the deposit as hereinbefore contained
after which a Shipping Ticket will be issued by the Company in the name of the buyer. The buyer shall
sign his copy of the Shipping Ticket before the same is presented to the Depot concerned for taking
delivery of the stores concerned.
(b) If the buyer shall make default in making payment for the stores in accordance with the provisions
of this contract the Company may without prejudice to its rights under Clause II thereof or other
remedies in law forfeit unconditionally the earnest money paid by the buyer and cancel the contract by
notice in writing to the buyer and resell the stores at such time and in such manner as the Company
thinks best and recover from the buyer any loss incurred on such resale. The Company shall, in
addition be entitled to recover from the buyer any cost of storage, warehousing or removal of the stores
from one place to another and any expenses in connection with such a resale or attempted resale
thereof. Profit, if any, on resale as aforesaid, shall belong to the Company.
From the above clauses, it will be seen that a buyer has to deposit with the company 25% of the total
value and that deposit is to remain with the company as earnest money to be adjusted in the final bills.
The buyer is bound to pay the full value less the deposit, before taking delivery of the stores. In case of
default by the buyer, the company is entitled to forfeit unconditionally the earnest money paid by a
buyer and cancel the contract.
8. The appellants instituted suit No. 2745 of 1947 in the Original Side of the Calcutta High Court
against the respondents for recovery of the sum of Rs. 2,50,000 together with interest. The plaintiffs
pleaded that there had been no concluded agreement entered into between the parties and even when
the matter was in the stage of proposal and counter-proposal, the plaintiffs had withdrawn from the
429

negotiations. They alleged that even if there was a concluded contract, the same was vitiated by the
false and untrue representations made by the respondents regarding the quantity of scrap material
available and the plaintiffs had been induced to enter into the agreement on such raise representations.
Hence the plaintiffs were entitled to avoid the contract and they have avoided the same. They pleaded
that the respondents were never ready and willing to perform their part of the contract. Even on the
assumption that the plaintiffs had wrongfully repudiated the contract, such repudiation was accepted
by the defendant by putting an end to the contract. The respondents were not entitled to forfeit the sum
of Rs. 2,50,000 as the latter cannot take advantage of their own wrongful conduct. In any event, the
sum of Rs. 2,50,000 represents money had and received by the defendants to and for the use of the
plaintiffs. The plaintiffs, in consequence, prayed for a decree directing the defendants to refund the
sum of Rs. 2,50,000 together with interest at 6% from November 18, 1946.
9. The defendants contested the claim of the plaintiffs. They pleaded that a concluded contract has
been entered into between the parties as per two letters dated November 18 and November 20, 1946.
The appellants had agreed to buy the lot of scraps lying in Dump No. 1 for Rs. 10,00,000 of which Rs.
2,50,000 was paid as deposit. The defendants had agreed to the balance amount being paid in
installments as asked for by the plaintiffs in their letter of November 18, 1946. The defendants further
pleaded that there has been no misrepresentation made by them but the plaintiffs, without any
justification, repudiated the contract by their letter dated November 22, 1946. As the plaintiffs
wrongfully repudiated the contract, the defendants, as they are entitled to in law, forfeited the sum of
Rs. 2,50,000 paid by the plaintiff as earnest money, under the terms of business of the Company which
had become part of the contract entered into between the parties. The defendants further pleaded that
they have always been ready and willing to perform their part of the contract and that they, in fact,
even after the plaintiff repudiated the contract, called upon them to pay the balance amount and take
delivery of the articles. But the plaintiffs persisted in their wilful refusal to perform their part and
therefore the defendants had no alternative but to forfeit the earnest money and conduct a resale of the
goods. The defendants further pleaded that the appellants had to pay them a sum of Rs. 42,499 for the
loss and damage sustained by the defendants. They further urged that the plaintiffs were not entitled to
claim the refund of the sum of Rs. 2,50,000 or any part thereof which had been paid as earnest money
and forfeited according to law, and the terms of contract, by the defendants.
430

10. Though the plaintiffs have raised various contentions in the plaint, it is seen from the judgments of
the learned Single Judge and the Division Bench, on appeal, that the appellants conceded that they
committed breach of contract and that the defendants have been at all material times ready and willing
to perform their part of the contract. The plea that the plaintiffs entered into the contract under a
mistake of fact and that they were induced, to so enter into the contract due to the misrepresentation of
the defendants regarding the quantity of scrap available, was also given up. The appellants have also
accepted the position that there has been a concluded contract between the parties and the said contract
was concluded by the correspondence between the parties consisting of the letters dated November 18,
1946 and November 20, 1946. The plaintiffs have further abandoned the plea that the defendants were
not ready and willing to perform their part of the contract. Therefore the two questions that ultimately
survived for consideration by the Court were: (1) as to whether the sum of Rs. 2,50,000 was paid by
the plaintiffs as and by way of part payment or as earnest deposit; and (2) as to whether the defendants
were entitled to forfeit the said amount. The learned Single Judge and, on appeal, the Division Bench,
have held that the sum of Rs. 2,50,000 paid by the appellants was so paid as and by way of deposit or
earnest money and that it is only when the plaintiffs pay the entire price of the goods and perform the
conditions of the contract that the deposit of Rs. 2,50,000 will go towards the payment of the price. It
is the further view of the Courts that the amount representing earnest money is primarily a security for
the performance of the contract and, in the absence of any provision to the contrary in the contract, the
defendants are entitled to forfeit the deposit amount when the plaintiffs have committed a breach of
contract. In this view the defendant's right to forfeit the sum of Rs. 2,50,000 was accepted and it has
been held that the plaintiffs are not entitled to claim refund of the said amount. The plaintiffs' suit, in
the result, was dismissed by the learned Single Judge and, on appeal, the decree of dismissal has been
confirmed.
11. On behalf of the appellants Mr. Maheshwari, learned Counsel, has raised two contentions: (1) That
the amount of Rs. 2,50,000 paid by the plaintiffs and sought to be recovered in the suit is not by way of
a deposit or as earnest money and that, on the other hand, it is part of the purchase price and therefore
the defendants are not entitled to forfeit the said amount. (2) In this case, it must be considered that the
sum of Rs. 2,50,000 has been named in the contract as the amount to be paid in case of breach or in the
alternative the contract contains a stipulation by way of penalty regarding forfeiture of the said amount
and therefore the defendants will be entitled, if at all, to receive only reasonable compensation under
Section 74 of the Contract Act and the Courts erred in not considering this aspect. Under this head, the
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counsel also urged that even a forfeiture of earnest money can only be, if the amount is considered
reasonable and in this case the amount which represents 25% of the total price cannot be considered to
be reasonable and hence the appellants are entitled to relief in law.
12. The learned Attorney General, on behalf of the respondents, pointed out that the material
correspondence between the parties, by which the contract was concluded read along with the terms of
business will clearly show that the sum of Rs. 2,50,000 paid by the appellants was as earnest. It was
further pointed out that the position in law is that the earnest money is part of the purchase price when
the transaction goes through and is performed and that on the other hand it is forfeited when the
transaction falls through by reason of the fault or failure of the vendee. The learned Attorney General
invited us to certain decisions laying down the salient features of 'earnest deposit' and the right of the
party to whom the amount has been paid to forfeit when the opposite party has committed a breach of
contract. Regarding the second contention of the appellant, the learned Attorney General pointed out
that the appellants never raised any contention that the amount of Rs. 2,50,000 deposited by the
appellants is to be treated as a sum named in the contract as the amount to be paid in case of breach, or
that the contract must be considered to contain any stipulation by way of penalty. He also pointed out
that the question of reasonableness or otherwise of the earnest deposit forfeited in this case, was never
raised by the appellant at any stage of the proceedings in the High Court. Therefore Section 74 of the
Contract Act has no application.
13. The first question that arises for consideration is whether the payment of Rs. 2,50,000 by the
appellants was by way of deposit or earnest money. Before we advert to the documents evidencing the
contract in this case, it is necessary to find out what in law constitutes a deposit or payment by way of
earnest money and what the rights and liabilities of the parties are, in respect of such deposit or earnest
money.
14. Borrows, in Words & Phrases, Vol. II, gives the characteristics of "earnest". According to the
author,
An earnest must be a tangible thing... That thing must be given at the moment at which the contract is
concluded, because it is something given to bind the contract, and, therefore, it must come into
existence at the making or conclusion of the contract. The thing given in that way must be given by the
contracting party who gives it, as an earnest or token of good faith, and as a guarantee that he will
432

fulfil his contract, and subject to the terms that if, owing to his default, the contract goes off, it will be
forfeited. K, on the other hand, the contract is fulfilled, an earnest may still serve a further purpose and
operate by way of part payment.
15. Benjamin, in his book on 'Sale', 8th Edition, after referring to clause 17 of the Statute of Frauds and
Section 4(1) of the Sale of Goods Act, 1893 providing for giving "something in earnest to bind the
contract, or in part payment", says, at p. 219:
'give something in earnest' or 'in part payment,' are often treated as meaning the same thing, although
the language clearly intimates that the earnest is 'something to bind the bargain,' or, 'the contract,'
whereas it is manifest that there can be no part payment till after the bargain has been bound, or closed.
The author further states that there are two distinct alternatives, viz., a buyer may give the seller money
or a present as a token or evidence of the bargain quite apart from the price, i.e., earnest, or he may
give him part of the agreed price to be set off against the money to be finally paid, i.e., part payment
and that if the buyer fails to carry out the contract and it is rescinded, cannot recover the earnest, but he
may recover the part payment. But this does not affect the seller's right to recover damages for breach
of contract unless it was by way of deposit or guarantee in which case it is forfeited. It is further stated
that an earnest does not lose its character because the same thing might also avail as a part payment.
16. Regarding "deposit, the author states at p. 946, that a deposit is not recoverable by the buyer, for a
deposit is a guarantee that the buyer shall perform his contract and is forfeited on his failure to do so
and if a contract distinguishes between the deposit and installments of price and the buyer is in default,
the deposit is forfeited.
17. Halsbury, in "Laws of England", Vol. 34, III Edition, in paragraph 189 at p. 118, dealing with
deposit, states:
Part of the price may be payable as a deposit. A part payment is to be distinguished from a deposit or
earnest.
A deposit is paid primarily as security that the buyer will duly accept and pay for the goods, but,
subject thereto, forms part of the price. Accordingly, if the buyer is unable or unwilling to accept and
pay for the goods, the seller may repudiate the contract and retain the deposit.
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18. Earl Jowitt, in his Dictionary of English Law, says:
Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by
giving to the vendor a nominal sum (e.g., a shilling) as a token that the parties are in earnest or have
made up their minds.
19. In Howe v. Smith L.R. [1884] Ch. D.89 Fry, L.J., discussed the history of "earnest", which is
identical with a deposit. In that case, the plaintiff agreed to purchase a property for the price mentioned
in the agreement and paid #500 on the signing of the agreement "as a deposit and in part payment, of
the purchase-money." There were other stipulations in the agreement regarding title to the property and
the payment of the balance of the purchase money. The plaintiff, apprehending that the defendant-
vendor would re-sell the property, brought an action against him for specific performance of the
agreement; but the suit was dismissed on the ground that there had been inordinate delay on the
plaintiffs part in insisting on the completion of the contract. The plaintiff appealed. Before the Court of
Appeal a request was made on his behalf for leave to amend the plaint that if specific performance
could not be decreed, he should get a return of the deposit of #500. Leave was granted by the
Appellate Court and the question hence arose as to whether the plaintiff was entitled to get a refund of
the said amount. In dealing with the deposit claimed back by the plaintiff, Cotton, L.J., at p. 95,
observes:
What is the deposit? The deposit, as I understand it, and using the words of Lord Justice James L. R.
10 Ch. 512 is a guarantee that the contract shall be performed. If the sale goes on, of course, not only
in accordance with the words of the contract, but in accordance with the intention of the parties in
making the contract, it goes in part, payment of the purchase-money for which it is deposited; but if on
the default of the purchaser the contract goes, off, that is to say, if he repudiates the contract, then,
according to Lord Justice James, he can have no right to recover the deposit.
20. Bowen, L.J., at p. 98, states:
We have therefore to consider what in ordinary parlance, and as used in an ordinary contract of sale, is
the meaning which business persons would attach to the term 'deposit'. Without going at length into the
history, or accepting all that has been said or will be said by the other members of the Court on that
point, it comes shortly to this, that a deposit, if nothing more is said about it, is, according to the
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ordinary interpretation of business men, a security for the completion of the purchase. But in what
sense is it a security for the completion of the purchase? It is quite certain that the purchaser cannot
insist on abandoning his contract and yet recover the deposit, because that would be to enable him to
take advantage of his own wrong.
21. Fry, L.J., at p. 101, observes:
Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no
terms are expressed, and we must therefore inquire what terms are to be implied. The terms most
naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in
the event of the contract being performed it shall be brought into account, but if the contract is not
performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is
then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive
in the payer to perform the rest of the contract.
Ultimately, the Court of Appeal rejected the claim of the plaintiff for refund of the deposit.
22. In Soper v. Arnold L.R. [1889] 14 A.C. 429 the House of Lords had to consider the right of the
plaintiff therein to claim a refund of the deposit made by him. In that case the plaintiff had contracted
to purchase a piece of land and entered into an agreement with the vendee. The agreement provided
that the purchaser viz., the plaintiff, should make a deposit and it further provided that if the vendee
failed to comply with the conditions, the deposit should be forfeited. The plaintiff, accordingly, paid
the deposit but as he was not in a position to complete the contract by paying the balance purchase
money, the contract could not be fulfilled. When in another litigation it was subsequently found that
the vendor's title to the property was defective, the plaintiff brought an action to recover his deposit on
the ground of mistake and failure of consideration. The suit was dismissed and the Court of Appeal
also confirmed the said decision. The House of Lords also finally rejected the plaintiff's claim. In
discussing the nature of the deposit made by the plaintiff under the agreement, Lord Macnaghten at p.
435 observes:
The deposit serves two purpose--if the purchase is carried out it goes against the purchase-money, but
its primary purpose is this, it is a guarantee that the purchaser means business; and if there is a case in
435

which a deposit is rightly and properly forfeited it is, I think, when a man enters into a contract to buy
real property without taking the trouble to consider whether he can pay for it or not.
23. In Fair, Smith & Co. v. Messrs, Ltd. L.R. [1928] 1 K.B.D.397 dealing with the question as to
whether the payment was by way of earnest given to bind the contract, or it was a part payment
towards the price. Wright J., observes at p. 408:
Certain characteristics, however, seem to be clear, An earnest must be a tangible thing, in which
definition it may be that a deposit is included, but in the old cases it was always some tangible thing.
That thing must be given at the moment at which the contract is concluded, because it is something
given to bind the contract, and, therefore, it must come into existence at the making or conclusion of
the contract. The thing given in that way must be given by the contracting party who gives it, as an
earnest or token of good faith, and as a guarantee that he will fulfil his contract, and subject to the
terms that if, owing to his default, the contract goes off, it will be forfeited. If on the other hand, the
contract is fulfilled, an earnest may still serve a further purpose and operate by way of part payment.
The learned Judge, quoting the observations of Hamilton, J., in Sumner and Leivesley v. John Brown
& Co. 25 Times L. R. 745, observes at p. 409:
'Earnest'... meant something given for the purpose of binding a contract, something to be used to put
pressure on the defaulter if he failed to carry out his part. If the contract went through, the thing given
in earnest was returned to the giver, or, if money, was deducted from the price. If the contract went off
through the giver's fault the thing given in earnest was forfeited.'
24. The Judicial Committee had to consider in Chiranjit Singh v. Har Swarup A.I.R.1926 P.C.1 the
question as to whether a payment made by way of earnest money by a buyer could be recovered when
the buyer had committed breach of contract. In that case the plaintiff had entered into a contract with
the defendant for purchase of a property. One of the terms of the contract of sale was:
Willing on old terms namely earnest twenty thousand balance in two moieties, first payable on
executing conveyance, last within six months net cash we receive 4 lakhs 76,000.
The plaintiff did not pay the earnest money to nomine but sent two cheques amounting to Rs. 1,65,000
and obtained a receipt that this amount was paid towards the sale price of the estate in question out of
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the total consideration of Rs. 4,76,000. Later the plaintiff informed the defendant that he was not in a
position to complete the purchase and gave opportunity to the latter to sell the property to any other
party. Therefore it was clear that the plaintiff-purchaser was unable or unwilling to complete the
contract of purchase. The plaintiff, notwithstanding his default, sued to recover the entire sum of Rs.
1,65,000 paid by him. The High Court held that as the plaintiff had broken the contract, he must lose
the earnest money of Rs. 20,000 but was entitled to a refund of the balance amount of Rs. 1,45,000
from and out, of the amounts paid by him on that account. The plaintiff, dissatisfied with the decision
of the High Court, carried the matter in appeal to the Judicial Committee for obtaining relief of
repayment of earnest money also. The Judicial Committee agreed with the High Court that from and
out of the amounts paid by the plaintiff, a sum of Rs. 20,000 was earnest money and there was nothing
in the contract to suggest that the seller had agreed to sacrifice the stipulated earnest. Regarding the
legal incidents of earnest money, the Judicial Committee stated:
Earnest money is part of the purchase price when the transaction goes forward; it is forfeited when the
transaction falls through, by reasons of the fault or failure of the vendee.
Holding that the above principle applied squarely to the contract before them, they dismissed the
plaintiffs appeal for refund of earnest.
25. From a review of the decisions cited above, the following principles emerge regarding "earnest":
(1) It must be given at the moment at which the contract is concluded.
(2) It represents a guarantee that the contract will be fulfilled or, in other words, 'earnest' is given to
bind the contract.
(3) It is part of the purchase price when the transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the contract, on default committed by the
buyer, the seller is entitled to forfeit the earnest.
26. Having due regard to the principles enunciated above, we shall now consider, the relevant claims
in the contract between the parties in the case before us, to ascertain whether the amount of Rs.
437

2,50,000 paid by the appellant constitutes earnest money and if so whether the respondents were
justified in law in forfeiting the same.
27. We have already referred to the letter, dated November 18. 1946 written by the respondents to the
appellants confirming the sale of scrap lying in Dump No. 1. That letter states that the total price for
which the appellants agreed to purchase the scrap material is Rs. 10,00,000 against which a sum of Rs.
2,50,000 had been paid and the balance amount was to be paid that day itself. In the reply sent by the
appellant on the same day, they confirmed the arrangement referred to by the respondents but,
regarding the payment of the balance amount, they agreed to pay the same in two installments. The
letter of November 18, 1946 to the appellants clearly refers to the fact that the Company's Terms of
Business applied to the contract and a copy of the said terms was also sent to the respondents. The
respondents, by confirming the arrangement, by their letter of November 18, 1946 were fully aware
that the terms of business of the respondent company formed part of the contract entered into between
the parties. We have also referred, earlier, to clauses 9 and 10 of the Terms of Business of the
respondents. Clause 9 requires the buyer to deposit 25% of the total value of the goods at" the time of
placing the order. That clause also further provides that the deposit shall remain with the company "as
earnest money", to be adjusted in the final bills. It further provides that no interest is payable to the
buyer by the company "on such amounts held as earnest money". There is no controversy in this case
that the appellants deposited the sum of Rs. 2,50,000 under this clause nine, representing 25% of the
purchase price of Rs. 10,00,000. It is therefore clear that this amount deposited by the appellant is a
deposit "as earnest money".
28. Mr. Maheshwari drew our attention to the letter, dated November 18, 1946 sent by the respondents
to the appellants wherein the respondents have stated that the appellants have agreed to pay Rs.
10,00,000 for all the materials in Dump No. 1 against which a cheque for Rs. 2,50,000 has been paid
and that the appellants further agreed to pay the balance of Rs. 7,50,000 that day itself. This statement,
according to the learned Counsel, will clearly show that the sum of Rs. 2,50,000 has been paid as part
payment towards the total price, pure and simple, and there is no question of any payment by way of
earnest money. But this contention ignores the last recital in the said letter wherein it has been
specifically stated that the terms of business of the, respondent company applied to the contract. This
condition has also beep accepted by the appellants in their reply., dated November 18, 1946. Therefore
the position is this, that the terms of business of the respondent company have been incorporated as
438

part of the letter and has been embodied in the terms of contract between the parties. Clause 9; to
which we have already referred, clearly shows that 25% of the total value is to be deposited and that
amount is to remain with the respondents as earnest money. It is again emphasized in Clause 9 that the
amount so deposited as earnest will not bear any interest, but will be only adjusted in the final bills.
Therefore the amount of Rs. 2,50,000 deposited by the appellants, representing 25% of the total of Rs.
10,00,000, is "earnest money" under Clause 9 of the Terms of Business.
29. We have also earlier referred to Clause 10 of the Terras of Business, which relates to the time and
method of payment. Under Clause 10(b) a right is given to the respondents when the buyer makes
default in making payment according to the contract, to forfeit unconditionally the earnest money paid
by the buyer. That clause further provides that this forfeiture of earnest money is without prejudice to
the other rights of the respondents in law. We have referred to the fact that though the appellants raised
pleas that they have not committed any breach of contract and that on the other hand the respondents
were the parties in breach, these contentions were not pursued and had been abandoned before the
High Court. Further, as noted by the High Court, the appellants conceded that they had committed a
breach of the contract. If so, as rightly held by the High Court, under Clause 10(b) the respondents
were entitled to forfeit the earnest money of Rs. 2,50,000.
30. Before closing the discussion on this aspect, it is necessary to note that in the case before the Privy
Council, in Chiranjit Singh's Case, though the contract stipulated that a sum of Rs. 20,000 should be
paid as earnest, the buyer did not pay any amount by way of earnest, as such, but he paid by two
cheques the sum of Rs. 1,65,000 against the purchase price of Rs. 4,76,000. The receipt of the sum of
Rs. 1,65,000, granted by the seller was also stated to be only towards the sale price. But, nevertheless,
the High Court, as well as the Judicial Committee, treated a sum of Rs. 20,000 out of the sum of Rs.
1,65,000, as earnest money paid under the terms of the agreement, and a claim to recover that amount
of earnest money was negatived. In the case before us, the contract read with the Terms of Business of
the company, clearly refers to the earnest money being paid and to the fact of Rs. 2,50,000 having been
paid as earnest. Therefore, there is no ambiguity regarding the nature of the above payment and the
right of the respondents to forfeit the same, under the terms of the contract, when the appellants
admittedly had committed breach of the contract, cannot be assailed. The first contention for the
appellants therefore fails.
439

31. The second contention of Mr. Maheshwari, noted earlier, is really based upon Sections 73 and 74
of the Contract Act. According to the learned Counsel, under Section 73, the respondents will be
entitled only to compensation for any loss or damage caused to them by the breach of the contract,
committed by the appellants. Counsel very strongly relied upon Section 74 of the Contract Act.
According to him, the sum of Rs. 2,50,000, referred to in the contract, must be treated as the amount to
be paid in case of a breach. In the alternative, counsel also urged that the provision in the contract
regarding the forfeiture of the said amount, should be treated as a term containing a stipulation by way
of a penalty. Under any of these circumstances, the remedy of the aggrieved party would be to get
compensation which is adjudged reasonable by the Court. Counsel also urged that "earnest money",
unless it is considered to be a reasonable amount, could not be forfeited in law.
32. The learned Attorney General very strongly urged that the pleas covered by the second contention
of the appellant had never been raised in the pleadings nor in the contentions urged before the High
Court. The question of the quantum of earnest deposit which was forfeited being unreasonable or the
forfeiture being by way of penalty, were never raised by the appellants. The Attorney General also
pointed out that as noted by the High Court the appellants led no evidence at all and, after abandoning
the various pleas taken in the plaint, the only question pressed before the High Court was that the
deposit was not by way of earnest and hence the amount could not be forfeited. Unless the appellants
had pleaded and established that there was unreasonableness attached to the amount required to be
deposited under the contract or that the clause regarding forfeiture amounted to a stipulation by way of
a penalty, the respondents had no opportunity to satisfy the Court that no question of unreasonableness
or the stipulation being by way of penalty arises. He further urged that the question of
unreasonableness or otherwise regarding earnest money does not at all arise when it is forfeited
according to the terms of the contract.
33. In our opinion the learned Attorney General is well founded in his contention that the appellants
raised no such contentions covered by the second point, noted above. It is therefore unnecessary for us
to go into the question as to whether the amount deposited by the appellants, in this case, by way of
earnest and forfeited as such, can be considered to be reasonable or not. We express no opinion on the
question as to whether the element of unreasonableness can ever be considered regarding the forfeiture
of an amount deposited by way of earnest and if so what are the necessary factors to be taken into
account in considering the reasonableness or otherwise of the amount deposited by way of earnest. If
440

the appellants were contesting the claim on any such grounds, they should have laid the foundation for
the same by raising appropriate pleas and also led proper evidence regarding the same, so that the
respondents would have had an opportunity of meeting such a claim.
34. In this view, it is unnecessary for us to consider the decision of this Court in Maula Bux v. Union
of India [1970]1SCR928 relied on by the appellants and wherein there is an observation to the effect:
Forfeiture of earnest money under a contract for sale of property--movable or immovable--if the
amount is reasonable, does not fall within Section 74 (of the Indian Contract Act). That has been
decided in several cases. Kunwar Chiranjit Singh v. Har Swamp AIR 1926 P.C.1 Roshan Lal v. The
Delhi Cloth and General Mills Co. Ltd. Delhi ILR. All.166 Muhammad Habibullah v. Muhammad
Shaft ILR. All. 324 Bishan Chand v. Radha Kishan Das ILR. All. 489 These cases are easily
explained, for forfeiture of reasonable amount paid as earnest money does not amount to imposing a
penalty. But if forfeiture is of the nature of penalty, Section 74 applies. Where under the terms of the
contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which
he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of
a penalty.
The learned Attorney General has pointed out that the decisions referred to in the above quotation do
not lay down that the test of reasonableness applies to an earnest deposit and its forfeiture. He has also
pointed out that this Court, in the above decision, did not agree with the view of the High Court that
the deposit, the recovery of which was sued for by the plaintiff therein, was earnest money. The
learned Attorney General also referred us to various decisions, wherein, according to him, though the
amounts deposited by way of earnest were fairly large in proportion to the total price fixed under the
contract, nevertheless the forfeiture of those amounts were not interfered with by the Courts. But, as
we have already mentioned, we do not propose to go into those aspects in the case on hand. As
mentioned earlier, the appellants never raised any contention that the forfeiture of the amount
amounted to a penalty or that the amount forfeited is so large that the forfeiture is bad in law. Nor have
they raised any contention that the amount of deposit is so unreasonable and therefore forfeiture of the
entire amount is not justified. The decision in Maula Bux's Case [1970]1SCR928 had no occasion to
consider the question of reasonableness or otherwise of the earnest deposit being forfeited. Because,
from the said judgment it is clear that this Court did not agree with the view of the High Court that the
441

deposits made, and which were under consideration, were paid as earnest money. It is under those
circumstances that this Court proceeded to consider the applicability of Section 74 of the Contract Act.
35. Mr. Maheshwari has relied upon the decision of this Court in Fateh Chand v. Balkishan Das
[1964]1SCR515 wherein, according to him, this Court has held, under similar circumstances, that the
stipulation under the contract regarding forfeiture of the amount deposited is a stipulation by way of
penalty attracting Section 74 of the Contract Act. On this assumption, counsel urged that there is a
duty, statutorily imposed upon Courts by Section 74 of the Contract Act not to enforce the penalty
clause but only to award reasonable compensation. This aspect, he urges, has been totally missed by
the High Court.
36. We are inclined to accept this contention of the learned Counsel. this Court had to consider, in the
said decision, two questions: (i) whether the plaintiff therein was entitled to forfeit a sum of Rs. 1,000
paid as earnest money on default committed by the buyer; and (ii) whether the plaintiff was further
entitled to forfeit the entire sum of Rs. 24,000 paid by the buyer under the contract which recognised
such right. this Court held that the plaintiff was entitled to forfeit the sum of Rs. 1,000 paid as earnest
money, when default was committed by the buyer. But, regarding the second item of Rs. 24,000 this
Court held that the same cannot be treated as earnest and therefore the rights of the parties would have
to be adjudged under Section 74 of the Contract Act. In view of this conclusion the Court further had
to consider the relief that the plaintiff had to get when breach of contract was committed by the buyer
and, in dealing with this question, it observed at p. 526:
Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i)
where the contract names a sum to be paid in case of breach and (ii) where the contract contains any
other stipulation by way of penalty. We are in the present case not concerned to decide whether a
covenant of forfeiture of deposit for due performance of a contract falls within the first class. The
measure of damages in the case of breach of a stipulation by way of penalty is by Section 74
reasonable compensation not exceeding the penalty stipulated for.
Again, at p. 528 it observed:
In our judgment the expression 'the contract contains any other stipulation by way of penalty'
comprehensively applies to every covenant involving a penalty whether it is for payment on breach of
442

contract of money or delivery of property in future, or for forfeiture of right to money or other property
already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is
statutorily imposed upon courts by Section 74. In all cases, therefore, where there is a stipulation in the
nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which
expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers
reasonable, but not exceeding the amount specified in the contract as liable to forfeiture.
The Court further observed at p. 529:
"There is no ground for holding that the expression contract contains any other stipulation by way of
penalty' is limited to cases of stipulation in the nature of an agreement to pay money or deliver
property on breach and does not comprehend covenants under which amounts paid or property
delivered under the contract, which by the terms of the contract expressly or by clear implication are
liable to be forfeited.
Section 74 declares the law as to liability upon breach of contract where compensation is by agreement
of the parties pre-determined, or where there is a stipulation by way of penalty. But the application of
the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The
section does not confer a special benefit upon any party; it merely declares the law that
notwithstanding any terra in the contract predetermining damages or providing for forfeiture of any
property by way of penalty, the court will award to the party aggrieved only reasonable compensation
not exceeding the amount named or penalty stipulated. The jurisdiction of the Court is not determined
by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of
the expression 'to receive from the party who has broken the contract" does not predicate that the
jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be
exercised in dealing with the claim of the party complaining of breach of contract.
this Court applied Section 74 of the Contract Act, and ultimately fixed a particular amount which the
plaintiff would be entitled to as reasonable compensation in the circumstances.
37. Mr. Maheshwari placed considerable reliance on the above extracts in support of his contention
and urged that the recitals regarding forfeiture of the amount of Rs. 2,50,000 shows that the contract
contains a stipulation by way of penalty and therefore Section 74 is attracted. It is not possible to
443

accept this contention. As we have already pointed out, this Court, in the above decision, recognised
the principle that earnest money can be forfeited, but in dealing with the rest of the amount which was
not, admittedly, earnest money, Section 74 was applied. In the case before us the entire amount, as
evidenced by the contract and as held by us earlier, is earnest money and therefore the above decision
does not apply.
38. Mr. Maheshwari finally urged that Section 64 of the Contract Act may apply and he also relied on
the decision of the Judicial Committee in Murlidhar Chatterjee v. International Film Co. L.R.70
IndAp35. On the basis of that ruling he urged that the respondents are bound to restore the benefit that
they have obtained under the contract. In our opinion there is no scope for applying Section 64 of the
Contract Act and it follows that the decision of the Judicial Committee, referred to above, and dealing
with Section 64 has no relevance.
39. We have already pointed out that the appellants raised a contention that they had been induced to
enter into the agreement on a misrepresentation made by the respondents regarding the quantity of
material available. If the appellants had proceeded on that basis, then the contract would have been
voidable at their instance under Section 19 of the Contract Act. But they have abandoned that plea and
have admitted that the breach of contract was committed by them. Hence Section 64 cannot be invoked
by the appellants.
40. In this view, the second contention also fails.
41. In the result, the appeal fails and is dismissed with costs.
444

Ghaziabad Development Authority vs. Union of India (UOI) and Ors.; AIR 2000 SC 2003
Judges/Coram: S. Rajendra Babu and R.C. Lahoti, JJ.
JUDGMENT
R.C. Lahoti, J.
1. Leave granted in SLP (C) No. 18897/99.
2. In this batch of appeals, Ghaziabad Development Authority constituted under Section 4 of the Uttar
Pradesh Urban Planning and Development Act, 1973 is the appellant. The Authority has from time to
time promoted and advertised several schemes for allotment of developed plots for construction of
apartments and/or flats for occupation by the allottees. Several persons who had subscribed to the
schemes approached different forums complaining of failure or unreasonable delay in accomplishing
the schemes. Some have filed complaints before the Monopolies and Restrictive Trade Practices
Commission and some have raised disputes before the Consumer Disputes Redressal Forum. In two
cases Civil Writ Petitions under Article 226 of the Constitution were filed before the High Court
seeking refund of the amount paid or deposited by the petitioners with the Authority. In all the cases
under appeal the Court or Commission or Forum concerned has found the appellant-Authority guilty of
having unreasonably delayed the accomplishment of the announced scheme or guilty of failure to
perform the promise held out to the claimants and therefore directed the amount paid or deposited by
the respective claimants to be returned along with interest. In the cases filed before the High Court of
Allahabad there was a term in the brochure issued by the Authority that in the event of the applicant
withdrawing its offer or surrendering the same no interest whatsoever would be payable to the
claimants. The High Court has held such term of the brochure to be unconscionable and arbitrary and
hence violative of Article 14 of the Constitution. The High Court has directed the amount due and
payable to be refunded with interest calculated at the rate of 12 per cent per annum from the date of
deposit to the date of refund. In all the other appeals before us the impugned order passed by the
Commission or the Forum directs payment of the amount due and payable to the respective claimants
with interest at the rate of 18 per cent per annum. In Civil Appeal No. 8316 of 1995, G.D.A. v. Brijesh
Mehta, the MRTP Commission has held the claimants entitled to an amount of Rs. 50,000/- payable as
445

compensation for 'mental agony' suffered by the claimants for failure of the Authority to make
available the plot as promised by it.
3. As all these appeals raise the following common questions of law, they have been heard together
and are being disposed of by this common judgment. The questions arising for decision are :
(i) Whether compensation can be awarded for 'mental agony' suffered by the claimants?
(ii) Whether in the absence of any contract or promise held out by the Ghaziabad Development
Authority any amount by way of interest can be directed to be paid on the amount found due and
payable by the Authority to the claimants?
(iii) If so, the rate at which the interest can be ordered to be paid?
4. In C.A. 8316/1995, Ghaziabad Development Authority had announced a scheme for allotment of
developed plots which was known as "Indirapuram Scheme". The Authority informed the claimants
that a plot of 35 sc. metres was reserved for them, the estimated cost of which was Rs. 4,20,000/-
payable in specified installments. An allotment of plot was also informed. Then at one point of time
the claimants were informed that due to some unavoidable reasons and the development work not
having been completed there has been delay in handing over possession. Having waited for an
unreasonable length of time the claimants approached the MRTP Commission.
5. When a Development Authority announces a scheme for allotment of plots, the brochure issued by it
for public information is an invitation to offer. Several members of public may make applications for
availing benefit of the scheme. Such applications are offers. Some of the offers having been accepted
subject to rules of priority or preference laid down by the Authority result into a contract between the
applicant and the Authority. The legal relationship governing the performance and consequences
flowing from breach would be worked out under the provisions of the Contract Act and the Specific
Relief Act except to the extent governed by the law applicable to the Authority floating the scheme. In
case of breach of contract damages may be claimed by one party from the other who has broken its
contractual obligation in some way or the other. The damages may be liquidated or unliquidated.
Liquidated damages are such damages as have been agreed upon and fixed by the parties in
anticipation of the breach. Unliquidated damages are such damages as are required to be assessed.
Broadly the principle underlying assessment of damages is to put the aggrieved party monetarily in the
446

same position as far as possible in which it would have been if the contract would have been
performed. Here the rule as to remoteness of damages comes into play. Such loss may be compensated
as the parties could have contemplated at the time of entering into the contract. The party held liable to
compensation shall be obliged to compensate for such losses as directly flow from its breach. Chitty on
Contracts (27th Edition, Vol. 1, Para 26.041) states..."Normally, no damages in contract will be
awarded for injury to the plaintiff's feeling, or for his mental distress, anguish, annoyance, loss of
reputation or social discredit caused by the breach of contract; The exception is limited to contract
whose performance is "to provide peace of mind or freedom from distress"....Damages may also be
awarded for nervous shock or an anxiety state (an actual breakdown in health) suffered by the plaintiff,
if that was, at the time the contract was made, within the contemplation of the parties as a not unlikely
consequence of the breach of contract. Despite these development, however, the Court of Appeal has
refused to award damages for injured feelings to a wrongfully dismissed employee, and confirmed that
damages for anguish and vexation caused by breach of contract cannot be awarded in an ordinary
commercial contract.
6. The ordinary heads of damages allowable in contracts for sale of land are settled. A vendor who
breaks the contract by failing to convey the land to the purchaser is liable to damages for the
purchasers' loss of bargain by paying the market value of the property at the fixed time for completion
less the contract price. The purchaser may claim the loss of profit he intended to make from a
particular use of the land if the vendor had actual or imputed knowledge thereof. For delay in
performance the normal nature of damages is the value of the use of the land for the period of delay,
viz. usually its rental value (See Chitty on Contracts, ibid, para 26.045).
7. In our opinion, compensation for mental agony could not have been awarded as has been done by
the MRTP Commission.
8. However, the learned Counsel for the respondents has invited our attention to Lucknow
Development Authority v. M.K. Gupta MANU/SC/0178/1994 : AIR1994SC787 wherein this Court
has upheld the award by the Commission of a compensation of Rs. 10,000/- for mental harassment.
The basis for such award is to be found in paras 10 and 11 wherein this Court has stated inter alia -
"Where it is found that exercise of discretion was mala fide and the complainant is entitled to
compensation for mental and physical harassment then the officer can no more claim to be under
447

protective cover. When the citizen seeks to recover compensation from a public authority in respect of
injuries suffered by him for capricious exercise of power and the National Commission finds it duly
proved then it has a statutory obligation to award the same." The Court has further directed the
responsibility for the wrong done to the citizens to be fixed on the officers who were responsible for
causing harassment and agony to the claimants and then recover the amount of compensation from the
salary of officers found responsible. The judgment clearly shows the liability having been fixed not
within the realm of the law of contracts but under the principles of administrative law. We do not find
any such case having been pleaded much less made out before the Commission. Indeed, no such
finding has been arrived at by the Commission as was reached by this Court in case of Lucknow
Development Authority (supra). The award of compensation of Rs. 50,000/-for mental agony suffered
by the claimants is held liable to be set aside.
9. The next question is the award of interest and the rate thereof. It is true that the terms of the
brochure issued by the Authority relevant to any of the cases under appeal and the correspondence
between the parties do not make out an express or implied contract for payment of interest by the
Authority to the claimants. Any provision contained in the Consumer Protection Act, 1986 the
Monopolies and Restrictive Trade Practices Act, 1969 and U.P. Urban Planning and Development Act,
1973 enabling the award of such interest has not been brought to our notice. The learned Counsel for
the claimants have placed reliance on a recent decision of this Court in Sovintorg (India) Ltd. v. State
Bank of India, New Delhi MANU/SC/0464/1999 : AIR1999SC2963 wherein in similar circumstances
the National Consumer Disputes Redressal Commission directed the amount deposited by the
claimants to be returned with interest at the rate of 12 per cent per annum. This Court enhanced the
rate of interest to 15 per cent per annum. To sustain the direction for payment of interest reliance was
placed on behalf of the claimants on Section 34 of the CPC and payment of interest at the rate at which
moneys are lent or advanced by National Banks in relation to commercial transactions was demanded.
This Court did not agree. However, it was observed :-
There was no contract between the parties regarding payment of interest on delayed deposit or on
account of delay on the part of the opposite party to render the services. Interest cannot be claimed
under Section 34 of the Civil Procedure Code as its provisions have not been specifically made
applicable to the proceedings under the Act. We, however, find that the general provision of Section
34 being based upon justice, equity and good conscience would authorise the Redressal Forums and
448

Commissions to also grant interest appropriately under the circumstance of each case. Interest may
also be awarded in lieu of compensation or damages in appropriate cases. The interest can also be
awarded on equitable grounds.
The State Commission as well as the National Commission were, therefore, justified in awarding the
interest to the appellant but in the circumstances of the case we feel that grant of interest at the rate of
12% was inadequate as admittedly the appellant was deprived of the user of a sum of Rs. one lakh for
over a period of seven years. During the aforesaid period, the appellant had to suffer the winding-up
proceedings under the Companies Act, allegedly on the ground of financial crunch. We are of the
opinion that awarding interest at the rate of 15 per cent per annum would have served the ends of
justice.
10. We are therefore of the opinion that interest on equitable grounds can be awarded in appropriate
cases. In Sovintorg (India) Ltd.'s case the rate of 15 per cent per annum was considered adequate to
serve the ends of justice. The Court was apparently influenced by the fact that the claimant had to
suffer winding-up proceedings under the Companies Act and the defendant must be made to share part
of the blame. However, in the cases before us, the parties have not tendered any evidence enabling
formation of opinion on the rate of interest which can be considered ideal to be adopted. The rate of
interest awarded in equity should neither be too high nor too low. In our opinion awarding interest at
the rate of 12 per cent per annum would be just and proper and meet the ends of justice in the cases
under consideration. The provision contained in the brochure issued by the Development Authority
that it shall not be liable to pay any interest in the event of an occasion arising for return of the amount
should be held to be applicable only to such cases in which the claimant is itself responsible for
creating circumstances providing occasion for the refund. In the cases under appeal the fault has been
found with the Authority. The Authority does not therefore have any justification for resisting refund
of the claimants' amount with interest.
11. For the foregoing reasons, the direction made by the MRTP Commission for payment of Rs.
50,0007- as compensation for mental agony suffered by the claimants-respondents in Civil Appeal No.
8316/1995 is set aside. In all the other cases the direction for payment of interest at the rate of 18 per
cent shall stand modified to pay interest at the rate of 12 per cent per annum. Civil Appeal No.
8482/1997
449

12. This case relates to allotment of a flat. The MRTP Commission has held the claimant entitled to
allotment of a flat. An option has been given to the claimant. If the claimant may refuse to take the flat
in terms of the direction made by the Commission he will be entitled to the refund of the amounts
deposited by him with interest at the rate of 18 per cent per annum from the dates of deposit of the
various amounts by the claimant. During the course of hearing before this Court the possibility of the
claim being satisfied by allotment of an alternative flat was explored but that could not materialise as
the claimant was not agreeable to accept the flat offered by the Authority submitting that it was located
in a deserted area and was heavily priced. That being the position the direction of the Commission for
refund of the amount shall stand though the rate of interest shall be 12 per cent and not 18 per cent.
13. All the appeals and contempt petitions stand disposed of accordingly. No order as to the costs.
450

State of West Bengal vs. B.K. Mondal and Sons; AIR 1962 SC 779
Judges/Coram: A.K. Sarkar, K.C. Das Gupta, K.N. Wanchoo, N. Rajagopala Ayyangar, P.B.
Gajendragadkar and G.K. Mitter, JJ.
JUDGMENT
P.B. Gajendragadkar, J.
1. This appeal by special leave arises out of a suit field by the respondent B. K. Mondal & Sons against
the appellant the State of West Bengal on the Original Side of the Calcutta High Court claiming a sum
of Rs. 19,325/- for works done by it for the appellant. This claim was made out in two ways. It was
alleged that the works in question had been done by the respondent in terms of a contract entered into
between the parties and as such the appellant was liable to pay the amount due for the said works. In
the alternative it was alleged that if the contract in question was invalid then the respondent's claim fell
under s. 70 of the Indian Contract Act. The respondent had lawfully done such works not intending to
act gratuitously in that behalf and the appellant had enjoyed the benefit thereof.
2. The respondent's case was that on February 8, 1944, it offered to put up certain temporary storage
godowns at Arambagh in the District of Hooghly for the use of the Civil Supplies Department of the
State of Bengal and that the said offer was accepted by the said department by a letter dated February
12, 1944. Accordingly the respondent completed the said construction and its bill for Rs. 39,476/- was
duly paid in July 1944. Meanwhile, on April 7, 1944, the respondent was requested by the Sub-
Divisional Officer, Arambagh, to submit its estimate for the construction of a kutcha road, guard room,
office, kitchen and room for clerks at Arambagh for the Department of Civil Supplies. The respondent
alleged that the Additional Deputy Director of Civil Supplies visited Arambagh on April 20, 1944, and
instructed the respondent to proceed with the construction in accordance with the estimates submitted
by it. Accordingly the respondent completed the said constructions and a bill for Rs. 2,322/8 was
submitted in that behalf to the Assistant director of Civil Supplies on April 27, 1944. Thereafter the
Sub-Divisional Officer Arambagh required the construction of certain storage sheds at Khanakul and
the Assistant Director of Civil Supplies wrote to the respondent on April 18, 1944, asking it to proceed
with the construction of the said storage sheds. This works also was completed by the respondent in
due course and for the said work a bill for Rs. 17,003/- was submitted. In the present suit the
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respondent claimed that the two bills submitted by it in which the respondent had claimed Rs.
2,322/8/- and Rs. 17,003/- respectively had remained unpaid and that was the basis of the present
claim.
3. The appellant denied all the material allegations made by the respondent in its plaint. It alleged that
the requests in pursuance of which the respondent claims to have made the several constructions were
invalid and unauthorised and did not constitute a valid contract binding the appellant under s. 175(3) of
the Government of India Act, 1935 (hereafter called the Act). It pleaded that there was no privity of
contract between the respondent and itself and it denied its liability for the entire claim. The written
statement filed by the appellant was very vague and general in terms and no specific or detailed pleas
had been set out by the appellant in its pleading.
4. However, G. K. Mitter, J., who tried the suit, framed five material issues on the pleadings and
recorded his findings on them. He held that having regard to the provisions of s. 175(3) of the Act
there was no valid and binding contract between the respondent and the appellant for the construction
of huts and sheds and Khanakul and Arambagh. This finding was in favour of the appellant. He held
that the respondent's claim against the appellant was, however, justified under s. 70 of the Indian
Contract Act, and he came to the conclusion that the said claim was not barred by limitation. He also
rejected the plea of the appellant that the liability of the Province of Bengal had not devolved upon the
appellant under the provisions of the Indian Independence (Rights, Property and Liabilities) Order
1947. Thus, on these three points the findings of the trial judge were against the appellant. It appears
that at the trial the respondent had also relied upon s. 65 of the Indian Contract Act in support of its
claim. The learned judge held that s. 65 did not apply to the facts of the case and so the finding on this
point was in favour of the appellant. The result was that the respondent's claim was upheld under s. 70
of the Contract Act and a decree for the amount claimed by it was accordingly passed in its favour.
5. The appellant disputed the correctness and validity of the said decree by preferring an appeal to the
Calcutta High Court in its civil appellate jurisdiction. The said appeal was heard by S. R. Das Gupta
and Bachawat, JJ. The two learned Judges who heard the said appeal delivered separate though
concurring judgments and substantially confirmed the material finding recorded by the trial court. In
the result the appeal preferred by the appellant was dismissed. The appellant then applied for a
certificate to come to this Court but the High Court rejected its application. Thereupon the appellant
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moved this Court for a special certificate and on obtaining it has come to this Court; and the principal
point which has been urged before us by Mr. Sen on behalf of the appellant is that s. 70 of the Contract
Act does not apply to the present case.
6. Before dealing wit this point it is necessary to refer briefly to the finding recorded by the Courts
below that the contract on which the respondent relied is invalid under s. 175(3) of the Act. Mr. Sen
argues that this finding is correct whereas Mr. Chatterjee faintly suggested that the contract cannot be
said to be invalid. Section 175(3) provides, inter alia, that all contract made in the exercise of the
executive authority of a province shall be expressed to be made by the Governor of a Province and all
such contracts made in exercise of that authority shall be executed on behalf of the Governor by such
persons and in such manner as he may direct or authorise. It is common-ground that the contracts in
question were not executed by any persons duly authorised by the Governor in that behalf and the
question is whether the said contracts can be said to be valid inspite of the fact that they do not comply
with the mandatory requirements of s. 175(3) of the Act. In our opinion, there can be no doubt that
failure to comply with the mandatory provisions of the said section makes the contracts invalid. The
question as to whether mandatory provisions contained in statutes should be considered merely as
directory or obligatory has often been considered in judicial decisions. In dealing with the question no
general or inflexible rule can be laid down. It is always a matter of trying to determine the real
intention of the Legislature in using the imperative or mandatory words, and such intention can be
gathered by a careful examination of the whole scope of the statute and the object intended to be
achieved by the particular provision containing the mandatory clause. If it is held that the mandatory
clause is obligatory it inevitably follows that contravention of the said clause implies the nullification
of the contract. There can be no doubt that in enacting the provisions of s. 175(3) the Parliament
intended that the state should not be burdened with liability based on unauthorised contracts and the
plain object of the provision, therefore, is to save the State from spurious claims made on the strength
of such unauthorised contracts. Thus the provision is made in the public interest and so there can be no
difficulty in holding that the word "shall" used in making the provision is intended to make the
provision itself obligatory and not directory. This is the view taken by this Court in Seth Bhikraj
Jaipuria v. The Union of India [1962]2SCR880 , and, with respect, we are in entire agreement with
that view.
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7. As in the case of Bhikraj Jaipuria [[1954] S.C.R. 817.] so in the present case too Mr. Chatterjee has
attempted to argue that the conclusion about the obligatory character of the provisions of s. 175(3) is
inconsistent with the decision of the this Court in Chatturbhuj Vithaldas Jasani v. Moreshwar
Parashram [[1954] S.C.R. 817.]. In that case a contract for the supply of goods had been entered into
with the Central Government by the firm Moolji Scika and Company of which the candidate
Chatturbhuj was a partner. The contract in question had not complied with the mandatory provisions of
Art. 299(1) of the Constitution (which corresponds substantially to s. 175(3) of the Act) and the
question which this Court had to consider was whether in view of the fact that the contract in question
had contravened the provisions of Art. 299(1) the candidate Chatturbhuj could be said to be
disqualified for being chosen as a member of Parliament by virtue of the disqualification set out in s.
7(d) of the Representation of the People Act 43 of 1951. In dealing with this question Bose, J., who
spoke for the Court, observed that "s. 7(d) of the Representation of the People Act does not require that
the contracts at which it strikes should be enforceable against the Government; all it requires is that the
contracts should be for the supply of goods to the Government. The contracts in question are just that
and so are hit by the section". It would thus be seen that in the case of Chatturbhuj [[1954] S.C.R.
817.] this Court was dealing with the narrow question as to whether the impugned contract for the
supply of goods would cease to attract the provisions of s. 7(d) of the Representation of the People Act
on the ground that it did not comply with the provisions of Art. 299(1), and this Court held that
notwithstanding the fact that the contract could not be enforced against the Government it was a
contract which fell within the mischief of s. 7(d). Mr. Chatterjee, however, contends that in
considering the effect of non-compliance of Art. 299(1) Bose, J., has also observed that "the
Government may not be bound by the contract but that is a very different thing form saying that the
contract was void and of no effect and that it only meant that the principal (Government) could not be
sued but there will be nothing to prevent ratification if it was for the benefit of the Government." Mr.
Chatterjee points out that this observation shows that the contract with which the Court was dealing
was not treated "as void and of no effect." It would be noticed that the observation on which Mr.
Chatterjee relies has to be read in the context of the question posed for the decision of this Court and
its effect must be judged in that way. All that this Court meant by the said observation was that the
contract made in contravention of Art. 299(1) could be ratified by the Government if it was for its
benefit and as such it could not take the case of the contractor outside the purview of s. 7(d). The
contract which is void may not be capable of ratification, but, since according to the Court the contract
454

in question could have been ratified it was not void in that technical sense. That is all that was intended
by the observation in question. We are not prepared to read the said observation or the final decision in
the case of Chatturbhuj [[1954] S.C.R. 817.] as supporting the proposition that notwithstanding the
failure of the parties to comply with Art. 299(1) the contract would not be invalid. Indeed, Bose, J., has
expressly stated that such a contract cannot be enforced against the Government and is not binding on
it. Therefore, we do not think that Mr. Chatterjee can successfully challenge the finding of the Courts
below that the contracts in question were invalid. It is on this basis that we have to consider the main
question about the applicability of s. 70 to the facts of the present case.
8. Mr. Sen argues that in dealing with the question about the scope and effect of s. 70 it would be
material to remember the background of this section. He suggests that the rule laid down in the section
is based on the notes in Smith's Leading Cases to Lampleigh v. Brathwaite [Smith's Leading Cases,
Vol. I. 13th ed., p. 148.], and so he argues that in construing the said section it would be relevant to
refer to the English decisions bearing on the point. The first decision on which Mr. Sen very strongly
relies is the case of H. Young & Co. v. The Mayor and Corporation of Royal Leamington Spa (1883) 8
App. Cas. 517. In that case, the House of Lords had to consider the effect of the provisions of s. 174(1)
of the Public Health Act, 1875 (38 & 39 Vict c. 55). The said section enacts that "every contract made
by an urban authority whereby the value or amount exceeds Pounds 50 shall be in writing and sealed
with the common seal of such authority". It was held that "the provision of the said section is
obligatory and not merely directory and it applies to an executed contract of which the urban authority
have had the full benefit and enjoyment, and which has been effected by their agent duly appointed
under their common seal." It appears that the Corporation of Leamington had entered into a contract
with one Powis for the execution of certain works to supply the district with water. Before Powis could
complete his contract it was terminated. Then the Council, in its capacity as urban authority, passed a
resolution not under seal whereby its engineer was authorised to enter into a contract for completing
the works left unfinished by Powis. The said engineer employed the plaintiff who completed the
unfinished work and sued the Corporation for the sum due to him as balance in respect of the work
executed by him. This claim was resisted by the Corporation on the ground that the provisions of s.
174(1) were mandatory and since the contract on which the plaintiff's claim was based had not
complied with the said mandatory provision no claim could be made against the Corporation. The
Queen's Bench Division upheld the defence and the decision of the Queen's Bench was confirmed by
the Court of Appeal as well as by the House of Lords.
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9. In dealing with the argument that the contract in question was not void Lord Blackburn cited with
approval the observations made by Lindley L.J., in the Court of Appeal, "In a case like the present
before us", observed Lindley, L.J., "if we were to hold the defendants liable to pay for what has been
done under the contract, we should in effect be repealing the Act of Parliament and depriving the
ratepayers of that protection which Parliament intended to secure for them". He also added "it may be
said that this is a hard and narrow view of the law, but my answer is that Parliament has though
expedient to require this view to be taken, and it is not for this or any other Court to decline to give
effect to a clearly expressed statute because it may lead to apparent hardship" Lord Bramwell went
further and in his speech added that he did not agree in the regret expressed at having to come to the
said conclusion. "The Legislature has made provision", said Lord Bramwell, "for the protection of
ratepayers, shareholders and others, who must act through the agency of a representative body, by
requiring the observance of certain solemnities and formalities which involve deliberation and
reflection. That is the importance of the seal. It is idle to say that there is no magic in a water". Mr. Sen
argues that the decision in the case of H. Young & Co [(1883) 8 App. Cas. 517.]. offers us material
assistance in dealing with the question about the effect of non-compliance of s. 175(3) of the Act and
the applicability of s. 70 of the Indian Contract Act.
10. Incidentally it may be pointed out that in England the decision in Young's case [(1883) 8 App. Cas.
517.] has now become obsolete because the relevant provisions of the Public Health Act, 1875, were
repealed in 1933 by the Local Government Act, 1933. Section 266 of the said Act authorises the local
authority to enter into contract necessary for the discharge of their functions and provides that all
contracts made by a local authority or by a committee thereof shall be made in accordance with the
standing orders of the local authority, and in the case of contracts for the supply of goods or materials,
or for the execution of works, the standing orders shall (a) require that, except as otherwise provided
by or under the standing orders, notice of the intention of the authority or the committee, as the case
may be, to enter into the contract shall be published and tenders invited, and (b) regulate the manner in
which notice shall be published and tenders invited. The proviso to this section lays down that a person
entering into a contract with the local authority shall not be bound to enquire whether the standing
orders of the authority which applied to the contract have been complied with, and all contracts entered
into with the local authority, if otherwise valid, shall have full force and effect not withstanding that
the standing orders applicable thereto have not been complied with. Subsequently in 1960 the
Corporate Bodies Contract Act (8 & 9 Eliz., 2 c. 46) has been passed; and s. 1 of the Act now governs
456

the contracts entered into by the corporate bodies wherever incorporated. The said section provides
that (1)(a) a contract which if made between private persons would be by law required to be in writing,
signed by the parties to be charged therewith, may be made on behalf of the body corporate in writing
signed by any person acting under its authority, express or implied, and (b) a contract which if made
between private persons would by law be valid although made by parol only, and not reduced into
writing, may be made by parol on behalf of the body corporate by any person acting under its
authority, express or implied; (2) a contract made according to this section shall be effectual in law and
shall bind the body corporate and its successors and all other parties thereto. Sub-section (4) of s. 1
provides that nothing in this section shall be taken as preventing a contract under seal from being made
by or on behalf of a body corporate. It will thus be seen that the technical and rigorous requirement
that the contract shall be made under seal by a corporation has how become obsolete; and so the
decision in Young's case [(1883) 8 App. Cas. 517.] has ceased to be a matter of any importance.
11. Before these legislative changes were however made a distinction used to be drawn between cases
where the requirement of a seal was the result of the common law rule as to contracts by corporations
and those where the said requirement was based on a statutory provision like the one under s. 174(1) of
the Public Health Act, 1875. The non-observance of the statutory provision requiring that a contract of
the specified type should be in writing and sealed with the common seal of the authority in question
renders the contract void and as such exempts the corporation from any liability to pay compensation
for the performance of the contract even where the corporation may have had the full benefit and
enjoyment of the said contract. On the other hand, where the requirement so to writing and seal is
based not on statutory provision but on principles of common laws, failure to comply with the said
requirement would not afford a valid defence to the corporation to resist a claim made by a contractor
for compensation for a work done by him if it is shown that the corporation had the benefit and
enjoyment of the said work. This latter principle has been laid down by the Court of Appeal in
Lawford v. The Billericay Rural District Council (1903) 1 K.B. 772. In that case it was held that
"where the purposes for which a corporation is created render it necessary that work should be done or
goods supplied to carry those purposes into effect and orders and given by the corporation in relation
to work to be done or goods to be supplied to carry into effect those purposes, if the work done or
goods supplied are accepted by the corporation and the whole consideration for payment is executed,
there is a contract to pay implied from the acts of the corporation, and the absence of a contract under
the seal of the corporation is no answer to an action brought in respect of the work done or the goods
457

supplied." In coming to this conclusion Vaughan Williams, L.J., followed the rule recognised by Lord
Denman in Doc v. Taniere (1848) 12 Q.B. 998 where he said that "where the corporation have acted as
upon an executed contract, it is to be presumed against them that everything has been done that was
necessary to make it a binding contract upon both parties, they having had all the advantage they
would have had if the contract had been regularly made. That is by no means inconsistent with the rule
that, in general, a corporation can only contract by deed, it is merely raising a presumption against
them, from their acts, that they have contracted in such a manner as to be binding upon them". In other
words, the decision was based on the ground that reliance may be placed on an implied contract arising
from an executed consideration on an acceptance of the benefit of the contract.
12. Mr. Sen's argument is that in dealing with the question about the effect of the contravention of s.
175(3) of the Act and the applicability of s. 70 of the Contract Act the decision in the case of Lawford
[[1903] 1 K.B. 772.] is irrelevant while that in the case of H. Young and Co. [(1883) 8 App. Cas. 517.]
is relevant and material because we are concerned with the contravention of a statutory provision and
not with the contravention of the provision of the rule of common law. We are not impressed by this
argument. The question which the appellant has raised for our decision falls to be considered in the
light of the provisions of s. 70 and has to be answered on a fair and reasonable construction of the
relevant terms of the said section. In such a case, where we are dealing with the problem of construing
a specific statutory provision it would be unreasonable to invoke the assistance of English decisions
dealing with the statutory provisions contained in English Law. As Lord Sinha has observed in
delivering the judgment of the Privy Council in Ramanandi Kuer v. Kalawati Kuer
MANU/PR/0168/1927; I.L.R(1928) . 7 Pat. 221 "it has often been pointed out by this Board that where
there is a positive enactment of the Indian Legislature the proper course is to examine the language of
that statute and to ascertain its proper meaning uninfluenced by any consideration derived from the
pervious state of the law or of the English law upon which it may be founded". If the words used in the
Indian statute are obscure or ambiguous perhaps it may be permissible in interpreting them to examine
the background of the law or to derive assistant from English decisions bearing on the point; but where
the words are clear and unambiguous it would be unreasonable to interpret them in the light of the
alleged background of the statute and to attempt to see that their interpretation conforms to the said
background. That is why, in dealing with the point raised before us we must primarily look to the law
as embodied in s. 70 and seek to put upon it a fair and reasonable construction.
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13. Section 70 reads thus :
"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, or to restore, the thing so done or delivered."
14. It is plain that three conditions must be satisfied before this section can be invoked. The first
condition is that a person should lawfully do something for another person or deliver something to
him. The second condition is that in doing the said thing or delivering the said thing he must not intend
to act gratuitously; and the third is that the other person for whom something is done or to whom
something is delivered must enjoy the benefit thereof. When these conditions are satisfied s. 70
imposes upon the latter person, the liability to make compensation to the former in respect of or to
restore, the thing so done or delivered. In appreciating the scope and effect of the provisions of this
section is would be useful to illustrate how this section would operate. If a person delivers something
to another it would be open to the later person to refuse to accept the thing or to return it; in that case s.
70 would not come into operation. Similarly, if a person does something for another it would be open
to the latter person not to accept what has been done by the former; in that case again s. 70 would not
apply. In other words, the person said to be made liable under s. 70 always has the option not to accept
the thing or to return it. It is only where he voluntarily accepts the thing or enjoys the work done that
the liability under s. 70 arises. Taking the facts in the case before us, after the respondent constructed
the warehouse, for instance, it was open to the appellant to refuse to accept the said warehouse and to
have the benefit of it. It could have called upon the respondent to demolish the said warehouse and
take away the materials used by it in constructing it; but, if the appellant accepted the said warehouse
and used it and enjoyed its benefit then different considerations come into play and s. 70 can be
invoked. Section 70 occurs in chapter V which deals with certain relations resembling those created by
contract. In other words, this chapter does not deal with the rights or liabilities accruing from the
contract. It deals with the rights and liabilities accruing from relations which resemble those created by
contract. That being so, reverting to the facts of the present case once again after the respondent
constructed the warehouse it would not be open to the respondent to compel the appellant to accept it
because what the respondent has done is not in pursuance of the terms of any valid contract and the
respondent in making the construction took the risk of the rejection of the work by the appellant.
Therefore, in cases falling under s. 70 the person doing something for another or delivering something
459

to another cannot sue for the specific performance of the contract nor ask for damages for the breach of
the contract for the simple reason that there is no contract between him and the other person for whom
he does something or to whom be delivers something. All that s. 70 provides is that if the goods
delivered are accepted or the work done is voluntarily enjoyed then the liability to pay compensation
for the enjoyment of the said goods or the acceptance of the said work arises. Thus, where a claim for
compensation is made by one person against another under s. 70, it is not on the basis of any subsisting
contract between the parties, it is on the basis of the fact that something was done by the party for
another and the said work so done has been voluntarily accepted by the other party. That broadly stated
is the effect of the conditions prescribed by s. 70.
15. It is, however, urged by Mr. Sen that the recognition of the respondent's claim for compensation
virtually permits the circumvention of the mandatory provisions of s. 175(3), because, he argues, the
work done by the respondent is no more than the performance of a so-called contract which is contrary
to the said provisions and that cannot be the true intent of s. 70. It is thus clear that this argument
proceeds on the assumption that if a decree is passed in favour of the respondent for compensation as
alternatively claimed by it, it would in substance amount to treating the invalid contract as being valid.
In our opinion, this argument is not well-founded. It is true that the provisions of s. 175(3) are
mandatory and if any contract is made in contravention of the said provisions the said contract would
be invalid; but it must be remembered that the cause of action for the alternative claim of the
respondent is not the breach of any contract by the appellant; in fact, the alternative claim is based on
the assumption that the contract in pursuance of which the respondent made the constructions in
question was ineffective and as such amounted to no contract at all. The respondent says that it has
done some work which has been accepted and enjoyed by the appellant and it is the voluntary
acceptance and enjoyment of the said work which is the cause of action for the alternative claim. Can
it be said that when the respondent built the warehouse, for instance, without a valid contract between
it and the appellant it was doing something contrary to s. 175(3) ? As we have already made it clear
even if the respondent built the warehouse he could not have forced the appellant to accept it and the
appellant may well have asked it to demolish the warehouse and take away the materials. Therefore,
the mere act of constructing the warehouse on the part of the respondent cannot be said to contravene
the provisions of s. 175(3). In this connection it may be relevant to consider illustration (a) to s. 70.
The said illustration shows that if A a tradesman leaves goods at B's house by mistake, and B treats the
goods as his own he is bound to pay A for them. Now, if we assume that B stands for the State
460

Government, can it be said that A was contravening the provisions of s. 175(3) when by mistake he left
the goods at the house of B ? The answer to this question is obviously in the negative. Therefore, if
goods are delivered by A to the State Government by mistake and the State Government accepts the
goods and enjoys them a claim for compensation can be made by A against the State Government, and
in entertaining the said claim the Court could not be upholding the contravention of s. 175(3) at all
either directly or indirectly. Once it is realised that the cause of action for a claim for compensation
under s. 70 is based not upon the delivery of the goods or the doing of any work as such but upon the
acceptance and enjoyment of the said goods or the said work it would not be difficult to hold that s. 70
does not treat as valid the contravention of s. 175(3) of the Act. That being so, the principal argument
urged by Mr. Sen that the respondent's construction of s. 70 nullifies the effect of s. 175(3) of the Act
cannot be accepted.
16. It is true that s. 70 requires that a person should lawfully do something or lawfully deliver
something to another. The word "lawfully" is not a surplusage and must be treated as an essential part
of the requirement of s. 70. What then does the word "lawfully" in s. 70 denote ? Mr. Sen contends that
the word "lawfully" in s. 70 must be read in the light of s. 23 of the said Act; and he argues that a thing
cannot be said to have been done lawfully if the doing of it is forbidden by law. However, even if this
test is applied it is not possible to hold that the delivery of a thing or a doing of a thing the acceptance
and enjoyment of which gives rise to a claim for compensation under s. 70 is forbidden by s. 175(3) of
the Act; and so the interpretation of the word "lawfully" suggested by Mr. Sen does not show that s. 70
cannot be applied to the facts in the present case.
17. Another argument has been placed before us on the strength of the word "lawfully" and that is
based upon the observations of Mr. Justice Straight in Chedi Lal v. Bhagwan Dass I.L.R(1889) . 11
All. 234. Dealing with the construction of s. 70 Straight, J., observed :
"I presume that the legislature intended something when it used the word "lawfully" and that it had in
contemplation cases in which a person held such a relation to another as either directly to create or by
implication reasonably to justify an inference that by some act done for another person the party doing
the act was entitled to look for compensation for it to the person for whom it was done." It is urged that
in the light of this test it cannot be said that the respondent held such a relation to the appellant as to be
able to claim compensation from the appellant. With respect, we are not satisfied that the test laid
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down by Straight, J., can be said to be justified by the terms of s. 70. It is of course true that between
the person claiming compensation and person against whom it is claimed some lawful relationship
must subsist, for that is the implication of the use of the word "lawfully" in s. 70; but the said lawful
relationship arises not because the party claiming compensation has done something for the party
against whom the compensation is claimed but because what has been done by the former has been
accepted and enjoyed by the latter. It is only when the latter accepts and enjoys what is done by the
former that a lawful relationship arises between the two its is the existence of the said lawful
relationship which gives rise to the claim for compensation. This aspect of the matter has not been
properly brought into the picture when Straight, J., laid down the test on which Mr. Sen's argument is
based. If the said test is literally applied then it is open to the comment that if one person is entitled by
reason of the relationship as therein contemplated to receive compensation form the other s. 70 would
be hardly necessary. Therefore, in our opinion, all that the word "lawfully" in the context indicates is
that after something is delivered or something is done by one person for another and that thing is
accepted and enjoyed by the latter, a lawful relationship is born between the two which under the
provisions of s. 70 gives rise to a claim for compensation.
18. There is no doubt that the thing delivered or done must not be delivered or done fraudulently or
dishonestly nor must it be delivered or done gratuitously. Section 70 is not intended to entertain claims
for compensation made by persons who officiously interfere with the affairs of another or who impose
on others services not desired by them. Section 70 deals with cases where a person does a thing for
another not intending to act gratuitously and the other enjoys it. It is thus clear that when a thing is
delivered or done by one person it must be open to the other person to reject it. Therefore, the
acceptance and enjoyment of the thing delivered or done which is the basis for the claim for
compensation under s. 70 must be voluntary. It would thus be noticed that this requirement affords
sufficient and effective safeguard against spurious claims based on unauthorised acts. If the act done
by the respondent was unauthorised and spurious the appellant could have easily refused to accept the
said act and then the respondent would not have been able to make a claim for compensation. It is
unnecessary to repeat that in cases falling under s. 70 there is no scope for claims for specific
performance or for damages for breach of contract. In the very nature of things claims for
compensation are based on the footing that there has been no contract and that the conduct of the
parties in relation to what is delivered or done creates a relationship resembling that arising out of
contract.
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19. In regard to the claim made against the Government of a State under s. 70 it may be that in many
cases the work done or the goods delivered are the result of a request made by some officer or other on
behalf of the said Government. In such a case, the request may be in effective or invalid for the reason
that the officer making the request was not authorised under s. 175(3), or, if the said officer was
authorised to make the said request the request becomes inoperative because it was not followed up by
a contract executed in the manner prescribed by s. 175(3). In either case the thing has been delivered or
the work has been done without a contract and that brings in s. 70. A request is thus not an element of
s. 175(3) at all though the existence of an invalid request may not make s. 175(3) inapplicable. An
invalid request is in law no request at all, and so the conduct of the parties had to be judged on the
basis that there was no subsisting contract between them at the material time. Dealing with the case on
the basis we have to enquire whether the requisite conditions prescribed by s. 175(3) have been
satisfied. If they are satisfied then a claim for compensation can and must be entertained. In this
connection it is necessary to emphasise that what s. 175(3) provides is that compensation has to be
paid in respect of the goods delivered or the work done. The alternative to the compensation thus
provides is the restoration of the thing so delivered or done. In the present case there had been no
dispute about the amount of compensation but normally a claim for compensation made under s.
175(3) may not mean the same thing as a claim for damages for breach of contract if a contract was
subsisting between the parties. Thus considered it would, we think, not be reasonable to suggest that in
recognising the claim for compensation under s. 175(3) we are either directly or indirectly nullifying
the effect of s. 175(3) of the Act or treating as valid a contract which is invalid. The fields covered by
the two provisions are separate and distinct, s. 175(3) deals with contracts and provides how they
should be made. Section 70 deals with cases where there is no valid contract and provides for
compensation to be paid in a case where the three requisite conditions prescribed by it are satisfied.
We are therefore, satisfied that there is no conflict between the two provisions.
20. It is well-known that in the functioning of the vast organisation represented by a modern State
Government officers have invariably to enter into a variety of contracts which are often of a petty
nature. Sometimes they may have to act in emergency, and on many occasions, in the pursuit of the
welfare policy of the State Government officers may have to enter into contract orally or through
correspondence without strictly complying with the provisions of s. 175(3) of the Act. If, in all these
cases, what is done in pursuance of the contracts is for the benefit of the Government and for their use
and enjoyment and is otherwise legitimate and proper s. 70 would step in and support a claim for
463

compensation made by the contracting parties notwithstanding the fact that the contracts had not been
made as required by s. 175(3). If it was held that s. 70 was inapplicable in regard to such dealings by
government officers it would lead to extremely unreasonable consequences and may even hamper, if
not wholly bring to a standstill the efficient working of the Government from day to day. We are
referring to this aspect of the matter not with a view to detract from the binding character of the
provisions of s. 175(3) of the Act but to point out that like ordinary citizens even the State Government
is subject to the provisions of s. 70, and if it has accepted the things delivered to it or enjoyed the work
done for it, such acceptance and enjoyment would afford a valid basis for claims of compensation
against it. Claims based on a contract validly made under s. 175(3) must, therefore, be distinguished
from claims for compensation made under s. 70, and if that distinction is borne in mind there would be
no difficulty in rejecting the argument that s. 70 treats as valid the contravention of s. 175(3) of the
Act. In a sense it may be said that s. 70 should be read as supplementing the provisions of s. 175(3) of
the Act.
21. There is one more argument which yet remains to be considered. Mr. Sen ingeniously suggested
that the position of the appellant is like that of a minor in the matter of its capacity to take a contract,
and he argues that just as a minor is outside the purview of s. 70 so would be the appellant. It is true as
has been held by the Privy Council in Mohori Bibee v. Dhurmodas Ghose that a minor, like a lunatic,
is incompetent, to contract and so where he purports to enter into a contract the alleged contract is void
and neither s. 64 nor s. 65 of the Contract Act can apply to it. It is also true that s. 68 of the Contract
Act specifically provides that certain claims for necessaries can be made against a minor and so a
minor cannot be sued for compensation under s. 70 of the Contract Act (Vide : Bankay Behari Prasad
v. Mahendra Prasad I.L.R(1940) . 19 Pat. 739 Mr. Sen pressed into service the analogy of the minor
and contends that the result of s. 175(3) of the Act is to make make the appellant incompetent to enter
into a contract unless the contract is made as required by s. 175(3). In our opinion, this argument is not
well founded. Section 175(1) provides for and recognises the power of the Province to purchase or
acquire property for the purposes there specified and to make contracts. No doubt s. 175(3) provides
for the making of contracts in the specified manner. We are not satisfied that on reading s. 175 as a
whole it would be possible to entertain the argument that the appellant is in the position of a minor for
the purpose of s. 70 of the Contract Act. Incidentally, the minor is excluded from the operation of s. 70
for the reason that his case has been specifically provided by s. 68. What s. 70 prevents is unjust
enrichment and it applies as much to individuals as to corporations and Government. Therefore, we do
464

not think it would be possible to accept the very broad argument that the State Government is outside
the purview of s. 70. Besides, in the case of a minor, even the voluntary acceptance of the benefit of
work done or thing delivered which is the foundation of the claim under s. 70 would not be present,
and so, on principle s. 70 cannot be invoked against a minor.
22. The question about the scope and effect of s. 70 and its applicability to cases of invalid contracts
made by the Provincial Government or by corporations has been the subject-matter of several judicial
decisions in this country; and it may be stated broadly that the preponderance of opinion is in favour of
the view which we are inclined to take (Vide : Mathura Mohan Saha v. Ram Kumar Saha and
Chittagong District Board I.L.R(1916) . 43 Cal. 790; Abaji Sitaram Modak v. The Trimbak
Municipality I.L.R(1904) . 23 Bom. 66; Pallonjee Eduljee & Sons, Bombay v. Lonavla City
Municipality V(1937) . Bom. 782; Municipal Committee, Gujranwala v. Fazal Din I.L.R(1930) . 11
Lah. 121; Ram Nagin Singh v. Governor-General in Council A.I.R. (39) 1952 Cal. 306; Union of India
v. Ramnagina Singh (1952) 89 C.L.J. 342; Union of India v. New Marine Coal Co. (Bengal) Ltd. : 65
C.W.N. 441; Damodara Mudaliar v. Secretary of State for India I.L.R(1895) . 18 Mad. 88; Corporation
of Madras v. M. Kothandapani-Naidu AIR1955Mad82 ; Yogambal Boyee Ammani Ammal v. Naina
Pillai Markayar I.L.R(1909) . 33 Mad. 15; and, Ram Das v. Ram Babu AIR1936Pat194 . Sometimes a
note of dissent from this view has no doubt been struck (Vide : Chedi Lal v. Bhagwan Das I.L.R(1889)
. 11 All. 234; Radha Krishna Das v. The Municipal Board of Benares I.L.R(1905) . 27 All. 592; Anath
Bandba Deb v. Dominion of India AIR1955Cal626 ; Punjabhai v. Bhagwan das Kisandas I.L.R(1929)
. 53 Bom. 309; and G. R. Sanchuiti v. Pt. R.K. Choudhari I.L.R(1952) . 31 Pat. 303.
23. Before we part with this point we think it would be useful to refer to the observations made by
Jenkins, C.J. In dealing with the scope of the provisions of s. 70 in Suchand Ghosal v. Balaram
Mardana I.L.R(1911) . 38. Cal. 1. "The terms of s. 70", said Jenkins, C.J., "are unquestionably wide,
but applied with discretion they enable the Court to do substantial justice in cases where in would be
difficult to impute to the persons concerned relations actually created by contract. It is, however,
especially incumbent on final Courts of fact to be guarded and circumspect in their conclusions and not
to countenance acts or payments that are really officious."
24. Turning to the facts of this case it is clear that both the Courts have found that the acts done by the
respondent were done in fact in pursuance of the requests invalidly made by the relevant officers of the
465

appellant, and so they must be deemed to have been done without a contract. It was not disputed in the
Courts below that the acts done by the respondent have been accepted by the appellant and the
buildings constructed have been used by it. In fact, both the learned judges of the Appellate Court have
expressly pointed out that the appellant did not contest this part of the respondent's case. "I should
mention", says S. R. Das Gupta, J., "that the appellant did not contest before us the quantum decreed in
favour of the plaintiff"; and Bachawat, J., has observed that "the materials from the record also show
that the Government urgently needed the work which was done by the respondent and that the
Government accepted it as soon as it was done and used it for its benefit". In fact the learned judge
adds that "the learned Advocate-General frankly confessed that this is a case where the Province of
Bengal was under a moral obligation to pay the respondent", and has further added his comment that
"an obligation of this kind which is apart from the provisions of s. 70 of Indian Contract Act a moral
and natural obligation is by the provision of that section converted into a legal obligation". Therefore
once we reach the conclusion that s. 70 can be invoked by the respondent against the appellant on the
findings there is no doubt that the requisite conditions of the said section have been satisfied. That
being so, the Courts below were right in decreeing the respondent's claim.
25. The result is the appeal fails and is dismissed with costs.
A.K. Sarkar, J.
26. We also think that this appeal should fail.
27. In 1944, the respondent, a firm of contractors, had at the request of certain officers of the
Government of Bengal as it then existed, done certain construction work for that Government and the
latter had taken the benefit of that work. These officers, however, had not been authorised by the
Government to make the request on its behalf and the respondent was aware of such lack of authority
all along. These facts are not in controversy.
28. As the respondent did not receive payment for the work, it filed a suit in the Original Side of the
High Court at Calcutta in 1949 against the Province of West Bengal for a decree for moneys in respect
of the work. The High Court both in the original hearing and appeal, held that there was no contract
between the respondent and the Government in respect of the work on which the suit might be decreed
but the respondent was entitled to compensation under s. 70 of the Contract Act and that the liability to
466

pay the compensation which was originally of the Government of Bengal, had under the Indian
Independence (Rights, Properties and Liabilities) Order, 1947, devolved on the Province West Bengal
(now the State of West Bengal) which came into existence on the partition of India. In the result the
respondent suit succeeded. The State of West Bengal has appealed against the decision of the High
Court.
29. The only question argued in this appeal is whether the High Court was right in passing a decree
under under s. 70 of the Contract Act. We think it was.
30. Now s. 70 is in these terms :-
31. Section 70 "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, or to restore, the thing so done or delivered."
G.K. Mitter, J.
32. who heard the suit in the first instance, observed in regard to s. 70 that, "The requisites for entitling
a person to compensation for work done are : (i) that it should be lawfully done, (ii) that it should not
be intended to be done gratuitously and (iii) that the person for whom the work is done should enjoy
the benefit thereof". We agree with this analysis of the section and the view of the High Court that the
necessary requisites exist in the present case.
33. In this Court the case was argued on behalf of the appellant on the basis that the High Court was in
error in holding that, relief under s. 70 can be granted where the Government has the benefit of work
done under a contract with it which was not made in terms of s. 175(3) of the Government of India
Act, 1935, and was, therefore, invalid. Various authorities, both English and Indian, were cited in
support of this argument. We think it unnecessary to discuss them as the basis on which the present
contention is advanced does not exist in this case. Nor do we think that the High Court decided the
case on that basis.
34. It is clear from the findings of the High Court, to which we shall presently refer, that there was in
fact no agreement, valid or invalid between the respondent and the Government. It follows that the
work had not been done under any agreement with the Government. No question, therefore arises as to
467

the validity or invalidity of an agreement with the Government because of a failure to comply with the
terms of s. 175(3) of the Government of India Act nor as to the applicability of s. 70 of the Contract
Act for granting compensation for work done under a contract with the Government which is invalid
because it had not been made in the manner prescribed by s. 175(3).
35. The reason why we say that there was no agreement whatever between the government and the
respondent is that the agreement could in the present case have been made only through the officers
but these officers did not to the knowledge of the respondent possess the authority of the Government
to bind it by contract. That was what the High Court held, as would appear from the observations of
the learned Judges which we will now set out. G. K. Mitter, J., said, "The plaintiff never had any doubt
about the fact that no agreement of any kind had been entered into between it and the province of
Bengal" and "The plaintiff knew right from the beginning, that the officers who were requesting the
plaintiff to proceed with the work had, no authority to enter into a binding contract with the plaintiff
and that they were awaiting sanction from higher officials which they hoped to get." The learned
Judges of the appellate bench also took the same view. Bachawat, J., observing, "Neither of these
officers had any authority from the Province of Bengal to make the request to the plaintiff. There was
no agreement either express or implied between the plaintiff and the Province of Bengal. There is,
therefore, no agreement which is void or which is discovered to be void". The learned Judges no doubt
referred to s. 175(3) of the Government of India Act that was obviously because arguments based on it
had been advanced before them. The distinguished the case of Union of India v. Ramnagina Singh
(1951) 89 C.L.J. 342 in which it had been held that s. 70 of the Contract Act had no application where
work was done under a request which had resulted in a void agreement, on the ground that in the
present case there had been no request from the Government as the persons making the request had no
authority to do so for the Government and so no question of an agreement with the Government, which
was void, arose. It is wrong, to contend, as the learned advocate for the appellant did, that the learned
Judges of the High Court decided the case on the basis that s. 70 is applicable where work is done for
the Government under an invalid contract with it. No doubt the learned Judges dealt with certain cases
dealing with the question of work done under an invalid contract but that was because those cases had
been cited at the bar.
36. We are not, therefore, called upon in the present case to pronounce upon the question whether
compensation under s. 70 of the Contract Act can be awarded where goods are delivered to, or work
468

done for, the Government under a contract with it which is invalid for the reason, that it had not been
made in the terms prescribed by s. 175(3) of the Government of India Act and we do not do so.
37. Now, if the work was done at the request of the officers of Government who had no authority to
make the request for Government and the respondent was aware of this, it would follow that the work
had been done at the request made by the officers in their personal capacity. In such a case it seems to
us that if the request resulted in the contract between the officers and the respondent under which the
officers were personally bound to pay the respondent reasonable remuneration for the work, the it
would be a very debatable question whether the respondent would have any claim against the
Government under s. 70. We say debatable because we have grave doubts if the section was intended
to give a person in the position of the respondent who had a remedy against the officers personally
under a contract with them, a remedy against the Government for the same thing in addition to the
remedy under the contract. We, however, need say no more on this aspect of the matter for we do not
think that any contact had in the present case come not existence between the officers and the
respondent.
38. It is true that when one requests another to do work for him a tacit promise to pay reasonable
remuneration for the work may be inferred in certain circumstances and that promise may result in a
contract when the work is done which may be enforced. That may also be the case when the request is
to do the work for another's benefit, for consideration for the promise would in either case be the
detriment suffered by the promise by doing the work. The following illustration may be given from
Pollock on Contracts (13th edition) p. 9 :- "The passenger who steps into ferry-boat thereby requests
the ferryman to take him over for the usual fare". We should suppose the position would be the same
where a person expressly asks the ferryman to carry him or another over without saying anything about
the remuneration to be paid for the carriage; in each of these cases the person making the request
would be tacitly promising to pay the ferryman his usual fare.
39. A tacit promise of this kind may however be inferred only if the circumstances are such that from
them a man of business and experience would consider it reasonable to infer. It is an inference of fact
and not which any law requires to be made An interesting passage from Cheshire and Fifoot's Law of
Contract (5th Edition) p. 30 may be quoted here : "It would be ludicrous to suppose that businessmen
couch their communications in the form of a catechism or reduce their negotiations to such a species of
469

interrogatory as was formulated in the Roman stipulation. The rules which the Judges have elaborated
from the promise of offer and acceptance are neither the rigid deductions of logic nor the inspiration of
natural justice. They are only presumption, drawn from experience, to be applied in so far as they serve
the ultimate object of establishing the phenomena of agreement ..."
40. Now on the facts of this case we are entirely unable to infer any tacit promise by the officers to pay
personally for the work done. As the High Court pointed out, the officers made it clear, of which
indeed the respondent itself was fully aware, that the payment would be by the Government, and,
therefore, that they themselves would have no liability. They said the respondent's "estimates have
been submitted to the Deputy Director for formal sanction which when received will be communicated
to them. Meanwhile they must not delay the work." The Deputy Director presumably was the officer
authorised to grant the sanction. He however was not one of the officers who had made the request for
the work. The respondent was fully aware that the work was needed for the Government and the
officer had no personal interest in it. And what is most important is that the respondent never itself
though that the officers had made any personal promise to pay. Throughout, the respondent had been
requesting the Government to sanction the orders placed by the officers, submitting estimates for the
work to the Government and requesting the latter for payment; not once did it look to the officers for
any liability in respect of the work done under their orders. The respondent had on previous occasions
done work for the Government on similar requests and had never though that the officers had thereby
undertaken any personal liability. If it itself did not get that impression, no other person of experience
could reasonably infer in the same circumstances a tacit promise by the officers to pay personally. It is
of some interest to point out that the learned advocate for the appellant never even suggested there was
such a contract. We find it impossible in such circumstances to think that there was any tacit promise
by the officers personally to pay for the work or any contract between them and the respondent in
respect of it.
41. It is also not possible to say on the materials on the record that the officers promised to the
respondent that they would secure payment for the work done. We think Bachawat, J., of the appellate
bench of the High Court correctly put the position when he said :- "The work was certainly done at the
request of these officers but it was done under circumstances in which it is not possible to imply that
the officers personally promised to pay for the work done. There is therefore, no scope for any
argument that the work was done in course of performance of a contract between the plaintiff and the
470

officers who requested him to do the work ....... The materials on the record clearly shows that the
plaintiff did the work for the Province of Bengal. Credit was given to the Province of Bengal and not
to the officers. It is impossible to say on the materials on the record that work was done for the
officers." If the other learned Judges of the High Court did not expressly refer to this aspect of the case
that was clearly because it was not argued by the advocates; it was obviously not a point which any
advocate could reasonably advance on the facts of this case.
42. We are, however, not to be understood as saying that in no case can Government officers undertake
personal liability to contractors in the position of the respondent. Each case must depend on its own
facts. Circumstances may conceivably exist where it would be reasonable to infer a personal
undertaking by the officers to pay a contractor doing work for the Government. All that we decide is
that such is not the present case.
43. The position then is that the respondent had done the work for the Government without any
contract with anybody. The question is, are the three requisites of s. 70, as very correctly formulated
by G. K. Mitter, J., satisfied ? We think they are. There is no dispute that Government had taken the
benefit of the work. We also feel no doubt that the respondent did not intend to do the work
gratuitously. It submitted its estimate for the work and was very prompt in submitting its bill after the
work was done. It had earlier in similar circumstances without proper contract with the Government
done work for it at the request of its officers and received payment from the Government. It was a firm
of contractors whose trade it was to carry out works of construction for payment and the Government
was aware of this. There is no reason to think that in the present case it did the work gratuitously. On
its part the Government never thought that the work had been done gratuitously for it raised objections
to the bill submitted by the respondent on grounds of bad quality of the work and that it had been done
without proper sanction. The Government urgently needed the work and no sooner was it completed, it
promptly put it to its use. It was plainly fully aware that the work was done for it by a party whose
trade was to work for remuneration and who had previously done similar work and had been paid for it
by the Government.
44. The request by the officers does not affect the question that arises in this case. It had no compelling
effect and no effect as a promise and in fact no effect at all. Its practical use was to inform the
respondent that the Government needed the work immediately and it would give a sanction in respect
471

of it in due course and pay for it when done, an information on which the respondent readily acted as it
gave it a chance to do more business. So the work was done by the respondent really out of its free
choice by way of its business and with the intention of getting paid for it.
45. We also feel no doubt that the work was done lawfully. It was work which the Government badly
needed. We will assume for the present purpose, as the learned advocate for the appellant said, that
work done under a contract with the Government which is invalid in view of the provision of s. 175(3)
of the Government of India Act, is work unlawfully done. The learned advocate contended that that
would be because thereby section 175(3) of the Government of India Act would be evaded which is
the same thing as doing that which the section forbids. Assume that is so. But that section does not say
that if work is done for the Government without any contract or agreement at all and voluntarily, as
was done in the present case, that work would not have been lawfully done. Government is free not to
take the benefit of such work. There is no law, and none has been pointed out to us, which makes the
doing of such work unlawful. No other reason was given or strikes us for saying that the work was not
lawfully done. There is no law, as Bachawat, J., said that Government cannot take any work except
under a contract in respect of it made in terms of s. 175(3) of the Government of India Act. That
section may forbid a Government to take work under a contract which is invalid because not in terms
of it, but it does not make it unlawful for the Government to take the benefit of work done for it
without any contract at all. We should suppose that if the doing of the work was unlawful the
Government would not have accepted the benefit of it. In the present case, the Government needed the
work badly and we do not see how then the Government can say that the work was not done lawfully.
We therefore think that the work was done lawfully.
46. It was contended that the obligation under s. 70 of the Contract Act arises only in circumstances in
which English law would have created an obligation on the basis of an implied contract or a quasi-
contract and that there could be no implied contract or quasi-contract with the Government because a
contract could be made with it only in accordance with s. 175(3) of the Government of India Act. Now
it has been repeatedly held that a resort to English law is not justified for deciding a question arising on
our statue unless the statue is such that it cannot be reasonably understood without the assistance of
English law, indeed, there is good authority for saying that s. 70 was framed in the form in which it
appears with a view to avoid the niceties of English law on the subject, arising largely from historical
reasons and to make the position simple and free from fictions of law and consequent complications :
472

see Pollock on Contracts (13th ed.) p. 10. Furthermore, we do not see that s. 175(3) in any way
prevents a contract with the Government being implied or a Government from incurring an obligation
under a quasi-contract. A contract implied in law or a quasi-contract is not a real contract or, as it is
called, a consensual contract and s. 175(3) is concerned only with such contracts. The section says that
"all contracts made in the exercise of the executive authority of the Federation or of a Province shall be
expressed" in a certain manner and "shall be executed on behalf of the Governor-General or Governor
by such person and in such manner as he may direct or authorise". It therefore applies to consensual
contracts which the Government makes and not to something which is also called a contract but which
the law brings into existence by a fiction irrespective of the parties having agreed to it. Now, by its
terms s. 70 of the Contract Act must be applied where its requisites exist, if it is necessary to imply a
contract or to contemplate the existence of a quasi-contract for applying the section that must be done
and we do not think that s. 175(3) of the Government of India Act prevents that, nor are we aware of
any other impediment in this regard. This argument must also fail.
47. We, therefore, fell that s. 70 of the Contract Act applies to this case and the decree of the High
Court should be confirmed.
473

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LAW OF CONTRACT-I B.A./B.B.A. LL.

Course Contents & Reading Material

Dr. Girjesh Shukla

for private circulation only

For private circulation only HPNLU Shimla Page No.1

B.A./B.B.A. LL.B. (Hons.) PAPER CODE: LLB 201

COURSE TITLE: CONTRACT-I CREDITS-04

3.1 Discharge of Contract: Meaning and Modes

For private circulation only HPNLU Shimla Page No.2

4.1 Recovering Possession of Property

• The Indian Contract Act, 1872

1. Bangia, R.K., Law of Contract.

For private circulation only HPNLU Shimla Page No.3

Law of Contract I (Part I) Index

S. No. Topic Details Page No.

For private circulation only HPNLU Shimla Page No.4

INTRODUCTION: THE PURPOSES OF

In recent years, interest in the theory of contract law has in-

THE FUNCTIONS OF CONTRACT THEORY

Gerald Fridman begins his paper in this symposium by sug-

theories of contract law can be developed for different purposes, and

theory of contract law can have without identifying these functions

At least three distinct functions can be served by a theory of

relative emphasis they place on them. Fridman implicitly ascribes

* Director, Westminster Institute; and Professor of Philosophy, University

force them. Consequently, a predictive function is often best fulfilled

discussed above. By classifying cases under various legal doctrines,

preserve the same general rationale and pattern of decisions, so one

Explanation can also be sought at a second level-that of under-

of the first level to provide practicing lawyers persuasive arguments

tions. An explanation of a doctrine may indicate that it is simply not

predominant in a theory one examines or constructs. Often, strong

THE QUESTIONS AND TRADITIONAL ANSWERS

In a contract action, the plaintiff needs to show that there was

defendant did or did not do something, for example, complete con-

ple, supplying merchandise that is fit for normal use or building a

Finally, the plaintiff must show that a certain legal response is

defendant performed as specified in the contract. The plaintiff is

specific performance, usually when something unique is involved,

legal remedy is appropriate?

Agreement and Promise

One type of recent contract theory takes agreement or promise

many variations which cannot be considered here. The paper by

A similar yet distinct view advanced by Charles Fried holds

really promises at all. Ardal illustrates the implications of his view

The differences between Fridman's agreement and Fried's prom-

agree. The central difference between them appears to concern what

tention) of the parties to be legally bound. On Fried's view, promises

2. C. FRIED, supra note 1, at 17.

opinions explicitly conforms to the theory, although it is often urged

freedom to contract to be important. The freedom is not important

determined by the free preferences of individuals, so if two persons

dividuals' preferences will be satisfied; both will get something more

preference for equality by a poor party to a projected exchange is

of second level explanation reasonably well, it is not likely to fulfill

A promise theory and an economic theory might differ with

force promises, then it might be plausible to invoke penal damages

relational norms promote concreteness by emphasizing role integrity

ination of conflicts in the relation, and consideration of "supra-

Elsewhere Macneil analyzes the values involved in the norms

norms in their own social contexts. Thus, relational analysis does

10. . MACNEIL, supra note 1, at 50.

capable of justifying contract law, because they are descriptive.

proach. Mullock develops the concepts of conventional action and