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General principles of Contract law

By: Charu Marwaha

Asst. Prof.
Chandigarh University

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Essentials of a contract:
According to Section 10, "All agreements are contracts, if
they are made by the free consent of the parties, capacity of
parties to contract, for a lawful consideration with a lawful
object, and not hereby expressly to be void.

1. Proper offer and proper acceptance There must be an

agreement based on a lawful offer made by person to
another and lawful acceptance of that offer by the letter.
Sections 3 to 9 of the Contract Act, 1872 lay down the rules
for making valid acceptance.

2. Lawful consideration An agreement to form a valid

contract should be supported by consideration.
Consideration means something in return (quid pro quo).
It can be cash, kind, an act or abstinence. It can be past,
present or future. However, consideration should be real and
lawful and not fictional.
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3. Capacity of parties to Contract In order to make a
valid contract the parties to it must be competent to
be contracted. According to section 11 of the Contract
Act, a person is considered to be competent to
contract if he satisfies the following criterion:
The person has reached the age of majority.
The person is of sound mind.
The person is not disqualified from contracting by any
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4. Free Consent To constitute a valid contract there
must be free and genuine consent of the parties to the
contract. It should not be obtained by misrepresentation,
fraud, coercion, undue influence or mistake.

5. Lawful Object and Agreement The object of the

agreement must not be illegal or unlawful.

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6. Agreement not declared void or
illegal Agreements which have been expressly
declared void or illegal by law are not enforceable at
law; hence they do not constitute a valid contract.
7. Intention To Create Legal Relationships When
the two parties enter into an agreement, there must
be intimate relationship between them to create a
legal relationship between them. If there is no such
intention on the part of the parties. There is no
contract between them. Agreements of a social or
domestic nature do not contemplate legal
relationship; as such they are not contracts.
8. Certainty, Possibility Of Performance
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1. Offer(i.e. Proposal) [section 2(a)]:-When person
signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent
of the other person to such act or abstinence, he is said
to make a proposal.

2. Acceptance 2(b):- When the person to whom the

proposal is made, signifies his assent there to, the
proposal is said to be accepted.

3. Promise 2(b) :- A Proposal when accepted becomes

a promise. In simple words, when an offer is accepted it
becomes promise. Charu Marwaha
4. Promisor and promisee 2(c) :- When the
proposal is accepted, the person making the proposal
is called as promisor and the person accepting the
proposal is called as promisee.

5. Consideration 2(d):
- When at the desire of the promisor, the promisee or
any other person has done or abstained from doing
something or does or abstains from doing something
or promises to do or abstain from doing something,
such act or abstinence or promise is called a
consideration for the promise.

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Price paid by one party for the promise of the other
Technical word meaning QUID-PRO-QUO i.e.
something in return.
6. Agreement 2(e) :- Every promise and set of
promises forming the consideration for each
In short, Agreement = offer + acceptance

8. Void agreement 2(g):- An agreement not

enforceable by law is void. Charu Marwaha
9. Voidable contract 2(i):- An agreement is a voidable
contract if it is enforceable by Law at the option of one or
more of the parties there to (i.e. the aggrieved party), and
it is not enforceable by Law at the option of the other or

10. Void contract :- A contract which ceases to be

enforceable by Law becomes void when it ceases to be

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Types of contract
On the basis of validity:
1. Valid contract: An agreement which has all the
essential elements of a contract is called a valid contract.
A valid contract can be enforced by law.

2. Void contract[Section 2(g)]: A void contract is a

contract which ceases to be enforceable by law. A
contract when originally entered into may be valid and
binding on the parties. It may subsequently become void.
There are many judgments which have stated that
where any crime has been converted into a "Source of
Profit" or if any act to be done under any contract is
opposed to "Public Policy" under any contractthan that
contract itself cannot be enforced under the law-

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3. Voidable contract[Section 2(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
other or others, is a voidable contract. If the essential
element of free consent is missing in a contract, the
law confers right on the aggrieved party either to
reject the contract or to accept it. However, the
contract continues to be good and enforceable unless
it is repudiated by the aggrieved party.
4. Illegal contract: A contract is illegal if it is forbidden
by law; or is of such nature that, if permitted, would
defeat the provisions of any law or is fraudulent; or
involves or implies injury to a person or property of
another, or court regards it as immoral or opposed to
public policy.. Charu Marwaha
These agreements are punishable by law. These are
"All illegal agreements are void agreements but all
void agreements are not illegal.

5. Unenforceable contract: Where a contract is good

in substance but because of some technical defect
cannot be enforced by law is called unenforceable
contract. These contracts are neither void nor

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On the basis of formation:
1. Express contract: Where the terms of the contract are
expressly agreed upon in words (written or spoken) at the time
of formation, the contract is said to be express contract.

2. Implied contract: An implied contract is one which is inferred

from the acts or conduct of the parties or from the
circumstances of the cases. Where a proposal or acceptance
is made otherwise than in words, promise is said to be implied.

3. Quasi contract: A quasi contract is created by law. Thus,

quasi contracts are strictly not contracts as there is no
intention of parties to enter into a contract. It is legal obligation
which is imposed on a party who is required to perform it. A
quasi contract is based on the principle that a person shall not
be allowed to enrich himself at the expense of another.

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claim for necessaries supplied to person incapable of
contracting or on his account
Reimbursement of person paying money due to
another, in payment of which he is interested
obligation of person enjoying benefit of non gratuitous
Responsibility of finder of goods
Liability of person to whom money is paid or thing

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On the basis of performance:

1. Executed contract: An executed contract is one in

which both the parties have performed their respective

2. Executory contract: An executory contract is one

where one or both the parties to the contract have still to
perform their obligations in future. Thus, a contract which
is partially performed or wholly unperformed is termed as
executory contract.

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3. Unilateral contract: A unilateral contract is one in
which only one party has to perform his obligation at
the time of the formation of the contract, the other
party having fulfilled his obligation at the time of the
contract or before the contract comes into existence.

4. Bilateral contract: A bilateral contract is one in

which the obligation on both the parties to the
contract is outstanding at the time of the formation of
the contract. Bilateral contracts are also known as
contracts with executory consideration.
-Dr. R.K Bangia
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Proposal is defined under section 2(a) of the Indian
contract Act, 1872 as "when one person signifies to
another his willingness to do or to abstain from doing
anything with a view to obtain the assent of that other to
such act or abstinence, he is said to make a
Thus, for a valid offer,the party making it must express
his willingness to do or not to do something. But mere
expression of willingness does not constitute an offer.

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, the terms of offer must be definite, unambiguous,
not loose and vague. For example "A" says to "B". "I
will sell you a car" "A" owns three different cars. The
offer is not definite. Third thing regarding offer is,
mere declaration of intention and announcement is
not an offer.
A declaration by a person that he intends to do
something, gives no right of action to another. Such a
declaration only means that an offer will be made or
invited in future and not an offer is made now

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Declaration of intention to do something did not create a
binding contract with those acted upon it and hence the
broker could not recover damages.
An offer should be made to obtain the assent of the
The offer should be communicated to the offeree.
Unless an offer is communicated to the offeree by the
offerror or his duly agent, there can be no acceptance.
For example, "A" writes to "B", "i will sell you my horse
for Rs.10,000/- and if you do not reply I shall assume you
have accepted the offer". There is no contract if "B" does
not reply.

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Classification of Offer
1. General Offer: Which is made to public in general.
2. Special Offer: Which is made to a definite person.
3. Cross Offer: Exchange of identical offer in
ignorance of each other.
4. Counter Offer: Modification and Variation of
Original offer.
5. Standing, Open or Continuing Offer: Which is open
for a specific period of time. The offer must be
distinguished from an invitation to offer.

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Invitation to offer "An invitation to offer" is only a
circulation of an invitation to make an offer, it is an
attempt to induce offers and precedes a definite offer.
Acceptance of an invitation to an offer does not result
in formation of a contract and only an offer emerges
in the process of negotiation. A statement made by a
person who does not intend to bound by it but,
intends to further act, is an invitation to offer.

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According to Section 2(b), "When the person to whom
the proposal is made signifies his assent thereto, the
proposal is said to be accepted.

1. Acceptance must be absolute and unqualified.
For example "A" says to "B" "I offer to sell my car fror
Rs.50,000/-. "B" replies "I will purchase it for Rs.45,000/-
". This is not acceptance and hence it amounts to a
counter offer.
2. It should be Communicated to the offeror.

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3. Acceptance must be in the mode prescribed.
For example "A" makes an offer to "B" says to "B"
that "if you accept the offer, reply by voice. "B" sends
reply by post. It will be a valid acceptance, unless "A"
informs "B" that the acceptance is not according to
the prescribed mode.
4. Acceptance must be given within a reasonable
time before the offer lapses.
5. Mere silence is no acceptance.
6.Acceptance must be unambiguous and definite.

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Lawful Consideration
In short, Consideration means quid pro quo i.e. something in
An agreement must be supported by a lawful consideration on
both sides.
Essentials of valid considerations are:-
It must move at the desire of the promisor. An act constituting
consideration must have been done at the desire or request of
the promiser. For example "A" saves "B"'s goods from fire
without being ask him to do so. "A" cannot demand payment
for his service.
Consideration may move from the promisee or any other
Consideration must be an act, abstinence or forebearance or
a returned promise. Charu Marwaha
Consideration may be past, present or future.
Consideration must be real. Consideration must be
real, competent and having some value in the eyes of
- For example "A" promises to put life to "B"'s dead
wife, if "B" pay him Rs.1000/-. "A"'s promise is
physically impossible of performance hence there is
no real consideration.

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Consideration must be something which the promiser
is not already bound to do. A promise to do
something what one is already bound to do, either by
law, is not a good consideration., since it adds
nothing to the previous existing legal consideration.

Consideration need not be adequate. Consideration

need not be necessarily be equal to value to
something given. So long as consideration exists, the
courts are not concerned as to adequacy, provided it
is for some value.

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The consideration or object of an Agreement is lawful,

unless and until it is:
Forbidden by law:
- for example,"A" promises "B" to obtain an employment in
public service and "B" promises to pay Rs one lakh to "A".
The agreement is void as the procuring government job
through unlawful means is prohibited.
If it involves injury to a person or property of another: For
example, "A" borrowed rs.100/- from"B" and executed a
bond to work for "B" without pay for a period of 2 years. In
case of default, "A" owes to pay the principal sum at once
and huge amount of interest. This contract was held void as
it involved injury to the person.
If courts regards it as immoral: For example, An agreement
between husband and wife for future separation is void.
Is of such nature that, if permitted, it would defeat the
provisions of any law.
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is fraudulent, or involves or implies injury to the
person or property of another, or
Is opposed to public policy. An agreement which
tends to be injurious to the public or against the
public good is void. For example, agreements of
trading with foreign enemy, agreement to commit
Agreements in restrained of legal proceedings.

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trafficking in public offices and titles:agreements for
sale or transfer of public offices and title or for
procurement of a public recognition like padma
vibhushanor padma sree etc. for monetary
consideration is unlawful, being opposed to public
Agreements restricting personal liberty: agreements
which unduly restricts the personal liberty of parties
to it are void as being oppposed by public policy.
consideration may take in any form-money,goods,
services, a promise to marry, a promise to forbear
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Competent to contract
Section 11 of The Indian Contract Act specifies that
every person is competent to contract provided:

1. He should not be a minor

i.e. an individual who has not attained the age of
majority i.e. 18 years in normal case and 21 years if
guardian is appointed by the Court.

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2. He should be of sound mind while making a
contract. A person who is usually of unsound mind,
but occasionally of sound mind, can make a contract
when he is of sound mind. Similarly if a person is
usually of sound mind, but occasionally of unsound
mind, may not make a valid contract when he is of
unsound mind.
3. He should not be disqualified from contracting by
any law to which he is subject

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Free Consent
According to Section 14, " two or more persons are said to be
consented when they agree upon the same thing in the same
sense (Consensus-ad-idem).
A consent is said to be free when it is not caused by coercion
or undue influence or fraud or misrepresentation or mistake.

Elements Vitiating free Consent

1. Coercion (Section 15): "Coercion" is the committing, or
threatening to commit, any act forbidden by the Indian Penal
Code under(45,1860), or the unlawful detaining, or
threatening to detain, any property, to the prejudice of any
person whatever, with the intention of causing any person to
enter into an agreement. For example, "A" threatens to shoot
"B"if he doesn't release him from a debt which he owes to "B".
"B" releases "A" under threat. Since the release has been
brought about by coercion, such release is not valid.
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2. Undue influence (Section 16): "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, to be
unconscionable, the burden of proving that such
contract was not induced by undue influence shall lie
upon the person in the position to dominate the will of
the other."
(Section 16(2)) States that "A person is deemed to be
in a position to dominate the will of another;Where he
holds a real or apparent authority over the other. For
example, an employer may be deemed to be having
authority over his employee. an income tax authority
over to the asessee.
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Where he stands in a fiduciary relationship to other,
For example, the relationship of Solicitor with his
client, spiritual advisor and devotee.
Where he makes a contract with a person whose
mental capacity is temporarily or permanently
affected by the reason of age, illness or mental or
bodily distress
3. Fraud (Section 17): "Fraud" means and includes
any act or concealment of material fact or
misrepresentation made knowingly by a party to a
contract, or with his connivance, or by his agent, with
intent to deceive another party thereto of his agent, or
to induce him to enter into the contract.
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-Mere silence is not fraud. a contracting party is not obliged
to disclose each and everything to the other party.

There are two exceptions where even mere silence may be

fraud, one is where there is a duty to speak, then
keeping silence is fraud. or when silence is in itself
equivalent to speech, such silence is fraud.

4. Misrepresentation (Section 18): " causing, however

innocently, a party to an agreement to make a mistake
as to the substance of the thing which is the subject of
the agreement".

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5. Mistake of fact (Section 20): "Where both the
parties to an agreement are under a mistake as to a
matter of fact essential to the agreement, the
agreement is void". A party cannot be allowed to get
any relief on the ground that he had done some
particular act in ignorance of law.
-Mistake may be bilateral mistake where both parties to
an agreement are under mistake as to the matter of
-The mistake must relate to a matter of fact essential to
the agreement.

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It is a legal cause of action in which a binding agreement or
bargained-for exchange is not honored by one or more of the
parties to the contract by non-performance or interference
with the other party's performance.

If the party does not fulfill his contractual promise, or has

given information to the other party that he will not perform
his duty as mentioned in the contract or if by his action and
conduct he seems to be unable to perform the contract, he is
said to breach the contract.
Breach of contract is a type of civil wrong.


-Dr. R.K Bangia
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1. Remoteness of damage: A defendant can not be held
liable for all the consequences of breach i.e , compensation
is not to be given for any remote or indirect loss or damage
sustained by breach of contract.

Hadley vs. Baxendale (1854) 9 Ex 341

- General Damages: aggrived party is entitled to receive
compensation for any loss or damage caused to him
which naturally arose in usual course of business from
such breach.

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- Special Damage: A party to a contract can claim
special damages from the party in breach, only if at
the time of contract he gave notice to the other party
that such special damages were likely to result from
a breach of contract.
-Dr. R.K Bangia

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Amount of recoverable loss is evaluated in terms of
money. It is evaluated keeping in following principles :

1. Damages are compensatory in nature and not penal.

2. Damages may be claimed for personal inconvenience
suffered by a party by reason of breach of contract.
3. Ordinarily no damages can be claimed for mental pain
and sufferings caused by breach. But in proper case,
damages can be recovered.
4. Duty to mitigate : In estimating the loss or damage
arising from a breach of contract, the means which
existed of remedying the inconvenience caused by
non-performance of the contract must be taken into
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- LOSS OF PROFIT: it cannot be recovered unless
communicated to other party that such goods are for
re-sale. LIQUIDATED DAMAGES: When the parties
to the contract afree that a certain sum of money
would be payable, in case of breach of contract,
such payment of damages is called liquidated
- It is the damage stipulated in the contract itself and
payable by the party, who commits a breach thereof.

- PENALTY : If the amount is fixed in terrorem [a legal

warning] , with a view to discourage the breach of
contract, it is called penalty.
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Section73. Compensation of loss or
damage caused by breach of contract
When a contract has been broken, the party who suffers
by such breach is entitled to receive, from
the party who has broken the contract, compensation for
any loss or damage caused to him thereby,which
naturally arose in the usual course of things from such
breach, or which the parties knew, when they made the
contract, to be likely to result from the breach of it.

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A contracts to buy B's ship for 60, 000 rupees, but
breaks the promise. A must pay to B, by way of
compensation, the excess, if any, of the contract price
over the price which B can obtain for the ship
at the time of breach of promise.
-Dr. R.K Bangia

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Section74. Compensation for breach of
contract where penalty stipulated for
When a contract has been broken, if a sum is named in
the contract as the amount 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, 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.

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EXAMPLE:. : A contracts with B that, if A will not be
able to deliver goods to B within Calcutta and on
time, he will pay B Rs. 5, 000.
- A broke the promise as he was not able to deliver
goods on time and with in calcutta. B is entitled to
such compensation; not exceeding Rs. 5, 000 as the
court considers reasonable.

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Section75. Party rightfully rescinding
contract, entitled to compensation
A person who rightfully rescinds a contract is entitled to
consideration for any damage which he has sustained
through the no fulfillment of the contract.
Rescind means revoke, cancel, or repeal.
A, a singer, contracts with B, the manager of a theatre, to
sing at his theatre for two nights in every week during the
next two months, and B engages to pay her 100 rupees for
each nights performance.
-On the sixth night, A wilfully absents herself from the theatre,
and B, in consequence, rescinds the contracts.
B is entitled to claim compensation for the damage which he
has sustained through the non-fulfilment of the contract.
- Pollock & Mulla Charu Marwaha
Article 299 :
Article 299 lays down three conditions which the
contracts made in the exercise of the executive power of
the Centre or a State must fulfill to be valid:
The contract must be expressed to be made by the
president or the Governor as the case may be;
These contracts made in the exercise of the executive
power are to be executed on behalf of the
President/Governor as the case may be; and
The execution must be by such person and in such manner
as the President or the Governor of the case as the case
may be, may direct or authorize.
- Pollock & Mulla
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REASONABLENESS: The principle of reasonableness
and rationality which is legally as well as philosophically
an essential element of equality or non-arbitrariness is
projected by Article 14 and it must characterize every
State Action, whether it be under the authority of law or in
exercise of executive power without making of law.

-The state cannot , therefore , act arbitrarily in entering into

relationship, contractual or otherwise with a third party,
but its action must conform to some standard or norm
which is rational an non- discriminatory.
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- The action of the Executive Government should be
informed with reason and should be free from
- It is settled law that the rights and obligations arising out
of the contract after entering into the same is regulated
by terms and conditions of the contract itself.

PUBLIC INTEREST: Appearance of public justice is as

important as doing justice. Nothing should be done
which gives an appearance of bias, jobbery or
nepotism9. State owned or public owned properties are
not to be dealt with at the absolute discretion of the
executive. Certain principles have to be observed in
accordance with the public interest.
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is arbitrary, it is implicit in it that it is unequal both
according to political logic and constitutional law and
is violative of Article 14. -The principle of
reasonableness is an essential element of equality or
non-arbitrariness pervades Article 14 like a brooding
omni-presence and the procedure contemplated by
Article 21 must answer the test of reasonableness in
order to be in conformity with Article 14.

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CONTRACTUAL LIABILITY: In order to protect the
innocent parties, the courts have held that if government
derives any benefit under an agreement not fulfilling the
requisites of Article 299(1), the Government may be held
liable to compensate the other contracting party under
S.70 of the Indian Contract Act, on the basis of quasi-
contractual liabilities, to the extent of the benefit
Section 70 lays down three conditions namely:
1. a person should lawfully do something for another
person or deliver something to him;

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2. in doing so, he must not intend to act gratuitously;
3. the other person for whom something is done or to
whom something is delivered must enjoy the benefit
If under a contract with a government, a person has
obtained any benefit, he can be sued for the dues
under Section 70 of the Act though the contract did
not confirm to Article 299 and if the Government has
made any void contracts, it can recover the same
under Section 65 of the Indian Contract Act.

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Standard Form Contract
A standard form contract is a contract between two parties,
where the terms and conditions of the contract are set by one of
the parties, and the other party has little or no ability to negotiate
more favorable terms and is thus placed in a "take it or leave it"

Standard contracts are contracts which are drafted by one party

and signed by another party without any modification or change.
-Though standard contracts present the advantage of preprinted
standard format; they are essentially "take it or leave it" contracts
with no room for negotiations.
-These contracts are criticized for killing the bargaining power of the
weaker party and open up wide opportunity for exploitation.

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Nature of standard form contract
In the case of commercial contracts courts have
repeatedly held that contracts even if entered into the
standard format, are meant to be performed and not to be
Unless it is shown that consent is obtained by fraud,
mistake a consent given by party to a contract cannot be
As defined under Section 13 of the Contract Act, 1872
two or more persons are said to consent, when they
agree upon the same thing in the same sense.

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Consent, according to Section 14, is free, when it is
not caused by coercion, undue influence, fraud,
misrepresentation or mistake.
Thus where the parties with equal bargaining powers
have fairly consented to the terms of the contract
without any fraud, duress or mistake courts have
refused to interfere
- Pollock & Mulla

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Courts have looked into the terms of the contract in
relation to the bargaining powers of the parties and have
interfered in cases where the bargaining power of the
parties was not equal.

CASE LAW : In Life Insurance Corporation of India v.

Consumer Education and Research Centre and
- The Hon'ble Supreme Court has held that "if a contract or
a clause in a contract is found unreasonable or unfair or
irrational one must look to the relative bargaining power
of the contracting parties.

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In dotted line contracts there would be no occasion for a
weaker party to bargain or to assume to have equal
bargaining power.
- He has either to accept or leave the services or
goods in terms of the dotted line contract. His option
would be either to accept the unreasonable or unfair
terms or forego the service forever.
- With a view to have the services of the goods, the
party enters into a contract with unreasonable or
unfair terms contained therein and he would be left
with no option but to sign the contract".

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Courts have strictly ruled against those standard contracts which exploit
the position of an employee vis a vis the employer.
-They have repeatedly held that in case of employment contract between
the employer and employee, there is a universal tendency on the part of
the employer to insert those terms, which are favorable to him in a
printed and standard form, leaving no real meaningful choice to the
employee except to give assent to all such terms.

-In such a situation the parties cannot said to be in even position

possessing equal bargaining power.
-Where the parties are put on unequal terms the standard form of contract
cannot be said to be the subject-matter of negotiation between the
parties and the same is said to have been dictated by the party whose
higher bargaining power enable him to do so
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4. Favoring One Party
Standard form contract are basically in favour of the
company making it.

5.Language Problems
-The law often hinges on language.
-Words have specific meanings in contracts, and though
your eye might gloss over words that sound right, you
must be aware that a simple word change can alter your
legal status.
-For example, use of the word "shall" has specific
connotations. If a contract says that you shall do
something, that means you are obligated to perform that
action. It is legally binding language.
-If this word is used regarding an action that you feel you
should not be obligated to perform, ask that it be
changed to "may. Charu Marwaha
Advantages of standard form of
-For a business, using a standard form contract is
extremely efficient because they do not have to draft a
new contract for every single person they make an
agreement with.

It also gives companies the ability to issue contracts on

a take-it-or-leave it basis.

NO NEGOTIATION: The person entering in to the contract

does not have the opportunity to negotiate the terms.
- Pollock & Mulla
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Exemption clause:
Provision in a contract under which one party (usually the one
which drafted the agreement) is protected from being sued by
the other party for damages, loss, negligence, non-
performance, etc., or its liabilities are severely restricted.
Banks, for example, use
exemption clauses in documents of foreign trade where they
accept no liability for any injury to the customer unless it can
be proven to have been the direct result of their negligence
or mistake.
The courts, however, look at this clause with disfavor and
often interpret it narrowly to see if it is reasonable in the
-Dr. R.K Bangia Charu Marwaha


-Dr. R.K Bangia
- Pollock & Mulla, Revised & edited by
Nilima Bhadbhade
Other websites-
Charu Marwaha