Introduction

• Function of contract is to :-
1. Facilitate
2. Fix responsibilities
3. Allocate economic risk
4. Provide remedies
 General principles
sections 1 - 75)

Contract relating to Sale of

Goods- Sections 76 to
123(repealed)
Indian Contract Act - 1872
Special contracts
sections 124 to 238

Contracts relating to
Partnership
Sections 239 to 266(repealed)
 Formation contract

General
principles Discharge of contract
(sec. 1 - 75)

Remedies for breach

Indian Contract Act -
1872
Indemnity & guarantee

Special
contracts
Bailment & pledge
(sec – 124 to
238)

Agency
 CLASSIFICATION OF CONTRACT
Enforceabilty Formation Performance

Valid contract Express Contract Executed Contract

Voidable contract Implied Contract Executory Contract

Void Agreement Quasi Contract Unilateral Contract

Illegal Agreement Bilateral Contract

Unenforceable
agreement
• Valid Contract:
• A valid contract is enforceable by law, An agreement
becomes enforceable by law when all the essentials of
a valid contract are present.
• Obligations of Parties:
• In a valid contract, all parties are legally responsible for
the performance of the contract, if one of the parties
breaches the contract, the other party can enforce it
through court of law.
• Example: If “A” agrees to sell a car to “B”, if it fulfills all
the essentials of a contract, it is a valid contract, If “A”
fails to deliver the car, “B” can sue him and if “B” fails to
• Voidable Contract:
• It is voidable contract when the consent of
one of the parties is not free, contract which
has been made on by using false means,
through fraud and mispresentation.
• Example:“D” forced “Q” to sell his car at
gunpoint.
• “A” deceives “B” by stating that his factory
produces 10 million kg of sugar monthly and
induces “B” to buy it. The contract is voidable
• Void Contract:
• The term void means not binding by the law.
A contract which is not enforceable by law is
a void contract.

• Obligations of Parties:
• A contract becomes void due to impossibility to
performance. A contract becomes void before
performance when it becomes impossible to be
performed by any party due to following reasons.
• Void Agreement:
• An agreement not enforceable by law is said
to be void. The void agreement does not
creates any legal obligations on among
parties. An agreement which is void from the
beginning is void agreement.
• Example: “A” promise to buy a cow from “B”
for 25000Rs/= .The cow was dead before the
contract. Both parties were unaware. The
agreement is void.
• Unenforceable contract:
• An unenforceable contract is that contract
which cannot be enforced in a court of law
because of some technical defects and
faults such as absence of writing,
registration, requisite stamp etc.
• Example: “A” borrow Rs. 1 billion from “B”
and makes a pronote on a Rs.10 stamp
paper, it is unenforceable because pronote is
undervalued.
• illegal Agreement:
• An agreement is illegal when its performance
is forbidden by any law. Such an agreement
can never become a contract. An agreement
is illegal and void if it is forbidden by law.

• Example: “A” gives “B” money to buy

smuggling goods, The agreement is illegal and
the money cannot be recovered.
• 2: According to Formation:
• According to Formation a contract has the
following three kinds.

 Express Contract.
 Implied Contract.
 Quasi Contract
• Express Contract :
• Express contract is one which is expressed in
words spoken or written. When such a
contract is formed, there is no difficulty in
understanding the rights, terms, obligations
and conditions of a contract.

• Example: “A” gives his house on rent to “B”, on

per month 10000 Rs and for one year of period,
“A” mentioned terms and condition on a paper.
• Implied Contract: An implied contract is made
without any words spoken and written, It
arise from acts, conduct of parties, course
of dealing or circumstances.

• Example: “A” went into a restaurant and had a

cup of tea. It is implied contract that A will
pay for the cup of tea
• Quasi Contract:
• In a quasi contract, the law imposes certain
obligations under some special
circumstances.
• It is based upon the principle of equity that a
person shall not get allowed to get benefit at
the cost of another.
• Example: “A” finds lost goods of “B” . “A” is
bound legally to return goods back to “B”.
• According to Performance:
• According to performance a
contract is of following two
kinds.
• Executed Contract
• Executory contract
• Executed Contract :
• A contract is said to be executed when both
the parties have completely performed
their obligations. It means that nothing
remains to be done by either party under the
contract.
• Example:
• “A” buys a book from “B” . “A” delivers the
books “B” pays the price. It is an executed
contract.
• According to Parties:

• According to parties a contract may be of the

following two kinds.

• Unilateral Contract
• Bilateral Contract
• Executory Contract :
• In an executory contract something remains
to be done. In other words, a contract is said
to be executory when both parties to a
contract have yet to perform their obligations.
• Example:
• “M” sells his car to “N” for 1 million, “N” has
not yet paid and “M” has not delivered the
car.
• Unilateral Contract: In a unilateral contract only
one party has commitment. In other words, it is
a contract where only one party is bound but
the other party chooses to be bound by it.

• Example:
• A promises to pay Rs 10,000 to any one who
finds his lost beg, B finds the bag and returns to
A, it is a unilateral contract which comes
• Bilateral Contract: It is a contract where
both parties are bounded to perform
certain duties, responsibilities and
obligations.

• Example: A promises to supply raw

material and B promises to pay the price
of raw materials to B.
• Definition of Contract by Pollack

• “every agreement and promise enforceable

at law is contract.”
• Definition of Contract by Salmond

• “a contract is an agreement creating and

defining obligations between the parties”
• Definition of Contract u/s 2(h)

• “An agreement enforceable by

law is a Contract.”
• Enforceability:

• An agreement is enforceable if it is recognized

by court. In order to be enforceable by law,
the agreement must create legal obligations
between the parties.
 Types of Agreement
• Social Agreement: Social agreement are not
enforceable because they do not create legal
obligations between the parties.

• Example: invitation for dinner

• Legal Agreement: Legal agreement are

enforceable because they create legal obligations
between the parties.
• Example: “A” promise to sell his car to “B”
• Contract = Agreement + Enforceability

• Agreement = Offer + Acceptance

• Enforceability = Legal obligations b/w parties

 Formation of contract
CONTRACT
SEC. 2(h)
AGREEMENT
Sec. 2(e)
PROMISE
Sec. 2(b)
OFFER
Sec. 2(a)
 OFFER / PROPOSAL

Section – 2(a)
when one person signifies to another his
willingness to do or to abstain from doing
anything, with a view to obtaining the assent of
that other to such act or abstinence, he is said to
make a proposal.
1. TWO DISTINCT PERSONS

OFFEROR OFFEREE
• Writers of English law have defined an offer
as:

• ...an intimation, by words or conduct, of a

willingness to enter into a legally binding
contract, and which in its terms expressly or
impliedly indicates that it is to become binding
on the offeror as soon as it has been accepted
by an act, forbearance, or return promise on
the part of the person to whom it is addressed
• In Chitty on Contracts, the word 'proposal' has
been defined as:

• an expression of willingness to contract made

with an intention (actual or apparent) that it is
to become binding on the person making it as
soon as it is accepted by the person to whom
it is addressed
• To have made a proposal, a person must have:

1)signified to another his willingness to do or to

abstain from doing anything; and
2)has done so with a view to obtaining the
assent of that other to such act or abstinence.
 2. INTENTION TO CREATE LEAGAL
RELATIONSHIP
• Objective test will be applicable
Balfour vs Balfour, (1919) 2 KB 571

In India:
Principal is useful only in systems which lack
the test of consideration to enable them to
determine the boundaries of contract.
 3. OFFER MUST BE COMMUNICATED
• Sec. - 3 & 9
• Express Offer and Implied Offer (Eg. Letters,
spoken words, Auction, self- service)
• Sec. - 4
• Communication of offer completes when it comes
to the knowledge of the person to whom it is
made.
• It is purely a Question Of Fact.
• Lalman shukla vs Gauri dutt, (1913) 11 All LJ 489
 Types
• Specific offer
• General offer
 General offer
• Carlill vs Carbolic Smoke Ball Co., (1893) 1 QB
256

• Har bhajan lal vs Har charan lal, AIR 1925 All 539
 INVITATION TO OFFER
• Offer to receive offers.
• The distinction is - accepting an offer creates a
binding contract while "accepting" an
invitation to treat is actually making an offer.
• Harvey vs Facey, (1893) AC 552.
• Pharmaceutical Society of Great Britain V.
Boots Cash Chemists (Southern) Ltd.  [1953] 2
WLR 427
• Cross offer (Tin vs Hoffmann (1873))
• Counter offer
• Standing offer /Continuing offer (Great
Northen Rail Vs Witham (1973)L.R.9 C.P.16)
 Essentials of valid offer

1. The terms of the offer must be definite or capable of

being made definite.
2. Offer must be capable of creating a legal relationship
3. Every offer must be communicated to offeree
4. Must not be invitation to offer
5. Offer cannot impose burden of refusal
• Felthouse vs Bindley (1863) 7 LT 835
• Cotton Corpn. of India Ltd. Vs Bombay Dyeing & Mfg Co.
Ltd. (2006) 5 Bom CR105 (Bom)
4. Offer may be conditional and unconditional
 Class Room Exercise (CRE - 1)
• A wrote a letter, offering to buy B’s property
for Rs. 6 lacs. To which B replied ‘won’t accept
less then 10 lacs.’ A informed his acceptance
to B but B sold it to another on higher price.
Can A sue B ?
• A fire broke out in the defendant’s farm. He
called Upton fire brigade, which he intented to
be free. Brigade put out the fire. It then
turned out that defendant’s farm was not
within free zone of Upton, therefore, claimed
compensation for services.
• A catalogue of goods for sales
• The mere quotation of term by trader
• A request for a loan
• Advertisement for sale or auction of goods
• Bids in an auction sale
• Advertisement for tenders
• Free distribution of articles
 Revocation of proposal
• Sec- 5
Offer can be withdrawn/revoked anytime before it is
accepted by the offeree and not after his acceptance.

Sec – 4 (postal rule)

• Revocation must actually be communicated.
• the Communication of revocation of offer
completes :
• against offeror --- when revocation letter is posted /
dispatched.
• against offeree – when letter is received by offeree.
 Modes of revocation
• By notice
• By lapse of time
• Non fulfilment of conditions
• By death or insanity of offeror
 Acceptance
• Sec: 2(b)

• Effect of acceptance: Acceptance of proposal

has the effect of converting the proposal into
promise and binds both the parties to the
promise
 Essentials of valid acceptance
1. Should be communicated
• Brogden vs Metropoliton railway co, (1877) 2
App Cas 666 HL.
• Hindustan coop insurance society vs Shyam
sunder, AIR 1952 Cal 691
• General Assurance society Ltd vs Chandmull
Jain, AIR 1966 SC 1644
2. By offeree to the offeror only
Felthouse vs bindley; (1863) 7 LT 835)

3. Should be absolute and unqualified (sec-7)

4. Should be made in prescribed manner

{sec – 7 (2)}

5. Should be made while the offer is still

subsisting
 Completion of Communication
When and where the contract has been
formed/made?.
• Adams vs Lindsell; (1818) 106 ER 250
• Household Fire & Accident Insurance Co. vs
Grant; (1879) LR 4 Ex div 216 (CA)
 Indian Position
• Sec – 4
• sec. 4 r/w Sec 2, and 3
Time & place - jurisdiction of the court.

Time of formation of contract :

• Hairoon Bibi vs United India Life Insurance co. AIR 1947
Mad 122. (when letter of acceptance is posted)
Place of formation of contract :
• Ram Das Chakarbarti vs Cotton Ginning Co Ltd.; ILR (1887)
9 All 366. (form where letter was posted.)
Instantaneous mode of communication

Acceptance by telephone or telex

No contract will arise until the offeror receives
the notification of acceptance at his place.
• Entores ltd. Vs miles far east cor. (1955) 2 All
ER 493
• Bhagwan Dass Kedia vs Girdhailal AIR 1966
SC 543
 Electronic communication: emails etc.
IT Act 2000 – sec- 13 - Time and place of dispatch and receipt of electronic
record:

1. unless otherwise agreed, the dispatch of an electronic record occurs

when it enters a computer resource outside the control of the
originator.
2. When specific address has been given by offerer, and offeree sent his
acceptance to such resource – it will be considered as received when
the electronic record enters the designated computer resource.
3. But when it is sent to other computer resource then it will be
considered as received when it is retrieved by the addressee.
4. When no specific address has been given by offerer, the record is
received when it enters the computer resource of the offerer.
 Consideration

• Blackstone: consideration is the recompense

given by the party contracting to the other.

• Price of promise.

• Justice Patterson: consideration means something

which is of some value in the eyes of law.
 Currie vs Misa, (1875) 1 Ex 153

• A valuable consideration in the sense of the

law, may consist either in some right, interest,
profit or benefit accruing to the one party, or
some forbearance, detriment, loss or
responsibility given, suffered or undertaken
by the other.

• Quid pro quo – something in return

• Chidambara Iyer Vs. Renga Iyer, AIR 1966 SC 193
SC while comparing, Currie vs Misa with sec. 2 (d) –
held – word ‘something valuable’ was implied in our
law, and could be negative and positive.
• Sec 25 – an agreement made without
consideration is void.

• Sec. 2(d) - Consideration is some act, done or

promised to be done, at the desire of the
promisor by promisee or any other person.
 Requirements

1. act and abstinence should be at the desire of

promisor.
2. Should be done by promisee or any other
person on behalf of promisee
3. Consideration may be past, present and
future
4. There should be some act and abstinence
 At the desire of promisor
• Promissory estoppel - nexus between the
request of promisor and act done by
promisee.

• Durga prasad vs Baldev, (1880) 3 All 221

• Kedarnath vs Gorie Mohamed, 1886 ILR 14
cal 64.
• Doraswami Iyer vs Arunachala ayyar, AIR
1936 Mad 135
Morrison steamship co. ltd. Vs the crown, (1924) 20
LILR 283

• Mere commencement of performance does

not convert the offer into a contract in the
sense that promisor is bound to stay with his
promise, but that if he revokes it, he may be
sued for damages.
 Promisee or any other person
English Position
• Dutton vs Poole, 83 ER 523
• Tweddle vs Atkinson, 123 ER 762
• Dunlop pneumatic tyre co vs selfridge & co.
Ltd, 1915 AC 847
• Beswick vs Beswick, 1968 AC 58
 Indian position
• Chinnaya vs Ramayya, ILR (1876 - 82) 4 Mad
137
• Nawab Khwaja Muhammad Khan Vs Nawab
Hussaini Begum, (1909-10) 37 IA 152
• Jamna Das vs Pandit Ram Autar Pande,
(1911-12) 39 IA 7
• M.C.CHACKO vs State Bank of Travancore,
(1969) 2 SCC343
 Exceptions to Privity of contract
1. Beneficiaries under trust or charge
2. Family arrangements
3. Acknowledge or estoppel
4. covenants running with land
 Consideration:
has done, in progress or is to be done in future

• Act done , should be in response to and as an

inducement for the promise.
• Past consideration: the act has been done
before any promise is made
• Past is different from executed consideration
UOI vs Chaman Lal Loona & Co., AIR 1957 SC 652
English Position
• Past act at request – good consideration
Lampleigh vs Brathwait, 80 ER 255
• Promise to pay time barred debt
• Negotiable instrument issued for a past consideration

Indian position
• Past voluntary services: sec – 25(2)
• Past service at request:
Upton Rural Distt. Council Vs. Powell, (1942) 1 All ER 200
Sindha shri ganpat singh vs Abraham, ILR (1896) 20 Bom
755 - Act done on request of minor, continued even after his
majority – good consideration.
 Something
• Act, Abstinence or Promise
1. Must have some value in the eyes of law
Must not be illusory, must be real.
• White vs Bluett, (1853) 23 LJ Ex 36
• Chidambara Iyer vs P.S. Renga Iyer, AIR 1966
SC 193
2. Consideration need not be adequate:

De la bere vs pearson Ltd, (1908) 1 KB 280 (CA)

India
• Explanation 2 of section 25 read with illustration (f)
• Illustration (g)

3. Performance of existing duties

Legal duties
Contractual duties
• Promise to pay less than the amount which is
due under a contract
 Exceptions to consideration
• Sec- 25 -
a. Natural love and affection between parties
having near relation (written, signed and
registered)
b. Past voluntary services
c. Time barred debt (written and signed)
d. Explanation I - Gift
 Essentials of valid contract
(sec - 10)
1. Parties competent to contract.
2. Free and genuine consent.
3. Lawful consideration.
4. Lawful object.
5. Agreements not declared void or illegal.
 1. Parties competent to contract
(Sec – 11)
• Every person is competent to contract, who
is:
i. Age of majority
ii. Sound mind
iii. Not disqualified by law
 Age of majority

• Age of majority is determined according to the

law to which he is subject.
• Section 3 of Indian Majority Act, 1875
STATUS OF MINOR’S AGREEMENT
• England:
Infant’s Relief Act, 1874

Minors agreements is absolutely void if it is contract for:

1. Repayment of money lent or to be lent
2. Goods supplied or to be supplied (other than
necessary)
 Indian position
Controversy: Whether minor’s contract is void
or voidable?

Mohori Bibee Vs. Dharmodas Ghose (1903) 30

IA 114
The Dharmodas Ghose borrowed money from
defendant (a sum of 20,000 rupees at 12%
interest and secured the loan by way of
mortgage executed by him in favor of the
Brahmo Dutt
 Issues
Q1. Whether the mortgage was void u/s 2, 10,
11 of ICA?

Q2. Whether plaintiff to return the money

received by him under such mortgage?
 Held
Agreement is void ab initio, i.e., without any
legal effect.
 An agreement for the benefit of minor is
enforceable by minor

Srikakulam Subrahmanyam vs Kurra Subba Rao, AIR 1949

PC 25

A contract by a guardian on behalf of a minor shall be valid

if:
(a)The contract is for the benefit of minor
(b)The guardian has the authority to enter into such a
contract.
EFECTS OF MINOR’S AGREEMENT
1. No estoppel against a minor
• If the rule of estoppel is applied against a minor, it would
amount to an indirect way of enforcing a void agreement.
• Rule of estoppel cannot be used against the policy or intent of
legislature

2. No liability in contract or in torts arising out of contract

3. Doctrine of Restitution

Leslie ltd. Vs sheill, (1914)

 Mohori Bibi v Dharmodas Ghose

Sec – 41, Specific Relief Act 1877 – court may grant any
compensation that justice required to be paid by the
party at whose instance a contract was cancelled.

Khan Gul v Lakha Singh, ILR (1928) 9 Lah 701

The Lakha Singh (defendant), while still a minor, by

fraudulently concealing his age, contracted to sell a
plot of land to the Khan Gul (plaintiff). He recevied the
consideration of Rs 17,500 and the refused to perform
his part of the bargain.
Court Held
The Court may grant relief to the other party if
the other party had entered into a contract with
the minor on the basis of a misrepresentation
made by the minor.
the minor shall not be personally liable. In other
words, restitution shall be made only to such an
extent as the estate of minor has been
benefited.
• Ajudhia prasad vs chandan lal. AIR 1937 All 610
(FB)
There is no rule of equity, justice and good
conscience which entails a court to enforce a void
contract of a minor against him under the cloak of
restitution.

• Specific Relief Act 1963 - sec 33

4. No specific performance

5. No ratification by a minor
• Ratification means acceptance of a transaction
already done.
• An agreement entered into by a minor cannot
be ratified by him after he has attained
majority.

6. No liability of guardian
Contracts that are beneficial to the minor

• Contract for service and apprenticeship

• Contract of marriage
• Minor vis-à-vis partnership
• Minor vis-à-vis negotiable instruments
 Minor’s liability for necessities

As per Sec. 68, a minor is liable for necessities supplied

to him or any other, who is dependent on the minor.

Conditions
a. The liability is only for necessities of life.
b. The minor is not already in possession of such
necessities.

The minor shall not be personally liable,

reimbursement is permitted from the estate of minor.
• Liability under tort.
 PERSONS OF SOUND MIND

• English position
Unsound mind person is competent to contract
He may avoid the contract – was not capable to
understand the contract and the party was
aware of this fact.
 Sec. 12
• Meaning of ‘sound mind’
A person is said to be of sound mind if he is able to -
understand the contract; and Form a rational
judgment.

Presumption
The law presumes that every person is of sound
mind.
 Burden of proof

A person who is usually of sound mind

• The burden of proving that he was of unsound mind
at the time of entering into the contract lies on the
person who challenges the validity of the contract.

A person who is usually of unsound mind.

• The burden of proving that he was of sound mind at
the time of entering into the contract lies on the
person who affirms the contract.
 PERSONS DISQUALIFIED UNDER LAW

Company
disqualified to enter into any contract which falls
outside the object clause of memorandum
 Alien enemy
Existing contract
1. is suspended until the war is over;
2. is discharged, if such contract is against public
policy.
Fresh contract
3. cannot be entered into until the war is over

Permission of Central Government

4. An existing contract can be enforced;
5. A fresh contract can be entered into.
 Convict

Existing contract
Is suspended until his conviction is completed.
Fresh contract
Cannot be entered into

Permission of Central Government

1. An existing contract can be enforced
2. A fresh contract can be entered into
 2. Consent
Section- 13
• Two or more persons are said to consent
when they agree upon the same thing in the
same sense.

• ‘consensus – ad – idem’
 Free consent
Sec – 14: consent is free when not caused by –
1. Coercion (Sec-15)
2. Undue Influence (Sec 16)
3. Fraud (Sec 17)
4. Misrepresentation (Sec 18)
5. Mistake (Sec 20, 21,22)
 Coercion [Section 15]

(a)Committing or threatening to commit any

act which is forbidden by the IPC
Ammiraju vs seshamma (1917) 41 Mad 33
A man gave a threat to his wife and son to
commit suicide if they did not executed a
release deed regarding some properties in
favour of his brother.
b) Unlawfully detaining or threatening to detain any
property

Muthia chettiyar vs karupon cheti (1927) 50 Mad 786

An agent refused to hand over the books of the
business at the end of his term of office to a new agent
sent in his place, unless the principal gave him a
release from all liabilities.
A threat to strike by employees in support of their
demands is not regarded as coercion. This is because
the threat to strike is not an offence under the I.P.C. it
is a right given under the Industrial Disputes Act.
• Essar steel ltd vs UOI (2006) 1 GLH 609
GAIL, entered into contract with a company for
sale of gas. The buyer company constructed the
pipeline for carriage of gas and was also
responsible for its maintenance. Even then GAIL
demanded transportation charges
NOT allowed - coercion proved
Coercion may proceed from –
• A party to the contract; or Stranger to
contract.

It is immaterial whether the IPC is or is not in

force at the time or at the place where the
coercion is employed

• Agreement is voidable
• Sec 72 – repayment of money
 Duress / menace Vs Coercion

English Law
Duress does not include detaining of property or
threat to detain property.

Duress can be employed only by a party to the

contract or his agent.

Must cause immediate violence

 Undue influence
(Sec. 16)
(a) the relation between the parties must be such that
one party is in position to dominate the will of the other.
(b) The dominant party uses his position.
(c) To obtain an unfair advantage over the other .

Mannu singh vs Umadat pande (1890) All 523

Spiritual adviser induced the plaintiff to gift, him the
whole of his property to secure benefits to his soul in the
next world.
 Dominating position
1. Person having real or apparent authority over the other
E.g. Master and servant, parent and child, Income Tax officer and
assesses, principal and a Temporary Teacher.

2. A person standing in fiduciary relation to the other

E.g. Trustee and beneficiary, spiritual Guru and his devotees,
solicitors and clients. Guardian and wards, doctor and patient

3. Person making a contract with a person whose mental

capacity is affected by reason of age, illness, mental distress
(temporarily or permanent )
Rannee annapurni vs swami natha, (1910) 34
Mad.
A poor hindu widow, was in great need of
money to established her right to maintenance,
was persuaded by a moneylender to agree to
pay 100 % rate of interest.
Court held: Undue influence – 24 % rate of
interest
• burden of proof (sec. 16 (3))

Unreasonable transactions

• The burden of proof is on the dominant

party, that undue influence was not
employed.

Any other transaction

• The burden of proof is on the weaker party,

that undue influence was employed
Rebutting presumption

• Dominant party – full disclosure

• Price was adequate
• Receipt of competent independent advice
before entering into contract – weaker party.
Jean mackenzie vs bank of canada, (1934) AC 468
No presumption of undue influence between husband and
wife.

• In case of contingencies – in course of business - not

undue influence.
Example :
A applies to a banker for a loan at a time when there is
stringency in the money market. The banker declines to
make the loan except at an unusually high rate of interest.
A accepts the loan on these terms. This is a transaction in
the ordinary course of business, and the contract is not
induced by undue influence
Contract with Pardanashin woman :

Pardanashin Women –
Understand the contract
Receipt of competent independent advice

Burden of Proof –
Full disclosure is made to pardanashin women
 Sec 111 of Indian evidence act
• Burden of proof of good faith
 Points to be considered by courts
1. Whether the transaction is a righteous
transaction
2. Whether it was a matter requiring a legal
advisor
3. Whether the intention of making the
contract originated with protect person
 Coercion (15) Undue Influence (16)

• Meaning – using or threat to use • Involves mental pressure

physical force
• Obtain an unfair advantage (intention)
• obtain the consent of party (intention)
• Not criminally liable
• Punished under IPC
• Between the parties to the contract
• Parties – Stranger
• One party dominate the other party
• Relationship – Immaterial
• Voidable or court - set aside
• Voidable at the option of aggrieved
party • Benefit – order of court – Back

• Benefit - Back
 Fraud (17)

• Act including any of the following with

intention to deceive or induce to other party
to enter into a contract:
a. Suggestion, as a fact
b. Active concealment
c. A promise without intention to perform
d. Any other act fitted to deceive
e. Law declares fraudulent.
 Mere silence is no fraud
• Caveat emptor
EXCEPTION
(1) Duty to speak
a. where the parties stand in a fiduciary relationship.
e.g. father and son, guardian and ward, trustee and beneficiary etc.

b. where contract is a contract of ubberima fidei (requiring utmost good faith),

e.g. contracts of insurance.

• Ex.:- A sells by auction to B a horse which A knows to be unsound. B’ is A’s

daughter and has just come of age. Here the relation between the parties would
make it A’s duty to tell B is the horse is unsound.
(2) When silence itself equivalent to speech.
B says to A “ if you do not deny it I shall assume
that the horse is sound”. A say nothing – A’s
silence equivalent to speech. A can held liable to
fraud.
(3) Change of circumstances
(4) Half Truth : - Example – company pay
dividend – in class room
 Effect of Fraud:-

Sec. 19:
voidable
• Rescinds of contract
• Right to insist upon performance
• Right to claim damages – if he suffered loss.
 Misrepresentation
• Sec: 18
misstatement of facts material to contract, made innocently.

An agreement is said to be influenced by misrepresentation

if all the following conditions are satisfied.
• (a) The party makes a representation of a fact
• (b) The misrepresentation was made innocently
• (c) The other party has actually acted believing the
misrepresent to be true.
 Misrepresentation include:-

1. Unwarranted statements
• Mohan lal vs Shri Gangaji Cotton Mills Co, 4
C.W.N. 369

Belief must not only be reasonable, but also

must be derived from the best possible source.
 2. Breach of duty which bring an advantage to
the person committing it by misleading the
other to his prejudice is a misrepresentation.
• Khandu charan polley vs chanchala bhuinya,
AIR 2003 Cal 213

3. Inducing mistake about subject matter of

agreement
 Effect of Misrepresentation:-
• Right to Rescind contract:-

Exceptions
• Discovering the truth with ordinary diligence.
• Give consent in ignorance of misrepresentation
• Become aware of misrepresentation takes a benefit
• Where an innocent third party before the contract is rescinds
acquires consideration some interest in the property passing under
the contract.
• Where the parties can’t be restored to their original position.

• (2) Right to insist upon performance.

 Of Indian law

Mistake of law

Of foreign law
Mistake

Existence, Quantity,
Subject matter Quality, Prices, Identity,
Title
Bilateral

Possibility Legal, Physical

Mistake of fact

As to Nature

Unilateral

As to person
RAFFLES vs. WICHELHAUS(1864) 2 H & C. 906, the buyer
and the seller entered into an agreement under which
the seller was to supply a cargo of cotton to arrive “ex
Peerless from Bombay”. There were two ships of the
same name i.e. Peerless and both were to sail from
Bombay, one in October and other in December. The
buyer had in mind peerless sailing in October while the
seller thought of the ship sailing in December. The seller
dispatched the cotton by December ship but the buyer
refused to accept the same. In this case, the offer and
the acceptance didn’t coincide and there was no
contract. Therefore, it was held that the buyer was
entitled to refuse to take delivery.
 Cundy vs lindsay, (1878) 3 A.C. 459
one Blenkarn placed an order for supply of goods to the plaintiffs,
fraudulently imitating signatures of other goods at an address which
happened to be in the same street in which Blenkiron and co. was
located. The plaintiff believed that this was an order from the reputed
firm Blenkiron and co. and supplied the goods to Blenkarn. After
receiving the goods, Blenkarn sold the goods to the defendants, who
were acting innocently in good faith. The plaintiffs brought an action
against the defendants to recover the goods contending that since there
was a mistake as to the identity of the party when the plaintiff accepted
the offer, there was no contract. Therefore, the defendants also did not
get a good title to the goods and therefore, the defendants also didn’t
get any title and they were bound to return the goods to the plaintiffs. It
was held that because of mistake Blenkarn did not get any title to the
goods and the transferee from Blenkarn, i.e. the defendants also did not
get any title and they were bound to return the goods to the plaintiff.
Dularia Devi v. Janardan Singh

Woman put her thumb impression on two

documents thinking they were the same. She
thought the document was to gift some
property to her daughters. But the other
document was a Sale deed.

This contract was held void by the courts

HARTOG vs. COLINS & SHIELDS(1939) 3 All E.R. 556,
there was a contract for the sale of 30,000 pieces of
Argentine hare-skins. Negotiations as to price were on
‘per piece’ basis and that was in accordance with the
usual trade practice. The sellers by mistake in the offer
stipulated to supply at a certain rate “per pound”
instead of “per piece”. A pound on an average contained
three pieces of such skins. The buyer sued the sellers for
the non delivery of goods. It was held that there had
arisen no contract in this case, because the buyer could
have noticed the mistake by the sellers contained in
their offer, and because of their mistake, the seller’s
intention was not properly reflected in the offer.
Foster vs Mackison
illiterate man sign Bill of exchanges by means of
false representation that it was a mere
guarantee.
It was held that he was not liable for bill of
exchange because never intended to sign the bill
of exchange
• Boulton Vs Jones, (1857) 27 LJ Ex 117
Object or consideration – unlawful

• SEC 23
• EVERY AGREEMENT OF WHICH THE OBJECT
OR CONSIDERATION IS UNLAWFUL IS VOID

• Object and consideration are not synonym

terms.
 forbidden by law

Defeating the provisions

of any law

Circumstances in which object or

Fraudulent
consideration is unlawful

Involves injury to any

person or his property.

Immoral or opposed to
public policy
 Forbidden by law

• Bhikanbhai vs hiralal, ILR (1900) 24 Bom 622

Legislative intent is important

Goutam hazra vs pinaki hazra, (2005) 3 CHN

364
Partnership is not subletting
 Defeating the provision of any law

• Include enactment or rule of law for the time

being in force.
• not directly prohibited by any Law
• ill. - i
Mohinder Singh vs State of Punjab, AIR 2009
NOC 434 (P&H)
 Fraudulent

ill. – e & g
 Injurious to person or property,
• Money was given to publish a defamatory
statement against A.
• Contract for killing
 Immoral

Interference in marital relation

Sexual Immorality
Gherulal Parakh Vs Mahadeodas, AIR 1959 SC
781
 Opposed to public policy

Wide in nature – covers – political, economic or social nature against certain types
of agreements
The existing heads of policy are:
(1) By tending to the prejudice of the state. It may be further divided into following
two sub-heads:
(a) Trading with enemy
(b) Sale of public offices and appointments.

(2) By tending to the perversion of or interference with the administration of

justice. It may also be divided into the following heads:
(c) Perversion or interference in justice - (i) Maintenance; (ii) Champerty;
(d) Agreement to stifle prosecution.

(3) Violation of public decency.

 ONGC Ltd. v. Saw Pipes Ltd. 2003 (2) RAJ 1 (SC)

Oil and Natural Gas Commission had placed an order on Saw Pipes for supply of
equipment for off shore exploration, to be procured from approved European
manufacturers. The delivery was delayed due to general strike of steel mill workers in
Europe. Timely delivery was the essence of the contract. ONGC granted extension of
time, but it invoked the clause for recovery of Liquidated Damages by withholding the
amount from the payment to the supplier. ONGC deducted from the payment
$3,04,970.20 and Rs 15,75,557 towards customs duty, sales tax and freight charges.
Saw pipes disputed the deduction and matter was referred to arbitration. While the
arbitral tribunal rejected Saw Pipe’s defence of force majure, it required ONGC to
lead evidence to establish the loss suffered by breach and proceed to hold, in
absence of evidence of financial losses, that the deduction of Liquidated damages
was wrongful. The award was challenged by ONGC; inter alia as being opposed to
public policy ONGC’s case was that the arbitral tribunal failed to decide the dispute
by not applying the prevailing substantive law, ignoring the terms of the contract and
customary practices of usage of trade in such transactions. ONGC challenged the
award as being patently illegal. The single judge and division bench of Bombay High
Court dismissed the challenge. The Supreme Court set aside an arbitration award
directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs towards liquidated
damages retained by it while making payment to the company.
While interpreting the meaning of 'public policy' in this case, it was
held that the term should be given a wider meaning. It can be stated
that the concept of public policy connotes some matter which
concerns public good and the public interest. What is good for the
public or in public interest or what would be harmful or injurious to
the public good or interest varies from time to time. However, an
award, which is on the face of it, patently in violation of statutory
provisions cannot be said to be in public interest. Such an award is
likely to adversely affect the administration of justice. Hence, the
award should be set aside if it is contrary to (i) fundamental policy of
Indian Law; (ii) the interest of India; (iii) justice or morality; (iv) in
addition, if it is patently illegal. The illegality must go to the root of
the matter and if the illegality is of a trivial nature, it cannot be held
that the award is against the public policy. An award can also be set
aside if it is so unfair and unreasonable that it shocks the conscience
of the court.
Public Policy is that principle of law which holds that no subject can do,
which has a tendency to be injurious to the public or against the public
good, which may be termed as it sometimes has been policy of the law or
public policy in relation to administration of the law. Public Policy connotes
some matter which concerns public good and public interest. The concept
of Public Policy varies from time to time.

The judgment expanded the concept of Public Policy to add that the award
would be contrary to public policy if it is “patently illegal”. An earlier
Supreme Court decision of a three judge (larger bench) bench, in the case
of Renu Sagar Power Co v General Electrical Corporation had construed the
ground of public policy narrowly as confined to the “fundamental policy of
Indian Law or the interest of India or justice or morality.” This was a clear
violation of doctrine of precedents i. e the Supreme court bench of 2 judges
did not.
 Partially unlawful Object or consideration
[Sec. 24]:
• An Agreement is void if -
• (a) any part of a single consideration for one or more objects
is unlawful; or
• (b) any one or any part of one of several consideration for a
single object, is unlawful.

• Example: B is a licensed manufactured of permitted

chemicals. A promise B to supervise B’s business and
combine it with the production of some contraband items
together with the permitted items. B promises to pay A,
Salary of Rs.10,000/month.
Test of Severability:
• (a) If it is possible to severe the bad part from
good part then only bad part will be rejected
• (b) If illegal part cannot be severed from legal
part of a agreement, contract is altogether
void. [Sec.57]
Agreement ab initio void
2(g)- Void agreement is an agreement which is not enforceable by Law
– void – ab – inito.

(1) Agreement by or with person’s incompetent to contract [10, 11]

(2) Agreement entered into through a mutual mistake [20]
(3) Object or consideration – unlawful [23]
(4) Consideration or object partially, unlawful [24]
(5) Without consideration [25]
(6) Restraint of marriage [26]
(7) Restraint of trade [27]
(8) Legal proceeding [28]
(9) Consideration identified [29]
(10) Wagering agreement [30]
(11) Impossible agreement [56]
(12) An agreement to enter into an agreement in the future.
Agreement in Restraint of marriage [sec - 26]
• Any restraint of marriage whether total or
partial is opposed to public policy.
 Agreement in Restrain of trade
[sec -27]

Burden for Proof :-

Party supporting the contract:- must show that the restraint is
reasonably necessary to protect public interest.
Party challenging the contract:- restraints is injurious to the
public.

• In Patna, 29 out of 30 manufacturers of combs agreed with R

to supply combs only to him and not to anyone else. Under
the agreements R was free to reject the goods if he found no
market for them. Held, the agreement amounted to restraint
of trade and void.
 Exception to Sec. 27

(1) Sale of goodwill: - Seller of goodwill of a business

may agree with the buyer to refrain from carrying on
business.
(a) Must relate to same business
(b) Restriction shall apply within specified Local limits.
(c)The specified local limits – depends on nature of
business.
(d) Restriction shall apply within a reasonable time
period
Exceptions under Partnership Act

(a)Restriction on existing partner (sec - 11)

Not carry on business other than business of the firm till he is partner.
(b) Restriction on outgoing partner [Sec - 36]
Not to carry on a similar business within a specified period or within
specified local limits after retirement
(c) Dissolution of Firm Sec. 54
Partners may agree that some or all of them will not carry on business
similar to that of the Firm within specified periods or local limits.
(d) Sec. 55(2) : Partner may agree with due buyers of Goodwill, not to use
the Firm name or carry on Firm’s business or solicit clients of the Firm.
(e) Sec. 55(3): Upon sale of Firm’s Goodwill, a partner may agree that he
will not carry on any business similar to Firm’s within specified periods or
local limits.
Exception under judicial interpretations :-
(a) Trade combination.
• Traders may create associations among them to
regulate the business or to fix prices.
• Such agreement like opening and closing of
business venture, licensing of traders, supervision
and control of dealers, etc. are valid even if they
are in restraint of trade.
(b) Exclusive dealing agreement: - Agreements to
deal in the products of a single manufacturer or to
sell the whole produce to a single dealer are valid if
their terms are reasonable.
(c) Service agreement.
Employers may enter into agreements with
employees –
(i) During Employment : not to engage in other
work during the tenure of his employment;
e.g. doctors may be paid non practicing
allowances to avoid practicing when they are
employed in a hospital.

(ii) After termination of service:

Agreement in Restraint of legal proceedings
[Sec - 28]

• Agreement restricting enforcement of rights:

An agreement by which any party is restricted
absolutely from enforcing his legal rights under
any contract is void.
• Agreements Limiting period of limitation:-
An agreement which limits the time within
which an action may be brought is void.
 A partial restrain is not void, eg.
Ex. 1: A clause in a contract that any dispute
arising between the parties shall be subject to
jurisdiction of a court at a particular place only,
is valid.
Ex. 2: An agreement is not void merely because
it provides that any dispute arising between two
or prove person shall be referred to arbitration.
 Uncertain Agreement (Sec 29):
An agreement is called an uncertain agreement when the
meaning of that agreement is not certain or capable of being
certain.

Areas of uncertainty: Uncertainty may relate to

(a)Subject Matter: There may be uncertainty as regards – (i)
existence; (ii) quantity (iii) quality; (iv) price; or (v) title to
the subject matter.
(b)Terms of Contract: There may be uncertainty as regards – (i)
existence (ii) quality; (iv) price; or (v) title and other terms in
the contract.
• Example:

1. A says to B “I shall sell my house; will you

buy?” A says, “Yes, I shall buy”.

2. A agreed to sell to B, 100 tons of oil.

3. D agrees to sell his white horse, for Rs.5,000

or Rs.10,000.
 WAGERING AGREEMENT [Sec. 30]
• Gherulal parakh vs Mahadeodas, AIR 1959 SC
781
Subba Roa J - A promise to give money or money’s
worth upon the determination of an uncertain
event. (Sir Willian Anson)

X promise to pay Rs. 1000 to Y if it will rain on a

particular day, and Y promise to pay Rs.1000 to X if
it will not.
Essential elements of wagering agreements

1. The must be a promise to pay money or money’s worth

2. Performance of a promise must depend upon
determination of uncertain event –past or future
3. Mutual chances of Gains or Loss. {Carlil vs carbolic,
Narayana Ayyangar Vs K. Vallachami Ambalam, ILR
(1927) 50 Mad 696.}
4. Neither party to have control over the events
5. No party must have no other interest in the event
 Effects of wagering agreements:-

• Agreement is void. Cannot be enforced in any

court of law for the recovery of the amount won
on any wager.
• It is not illegal so any agreement collateral to
wagering agreement is valid. {Gherulal Parekh vs
Mahadeo}
However, it is illegal in state of Maharashtra and
Gujarat.
 Exceptions
• Prize in terms of Prize competition Act, 1955 not exceeding
Rs.1000 is not wagering agreement.
• Horse race [500 rs or upwards] – An agreement to contribute a
plate or prize.
• Crossword competition involving skill for its solution.
• Contribution to chit fund is not wager
• Contract of insurance utmost in good faith eg. Favour in public
policy.
• Share market transaction A commercial transaction should always
be distinguished from a pure speculative transaction. A
commercial transaction is done with an intention of delivery of
goods (commodity or security) and payment of price. Therefore, it
is not wagering agreement.