INDIAN CONTRACT ACT 1872

 

Unit- i

 

INDIAN CONTRACT ACT, 1872

 

·       Meaning, definitions

 

·       Essentials of Contract,

 

·       Classification.

 

·       Meaning and essentials of offer and acceptance, capacity of parties to contract, consideration, free consent, legality of object, Agreement declared void.

 

·       MEANING AND NATURE OF CONTRACT

 

The law relating to contract is governed by the Indian Contract Act, 1872. The Act came into force on the first day of September 1872. The preamble to the Act says that it is an Act “to define and amend certain parts of the law relating to contract”. It extends to the whole of India except the State of Jammu and Kashmir.

As per section 2(h) of the Indian Contract Act, 1872, contract means “an agreement enforceable by law”.

·       ESSENTIAL ELEMENTS OF A VALID CONTRACT

 

Sec. 10 of Indian Contract Act says, “All, agreements are contracts if it includes:

 

-                     Offer and Acceptance.

-                     Intention to create legal relationship.

-                     Lawful consideration and object

-                     Capacity to contract

-                     Free consent

-                     Lawful object

-                     Agreement not expressly declared void.

-                     Consensus -ad- idem i.e. meeting of minds

-                     Certainty of meaning

-                     Possibility to perform.

-                     Legal formalities

 

CHARACTERISTICS OF AN AGREEMENT

 

(a)               Plurality of persons: There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself.

(b)               Consensus ad idem: The meeting of the minds is called consensus-ad-idem. It means both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.

RIGHTS AND OBLIGATIONS

 

A agrees with B to sell his car for Rs 10,000 to him. In this example, the following rights and obligations have been created:

(i) A is under an obligation to deliver the car to B. B has a corresponding right to receive the car.

(ii)  B is under an obligation to pay Rs 10,000 to A. A has a correlative right to receive Rs 10,000.

OFFER OR PROPOSAL

As per Section 2(a) of the Indian Contract Act defines proposal or offer as “when one person signifies to another his willingness to do or 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”.

The person making the proposal or offer is called the proposer or offeror and the person to whom the proposal is made is called the offeree.

Rules Governing Offers

 

(a)               An offer must be clear, definite, complete. It must not be vague. For example, a promise to pay an increased price for a horse if it proves lucky to promisor, is vague and is not binding.

(b)               An offer must be communicated to the offeree.

 

(c)               The communication of an offer may be made by express words-oral or written-or it may be implied by conduct. A offers his car to B for Rs 10,000. It is an express offer. A bus plying on a definite route goes along the street. This is an implied offer on the part of the owners of the bus to carry passengers at the scheduled fares for the various stages.

(d)               The communication of the offer may be general or specific. Where an offer is made to a particular person or a particular group of people it is called specific offer and it can be accepted only by that particular person. But when an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer.

Carlill v. Carbolic Smoke Ball Co Case:

 

Facts:

 

(i)                A co. advertised that it would give a reward of Rs 10,000 to anyone who contracted influenza after using its smoke balls for a certain period according to printed directions.

(ii)              Mrs Carlill purchased and used smoke balls as per the printed instructions, even then contracted influenza.

(iii)            She claimed the reward of Rs 10,000.

 

(iv)            Co. resisted the claim on the ground that offer was not made to her and she had also not communicated her acceptance to the offer.

Decision: She could recover the reward as she had accepted the Company’s offer by complying

 

with terms.

 

Example: -A advertise in the newspapers that he will pay rupees one thousand to anyone who

 

restores to him his lost son. B without knowing of this reward finds A’s lost son and restore him to A. In this case since B did not know of the reward, he cannot claim it from A even though he finds A’s lost son and restores him to A.

In India also, in the case of Harbhajan Lal v. Harcharan Lal (Lalman Shukla v. Gauri Dutt case), the same rule was applied. In this case, a young boy ran away from his father’s home. The father issued a pamphlet offering a reward of Rs 500 to anybody who would bring the boy home. The plaintiff saw the boy at a railway station and sent a telegram to the boy’s father. It was held that the handbill was an offer open to the world at large and was capable to acceptance by any person who fulfilled the conditions contained in the offer. The plaintiff substantially performed the conditions and was entitled to the reward offered.

Cross offer

 

It occurs when two persons make identical offers to each other in ignorance of each other’s offer. It leads to termination of the original offer.

Counteroffer

Upon receipt of an offer from an offeror, if the offeree instead of accepting it, straightaway modifies or varies the offer, he is said to make a counteroffer. It leads to rejection of original offer.

Standing/ Continuing / Open Offer

 

Offer which is made to public at large and kept open for public acceptance for a certain time period. It refers to a tender to supply goods as and when required. Each successive order given creates a separate contract. It does not bind either party unless or until such orders are given.

AN OFFER MUSST BE DISTINGUISHED FROM

 

(a)      An invitation to treat or an invitation to make an offer: e.g., an auctioneer’s request for bids (which are offered by the bidders), the display of goods in a shop window with prices marked upon them, or the display of priced goods in a self- service store or a shopkeeper’s catalogue of prices are invitations to an offer.

b)       A mere statement of intention: e.g., an announcement of a coming auction sale.

 

Thus, a person who attended the advertised place of auction could not sue for breach of contract if the auction were cancelled. (Harris v. Nickerson)

(c)        A mere communication of information in the course of negotiation: e.g., a statement of the price at which one is prepared to consider negotiating the sale of piece of land (Harvey

v. Facey).

 

LAPSE OF OFFER

 

(a)   it is not accepted within the specified time (if any) or after a reasonable time if none is specified.

(b)               it is not accepted in the mode prescribed or if no mode is prescribed in some usual and reasonable manner, e.g., by sending a letter by mail when early reply was requested.

(c)               the offeree rejects it by distinct refusal to accept it.

 

(d)               either the offeror or the offeree dies before acceptance.

 

(e)               the acceptor fails to fulfil a condition precedent to an acceptance.

 

(f)                the offeree makes a counteroffer; it amounts to rejection of the offer and an offer by the offeree may be accepted or rejected by the offeror

ACCEPTANCE

 

Under Section 2(b) of the Contract Act when a 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.

Rules Governing Acceptance

 

(a)               Acceptance may be express i.e., by words spoken or written or implied from the conduct of the parties.

(b)               If a particular method of acceptance is prescribed, the offer must be accepted in the prescribed manner.

(c)               Acceptance must be unqualified and absolute and must correspond with all the terms of the offer.

(d)               A counteroffer or conditional acceptance operates as a rejection of the offer and causes it to lapse, e.g., where a horse is offered for Rs 1,000 and the offeree counter-offers Rs 990, the offer lapses by rejection.

(e)               Acceptance must be communicated to the offeror, for acceptance is complete the moment it is communicated. Where the offeree merely intended to accept but does not

communicate his intention to the offeror, there is no contract. Mere mental acceptance is not enough.

(f)                Mere silence on the part of the offeree does not amount to acceptance. Ordinarily, the offeror cannot frame his offer in such a way as to make the silence or inaction of the offeree as an acceptance.

In Felthouse v. Bindley, F offered by letter to buy his nephews horse for $ 30 saying: “If I hear no more about him, I shall consider the horse is mine at $ 30". The nephew did not reply, but he told an auctioneer who was selling his horses not to sell that particular horse because it was sold to his uncle. The auctioneer inadvertently sold the horse. Held: F had no claim against the auctioneer because the horse had not been sold to him, his offer of $ 30 not having been accepted.

(g)               If the offer is one which is to be accepted by being acted upon, no communication of acceptance to the offeror is necessary, unless communication is stipulated for the offer itself.

Thus, if a reward is offered for finding a lost dog, the offer is accepted by finding the dog after reading about the offer, and it is unnecessary before beginning to search for the dog to give notice of acceptance to the offeror.

(h)               Acceptance must be given within a reasonable time and before the offer lapses or is revoked. An offer becomes irrevocable by acceptance.

An acceptance never precedes an offer. There can be no acceptance of an offer which is not communicated. Similarly, performance of conditions of an offer without the knowledge of the specific offer, is no acceptance. Thus, in Lalman Shukla v. Gauri Dutt (1913), where a servant brought the boy without knowing of the reward, he was held not entitled to reward because he did not know about the offer.

CONTRACTS BY POST

 

An offer by post may be accepted by post unless the offeror indicates anything to the contrary.

 

CONTRACTS OVER THE TELEPHONE

 

-                     In this case, an oral offer is made, and an oral acceptance is expected. It is important that the acceptance must be audible, heard and understood by the offeror.

-                     If during the conversation the telephone lines go “dead” and the offeror does not hear the offerees word of acceptance, there is no contract at the moment.

-                     If the whole conversation is repeated and the offeror hears and understands the words of acceptance, the contract is complete (Kanhaiyalal v Dineshwar chandra)

COMPLETION & REVOCATION OF OFFER AND ACCEPTANCE

 

-                     An offer is made only when it actually reaches the offeree and not before, i.e., when the letter containing the offer is delivered to the offeree.

-                     An acceptance is made as far as the offeror is concerned, as soon as the letter containing the acceptance is posted, to offerors correct address; it binds the offeror, but not the acceptor.

-                     An acceptance binds the acceptor only when the letter containing the acceptance reaches the offeror. The result is that the acceptor can revoke his acceptance before it reaches the offeror.

-                     An offer may be revoked by the offeror at any time before acceptance. Like any offer, revocation must be communicated to the offeree, as it does not take effect until it is actually communicated to the offeree.

-                     The revocation must reach the offeree before he sends out the acceptance.

-                     An offer may be revoked before the letter containing the acceptance is posted. An acceptance can be revoked before it reaches the offeror.

AGREEMENT

 

As per Section 2(e) of the Indian Contract Act “every promise and every set of promises, forming the consideration for each other, is an agreement.”

ALL AGREEMENTS ARE NOT CONTRACTS

 

An agreement to become a contract must give rise to legal obligation. If an agreement is incapable to be enforced by law, it remains only agreement and not contract, such as:

(a)               Social Agreements

 

(b)               Agreements without legal intention

 

(c)               Agreements without consideration.

 

INTENTION TO CREATE LEGAL RELATIONS

 

The second essential element of a valid contract is that there must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. 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.

CONSIDERATION

 

Consideration is identified as “quid pro quo”, i.e., “something in return”. Section 2(d) of the Indian Contract Act, 1872 defines consideration thus: “when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing,

or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise”.

It must be noted that:

 

-                     Consideration must be at the desire of the promisor

 

-                     Consideration may move from the promise or any other person

 

KINDS OF CONSIDERATION

 

-                     Executory or future

 

-                     Executed or present

 

-                     Past

 

According to English law, a consideration may be executory or executed but never past. The English law is that past consideration is no consideration. The Indian law recognizes all the above three kinds of consideration.

PRIVITY OF CONTRACT

 

A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract. It’s only the parties to the contract, who can sue each other.

In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd, D supplied tyres to a wholesaler X, on condition that any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public below Ds list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price. Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for Ss promise to X nor was he party to the contract between D and X.

Thus, a person who is not a party to a contract is stranger to contract and cannot sue upon it even though the contract is for his benefit.

The leading English case on the point is Tweddle v. Atkinson. In this case, the father of a boy and the father of a girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband) sued the executors of his father- in-law upon the agreement between his father-in-law and his father. Held: the suit was not maintainable as the boy was not a party to the contract.

Exception to the doctrine of privity of contract:

 

-                     A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party to it.

-                     An assignee under an assignment made by the parties, or by the operation of law (e.g., in case of death or insolvency), can sue upon the contract for the enforcement of his rights, tittle and interest.

-                     In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though not parties to the contract, possess an actual beneficial right which place them in the position of beneficiaries under the contract, and can therefore, sue.

-                     In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, and admits to C the receipt of that amount, then A constitutes himself as the agent of C.

RULES GOVERNING CONSIDERATION

(a)               Every simple contact must be supported by valuable consideration otherwise it is formally void subject to some exceptions.

(b)               Consideration may be an act of abstinence or promise.

 

(c)               There must be mutuality.

 

(d)               Consideration must be real, indefinite and not vague, or illusory, e.g., a son’s promise to “stop being a nuisance” to his father, being vague, is no consideration.

(e)               Although consideration must have some value, it need not be adequate.

 

(f)                Consideration must be lawful, e.g., it must not be some illegal act such as paying someone to commit a crime.

(g)               Consideration must be something more than the promisee is already bound to do for the promisor.

WHEN CONSIDERATION NOT NECESSARY

 

Thus, an agreement without consideration is valid in the following cases:

 

1.               If it is expressed in writing and registered and is made out of natural love and affection between parties standing in a near relation to each other; or

2.               If it is made to compensate a person who has already done something voluntarily for the promisor, or done something which the promisor was legally compellable to do; or

3.               If it is a promise in writing and signed by the person to be charged, or by his agent, to pay a debt barred by the law of limitation.

4.               Consideration is not required to create an agency.

 

5.               In the case of gift actually made, no consideration is necessary.

Illustrations

 

A, for natural love and affection, promises to give his son B Rs 10,000. A put his promise to B into writing and registered it. This is a contract.

A registered agreement between a husband and his wife to pay his earnings to her is a valid contract, as it is in writing, is registered, is between parties standing in near relation, and is for love and affection (Poonoo Bibi v. Fyaz Buksh).

But where a husband by a registered document, after referring to quarrels and disagreement between himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence, it was held that the promise was unenforceable, as it was not made for love and affection (Rajluckhy Deb v. Bhootnath).

WHETHER GRATUITOUS PROMISE CAN BE ENFORCED

 

A gratuitous promise to subscribe to a charitable cause cannot be enforced, but if the promisee is put to some detriment as a result of his acting on the faith of the promise and the promisor knew the purpose and also knew that on the faith of the subscription an obligation might be incurred, the promisor would be bound by promise.

TERMS MUST BE CERTAIN

 

The parties must agree on the terms of their contract. They must make their intentions clear in their contract. The Court will not enforce a contract the terms of which are uncertain. Thus, an agreement to agree in the future (a contract to make a contract) will not constitute a binding contract e.g., a promise to pay an actress a salary to be “mutually agreed between us” is not a contract since the salary is not yet agreed.

CLASSIFICATION OF CONTRACT/ AGREEMENT

 

Void Agreement

A void agreement is one which is destitute of all legal effects. It cannot be enforced and confers no rights on either party. It is ‘void ab initio’ i.e., not exist in the eyes of law. For example, an agreement without consideration is void.

Void Contract

 

A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. For example, throat cancer a singer refused to sing for the musical concert for which he was agreed before six months without knowing his disease. The only remedy is whatever is advanced can be restored.

Voidable Contract

 

A contract which is enforceable by law at the option of one or more parties but not at the option of the other or others is a voidable contract. A contract becomes voidable when the consent of the parties is induced by coercion, undue influence, misrepresentation or fraud.

Illegal Agreement

 

An agreement with an unlawful object and consideration is known as illegal agreement. The object and consideration are said to be unlawful if –

-                     it is forbidden by any law time being in force

 

-                     it defeats the provisions of any law

 

-                     it is fraudulent

 

-                     it is injurious to a person or property

 

-                     it is immoral

 

-                     it is opposed to public policy

Parties to an unlawful agreement cannot get any help from a Court of law, for no polluted hands shall touch the pure fountain of justice. On the other hand, a collateral transaction is also considered as void agreement.

Quasi/Implied Contract

 

Certain relations resembling those created by contract” are known as quasi contract. Such contracts do not involve either offer or acceptance but are still considered as contracts.

Express Contract

 

A contract where the proposal acceptance and conditions are made in words either written or oral is an express contract.

Tacit Contract

 

A contract in which offer, and acceptance are expressed other than words i.e. conduct of the parties, circumstances is a tacit contract. For example, to withdraw money from an ATM machine is a tacit contract.

CONTRACTUAL CAPACITY

 

The general rule is that all-natural persons have full capacity to make binding contracts except.

 

-                     Minors

 

-                     Lunatics

 

-                     Persons disqualified by any law.

 

AGREEMENT WITH MINOR

 

-                     According to the Indian Majority Act, 1875, a minor is a person, male or female, who has not completed the age of 18 years.

-                     In case a guardian has been appointed to the minor or where the minor is under the guardianship of the Court of Wards, the person continues to be a minor until he completes his age of 21 years.

-                     According to the Indian Contract Act, no person is competent to enter into a contract who is not of the age of majority.

-                     It was finally laid down by the Privy Council in the leading case of Mohiri Bibi v. Dharmodas Ghose, (1903), that a minor has no capacity to contract and minors’ contract is absolutely void. In this case, X, a minor borrowed Rs 20,000 from Y, a money lender. As a security for the money advanced, X executed a mortgage in Y’s favour. When sued by Y, the Court held that the contract by X was void and he cannot be compelled to repay the amount advanced by him.

The following points must be kept in mind with respect to minor’s agreement:

 

(a)               A minor’s contract is altogether void in law, and a minor cannot bind himself by a contract. If the minor has obtained any benefit, such as money on a mortgage, he cannot be asked to repay, nor can his mortgaged property be made liable to pay.

(b)               Since the contract is void ab initio, it cannot be ratified by the minor on attaining the age of majority.

(c)               Estoppel is an important principle of the law of evidence. A minor can always plead minority and is not estopped from doing so even where he had produced a loan or entered into some other contract by falsely representing that he was major and competent to contract, when in reality he was a minor. But where the loan was obtained by fraudulent representation by the minor or some property was sold by him and the transactions are set aside as being void, the Court may direct the minor to restore the property to the other party.

For example, a minor fraudulently overstates his age and takes delivery of a motor car after executing a promissory note in favour of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the Court on equitable grounds may order the minor to return the car to the trader, if it is still with the minor.

(d)               A minor’s estate is liable to pay a reasonable price for necessaries supplied to him or to anyone whom the minor is bound to support (Section 68 of the Act). However, minor is not liable personally, such contracts are considered as quasi contract. The necessaries supplied must be according to the position and status in life of the minor and must be things which the minor actually needs. The following have also been held as necessaries in India. Costs incurred in successfully defending a suit on behalf of a minor in which his property was in jeopardy; costs incurred in defending him in a prosecution; and money advanced to a Hindu minor to meet his marriage expenses have been held to be necessaries.

(e)               An agreement by a minor being void, the Court will never direct specific performance of the contract.

(f)                A minor can be an agent, but he cannot be a principal, nor can he be a partner. He can, however, be admitted to the benefits of a partnership.

(g)               Since a minor is never personally liable, he cannot be adjudicated as an insolvent.

 

(h)               An agreement by a parent or guardian entered into on behalf of the minor is binding on him provided it is for his benefit or is for legal necessity. For, the guardian of a minor, may enter into contract for marriage on behalf of the minor, and such a contract would be good in law and an action for its breach would lie, if the contract is for the benefit of the minor.

AGREEMENT BY PERSON OF UNSOUND MIND (SECTION 2)

-                     A person is of unsound mind if at the time when he makes the contract, he is incapable of understanding it and of forming rational judgment as to its effect upon his interests.

-                     A person of unsound mind cannot enter into a contract. A lunatics agreement is therefore void. But if he makes a contract when he is of sound mind, i.e., during lucid intervals, he will be bound by it.

-                     A sane man who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract or form a rational judgement as to its effect on his interests cannot contract whilst such delirium or state of drunkenness lasts. A person under the influence of hypnotism is temporarily of unsound mind. Mental decay brought by old age or disease also comes within the definition.

-                     Agreement by persons of unsound mind are void. But for necessaries supplied to a lunatic or to any member of his family, the lunatics estate, if any, will be liable. There is no personal liability incurred by the lunatic.

PERSONS DISQUALIFIED FROM ENTERNING INTO CONTRACT

 

Alien Enemies

 

A person who is not an Indian citizen is an alien. On the declaration of war between his country and India he becomes an alien enemy. A contract with an alien enemy becomes unenforceable on the outbreak of war.

Foreign Sovereigns and Ambassadors

 

Foreign sovereigns and accredited representatives of foreign states, i.e., Ambassadors, High Commissioners, enjoy a special privilege in that they cannot be sued in Indian Courts, unless they voluntarily submit to the jurisdiction of the Indian Courts.

Professional Persons

In England, barristers-at law is prohibited by the etiquette of their profession from suing for their fees. So also, are the Fellow and Members of the Royal College of Physicians and Surgeons. But they can sue and be sued for all claims other than their professional fees. In India, there is no such disability and a barrister, who is in the position of an advocate with liberty both to act and plead, has a right to contract and to sue for his fees.

Corporations

 

The Indian Contract Act does not speak about the capacity of a corporation to enter into a contract. But if properly incorporated, it has a right to enter into a contract. It can sue and can be sued in its own name. A company, for instance, cannot contract to marry. Further, its capacity and powers to contract are limited by its charter or memorandum of association. Any contract beyond such power in ultra vires and void.

Married Women

 

In India there is no difference between a man and a woman regarding contractual capacity. A woman married or single can enter into contracts in the same ways as a man.

FREE CONCENT

 

Consent is not free when it has been caused by coercion, undue influence, misrepresentation, fraud or mistake. These elements if present, may vitiate the contract. When this consent is wanting, the contract may turn out to be void or voidable according to the nature of the flaw in consent.

COERCION

 

The committing or threatening to commit any act forbidden by the Indian Penal Code, or 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.

If A at the point of a pistol asks B to execute a promissory note in his favour and B to save his life does so he can avoid this agreement as his consent was not free.

UNDUE INFLUENCE

 

A contract is said to be produced 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.

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, e.g., minor and guardian; trustee and beneficiary; solicitor and client. There is, however, no presumption of undue influence in the relation of creditor and debtor, husband and wife (unless the wife is a parda- nishin woman) and landlord and tenant.

(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 e.g., doctor and patient.

Transaction with parda-nishin women

 

The expression ‘parda-nishin denotes complete seclusion. Thus, a woman who goes to a Court and gives evidence, who fixes rents with tenants and collects rents, who communicates when necessary, in matters of business, with men other than members of her own   family, could not be regarded as a parda-nishin woman (Ismail Musafee v. Hafiz Boo).

The principles to be applied to transactions with parda-nishin woman are founded on equity and good conscience and accordingly a person who contracts with parda-nishin woman has to prove that no undue influence was used and that she had free and independent advice, fully understood the contents of the contract and exercised her free will.

Unconscionable transactions

 

An unconscionable transaction is one which makes an exorbitant profit of the others distress by a person who is in a dominant position. Merely the fact that the rate of interest is extremely high in a money lending transaction shall not make it unconscionable. But if the rate of interest is very exorbitant and the Court regards the transaction unconscionable, the burden of proving that  no undue influence was exercised lies on the creditor.

MISREPRESENTATION

 

Misrepresentation may be either.

 

(i)                Innocent misrepresentation, or

 

(ii)              Wilful misrepresentation with intent to deceive and is called fraud.

 

Innocent Misrepresentation

 

If a person makes a representation believing what he says is true he commits innocent misrepresentation. The effect of innocent misrepresentation is that the party misled by it can avoid the contract but cannot sue for damages in the normal circumstances.

Damages for Innocent Misrepresentation

 

Generally, the injured party can only avoid the contract and cannot get damages for innocent misrepresentation. But in the following cases, damages are obtainable:

(a)               From a promoter or director who makes innocent misrepresentation in a company prospectus inviting the public to subscribe for the shares in the company.

(b)               Against an agent who commits a breach of warranty of authority.

(c)               From a person who (at the Courts discretion) is estopped from denying a statement he has made where he made a positive statement intending that it should be relied upon and the innocent party did rely upon it and thereby suffered damages.

(d)               Negligent representation made by one person to another between whom a confidential relationship, like that of a solicitor and client exists.

Wilful Misrepresentation or Fraud

 

Fraud is an untrue statement made knowingly or without belief in its truth or recklessly, carelessly, whether it be true or false with the intent to deceive.

It is immaterial whether the representation takes effect by false statement or with concealment. The party defrauded can avoid the contract and also claim damages.

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless silence is in itself equivalent to speech, or where it is the duty of the person keeping silent to speak as in the cases of contracts uberrimae fidei.

Contracts of Uberrimae Fidei

 

(a)               Contract of insurance of all kinds: The assured must disclose to the insurer all material facts and whatever he states must be correct and truthful.

(b)               Company prospectus: When a company invites the public to subscribe for its shares, it is under statutory obligation to disclose truthfully the various matters set out in the Companies Act. Any person responsible for non-disclosure of any of these matters is liable to damages.

(c)               Contract for the sale of land: The vendor is under a duty to the purchaser to show good title to the land he has contracted to sell.

(d)               Contracts of family arrangements: When the members of a family make agreements or arrangements for the settlement of family property, each member of the family must make full disclosure of every material fact within his knowledge.

MISTAKE

 

Mistake must be a “vital operative mistake”, i.e., it must be a mistake of fact which is fundamental to contract.

To be operative so as to render the contract void, the mistake must be:

 

(a)               of fact, and not of law or opinion.

 

(b)               the fact must be essential to agreement, i.e., so fundamental as to negative the agreement; and

(c)               must be on the part of both the parties.

 

Thus, where both the parties to an agreement are under a mistake as to a matter of fact essential to agreement, the agreement is void (Section 20).

Mistake of Law and Mistake of Fact

 

Mistakes are of two kinds:

 

(i)                mistake of law, and

 

(ii)              mistake of fact.

 

If there is a mistake of law of the land, the contract is binding because everyone is deemed to have knowledge of law of the land and ignorance of law is no excuse (ignorantia juris non- excusat).

But mistake of foreign law and mistake of private rights are treated as mistakes of fact and are execusable. The law of a foreign country is to be proved in Indian Courts as ordinary facts. So,

mistake of foreign law makes the contract void. Similarly, if a contract is made in ignorance of private right of a party, it would be void, e.g., where A buys property which already belongs to him.

Mutual or Unilateral Mistake

 

Mistake must be mutual or bilateral, i.e., it must be on the part of both parties. A unilateral mistake, i.e., mistake on the part of only one party, is generally of no effect unless (i) it concerns some fundamental fact and (ii) the other party is aware of the mistake. For this reason, error of judgement on the part of one of the parties has no effect and the contract will be valid.

Mutual or Common Mistake as to Subject-matter

 

(a)               Mistake as to existence of the subject matter: Where both parties believe the subject matter of the contract to be in existence but in fact, it is not in existence at the time of making the contract, there is mistake and the contract is void.

(b)               Mistake as to identity of the subject matter: Where the parties are not in agreement to the identity of the subject matter, i.e., one means one thing and the other means another thing, the contract is void; there is no consensus ad idem.

(c)               Mistake as to quantity of the subject matter: There may be a mistake as to quantity or extent of the subject matter which will render the contract void even if the mistake was caused by the negligence of a third-party.

(d)               Mistake as to quality of the subject-matter or promise: Mistake as to quality raises difficult questions. If the mistake is on the part of both the parties the contract is void. But if the mistake is only on the part of one-party difficulty arises.

Unilateral Mistake as to Nature of the Contract

 

The general rule is that a person who signs an instrument is bound by its terms even if he has not read it. But a person who signs a document under a fundamental mistake as to its nature (not merely as to its contents) may have it avoided provided the mistake was due to either-

(a)               the blindness, illiteracy, or senility of the person signing, or

 

(b)               a trick or fraudulent misrepresentation as to the nature of the document.

 

Unilateral Mistake as to the Identity of the Person Contracted With

 

When a contract is made in which personalities of the contracting parties are or may be of importance, no other person can interpose and adopt the contract. For example, where M intends to contract only with A but enters into contract with B believing him to be A, the contract is vitiated by mistake as there is no consensus ad idem.

Mistake as to the identity of the person with whom the contract is made will operate to nullify the contract only if:

(i)                the identity is for material importance to the contracts; and

 

(ii)              the mistake is known to the other person, i.e., he knows that it is not intended that he should become a party to the contract.

IMMORAL AGREEMENT

 

An agreement is illegal if its object is immoral or where its consideration is an act of sexual immorality, e.g., an agreement for future illicit co-habitation, the agreement is illegal and so unenforceable.

Where A let a taxi on hire to B, a prostitute, knowing that it was to be used for immoral purposes, it was held that A could not recover the hire charges. (Pearce v. Brookes).

AGREEMENTS VOID AS BEING OPPOSED TO PUBLIC POLICY

 

The following agreement are void as being against public policy, but they are not illegal:

 

(a)               Agreement in restrain of parental rights: An agreement by which a party deprives himself of the custody of his child is void.

(b)               Agreement in restraint of marriage: An agreement not to marry at all or not to marry any particular person or class of persons is void as it is in restraint of marriage.

(c)               Marriage brokerage or brokerage Agreements: An agreement to procure marriage for reward is void. Where a purohit (priest) was promised Rs 200 in consideration of procuring a wife for the defendant, the promise was held void as opposed to public policy, and the purohit could not recover the promised sum.

(d)               Agreements in restraint of personal freedom are void: Where a man agreed with his money lender not to change his residence, or his employment or to part with any of his property or to incur any obligation on credit without the consent of the money lender, it was held that the agreement was void.

(e)               Agreement in restraint of trade: An agreement in restraint of trade is one which seeks to restrict a person from freely exercising his trade or profession.

AGREEMENTS IN RESTRAINT OF TRADE VOID

 

Section 27 of the Indian Contract Act states that every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is, to that extent, void.

Some restrains are personal covenants between an employer and his employee whereby the latter agrees not to compete with the former or serve with any of his competitors after employment.

This issue came before the Supreme Court in Niranjan Shanker Golikari v. The Century Spinning and Manufacturing Co. Ltd. In this case N entered into a bond with the company to serve for a period of five years. In case, N leaves his job earlier and joins elsewhere with company’s competitor within five years, he was liable for damages. N was imparted the necessary training, but he left the job and joined another company. The former employer instituted a suit against N. The Supreme Court held that the restraint was necessary for the protection of the company’s interests and not such as the Court would refuse to enforce.

WHEN CONTRACTS IN RESTRAINT OF TRADE VALID

 

(a)               Sale of goodwill: Where the seller of the goodwill of a business undertakes not to compete with the purchaser of the goodwill, the contract is enforceable provided the restraint appears to be reasonable as to territorial limits and the length of time.

(b)               Partners agreements: Section 11(2) of the Indian Partnership Act permits contracts between partners to provide that a partner shall not carry on any business other than that of the firm while he is a partner.

(c)               Trade Combinations: An agreement, the object of which is to regulate business and not to restrain it is valid. Thus, an agreement in the nature of a business combination between traders or manufactures e.g., not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion does not amount to a restraint of trade and is perfectly valid (Fraster & Co. v. Laxmi Narain).

(d)               Negative stipulations in service agreements: An agreement of service by which

 

a person binds himself during the term of the agreement not to take service with anyone else is not in restraint of lawful profession and is valid.

WAGERING AGREEMENTS

 

The literal meaning of the word “wager” is a “bet”. Wagering agreements are nothing but ordinary betting agreements.

For example, A and B enter into an agreement that if England’s Cricket Team wins the test match, A will pay B Rs 100 and if it loses B will pay Rs 100 to A. This is a wagering agreement, and nothing can be recovered by winning party under the agreement.

In India except Mumbai, wagering agreements are void. In Mumbai, wagering agreements have been declared illegal by the Avoiding Wagers (Amendment) Act, 1865. Therefore, in Mumbai a wagering agreement being illegal, is void not only between the immediate parties, but taints and renders void all collateral agreements to it.

Thus, A bets with B and loses, applies to C for a loan, who pays B in settlement of A’s losses. C cannot recover from A because this is money paid “under” or “in respect of” a wagering transaction which is illegal in Mumbai. But in respect of India such a transaction (i.e., betting) being only void, C could recover from A. Of course, if A refused to pay B the amount of the bet that he has lost, B could not sue A anywhere. Again, where an agent bets on behalf of his principal and loses and pays over the money to the winner, he cannot recover the money from his principal, if the transactions took place in Mumbai, but elsewhere he could recover. But if the agent wins, he must pay the winnings to the principal, as this money was received on behalf of the principal.

RESTITUTION

 

When a contract becomes void, it is not to be performed by either party. But if any party has received any benefit under such a contract from the other party, he must restore it or make compensation for it to the other party.

A agrees to sell to B after 6 months a certain quantity of gold and receives Rs 500 as advance. Soon after the agreement, private sales of gold are prohibited by law. The contract becomes void, and A must return the sum of Rs 500 to B.

CONTINGENT CONTRACT

 

A contingent contract is a contract to do or not to do something, if some event collateral to such contract, does or does not happen.

For example, A contracts to sell B 10 bales of cotton for Rs 20,000, if the ship by which they are coming returns safely. This is a contingent contract. Contract of insurance and contracts of indemnity and guarantee are popular instances of contingent contracts.

Rules regarding Contingent Contracts

 

(a)               Contracts contingent upon the happening of a future uncertain event cannot be enforced by law unless and until that event has happened. If the event becomes impossible, the contract becomes void.

A contracts to pay B a sum of money when B marries C, C dies without being married to B. The contract becomes void.

(b)               Contracts contingent upon the non-happening of an uncertain future event can be enforced when the happening of that event becomes impossible and not before.

A contracts to pay B a certain sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.

(c)               If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies.

A agrees to pay B Rs 1,000 if B marries C. C marries D. The marriage of B to C must now be considered impossible although it is possible that D may die, and C may afterwards marry B.

(d)               Contracts contingent on the happening of an event within a fixed time become void if, at the expiration of the time, such event has not happened, or if, before the time fixed, such event becomes impossible.

A promise to pay B a sum of money if a certain ship returns with in a year. The contract may be enforced if the ship returns within the year and becomes void if the ship is burnt within the year.

(e)               Contracts contingent upon the non-happening of an event within a fixed time may be enforced by law when the time fixed has expired and such event has not happened or before the time fixed has expired if it becomes certain that such event will not happen.

A promises to pay B a sum of money if a certain ship does not return within the year. The contract may be enforced if the ship does not return within the year or is burnt within the year.

(f)                Contingent agreements to do or not to do anything if an impossible event happens, are void, whether the impossibility of the event is known or not known to the parties to the agreement at the time when it is made.

A agrees to pay Rs 1,000 to B if two straight lines should enclose a space. The agreement is void.

Posted in: