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.
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