Contract Law I
Contract Law I
Contract Law I
When a person, without expressing his final willingness, proposes certain terms on which he wishes to negotiate, he is merely
making an invitation to proposals.
In the case of Harvy vs Facie 1893, plaintiff telegraphed, "Will you sell Bumper Hall pen? Send lowest price." Defendants
responded with "Lowest price of Bumper Hall Pen, $900". Plaintiffs then sent, "we agree to buy bumper hall pen for $900".
However, defendants refused to sell. It was held that defendants had not signified a final willingness to sell. They had only told
the lowest price. This, it was only an invitation to proposal and not a proposal.
In the case of Pharmacutical Society of GB vs Boots Cash Chemists Ltd. 1952, it was held that display of goods is also an
invitation to sell even if it is a self service shop.
MC Pherson vs Appanna 1951 - Proposal to buy property at 6000/- was replied with, " won't accept less than 10000". This
was not considered a proposal but an invitation to proposal.
Auctions : Announcement to hold auction is not an offer. Highest bid is nothing more than an offer to buy.
Definiteness of proposal: "Cocks and Hens - 25s each" is not an offer to sell.
Essential Elements
Section 10 - All agreements that are made by people competent to contract, with free consent, for a lawful object and lawful
consideration and not expressly declared to be void are contracts.
2. There must be an intention to contract. Balfour vs Balfour 1919 - Husband promised to send money to wife. Not a
contract because there was no intention to contract.
3. There must be an agreement to do or to abstain from doing something.
4. The agreement must involve a lawful purpose, which means - agreement must not be against marriage, trade, legal
proceedings, or it must not be a wagering agreement or must not be expressly prohibited by law.
5. Agreement must not be uncertain
6. Must not be impossible. Sec 56.
7. Free consent - not vitiated by coercion, undue influence, fraud, or misrepresentation.
8. Parties must be competent to contract.
9. Lawful consideration.
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10. Lawful object.
11. Legal formalities
12. Must be enforceable by law, which means must not be immoral or against public policy.
Q3. What is a general offer? How is a contract created through general offer? Refer to
leading cases.
An offer may be made to the world at large. Such an offer is a general offer. However, a contract is not done with the whole
world but only with the person who comes forward and accepts the offer. The acceptance might be express or implied.
As per Anson, "An offer need not be made to an asertained person, but no contract can arise until it is accepted by an
ascertained person".
Creation of the contract - If the person performs the conditions of the offer. Thus, a person who finds a lost dog fulfills the
condition of the prize money and thus a contract with the owner of the dog is created.
General Offer of Continuing Nature - Some offers such as finding a lost object close when it is accepted by the first person.
However, some offers, such as in the Carllil case, it can be accepted by any number of persons until the closing date of offer
or until it is retracted.
Q4. Describe the law relating to communication of proposals, their acceptance and their
revocation
Section 2(a) of Indian Contract Act 1972 says that when a person signifies his willingness to do or to abstain from doing
something to another, with a view to obtaining the assent of that another, he is said to make a proposal. Further, section 2(b)
says that when the person to whom the proposal is made signifies his assent, the proposal is said to be accepted. The
important point to note here is that the party making the proposal or the party accepting the proposal must "signify" their
willingness or assent to the other party. Thus, a promise cannot come into existence unless the willingness or assent is
communicated to the other party. Further, even the revocation, if any, must be communicated to the other party for it to take
effect. Therefore, communication is the most critical aspect in the making of a contract.
Communication
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• Communication of a proposal is complete when it comes to the knowledge of the party to whom the proposal is
made.
For example, if A sends a proposal in the mail to B and if the mail is lost, it can be held that the communication of the proposal
is not complete. In the case of Lalman vs Gauridatta 1913, it was held that the reward for the missing child cannot be claimed
by a person who traced the child without any knowledge of the announcement. There was no contract between the two in the
first place because the proposal never came to the knowledge of the person who found the child and thus he could never
accept it.
• Communication of the acceptance is complete, as against the promisor, when it is put in course of transmission to
the promisor so as to be out of the power of the acceptor, as against the acceptor, when it comes to the knowledge
of the promisor.
For example, as soon as B drops a letter of acceptance in mail back to A, A is bound by the promise. However, B is not bound
by it unless A receives the acceptance letter. In the case of Adams vs Lindsell 1818, it was held that a contract arose as soon
as the acceptance was posted by the acceptor. In this case, the plaintiff received the offer to sell wool on 5th and they posted
an acceptance, which was received on 9th by the defendants. The defendants, however, had already sold the wool on 8th.
The court observed that the contract must arise as soon as the acceptance is posted and is gone out of the reach of acceptor
otherwise this will result in an infinite loop.
• Communication of a revocation is complete as against the party who makes it when it is put in course of transmission
to the party to whom it is made, so as to be out of the power of the party who makes it; as against the party to whom
it is made, when it comes to the knowledge of the party to whom it is made.
For example, if A sends a letter revoking his proposal, it will be complete against A as soon as the letter is dropped in the
mailbox and is out of his control. However, the revocation will be held complete against B only when B receives the letter.
Further, if B revokes his acceptance by telegram, it will he deemed complete against B as soon as he dispatches the telegram.
It will be held complete against A, when A receives the telegram.
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○ by the lapse of prescribed time in the proposal for acceptance or if no time is prescribed, by the lapse of a
reasonable time in communication of the acceptance.
○ by the failure of the acceptor to perform a condition precedent to acceptance.
○ by death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the
acceptor before acceptance.
Acceptance
Section 7 specifies that an acceptance must be absolute and unqualified. A partial acceptance or a clarification regarding a
proposal, or specifying a condition on acceptance is no acceptance.
In the case of Hyde vs Wrench 1840, an offer was made to sell a farm for #1000, which was rejected by an plaintiff, who
counter offered #950 for it. This was rejected by the defendant, upon which the plaintiff agreed to pay #1000. However, it was
held than the defendant was not bound by any such second acceptance.
Section 7 further says that the acceptance must be in some usual and reasonable manner, unless the proposal prescribes the
manner in which the acceptance should be made. If the proposal prescribes the manner, and if the acceptance is not done in
that manner, the proposer may insist that the acceptance be made in the manner prescribed, and if he fails to do so, he
accepts the acceptance. Thus, if the acceptance is sent by any way other than what is prescribed by the proposal, the
proposer must reject it in a reasonable time otherwise the proposer accepts it. This is markedly different from English law
where a proposal must be accepted in the manner required in the proposal otherwise, the acceptance is invalid. In the case of
Elliason vs Henshaw 1819, it was held that an acceptance sent by mail instead of through the wagon that brought the offer,
was not valid.
Section 8 specifies that a proposal is accepted when the acceptor performs conditions prescribed for the acceptance or when
he accepts the consideration given along with the offer for a reciprocal promise. When acceptance consists of an act as in the
case of State of Bihar vs Bengal C & P Works 1954, it was held that, when an order is sent for goods, the posting of goods
itself is equivalent to acceptance. No further communication of acceptance is necessary.
In the case of Carlill vs Carbolic smoke ball co 1893, it was held that, purchasing and consuming the medicine performs the
condition of the proposal.
1. Acceptance must be from a person to whom the proposal was made. In the case of Powel vs Lee 1908, it was held
that communication of an acceptance from an unauthorized person is invalid.
2. Acceptance must be signified to the proposer. In the case of Felthouse vs Bindley 1863, it was held that unless an
acceptance is given to the offerer, it is no acceptance.
3. It is required that there be an act that signifies the acceptance. As held in the case of Bhagvandas Goverdhandas
Kedia vs Girdharilal Pursottamdas & Co SC AIR 1966, for an acceptance to be completed, a mere mental decision
is not sufficient. An external manifestation of the decision is a must.
Communication and acceptance of General Offers
A general offer, such as an advertisement for the sale of an article at a fixed price, or to give prize to the one that does
something first, is not made to a particular person. Whoever the contract is done with the person who responds or who does
the task first. Communication of such as offer is done through public media such as a newspaper. S general offer can be
perpetual or end as soon as the condition is fulfilled.
No explicit acceptance of such offers is usually required. Performing the conditions specified in the offer acts as the
acceptance of the offer. For example, in the case of Carlill vs Carbolic Smoke Ball Company 1893, it was held that it was a
general offer and anybody who fulfilled the condition was eligible for the $100 compensation as advertised.
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Q5. "An agreement enforceable by law is a contract" as per section 2(h) of Indian
Contract Act 1872 but "agreements enforceable by law have been defined in section 10".
Discuss the statement. Write essential elements of a valid contract.
In our regular day to day life we make several comments and statements. We say several things to people whom we talk to.
Most of these are not with any intention to create any legal obligation. For example, if we say to someone that we will go to
lunch with him, it is not a legal obligation. But some, which are related to business or civil matters, are understood to be in a
serious mood and have a potential to be legally enforceable. For example, when we hire an Auto-rickshaw for going from point
A to point B, we are legally bound to pay and the driver is legally bound to take us from A to B. Indian Contract Act 1872
defines these activities in precise terms in Section 2.
Definition of Terms
Sec. 2 (a) When a person signifies to the other, to do something or to abstain from doing something, with a view to obtaining
the assent of that other to such act or abstinence, he is said to make a Proposal.
Sec. 2 (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. An
accepted proposal becomes a promise.
Sec. 2 (c) The person making the promise is called Promisor, while the person accepting the promise is called Promisee.
Sec. 2 (d) When, at the desire of the Promisor, the Pomisee or any other person has done or abstained from doing, or does or
abstains from doing, or promises to do or abstain from doing, something, such act or abstinence is called a consideration for
the promise.
Sec. 2 (e) Every Promise and every set of Promises forming a consideration for each other, is an Agreement.
Sec. 2 (f) Promises which form the consideration or part of consideration for each other are "Reciprocal Promises".
Sec. 2 (g) An agreement not enforceable by law is void.
Sec. 2 (h) An agreement enforceable by law is a Contract.
Sec. 2 (i) An agreement that is enforceable by law at the option of one or more of the parties thereto but not at the other or
others is a voidable Contract.
Sec. 2 (j) A Contract that ceases to be enforceable by law becomes void when it ceases to be enforceable by law.
From sec 2(e) and 2(h), it is clear that Agreement and Contract are two different things. For an agreement to become a
contract, it has to be enforceable by law.
Section 10 states that all agreements that are made by free consent of the people who are competent to contract, for a legal
object and legal consideration, and are not hereby expressly declared to by void, are contracts and are thus legally
enforceable. Thus, there are five factors that determine whether an agreement can be legally enforced or not. These are
discussed below:
1. Competency of the people doing the agreement. (What do you understand by competency to contract?
Who are competent to contract? What protections are offered to minors?)
All the parties doing the agreement must be competent to contract. Section 11 determines who are competent to contract. As
per this section, person who has attained the age of majority according to the law to which is subject, who is of sound mind,
and who is not prohibited/disqualified from contracting by law to which he is subject. Majority is 18 years except when a
guardian is appointed by the court in which case it is 21 yrs.
In the case of Mohoribibee vs Dharmodas Ghosh in 1903, a minor had taken a loan and then he sued to avoid the contract.
Privy Council council held that any contract with a minor is void ab initio and so the loaner cannot get any money that he gave
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as advance back. This rule is adopted all over India whether or not it benefits the minor.
In the case of Mir Sarwarjan vs Fakhruddin Mohd. Chaudhary 1912, a contract to purchase a property was done on behalf
of minor. It was held that the minor could not sue for getting the possession of property.
However, since in today's times minors are coming a lot in public life, it is not always possible to consider an agreement with a
minor to be always void. Therefore, in the case of Srikakulam Sbhramanyam vs Kurra Sabha Rao 1949, Privy Council held
that a sale of inherited property of a minor to pay off inherited debt effected by the guardian was binding on the minor.
No liability in tort or in contract arising out of a contract - If a minor enters into a contract, he can neither be held liable in
contract nor in torts. In the case of Jennings vs Rundall 1799, when an infant hired a horse for riding short distance but rode
it for long distance resulting in injury to horse, he was not held liable because it was a contractual obligation. In the case of
Hari Mohan vs Dulu Mia 1934, Calcutta HC held minor not liable in tort for money lent on bond.
However, in absence of a contract, a minor may be liable in tort. Thus, in the case of Burnard vs Haggis 1863, when a minor
"borrowed" a mare only for riding and then lent it to a friend who jumped her and killed her, he was held liable in tort.
Doctrine of restitution - If a minor obtains property or goods by misrepresenting his age, he can be forced to return it but only
as long as the goods are traceable in the minor's possession. This is called doctrine of equitable restitution. If the minor sells
or converts the property, the value of the goods cannot be retrieved because that would amount to enforcing a void contract. In
the case of Leslie vs Sheill, a minor got 400 pounds from money lenders by misrepresenting his age. The money lenders
could not recover it under any of fraud, quasi-contract, or doctrine of restitution. This was followed in the case of Mohoribibee
vs Dharmodas Ghosh as well..
Beneficial Contracts - In contract where a minor has already supplied consideration, the minor can enforce the contract.
Thus, in the case of Ulfat Rai vs Gauri Shakar 1911, it was held that a minor can sue to take possession of a property for
which he has already paid. But where the contract is still executor and consideration has not been given, the principle adopted
in Mohoribibee will prevail. Thus, in the case of Raj Rani vs Prem Adib 1949, it was held that the film producer was not bound
by a contract with minor's father to give a role to minor in his movie. This is because minor could not be forced to give
consideration and father had not given any consideration. However, a contract of marriage of a minor enter into by the father is
not void for want of consideration because it is for the benefit of the minor.
Liabilities for necessities (Section 68) - If a minor is supplied with necessaries that are in accordance with his living
standard, the supplier can get paid through the minors property.
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2. Consent and Free Consent
Section 13 defines that two or more people are said to consent when they agree upon the same thing in the same sense.
However, many a times, a consent may not reflect the true intentions of a party. For example, one party may give consent
because of being financially pressured or criminally threatened. Thus, such a consent should not make the agreement
enforceable. Section 14 determines what factors can vitiate a consent and when a consent is considered free of any
complication that affects the enforceability of an agreement . It states that a consent that is not obtained through coercion,
undue influence, fraud, misrepresentation, or mistake subject to section 20, 21, and 22, is a free consent.
a. Coercion (Sec 15): Coercion is committing or threatening to commit any act forbidden by the Indian Penal Code, or
unlawful detaining or threatening to detain the property, to the prejudice of any other person, with an intention to cause that
other person to enter into an agreement. It is immaterial whether IPC is or is not in force where coercion is applied. Thus, an
act that is unlawful as per IPC but not as per England law and that has been used to induce the consent, will be considered
coercion.
A clear example would be force someone to consent on gun point or by hurting or threatening to hurt. In Chikham Amiraju vs
Chikham Seshamma Madras HC 1912 held that threatening to commit suicide is coercion. In the case of Astley vs
Reynolds 1771, the plaintiff had pledged his plate for #20 and when he went to claim it back, the defendant asked for #10
more as interest. To redeem his plate, the plaintiff paid the money but later sued to recover #10. The court allowed it.
b. Undue Influence (Sec 16): Undue influence occurs when because of the nature of the relationship that exists between the
parties, one party is able to dominate the will of the other and uses this dominance to obtain unfair advantage over the other. A
person is in a dominant position when he holds a real or apparent position of authority for example manager employee, or
stands in a fiduciary relationship with the other for example money lender and loanee. A person could also be in a dominant
position if the mental capacity of other party is temporarily or permanently effected due or illness, age, or distress.
The burden of proof that undue influence has not occurred is on the person who is in the dominant position, if the agreement
is unconscionable otherwise it is on the party that alleges undue influence.
Examples:
Father (A) give some money to son (B) when B was a minor. Upon majority, A makes B execute a bond for a much larger
amount.
A person (A) who is old and sick is induced into paying an unreasonably large amount of sum to his doctor (B).
A village moneylender (A) lends money to a villager (B), who is already in debt, at a very high interest. It lies on A to prove
that he has not used undue influence to induce the contract.
At a time of financial crises, a bank manager gives loan to a person at a substantially higher rate. This is not considered to
be undue influence but a simple business transaction.
In Mannu singh vs Umadat Pandey Allahbad HC 1890, a guru induced his devotee into giving all the devotee's property to
himself. This was considered undue influence.
c. Fraud (Sec 17): When a person intentionally tries to cheat another person, it is called as fraud in a general sense. Section
17 defines fraud precisely as such - Fraud means and includes any of the following activities done by a party or by his
connivance or by his agent, with an intent to deceive another party or his agent, or as to induce the other party to enter into the
contract.
1. the suggestion of a fact, of that which is not true, by the one who does not believe it to be true.
2. active concealment of a fact by one who knowledge or belief of the fact.
3. making a promise without an intention to perform.
4. any act fitted to deceive
5. any such act or omission that the law declares to be fraudulent.
Mere silence as to facts likely to affect the willingness of a person to enter into the contract is not fraud unless, according to
the circumstances of the case, it is the duty of the person keeping silence to speak or unless his silence itself is considered as
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speech.
Examples:
A sells a horse to B by auction without telling B that horse is unsound. This is not fraud.
B is A's daughter who has just come off age, then it is A's duty to tell B about the fact. So this is fraud.
B says to A, "if you do not deny it, I will assume that horse is sound". Here, silence is considered as speech so this is fraud.
A and B, being traders, enter into a contract. A has private pricing information that will cause B to not enter the contract. A is
not bound to inform this to B. This is not fraud.
Concealing the disease history while obtaining insurance is fraud because it is the duty of the insured to give this information
to the insurer.
Derry vs Peek 1889 was not fraud, because the company honestly believed in what they said and there was no intentional
misrepresentation, which is the essence of fraud.
Sri Krishan vs. Kurukshetra Univ., AIR 1976 SC the student was not found to be fraud. Even though he knew that he was
short on attendance, he did not disclose it on examination form. He was let off because 'mere silence' is not fraud.
d. Misrepresentation (Sec 18): When a person makes an unwarranted statement, however innocently, which the person
believes to be true, and which turns out to be false, it is misrepresentation. Any breach of duty, without an intention to deceive,
that gains an advantage to the person committing it or to the person claiming under him, by misleading the other person to his
prejudice or to person claiming under him, is also misrepresentation. Further, causing a party to an agreement to make a
mistake regarding the subject matter of the agreement, however innocently, is also misrepresentation.
Examples:
A claimed to B that the ship being considered under an agreement was below 2800 tonnage. But in reality it turned out to be
more than 3000 tonnage. It was held to be misrepresentation and B was entitled to avoid the contract. Oceanic Steam
Navigation vs Soonderdas Dharmasey. Bom HC 1980.
A land was purchased expressly for constructing duplexes. The seller claimed that he saw no permissioning problems.
However, later on the permission was denied. This was held to be misrepresentation and even though the claim was innocent,
the buyer was allowed to avoid the sale
Where the seller of a car stated the mileage of the car to be 20000, which turned out to be wrong, the buyer of the car was
allowed to recover compensation for misrepresentation.
Section 19 declares that a contract induced due to coercion, fraud, or misrepresentation is voidable at the option or the party
whose consent was obtained by coercion. An exception is that when the consent is obtained by silence fraudulent under sec
17, and when the affected party had the means of discovering the truth with ordinary diligence. In this case, the contract is not
voidable. Further, if the fraud or misrepresentation did not cause the party on which they were practiced to give consent, then
the contract will not be voidable.
Section 19A declares that the party whose consent was obtained by undue influence has the option to avoid the contract.
Some other agreements that satisfy all the four conditions given is section 10 can still be void. Such agreements are:
Sec 20 : when both the parties are under mistake as to the matter of fact, the agreement is void.
Sec 24 : agreement in which any part of a single consideration for one or more objects, or any consideration or part of a
consideration out one or more considerations for a single object is unlawful, is void.
Sec 25 : agreement without any consideration except if it is registered, or a promise to pay for something already done, or is a
promise to pay time barred debt.
Sec 26: agreement in restraint of marriage.
Sec 27 : agreement in restraint of trade.
Sec 28 : agreement against legal proceedings.
Sec 29 : agreement that is uncertain
Sec 30 : agreement by way of wager.
Sec 56 : agreement to do impossible act is void. If an act becomes impossible after the contract it done, the contract becomes
void when the act becomes impossible to do.
Legal formalities: Certain agreements such as agreement for the sale of immovable property, or agreement for insurance
become a contract only when they are properly registered. For such agreements, the procedure prescribed by law must be
followed to make them a contract.
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Coercion
Section 15 defines coercion as follows -
Coercion is committing or threatening to commit an act that is prohibited by IPC, or any unlawful detaining or threatening to
detain, any property, to the prejudice of any person whatever, with an intention of causing any person into entering a contract.
It is immaterial whether IPC is in operation at a place where such act took place.
Illustrations
A threatens B at gun point to sell his land to A.
A while in an English ship on high seas enter into a contract with B by intimidating B that is unlawful in India. Later on A sues B
of breach of contract in Calcutta. This is coercion.
Chikham Amiraju vs Chikham Seshamma 1912 - Husband threatened to suicide unless wife gave property to his brother.
This was held coercion.
Askari Mirza vs Bibi Jai Kishori 1912 - Threatening a criminal prosecution is not coercion per se. It could be coercion if the
threat is to file false charges.
Astley vs Reynolds 1731 - Plaintiff had pledged his place for $10. When he went to take it back, pledgee asked for $10 more.
He paid the additional $10, but sued to get recover it back. It was held coercion.
Andhra Sugars vs State of AP 1968 - A factory was bound to take the sugar cane from the farmer under an act. This was
not held to be coercion.
Undue Influence
Section 16 defines Undue Influence as follows -
A contract is said to be induced by Undue Influence when the relationship between the parties is such that one party is able to
dominate his will on the others and uses that position to gain an unfair advantage. A person is deemed to be in the position of
dominating the will of the other if -
• if the person holds a real or apparent position of power
• If stands in a fiduciary relationship with the other.
• if the other person is mentally weak because of sickness, disease, or economic distress
It further says that if a contract is unconscionable the burden of proof lies of the person in whose favor the contract is to prove
that it was not induced by Undue Influence, other wise the burden of proof is on the one who alleges it.
Illustrations
A advances some money to his minor son B. Upon majority, A makes B sign a contract to pay back more than the sum
advanced.
A is sick and physically feeble and is attended by his nurse B. B influences A to enter a contract to pay him an unreasonable
amount for his professional services.
A being in debt of B, the village money lender goes to B for getting a loan. B gives the loan on terms that are unconscionable.
It lies on B to prove that undue influence was not used to create the contract.
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A applies for loan to a banker B while there is a stringent crises in the money market. B declines to give the loan only at a very
high rate. This is not coercion but simple business transaction.
Fiduciary Relation
Every relationship of trust and confidence is a fiduciary relationship.
Solicitor - client, doctor - patient, spiritual guru - devotee.
Mental Distress
Ranee Annapurni vs Swaminatha 1910 - A poor widow who was in dire need to money to establish her right to maintenance,
was persuaded by a money lender to take loan at the rate of 100%. It was held to be undue influence while a person was
under mental distress and the court reduced the rate to 24%.
Burden of Proof - The person must show that the other party was in position of dominating the will and that he used that
position to gain advantage.
Lancashire Loans Ltd. vs Black 1934 : It was held that a daughter may not necessarily be independent and may be under
the influence of the mother.
1. Unconscionable bargains
Wajid Khan vs Raja Ewaz Ali Khan 1891 - An old illiterate woman conferred upon her managing agent a bug pecuniary
benefit without any valuable consideration under the guise of a trust. This was held to be under undue influence.
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collected rents in respect of her house. She was held not a pardanashin woman.
Fraud
Section 17 defines fraud as follows:
Fraud means and includes any of the following acts done by a party to a contract, or by his connivance, or by his agent, to
decieve another party thereto or his agent, or to induce him to enter the contract. Such acts include-
1. the suggestion, as a fact, that of which the party knows or has reason to believe to be not true.
2. active concealment of a fact by the one who knows or has reason to believe to be true.
3. Making a promise he does not intend to fulfill.
4. any act fitted to deceive.
5. any act or omission as the law specifically declares to be fraudulent.
Illustrations
A sells, by auction, to B a horse which A knows to be unsound but does not tell anything to B. This is not fraud.
B is A's daughter who has just come of age. In this case, it is A's duty to tell B that the horse is unsound.
B says to A, "If you do not deny it, I will assume that the horse is good.". Here, A's silence is equivalent to speech.
A and B are both traders and A has private information about change in prices, which would affect B's willingness to proceed
with contract. This is not fraud.
Suggestion of a fact
Derry vs Peek 1889, it was held not to be fraud because the defendants truly believe that permission would be granted by the
board of trade because parliament had approved it.
Active concealment
Active concealment is different from passive concealment. Passive concealment merely means silence as to material facts.
However, active concealment means making efforts to prevent the facts from reaching a party and this is fraud.
B R Chaudhary vs IOC 2004 - A dealer concealed his previous employment under govt. to get dealership. SC allowed the
contract to be terminated.
Silence may become fraud in certain cases - Duty to speak, Half truth, change of circumstances.
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Misrepresentation
Section 18 defines misrepresentation as follows:
Misrepresentation means and includes
1. making a statement in a manner that is unwarranted by the information of the person making it, of that which is not
true, though he believes it to be true.
2. any breach of duty which, without an intention to deceive, gains an advantage to the person committing it or any one
claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him.
3. causing, however innocently, another party to commit a mistake as to the substance of the thing which is the subject
of the agreement.
Thus, when there is no intention to deceive but still a wrong statement has been made, or a duty has not been performed, or a
mistake has been induced, it is misrepresentation.
Unwarranted Statements
Oceanic Steam Navigation vs Soonderdas Dharmasey 1980 - the defendants charted a ship from a company. The plaintiff
had made a claim that the ship was not more than 2800 tonnage even though the plaintiff had not known about it. In reality the
ship turned out to be more than 3000 tonnes. It was held to be misrepresentation and the defendants were allowed to avoid
the contract.
Breach of Duty
Thake vs Maurice 1986 - Husband was not informed of the risks and failure rate of vasectomy before the operation. Later on
wife became pregnant and the hospital was held guilty of misrepresentation and was ordered to pay compensation for all the
pains and expenses of delivery.
Expression of Opinion
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Merely expressing an opinion is not misrepresentation.
Bisset vs Wilkinsen 1927 - The seller was aware that the land was being purchased for sheep farming and he expressed an
opinion that the land could carry 200 sheep. It turned out that the land was no suitable for sheep farming. The seller was not
held liable.
Section 19 says that any contract which is induced by Coercion, Fraud, or Misrepresentation is voidable at the option of the
party whose consent was caused due to coercion, fraud, or misrepresentation.
However, if the consent is obtained by misrepresentation of a fact or silence amounting to fraud, the contract is not voidable if
the party whose consent was so caused was able to discover it with due diligence.
Also, a fraud or misrepresentation that did not cause a party to give consent, does not render a contract voidable.
Section 19 A says that when an agreement is created due to a consent induced by undue influence, such an agreement is a
contract voidable at the option of the contract whose consent is so caused.
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Law of Conract - I LLB
Q7. What are different types of mistakes? Explain their effects on the validity of the
contract.
There can be two types of mistakes - a mistake that misleads the parties to an agreement to consent and a mistake that
defeats the consent itself.
For example, A contracts with B for purchasing goods coming by a ship. However, unknown to both, the ship has already
drowned at the time of the contract. In this case, there was a mistake of a fact, which lead the parties to consent. This type of
mistake is covered by sections 20, 21, and 22.
In another example, A enters into a agreement with B thinking that he is C. In this case, there was no consent from A at all
because of mistake in identities. As another example, A agrees to sell to B his stock and B agrees to pay 5000Rs for A's stock.
However, A was thinking about his livestock (i.e. cattle) and B was thinking about shares of a corporation. In this case, there
was no consent because they agreed on the same thing but not in in the same sense. These mistakes defeat the consent
itself. There is no real consent here at all. This type of mistakes is covered by section 13, which says that when two persons
agree to the same thing in the same sense, they are said to consent. Agreement on the same thing in the same sense is true
consent and is called consensus ad idem. If there is no consensus ad idem, there is no agreement, and hence no contract.
Section 20 says that an agreement is void when both the parties are under mistake as to matter of fact that is essential to the
contract.
Illustrations
A agrees to buy a horse from B. At the time of agreement the horse was dead but no one knew about it. The agreement is
void.
A, being entitled an estate for the life of B, sells it to C. B was dead at the time of contract but both the parties were ignorant of
the fact. The agreement is void.
Section 21 says that a contract is not voidable if it was caused by mistake as to law in India. However, mistake as to law
outside India has the same effect as mistake of fact.
Section 22 says that contract is not voidable merely because one of the parties was under mistake as to fact.
Thus, for an agreement to be voidable due to a mistakes three conditions are required -
1. Both the parties are under mistake.
2. Mistake is of a fact.
3. fact is essential to the agreement.
Which facts are essential to the agreement?
This depends on the nature of the promise in each case. Something that is remotely linked to the agreement is not an
essential fact. For example, A agrees to hire B for taking his goods to a city. They came to know later that there is no electricity.
This fact is not essential to the contract. However, it they come to know later that all transporters are on strike, this would be a
fact essential to the agreement.
There are three types of things that are essential facts to an agreement - identity of the parties, identity and nature of the
subject matter of the contract, and nature and content of the promise itself.
Mistake as to identity
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In cases where identity of the offeree is important to the offerer, a contract cannot arise in the case of mistake as to identity. In
the case of Said vs Butt 1920, the plaintiff got the tickets for a show through a friend but the defendant, the manager of the
theater did not allow him to enter. It was held that since the manager did not give the ticket for the plaintiff, there was no
contract between them.
Limitations
Both Parties
According to Section 20 both the parties must be under a mistake for the agreement to be void. This is further supplanted by
article 22 that an agreement is not void if only one party is under mistake.
Erroneous Opinion
Explanation to section 20 says that an erroneous opinion regarding the subject matter does not render an agreement void.
This was reflected in the case of Smith vs Huges.
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Law of Conract - I LLB
Q8. What is a lawful consideration? When would a consideration or object of an
agreement unlawful? Explain with illustration.
Section 23 says that a consideration or an object of an agreement is lawful unless,
1. it is prohibited by law.
2. it is of such nature that, if permitted, defeats the provisions of a law.
3. it is fraudulent.
4. it involves or implies injury to another person or property of another.
5. it is immoral or against public policy.
Illustrations
1. A promises to sell his house to B for 10000 Rs. The object is the house and the consideration is 10000/- both are lawful.
2. A promises to pay B 1000/- if C fails to pay his debt to B within next 6 months. B upon this promise give 6 more months to C
repaying debt.
3. A promises to B to superintend B's manufacture of Indigo, which is lawful, as well as a trade in illegal items for a monthly
salary of 5000/. Unlawful.
4. A promises to pay 5000/- per month to B to clean his house and live with him in an adulterous relationship.
So on...
Forbidden by Law -
• Means any law in force, including Hindu and Muslim personal laws.
• Koteswar Vittal Kamath vs K Rangappa Baliga 1969 SC - Sale of liquor without license is void and prices paid is
irrecoverable.
• Mannalal Khetan vs Kedar nath Khetan 1977 SC - If the intention of the law is to forbid something in public interest,
an agreement that contravenes it is void. However, if the intention is to merely regulate something, the contract may
not be void even if the parties have to pay a penalty.
Defeats the provisions of a law
1. Fateh Singh vs Sanval Singh 1878 - An accused was required to put a surety of 5000/- for good behavior. He
deposited the money with defendant and asked the defendant to become surety. Ofter the period of surety, the
accused sued to recover the deposit. Agreement was held void.
2. Regazzoni vs K C Sethia 1956 - Two parties made an agreement that one will supply jute to another in an African
country so that it can then be resold in another country to which export of jute bags was prohibited. One party sued
the other for breach of contract. Agreement was held void.
Fraudulent
1. Scott vs Brown Doering McNab and Co 1891 - A trader asked the broker to purchase a stock of a company at a
premium to create an impression in people that the company was worth paying a premium. Later he discovered that
the broker sold his own shares to him. The trader sued to revert the transaction. Held void because it was done to
defraud people.
Injury to person or property
1. Ram Sarup vs Bansi Mandar 1915 - An agreement said that a person would work for another person for two years
for borrowing rs 100. In case of default, he was to pay an exorbitant interest and principal at once. This was held
indistinguishable from bonded labor and this was injurious to person. Held void.
Immoral
1. What is moral depends on the standards of morality prevailing at a particular time and approved by the courts.
2. Interference in marital relations is immoral.
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3. Dealings with sex workers
4. Allice Marry Hill vs William Clark 1905 - Adultery involving a married person is not only immoral but illegal and any
contract or promise related to that cannot be enforced.
Public Policy
1. Under Public Policy, sometimes the court may refuse to enforce a contract for the benefit of public interest.
2. Ratanchand Hirachand vs Askar Navaz Jung 1976 - J Reddy of AP HC observed, "The twin touchstones of public
policy are advancement of public good and prevention of public mischief and these are to be decided by the judges
not as a men of legal learning but as experienced and enlightened members of the society."
3. Trafficking in public offices, trading with enemy, interference with administration of justice, champerty, marriage
brokerage contracts, unfair or unreasonable dealings - when parties are not on equal footing.
Understanding of a lawful consideration is important because as per section24, an agreement is void if any part of a single
consideration for one or more objects, or if any one or any part of any one of several considerations for a single object is
unlawful.
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Q9. "An Agreement without consideration is void." Explain this rule and state
exceptions if any.
Indian Contract Act 1872 in section 2(e) says that every promise and every set of promises that form a consideration for each
other is an agreement. Thus, it is clear that the formation of consideration for a promise or promises is a key ground on which
a promise becomes an agreement. There cannot be an agreement if there is no consideration. Section 25 of the act says the
same thing in precise terms and also gives three exceptions when an agreement without consideration is a valid contract:
However, in Indian law, Section 25 (2) explicitly says that a promise to compensate a person who has voluntarily done
something for the promisor is binding. Thus, if B saves A from drowning and if A promises to pay B, then A is bound by the
promise.
Further, in the case of a past service on request without any promise to pay, it is construed that there is an implied promise to
pay only the amount of payment is not fixed. Thus, a promise to pay for a past service upon request is a valid contract.
In the case of Sri Sandhi Ganpatji vs Abraham, it was held that services rendered to a minor, which were continued after his
majority upon his request is a valid consideration for a promise to pay.
Debi Radha Ranee vs Ram Dass - Forbearance to sue to sue is a valid consideration.
However, a performance of a pre-existing contract with a third party was held a valid consideration. In the case of Shadwell vs
Shadwell, an uncle's promise to pay his nephew if he married some girl was held valid. This was held by MP HC in the case of
Gopal Co. vs Hazarilal Co AIR 1963.
Privity of Consideration
In India, the first rule is not followed at all. In fact section 2(d) specifically says that consideration can be provided by the
promisee or any other person. This was held in the case of Chinnaya vs Ramaya 1882.
Privity of Contract
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In the case of Tweddle vs Atkinson 1882, it was held by the privy council that the person who is not a party in the contract
cannot sue. SC in the case of MC Chacko vs State Bank of Travancore 1969 has adopted the same principle and held that
the since the bank was not a party to the contract between the father and the son, it cannot enforce the contract.
However, based on Privy Council's observation of the culture in terms of marriage and family relationship, in the case of Kwaja
Mohd. Khan vs Hussaini Begum 1910, some exceptions to this rule have been accepted.
1. Trust or Charge
When an agreement forms a trust for the benefit of a third person, the third person can enforce the agreement. This was held
in the case of Kwaja Mohd. Khan vs Hussaini Begum 1910 as well as in Rana Uma Nath Bakhs Singh vs Jung Bahadur
AIR 1938.
3. Acknowledgement or Estoppel
Where by the terms of a contract a party is to make payments to a third party and the party acknowledges this to the third
party, a binding obligation is created towards him. This was held in the case of Devraja Urs vs Ram Krishnaiya AIR 1952.
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Law of Conract - I LLB
Q11. Agreements in restraint of Trade are void. Explain with leading cases.
Section 27 "Agreement is restraint of trade, void" says thus,
Every agreement by which any one is restrained from exercising lawful trade, business, or profession of any kind is to that
extent, void.
Mahbub Chander vs Raj Koomar 1874 - Two shopkeeper entered into an agreement that one will pay the other to close his
business in that locality. One closed the shop but the other refused to pay. It was held that the agreement was void. Since the
wordings of section 27 do not do not use the word "absolute" as in section 28, even if the restraint is partial, it will be void.
Nordenfelt vs Maxim Nordenfelt Guns and Ammunition co ltd. 1894 - Inventor sold the goodwill of a gun company to a
buyer. The agreement was - Seller will not practice the same trade for 25 and the seller will not do any business that will
compete with the business carried on by the buyer at that time. It was held that the first part is valid because it is reasonable
but the second part is invalid because it is unreasonable.
English law tests reasonability while Indian law sees if it is allowed under statutory exceptions or exceptions created by judicial
decisions.
However, now such matters should be considered with respect to Monopolies and Restrictive Trade Practices Act 1969, which
forbids such collusions.
Freedom of Press
An agreement that puts a restraint of press not to publish on the conduct of a person is void because it is opposed to public
policy.
Restriction on Lease
Vidya Wati vs Hans Raj AIR 1993 - Lesor of a property can put a restriction on what kind of business can be done on the
property. It is an outlet of carrying business and not a restraint.
Exceptions
1. Sale of goodwill
2. Partnership : Under Partnership Act, partners of a firm may restrict their mutual liberty to do any trade other than within
their firm. An outgoing partner may also be restricted from carrying on similar trade for a period of time.
3. Trade Combinations : Companies doing business in the same field may regulate their trade practices for example opening
and closing time of business even if they marginally put restraint. However, restrain on employment are not allowed in disguise
of regulation.
Korus Mfg vs Koluk Mfg 1959 - Companies made an agreement that they would not hire anybody who has worked in the
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other company in past 5 yrs. Held void.
4. Exclusive dealing agreements
5. Restraint upon employees
Niranjan Shankar Golkari vs Century Spinning and Manufacturing Co 1976 - A company was offered collaboration by a
foreign company on the condition that they will maintain complete secrecy. A person was employed in the company on the
condition that he will not work for any other company in the same business for 5 years. SC held the agreement valid.
Exception - Any amount more than 500 rs can be paid to the winner or winners of any horse race.
Nothing in this section shall deem to legalize any transaction connected to horse racing to which provisions of section 294-A of
IPC apply.
Definition of wager was first given in Carlill vs Carbolic Smoke Ball Company 1892. It held that a wager contract is one in
which parties professing opposing views on the result of an uncertain event, mutually agree that depending on the outcome of
such event, one will pay or hand over a sum of money or other stake. Neither party has any other interest in the event other
than their stake that they may lose or win.
Essential elements -
1. Event must be uncertain : Outcome of an event cannot be predicted.
2. Each party must either win or lose depending on the result of an event
Baba Saheb vs Raja Ram 1940 : Two wrestlers agreed that if one fails to appear for a match he will pay Rs 500 to the other
and the winner will take Rs 1125 out of the gate money. Defendant failed to appear and the plaintiff sued for Rs 500. It was
held that it was not wager because had the defendant appeared for the match no one would have lost.
3. Parties should not have any control on the event
4. There should be no other consideration except the amount that one can win or lose - This is the difference between a
wagering agreement and an insurance agreement.
Speculative Transactions - An agreement to pay the difference between current market price and a speculative price on a
certain date is a wagering agreement. Such agreements are usually disguised as regular trade agreement and situation and
facts of the case has to be looked into to decide whether it is a wager or not. In the case of Kong Yee Lone vs Lowjee
Namjee 1901, a trader promising to deliver 199000 bags of rice while he had no such capacity was held a wagering
agreement.
Effects of wagering agreement - Such an agreement being void, it cannot be enforced by the court.
Collateral Transactions - Wagering agreement is only void but not necessarily illegal, thus any agreement such as a loan
given to a person to pay a wagering debt can be enforced.
Gherulal Parek vs Mahadeodas Maiya AIR 1959 - A partnership to participate in wagering agreement is not illegal and a
parter who paid for wagering loses could sue other partners for contributing proportional funds.
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Exceptions
1. Horse Race
2. Crosswords - Anything that requires skills to win. However, betting on a game being played by other people is wagering.
Moore vs Elphic 1945 - Literary competitions which involve skill and effort is made to select the best and most skillful
competitor are not wagers.
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Law of Conract - I LLB
The obligations may not necessarily arise from contract but may also arise from tort.
Section 10 of Specific Relief Act 1963 specifies the conditions in which a contract can be specifically enforced. These are as
follows -
1. When there exists no standard for ascertaining the actual damage caused by non-performance of the act agreed to
be done.
2. When the act agreed to be done is such that a compensation in the form of money would not afford adequate relief.
Unless contrary is proved, the court shall presume that
1. the breach of a contract to transfer immovable property cannot be adequately relieved by compensation in
money.
2. the breach of a contract to transfer a movable property can be so relieved except
1. when the property is not an ordinary article of commerce, or is of special value or interest to the
plaintiff or consists of goods which are not easily available in the market.
2. where the property is held by the defendant as the agent or trustee of the plaintiff.
Nivarti Govind Ingale vs R B Patil 1997 SCC - A woman took a loan from a relative and executed a deed of sale in favor of
the relative's minor son with an agreement of re-conveyance at the repayment of loan. This contract was held to be specifically
enforceable. The relative had sold the property off to a buyer. This decree was allowed to be enforced against such buyer also.
M S Madhusoodhanan vs Kerala Kaumudi Pvt. Ltd. 2003 SCC - Shares of a private company were held to be goods of
such a nature as are not easily obtainable in the market. Thus, SC allowed specific performance to be granted in such cases.
Section 11 says that specific performance can be enforced when the act agreed to be done is wholly or partly is in the
performance of a trust. An exception is that the contract must not be in excess of the power of a trustee.
Section 12 says that if, in the discretion of the court, only a small part of a contract cannot be specifically performed and if
such part can be alternatively compensated, the rest of the part can be specifically enforced.
According to Section 23, even if a contract includes a penalty or fixed amount of damages in case of default, its specific
performance can be ordered depending on the intention of the penalty. If the intention of the compensation for damages is to
secure the performance of the contract and not to give an alternative way of fulfilling the contract, it can be specifically
enforced.
This principle was adopted in the case of Manzoor Ahmed Magray vs. Ghulam Hasan Aram 1999 and M L Devender
Singh vs Syed Khaja 1973 by SC.
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Law of Conract - I LLB
Q15. What contracts cannot be specifically enforced?
Section 14 (1) of Specific Relief Act 1963 specifies the conditions in which a contract can be specifically enforced. These are
as follows -
b. when a contract runs into such minute and complex details or is dependent on personal qualifications or volition of
the defendant, or otherwise from its nature is such that a court cannot enforce specific performance of its material
terms.
Personal services such as painting, singing etc. cannot be specifically enforced. However, a contract to publish a
piece of music or to build a house can be specifically enforced because they are purely mechanical functions.
c. when a contract is in its nature determinable i.e. can be brought to an end under given conditions.
Illustration - A and B enter into a partnership to do certain business, without specifying the duration of the partnership.
This cannot be specifically enforced because if enforced, either A or B might at once dissolve the partnership.
A contract to employment is not specifically enforceable. The remedy in such cases is to sue for damages.
Indian Oil Corp. vs Amritsar Gas Agency 1991 - A contract for distributorship cannot be specifically enforced.
d. when a contract, the performance of which involves performance of continuous nature, which the court cannot
supervise.
Examples - An agreement to keep an airfield in operation, or an agreement by railway to keep signals operating.
Rayner vs Stone 1792 - A tenant's undertaking to cultivate a farm in a specific way was held to be not specifically
enforceable.
Section 14(2) - A contract to refer a present or future dispute to an arbitration cannot be specifically enforced.
Section 14(3) - A contract to execute a mortgage or furnish any other security for repayment of a loan, which the borrower is
not willing to repay at once.
Section 17 - A contract involving transfer of property when the party does not have the title or ownership of the property.
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Law of Conract - I LLB
Q16. Can the following be specifically enforced - a contract to give money on loan,
contract to write a book, contract to marry, an invitation to dinner, a contract to sell all
goods of a class that a party may require, a contract to run a franchised shop?
1. No, because as per 14 (1) (a), a contract that can be adequately compensated in money cannot be specifically enforced.
2. No, because as per 14(1) (b), an act that depends on personal skills or volition of a party cannot be specifically enforced.
Here, it depends on personal skills.
3. No, because as per 14(1) (b), an act that depends on personal skills or volition of a party cannot be specifically enforced.
Here, it depends on personal volition.
4. No, because as per 14(1) (b), an act that depends on personal skills or volition of a party cannot be specifically enforced.
Here, it depends on personal volition.
4. No, because as per 14(1) (b), a contract that is too complex to be supervised by the court cannot be specifically enforced.
5. No, because as per 14(1) (c), a contract that is determinable, i.e. can be ended, cannot be specifically enforced. Here, a
franchisee agreement can be terminated.
Q17. What grounds may be taken by a defendant in a suit for specific performance of
the contract?
1. All the grounds upon which a contract is voidable - no free consent.
2. Plaintiff has not performed the whole or part of his part of contract.
3. All grounds in section 14 i.e. Compensation in money is adequate, Depends on personal qualification, or
determinable contract.
4. breach of trust or beyond its powers.
5. Contract when made gave unfair advantage to the plaintiff.
6. Involves hardship.
7. Plaintiff has chosen his remedy and obtained satisfaction for the alleged breach of contract.
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