BUSINESS LAW

MODULE-2(A)
BUSINESS CONTRACTS
( Indian Contract Act,
1872)
 TOPICS
• Elements of Contracts – Parties – Offer –
Acceptance – Consideration
• Free consent – Legality of object and
consideration
• Types of Contracts – Valid and Voidable
Contracts – Discharge of Contracts &
Remedies -  Concept of damages
• Case discussion. 
 CONTRACT
Definition:
An agreement enforceable by law
Is a contract.

Two elements:
1. Agreement
2. Enforceability (Legal Obligation)
 Agreement
Definition:

Every Promise and every set of

promises, forming the consideration
for each other is an agreement.
 Promise
• 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.
Characteristics of an
Agreement

• Plurality of persons

• Consensus-ad-idem
 Legal obligations.
No legal obligations:
• Agreements of moral, religious or social nature

Legal obligations:
• Business agreements if made
• By free consent of parties competent to
contract
• Lawful consideration
• Lawful object
 Problems:
1. A invites B to a dinner. B accepts the
invitation. A made elaborate
arrangements. But B failed to turn up. Can
A sue B for the loss he has suffered.

2. M agrees to pay N Rs.100 if N writes 100

pages within five minutes. Is it a valid
contract?
 Solution:
• 1. A cannot sue B for the loss he has
suffered because the agreement was of a
social nature; hence lacked the intention to
create legal relationship – an essential
element of a valid contract.

• 2. No. it is not a valid contract. It is a void

agreement because “an agreement to do
an impossible act in itself is void.”
Agreements and Contracts
Agreement is a wider term.

All agreements are not contracts.

Only those agreements giving rise to

legal obligations are contracts.

Agreements of moral, religious and

social nature are not contracts.
 VALID CONTRACT
– ESSENTIAL ELEMENTS
• Offer and acceptance • Lawful object
• Intention to create • Writing and
legal obligations
registration
• Lawful consideration
• Competency of parties
• Certainty
• Free consent • Not impossible
• Not declared void
 Intention to create legal
obligations
Leading Case: Balfour vs. Balfour
Facts: The defendant Mr.Balfour was a Civil
servant stationed in Ceylon. Mr.Balfour and
his wife were enjoying leave in England. On
the due date of return to Ceylon, Mrs. Balfour
could not accompany
As she was unwell and had to stay back in
England. The defendant agreed to send £30
as maintenance expenses during the period
they were forced to live apart.
Mrs. Balfour sued for breach of this
agreement.
 Judgment

• The plaint was dismissed on the

ground that no legal relations had
been contemplated. Therefore, there
was no contract.
 Rose & Frank Co. Vs.
Crompton & Brothers Ltd.
• Rose & Frank entered into an Agency
agreement with Crompton & Bros. One
clause in the agreement read:
• “This agreement is not entered into as a
formal or legal agreement and shall not be
subject to legal jurisdiction in the law
courts.”
• R&F in their plaint claimed that there was
a binding legal contract of Agency and
hence Crompton are liable.
 Judgment:

It was held that there was no

intention to create legal relations on
the part of the parties to the
agreement and hence there was no
contract.
KINDS OF CONTRACTS
Points of view of

1.Enforceability

2. Mode of Creation

3.Extent of Execution
 Enforceability
1. Valid contract
2. Voidable contract
3. Void contract
– Void agreement
4. Unenforceable contract
5. Illegal or Unlawful contract
- Illegal and void agreements
Mode of Creation

• 1. Express Contract

• 2. Implied Contract
Extent of Execution

• 1. Executed contract

• 2. Executory contract

• 3. Uni-lateral contract

• 4. Bi-lateral contract.
 The Proposal or offer
'When one person signifies to another
his willingness to do or to abstain from doing
anything,
with a view to obtaining the assent of that other
to such act or abstinence,
he is said to make a proposal’.
Three essentials of a
Proposal
• 1. expression of
willingness

• 2. to another person

• 3. with a view to
obtaining the assent
 Legal Rules Regarding a Valid
Offer
• 1. An offer may be ‘express’ or ‘implied’.
• 2. An offer must contemplate legal
consequences - creating legal relations.
• 3. The terms must be certain and not
vague.
• 4. An invitation to offer is not an offer.
• 5. An offer may be ‘specific’ or ‘general’.
• 6. An offer must be communicated .
 General Offer:
Leading case: Carlill Vs. Carbolic Smoke
Ball Co.(1893)
Carbolic Smoke Ball Co. issued an advertisement in
which the Company offered to pay ₤100 to any
person who contacts influenza, after using their
smoke balls three times daily for two weeks,
according to the printed directions given in the
advertisement. Mrs. Carlill on the faith of the
advertisement bought and used the Balls
according to the directions, but she nevertheless
subsequently suffered from influenza. She sued
the company for the promised reward.
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 Court of Appeal
 Legal rules regarding a Valid
Offer
• 7. An offer should not contain a term the
non- compliance of which would
amount
to acceptance.

• 8. An offer can be made subject to any

terms and conditions.

• 9. Two identical cross- offers do not make

a contract.
 Leading Cases:
• Lalman Shukla vs. Gauri Dutt (26)501
• Handerson Vs. Stevenson (26)
• Parker Vs. South Eastern Railway
(26)
 Handerson Vs. Stevenson
The Plaintiff (Handerson) bought a steamer
ticket which bore on its face the words
“Dublin to Whitehaven”. On the back of the
ticket certain special terms were printed.
According to one of the terms, the
company was not liable for loss, injury or
delay to the passenger or his luggage. The
plaintiff never looked at the back of the
ticket and no one told him to do so. The
front of the ticket bore no reference to
what is written on the back.
The plaintiff’s luggage was lost. He claimed
damages for the loss.
 Judgment

• It was held that the plaintiff was

entitled to recover his loss from the
company as there was no sufficient
communication of the terms and
conditions contained on the back of
the ticket.
 Parker Vs South Eastern
Railway
• Plaintiff, Parker deposited his bag at the cloak-
room at a railway station and received a ticket
containing on its face the words, “see back”.
On the back of the ticket there was a condition
that “the company will not be responsible for
any package exceeding the value of £10
unless extra charge was paid”. A notice to the
same effect was hung up in the cloak-room
also. P’s bag was lot and he claimed the actual
value of the lost contents - £24 Sh.10. P
admitted knowledge of the printer matter on
the ticket, but denied having read it.
 Judgment
• It was held that, even though he had
not read the exemption clause, he
was bound by it, as the defendants
had done what was reasonably
sufficient to give him notice of its
existence, and therefore, P was
entitled to recover only £10.
 Olley Vs Marlborough Court Ltd.

• Olley and her husband hired a room at a hotel

and paid for a week’s board and lodging in
advance. When they went to occupy the room
there was a notice on one of the walls which
contained the clause:”The proprietors will not
held themselves responsible for articles lost or
stolen, unless handed over to the manageress for
safe custody”. Owing to the negligence of the
hotel staff, a thief entered the room and stole
some of their property. Olley claimed damages.
 Judgment
• It was held, that the owner of the
hotel was liable since the notice
formed no part of the contract as it
came to the knowledge of the
plaintiff after the contract had been
entered into.
 Doctrine of fundamental
breach and strict construction.
• M. Siddalingappa Vs T. Nataraj

• T. Nataraj – Laundry owner – terms of

service: in case of loss of clothes, only
8 times the cleaning charges will be
paid.
• T. nataraj lost his clothes and claimed
damages for the full value of the
clothes.a
 Judgment
• Held that the dry-cleaner’s terms
that he will pay only eight times the
amount of cleaning charges, is
unreasonable. He has to bear full
cost less reasonable depreciation.
 Felthouse Vs. Bindley
• Felthouse offered by letter to buy his
nephew’s horse for £30-15s, adding, “If I
hear no more about him, I shall consider the
horse mine at £30-15s.” The nephew sent no
reply to this letter but told Bindley, an
auctioneer, to keep the horse out of a sale of
his farm stock, as he intended to reserve it
for his uncle Felthouse. Bindley sold the
horse by mistake, abd Felthouse sued him
for conversion of his property.
 Judgment
• The court held that as there was no
contract and therefore Felthouse had
no right to complain of the sale.
 Powell Vs. Lee
• Powell was a candidate for the post of
Headmaster in a school. The managing
committee of the school passed a resolution
selecting him for the post. A member of the
managing committee, acting in his personal
capacity, informed Powell that he has been
selected, but Powell received no other
intimation. Subsequently, the resolution was
cancelled, and Powell was not appointed to
the post. Powell filed a suit against the
CFommittee for breach of contract.
 Judgment
• The court held that in the absence of
an authorised communication from
the Committee there was no binding
contract.
 Lapse and Revocation of an Offer
• 1. After stipulated time or reasonable time.

• 2. not accepted in the prescribed mode.

• 3. by rejection.

• 4. by death or insanity of offeror or offeree before acceptance.

• 5. by revocation

• 6. non-fulfilment of a condition precedent.

• 7. by subsequent illegality or destruction of subject-matter.

 HYDE Vs. WRENCH
• Wrench offered to sell his house for
Rs.90,000. Hyde offered to purchase the
house for Rs.80,000 for which price
Wrench refused to sell. Subsequently,
Hyde offered to purchase the house for
Rs.90,000, but Wrench declined to
adhere to his original offer. Hyde filed a
suit to obtain specific performance of the
alleged contract.
 Judgment
• Dismissing the suit, the court held that
Wrench was justified because no contact
had come into existence, since Hyde by
offering Rs.80,000, had rejected the
original offer. Subsequent willingness to
pay Rs.90,000 could be no acceptance of
Wrench’s offer, as there remained no
offer to accept. The original offer had
already come to an end on account of
the ‘counteroffer’ of Hyde.
 The Acceptance
• ‘When the 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 Regarding Valid
Acceptance
• 1. Only by the person • 5.within reasonable
to whom it is made. time before
revocation
• 2. absolute and
unqualified
• 6. Acceptance must
• 3. usual manner succeed offer
unless
prescribed
• 7. Rejected offers
• 4. communicated by can be accepted
the acceptor. only if renewed.
 Communication - Offer, Acceptance,
Revocation
• Communication of offer is complete
when it comes to the knowledge of the offeree.
• Communication of acceptance is complete
as against the proposer when it is in course of
transmission to him -
as against the acceptor, when it comes to the
knowledge of the proposer.

• Communication of revocation is complete as against

the person revoking, when it is put in the course of
transmission to the other person –
as against the person to whom it is made, when it
comes to his knowledge.
 When can offer or acceptance be
revoked?

• “ A proposal may be revoked at any time

before the communication of its
acceptance is complete as against the
proposer, but not afterwards.

• An acceptance may be revoked at any

time before the communication of the
acceptance is complete as against the
acceptor but not afterwards.”
 Problem
1) A offers by letter to sell his car to B for
Rs.75,000 on 1st August. B received the
letter on 3rd August.
2) B posts the letter of acceptance on 4th
August, which reaches A on 6th Aug.
3) A posts a letter of revocation of his offer on
3rd August, which reaches B on 5th August.

Clarify quoting legal rules the effect of

offer, acceptance and revocation in the
above case.
 Solution
• 1) Communication of offer is complete on 3rd August
i.e.when it comes to the knowledge of B.
• 2) Communication of acceptance is complete as
against the proposer i.e.,A, when the letter of
acceptance is posted i.e. on 4th , and as against the
acceptor i.e.B when the letter of acceptance
reaches the proposer, i.e., on 6th August.
• 3) Revocation of offer is complete as against A on
3rd August, when the revocation letter is posted, and
as against B on 5th August, when the letter of
revocation is received by him.
• 4) As B has put his acceptance into transmission on
4th August and revocation of offer is communicated
to him on 5th August, his acceptance is valid and
there shall be a binding contract. A cannot revoke
his offer after 4th August, when the communication
of acceptance is complete as against him.
“Acceptance is to an offer, what
a lighted match is to a train of
gun powder. It produces
something which cannot be
recalled or undone.”-Anson.
 Problem
• B offered to sell his car for Rs.95,000.
A accepts to purchase the car for
Rs.94,500. B refused to sell the car
for Rs.94,500. Subsequently, A
agreed to the price of Rs.95,000, but
B refused to sell. A sues B for specific
performance of the contract. Will he
succeed?
 Solution
• No.
• This case is similar to the case of
Hyde Vs. Wrench. B’s offer comes to
an end by the counter offer of A, and
there was no offer left subsequently
for acceptance.
 Problem
• B offered to sell his house to A for
Rs.50,000. A accepted the offer by post.
On the next day, A sent a telegram
revoking the acceptance which reached B
before the letter. Is the revocation of
acceptance valid? What would be the
effect if both the letter of acceptance and
the telegram of revocation of acceptance
reach B at the same time?
 Solution
• Yes. The revocation of acceptance is valid
because the acceptor may revoke his
acceptance at any time before the letter of
acceptance reaches the offeror.
• If both letter and telegram reach B at the
same time, the formation of contract will
depend on the fact – which of the two is
opened first by B. If B reads the telegram
first, revocation is valid, but if the letter is
read first, revocation is not possible.
 Exceptions to the Rule
“A stranger to a contract cannot
sue.”
• 1. Where an express or implied Trust is
created – the beneficiary can sue.
• 2. Family settlement – e.g. maintenance or
marriage expenses of female member.
• 3. When the defendant constitutes himself,
as the agent of the third party.
• 4. In case of Agency, Principal can sue the
third party to the transaction.
• 5. In case of assignment of rights under a
contract, either voluntarily or by operation
of law.
 Consideration
‘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 abstains from
doing, something, such act or
abstinence or promise is called a
consideration for the promise’
 Durga Prasad Vs. Baldeo
D had built at his own expense, a
market at the request of the
Collector of the District. The
shopkeepers in the market promised
to pay D a commission on all articles
sold by them in the market. D sued
the shopkeepers for non-receipt of
commission.
 Judgment
• Held that the promise to pay
commission did not amount to a
contract for want of consideration,
because D (the promisee) had
constructed the market not at the
desire of the shopkeepers (the
promisors) but at the desire of the
Collector of the District to please
him.
 Rules Regarding Consideration
• 1. must move at the desire of the promisor

• 2. may move from the promisee or any other person;

• i.e.a stranger to consideration may maintain a suit.

• 3. A stranger to a contract cannot maintain a suit.

• 4. may be past, present or future.

• 5. must be something of value; need not be adequate..

• 6. must be legal.
 CHINNAYYA Vs. RAMAYYA
(Leading Case)
A, an old lady, by a deed of gift, made over
ccertain property to her daughter R, with a
direction that the daughter should pay an
annuity to A’s brother (R’s maternal uncle) as
has been done by A so far. R, the daughter,
executed a writing in favour of her maternal
uncle C agreeing to pay the annuity.
Afterwards she declined to fulfil her promise
saying that no consideration had moved from
her maternal uncle i.e. the promisee.
 Judgment
• Held that the words “the promisee or any
other person” in Sec.2(d) clearly show
that a stranger to consideration may
maintain a suit. Hence the maternal uncle,
though a stranger to the consideration (as
the consideration indirectly moved from
his sister A) was entitled to maintain the
suit.
 An agreement made without
consideration is void
• “No consideration No contract”
Exceptions:
1. Natural love and affection.
2. Compensation for past voluntary service.
3. To pay time-barred debt.
4. Completed Gift.
5. Contract of Agency.
6. Remission by promisee of performance
7. Contribution to Charity.
 Rajalakhi Devi Vs
Bhoothnath
There were frequent quarrels and
disagreement between Bhoothnath and
his wife Rajalakhi Devi. He finally
executed a registered document in favour
of his wife agreeing to pay for the
separate residence and maintenance.
Rajalakhi Devi went to court and insisted
on specific performance by her husband
of what is stated in the registered
document.
 Judgment
Held that the agreement was void for
want of consideration because it was
not made out of natural love and
affection.
 Karamchand Vs. Basant
Kaur
In this case goods were supplied
voluntarily to the promisor during his
minority. The promise to pay for
these were made by him after
attaining majority.
Whether this promise can be enforced?
Judgment and observation of the court

• The court observed that they failed

to see how an agreement made by a
person of full age to compensate
wholly or in part a promisee, who
had already volutanrily done
something for the promisor, even at
a time when the promisor was a
minor, did not fall within the purview
of Sec.25(2) of the contract Act.
 observation of the court…
The reasoning of the court is, that at the time the
thing was done the minor was unable to contract,
and therefore the person who did it for the minor
must in law be taken to have done it voluntarily.
In their opinion the provisions of sec.25(2) applied
equally to a contract by a major, as well as by a
minor, to pay for past services.

Note: This observation should be distinguished

from a promise made by a minor after attaining
majority to repay a loan advanced to him during
his minority, as this is void.
 Contribution to charity
• Kedarnath Vs. Gorie Mohammad.
• Gorie Md. Promised to contribute
Rs.100 towards construction of a Town
Hall at Howrah but did not sent in his
contribution.
• Kedarnath, the Secretary of the Town
Hall on the faith of the promise,
entrusted the work to a contractor and
incurred liability to pay him.
 Contribution to Charity.
• Gorie Mohammed was held liable.
• Abdul Aziz Vs. Masum Ali – Masum Ali
promised to subscribe Rs.500 to a fund
started for rebuilding a mosque. No action
was taken for rebuilding. Abdul Aziz
demanded the promised contribution and
when refused went to court for recovery.
• Held that the defendant was not liable as
no liability has been incurred in anticipating
the charity contribution.
 Capacity of Contracting
Parties
“Every person is competent to contract

Who is of the age of majority according to

the law to which he is subject and

Who is of sound mind. and is

Not disqualified from contracting by any law

to which he is subject.”
 Minor
Every person who has completed the age
of 18 years becomes a major.
But
Minors of whose person or property or
both
a guardian is appointed by a court and
minors whose property
superintendence has been assumed by
a Court of Wards, attain majority at the
age of 21 years.
 Minor’s liability in
agreements
1. An agreement by a minor is absolutely void and
inoperative as against him.

2. Beneficial agreements are valid contracts.

3. No ratification on attaining majority.

4. Rule of estoppel does not apply to a minor.

5. Minor’s liability for necessaries.

6. Specific performance.
 Minor’s liability (contd.)
7. Minor Partner – benefits of Partnership.
8. Minor Agent – not liable for negligance or breach of
duty.
9. Minor cannot be adjudicated insolvent.
10.Minor and adult – only adult liable.
11.Surety for a minor – adult surety is liable not the
minor(Ref. decisions of Bombay & Madras HC)
12.Minor’s parents.(liable only when the minor acts as
agent of the parents).
13.Minor shareholder.(through Guardian can own shares)
14.Minor’s liability in tort.
 Persons of Unsound Mind
• “A person is said to be of sound mind
for the purpose of making a contract,
if, at the time when he makes it, he
is capable of understanding it and of
forming a rational judgment as to its
effects upon his interests.

• Agreements treated on the same

footing as minor’s.
 Disqualified Persons
1. Alien – Alien friend can contract but not alien
enemies.
2. Foreign sovereigns and ambassadors – they can
sue but cannot be sued upon.
3. Convict – incompetent during imprisonment.
4. Married woman – can contract separate
property not husband’s.
5. Insolvent – can contract after discharge,
otherwise suffers from several disqualifications.
6. Joint Stock Company & Corporations – powers of
contract limited by Memorandum – no personal
contracts.
 Free Consent

• Consent: ‘Two or more persons are said to

consent when they agree upon the same
thing in the same sense.’ Consent involves
identity of minds or consensus ad-idem.

• Consent is said to be ‘free’ when not

caused by
1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake
 Coercion
• ‘Coercion is the committing or threatening to commit,
any act forbidden by the Indian Penal Code, or

• the unlawful detaining or threatening to detain, any

property, to the prejudice of any person whatever,

• with the intention of causing any person to enter into an

agreement’.

• A contract brought about by coercion is voidable at the

option of the party whose consent was so caused.
 vs Chikkam Seshamma
(threatening to commit
suicide)
(Neither suicide, nor ‘threat to commit suicide’ is
pounishable under IPC, but ‘attempt to commit
suicide’ is punishable.)

By threatening to commit suicide, the person

induced his wife and son to execute a release
deed in favour of his brother in respect of certain
properties which they claimed as their own.
Whether his act amounts to “coercion”?
 Judgment & comments of
Division Bench of Madras High Court
(1918) 41.Mad.33
“ Though ‘a threat to commit suicide’ is not punishable
under IPC, it is deemed to be forbidden by that Code, as
‘an attempt to commit suicide’ was punishable under
Sec.309 of IPC. Their Lordships observed – the term ‘any
act forbidden by the IPC’ is wider than the term
‘punishable by the IPC’. Simply because a man escapes
punishment, it does not follow that the act is not
forbidden by the Penal Code. For example, a lunatic or a
minor may not be punished. This does not show that their
criminal acts are not forbidden by the Penal Code”
IT WAS THEREFORE HELD IN THIS CASE, THAT THE ACT
AMOUNTED TO COERCION.
 Ranganayakamma Vs. Alwar
Setti
• A Madrasi gentleman died leaving a
young widow. The relatives of the
deceased threatened the widow and
compelled her to adopt a boy otherwise
they would not allow her to remove the
dead body of her husband for cremation.
The widow adopted the boy and
subsequently applied for cancellation of
the adoption.
 Judgment
• Held that her consent was not free
but induced by coercion, as any
person who obstructed a dead body
being removed for cremation, would
be guilty of offence under S.297 of
IPC. The adoption was set aside.
 Undue Influence
“ A contract is said to be induced by undue
influence where,

(i) 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
(ii) He uses the position to obtain an unfair
advantage over the other.”

“When consent is caused by undue influence,

the agreement is a contract voidable at the
option of the party whose consent was so
caused…If the party entitled to avoid it has
received any benefit, upon such terms and
conditions as the court may deem just.”
 Presumption of Undue
Influence
There is no need of proving the use of
undue influence by the party, whose
consent was so caused in the following
cases:

Father and son

Doctor and patient
Solicitor and client
Guardian and Ward
Trustee and Beneficiary
Spiritual Guru and Disciple
Old illiterate person
Pardanishin woman
 No presumption of Undue
Influence
Undue Influence will have to be
proved in the following cases:
Husband and wife
Mother and daughter
Grandson and Grandfather
Landlord and Tenant
Creditor and Debtor
Master and Servant
‘When the consent is caused by undue influence,
the agreement is a contract voidable at the option
of the party whose consent was so caused’.

‘Any such contract may be set aside either

absolutely or, if the party who was entitled to
avoid it has received any benefit thereunder, upon
such terms and conditions as the court may seem
just’
 Coercion Vs. Undue
Influence
• Coercion • Undue influence
1.Threatening to commit an 1. Domination of the will of
act forbidden by IPC. one over another.
2.Mainly of physical or violent 2. Use of moral force or
force. mental pressure.
3. No presumption of law. 3. There is presumption in
Burden of proof on the certain relationships.
party giving consent. 4. Court has full discretion
4. In case contract is whether or not to refund
rescinded, benefit received the benefit, that too in
has to be restored. part or in full.
5. Person exercising coercion 5. No criminal liability in the
liable under criminal law as case of undue influence.
also action under contract
law
 Fraud
“Fraud means and includes any of the following acts
committed by a party to a contract, or with his
connivance, or by his agent, with intent to deceive or
to induce another party thereto or his agent, to enter
into the contract:
• 1. The suggestion, as a fact of that which is not true
by one who does not believe it to be true.
• 2. The active concealment of a fact by a person who
has knowledge or belief of the fact. Mere non-
disclosure is not fraud. “Caveat Emptor” applies.
• 3. A promise made without any intention of
performing it.
• 4. Any other act fitted to deceive.
• 5. Any such act or omission as the law specifically
declares to be fraudulent.
 Can silence be fraudulent?
1. As a rule, mere silence is not ‘fraud’.
2. Silence is fraudulent, if circumstances of the case are
such that ‘it is the duty of the person keeping silence
to speak’. E.g.in contracts of ‘uberrimae fidei’.
(a)Fiduciary relationships: principal & agent, solicitor &
client, guardian & ward, trustee & beneficiary – these
relationships are under a duty to act with utmost good
faith and to fully disclose all material facts concerning
the transaction known to him.
(b) Contracts of insurance.
(c) Marriage engagement.
(d) Family settlement contracts.
(e) Share allotment contracts.
3. When silence is equivalent to speech.
 Effect of Fraud:

A party who has been induced to enter into

a
Contract by fraud, has the following
remedies:

1. He can rescind the contract.

2. He can ask for restitution and insist that

the contract shall be performed.
 Misrepresentation
(a) the positive assertion, in a manner not warranted by the
information of the person making it, of that which is not
true, though he believes it to be true.

(b) Any breach of duty which, without an intent 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 any one claiming under him; or

(c) Causing, however, innocently, a party to an agreement, to

make a mistake as to the substance of the thing which is the
subject of the agreement.
Remedies in case of Misrepresentation:

The aggrieved party has two options:

1. He can rescind the contract.
2. He may affirm the contract and
insist on its performance
3. No Damages.
Misrepresentation does not entitle the aggrieved party to
claim damages.
 Distinction between
Fraud and Misrepresentation
FRAUD MISREPRESENTATION

1. Intention to deceive, 1. Innocent. No intention to

Deliberate and willful deceive.

2. Right only to avoid

2. Civil wrong – party contract. No suit for
entitled to claim damages.
damages.
3. If party had means of
3. Contract is voidable finding truth with ordinary
even if party had diligence, cannot avoid
means of finding truth contract.
with ordinary diligence.
Loss of Right of Rescission

1. Affirmation

2. Restitution not possible.

3. Lapse of time

4. Rights of third parties

 Rights of third parties:
Philips Vs. Brooks
• A person obtains goods by fraud, and
before the seller rescinds the contract,
disposes them off to a bona fide party, the
seller cannot rescind the contract.

• Rule: Before the contract is rescinded,

third parties, bonafide for value, acquire
rights in the subject matter of the
contract, those rights are valid against the
party misled, and the right to rescind will
no longer be available”.
 Mistake
Erroneous belief concerning something.
1. Mistake of Law
(a) Mistake of Law of the country
(b) Mistake of foreign law.
‘Ignorantia juris non-excusat’ – Ignorance of
law is no excuse.
“a contract is not voidable because it was
caused by mistake as to any law in force in
India”

Mistake of Foreign Law is treated on the

same footing as ‘mistake of fact’.
• 2. Mistake of Fact
a) Bilateral Mistake
b) Unilateral Mistake

‘Where both the parties to an agreement are

under a mistake as to a matter of fact
essential to the agreement, the agreement is
void”.

‘A contract is not voidable merely because it

was caused by one of the parties to it being
under a mistake as to a matter of fact’.
 Bilateral mistake
• 1. Both the parties must be under a mistake.
• 2. Mistake must relate to some fact and not to
judgment or opinion of the parties.
• 3. Mistaken fact must be essential to the agreement.
• a) mistake as to existence of subject matter.
• b) mistake as to identify.
• c) mistake as to title.
• d) mistake as to quantity or e) quality of subject matter.
• F) mistaken assumption going to the root of the agreement.
 Reffles Vs. Wichelaus
• Certain quantity of cotton arriving by
“m.v.Peerless” was contracted for sale by
Wichelaus to Reffles. There were two ships
of the same name sailing at that time. Either
parties had different ships in mind.

• The court observed: the defendant meant

one Peerless and the Plaintiff another. That
being so, there was no consensus-ad-idem
and therefore no minding contract.
• (mistake as to identity)
 Copper Vs. Phibbs)
• A agreed to take on lease a fishery from B. A
did not know that in his inheritance, the lease of
this fishery for life was included.
• B also was not aware of this fact, that he had no
right at all the fishery, but had been carrying on
out of ignorance.

• It was held that the new lease agreement was

void (mistake as to title).
 Henkel vs. Pope
• Pope enquired about the price of rifles from
Henkel stating that he may buy as many as
50. Henkel quoted the price. Pope
telegraphed “Send three rifles”. The
telegraph clerk had transcribed the cable to
read as “Send the rifles”. Henkel sent 50
rifles. Pope accepted only three and returned
47 rifles. Henkel filed a suit for damages for
non-acceptance pf 47 rifles.
 Judgment:
• It was held that there was no
contract as there was no consent. It
made no difference even if the
mistake was caused by the
negligence of a third party.

• Of-course Pope must pay the price of

3 rifles accepted by him.
 Nicholson & Venn Vs. Smith
Marriot
• A set of table linen was auctioned as
“with the crest of Charles I and
authentic property of the monarch” .
In fact the linen was Georgian. There
was genuine mistake by both the
parties as to the quality of the
subject matter.
• Held: the agreement was void.
 Galloway Vs. Galloway
• Mr. & Mrs. Galloway entered into an
agreement for separation. They believed
that they were lawfully married. It turned
out that there was no valid marriage.

• Held that the agreement was void as the

parties entered into the contract under a
false and fundamental assumption that
they were lawfully married.
 Unilateral Mistake
• 1. contract not voidable unless the mistake
is caused by misrepresentation or fraud.

• In certain exceptional cases in case of

unilateral mistake, whether caused by
fraud, misrepresentation etc. or otherwise,
• may make an agreement void ab-initio.
 Agreement void ab-initio
• 1. Mistake as to identity of the per contracted with.
• Said Vs. Butt
• Cundy Vs. Lindsay

• 2. Mistake as to the nature and character of the written

agreement.
• Foster Vs. Machinson
• Baladevi Vs. Santi Mazumdar
 Said Vs. Butt
• Butt, the managing director of a theatrical
company, gave instructions that no ticket was
to be sold to “Said”, who was a very bad critic
of all the plays of the company. Said came to
know of this. He asked his friend to buy a
ticket for him. He went to the theatre with
this ticket, but was refused admission. Said
filed a suit for damages for breach of
contract.
 Judgment
• Held that there was no contract
because the theatrical company
never intended to contract with Said.
(mistaken identity of the contracting
person)
 Cundy Vs. Lindsay
• A fraudulent person, Blenkarn, taking advantage
of the similarity of his name with that of a big
company, BLENKIRON & CO. in the same town,
placed an order with Lindsey & Co. for supply of
certain goods on credit and signed an order in
such a way as to look like that of Blenkiron & Co.
Lindsay & Co. mistook his order to be that of
Blenkiron & Co., despatched the goods. Blenkarn
took delivery of the goods and sold them to
Cundy & Co. a bonafide purchaser for value, and
did not pay Lindsay & Co. On coming to know of
the facts, Lindsay & Co., filed a suit on Cundy &
Co., for recovery of the goods.
 Judgment
• The court of appeal held that owing to mistake as
to identity of contracting party caused by
Blenkarn, the rogue, there was no consensus-ad-
idem which could lead to any agreement
whatever between Blenkarn & Lindsay & Co., and
hence the agreement was void ab-initio and
Blenkarn got no title to the goods which he could
pass to Cundy & Co. As Cundy & Co. obtained no
title to the goods, it must return them or pay their
price to Lindsay & Co.
 Explanation:
• If the contract between Blenkarn & Lindsay would
have been merely voidable for fraud, Cundy & Co.,
would have been entitled to retain the goods as it
had taken them in good faith for value, because in
case of a voidable contract before it is repudiated,
one can pass a good title to a bonafide purchaser for
value.
• Hence, the speciality of a mistake as to the identity
of person contracted with becomes clear that in such
a case, even if the mistake is committed because of
misrepresentation or fraud of another party, the
contract is absolutely void to the prejudice of theird
parties who later deal in good faith with the
fraudulent person.
 Baladevi Vs. Santi
Mazumdar
An old illiterate person executed a deed under
the impression that she was executing a
power of attorney authorising her nephew to
manage her estate, while in fact it was a gift
deed in favour of her nephew. The deed was
never read out to her before obtaining her
signature and evidence showed that she
never had any intention to execute such a gift
deed.
 Decision
• The document was held to be void, as
her mind did not go with her signature.

• The rule of law is that where the mind

of the signer did not accompany the
signature, i.e. she did not intend to
sign the contract to which her name is
appended and the agreement is void
ab-initio.
 Consideration Unlawful in
Part
“When an agreement contains several
distinct promises to do things legal
and also other things illegal, and the
legal part cannot be separated from
the illegal part (i.e. the consideration
for different promises is a single sum
of money), the whole agreement is
illegal and void”.
“Where there is a reciprocal promise
to do things legal and also other
things illegal, and the legal part can
be separated from the illegal part
(i.e. there is a separate
consideration for different
promises), the legal part is a
contract and the illegal part is a void
agreement.
 Illegal Agreements
• Parties to an illegal agreement
cannot get any help from a court of
law.

• “No polluted hand shall touch the

pure fountain of justice.”
What considerations or objects are
unlawful?
• 1. If it is forbidden by lawMohanchand vs. Manindra (vacation of
rented premises against pugdi)
• 2. If permitted, it would defeat the provisions of any law.
• (Chandra Srinivasa Rao Vs. Korrapati Raja Rama Mohan Rao)
• 3. If it is fraudulent.(dividing gains got by fraud)
• 4. If it involves or implies injury to the person or property of
another.Ramsarup vs. Bansidhar (bonded labour)
• 5. If the court regards it as immoral.Pearce vs. Brooks (hiring
carriage for immoral purpose)
• 6. If it is opposed to public policy.(trade with alien enemy,
stifling prosecutiion, champerty (unreasonable amount)
 What are Void Agreements?

Agreements are void if made

• 1. by a minor or a person of unsound mind
• 2. by a bilateral mistake of fact material to
the agreement.
• 3. the consideration or object is unlawful.
• 4. part consideration is unlawful, and the
legal and illegal parts are inseparable.
• 5. without consideration.
Expressly Declared Void Agreements

• 1. Agreements in restraint of marriage

• 2. Agreements in restraint of trade
• 3. Agreements in restraint of legal proceedings
• 4. Agreements the meaning of which is uncertain.
• 5. Agreements by way of wager
• 6. Agreements contingent of impossible events.
• 7. Agreements to do impossible acts.

“ No restitution of the benefit received is allowed in the

case of expressly declared void agreements.”
Cases decided as being against Public Policy:
1. Trading with an alien enemy.
2. Agreements to promote hostile action in a friendly State.
3. Agreements interfering with course of justice.
4. Agreements in restraint of legal proceedings.
5. Agreements for stifling criminal prosecution.
6. Agreements tending to an abuse of legal process.
7. Agreements to oust the jurisdiction of courts.
8. Agreements to vary periods of limitation.
9. Agreements for the sale or to influence of public offices/
titles/honours.
10. Agreements to influence election to public offices.
11. Agreements tending to create interest opposed to duty.
12. Agreements tending to create monopolies.
Cases declared against Public Policy (Contd.)

13. Agreement in restraint of parental rights.

14. Agreements restricting personal liberty.
15. Agreements in restraint of marriage.
16. Marriage brokerage agreements.
17. Agreements interfering with marital duties.
18. Agreement in fraud of creditors.
19. Agreements to defraud revenue authorities.
20. Agreements in restraint of profession.
21. Agreements in restraint of trade.
22. Agreements by way of wager
 Performance of Contracts

• General Rule:

• “A person cannot acquire rights

under a contract to which he is not a
party”.
 Contingent Contracts
• “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”.
• Essentials:
• 1. The performance of such a congtract depends
upon the happening or not happening of some
future uncertain event.
• 2. The future uncertain event is collateral i.e.,
incidental to the contract.
Contingent contracts to do or not to do
anything
if an uncertain future event,
1. Happens 1. Cannot be enforced until
that event has happened.
If it becomes impossible,
2. Does not happen contract becomes void.
2. Can be enforced when
the event becomes
3. Contingent upon impossible, not before.
how a person will 3. Cannot be enforced,
when such person does
act at an unspecified anything which renders
time the event impossible to
act within any timeframe.
Contingent contracts to do or not to do
anything if an uncertain future event,

4. Specified, happens 4. Becomes void, on expiration of

time fixed, when such event
within a fixed time has not happened, or becomes
impossible even before the
time.
5. Does not happen 5. May be enforced on expiration
of time and the event has not
within a fixed time happened.

6. Void, whether the impossibility

6. If an impossible is known or not at the time of
event happens agreement.
 Contingent Contract Vs.
Wagering Agreements
Contingent Contract Wagering Agreement
1. Valid contract 1. Absolutely void.
2. The parties have 2. Only interest is
real interest in the winning or losing
occurrence or the bet amount; no
other interest.
non-occurrence of
the event.
3. Future uncertain 3. Uncertain event is
event is merely the sole
determining factor.
collateral.
By whom contracts must be
performed
1. By the promisor himself.

2. By the promisor or his agent.

3. By the legal representatives.

4. Performance by a third person.

 Rules regarding
Assignment of Contracts
1. Contracts involving skill cannot be assigned.

2. Obligations cannot be assigned except with the consent

of the promisee, in which case it becomes ‘novation’ –
substitution of liabilities.

3. Rights and benefits are assignable except

Contracts of personal nature, involving skill.
An ‘actionable claim’ can be assigned but must be an
instrument in writing.

4. Assignment by operation of law –

By death or insolvency. On death to legal
representatives
In insolvency, to Official Assignee or receiver.
Remedies for Breach of
Contract

1. Rescission of the contract.

2. Suit for damages.
3. Suit upon quantum meruit.
4. Suit for specific performance.
5. Suit for injunction.
 Suit for damages

Different kinds of Damages:

• 1. Ordinary, General or Compensatory

damages

• 2. Special damages

• 3. Exemplary, Punitive or Vindictive damages

• 4. Nominal damages.
 Rules regarding the Measure of
Damages

• 1. Damages are compensation for loss

Not punishment of the guilty.
• 2. Injured party to be put in the same
position as though contract was
performed.
• 3. Only the actual loss arising out of breach.
• 4. Special or remote damages are allowed
only if it was in the knowledge of both
the parties.
• 5. Difficulty of assessment of damages does
not prevent their recovery.
Rules for measure of damages (contd.)

• 6. If no real loss arises from breach, only

nominal damages awarded.
• 7. If sum payable in case of breach is fixed
in advance, reasonable compensation not
exceeding such amount is allowed.
• 8. Exemplary damages allowed only for
breach of marriage contract and bank’s
wrongful refusal to honor customer’s
Cheque.
• 9. Injured party’s duty to minimise damage.
10.Costs of decree allowed to injured party.