business law self-learning manual

8/20/2019 Business Law Self-Learning Manual

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Self-Learning Material 3

Notes

Section

1

Law and Business

“I gnorance of law excuses no man: Not that al l men know the law, but because it is an excuse every man wil l plead, and no man can tell how to refu te him.”

— John Seldon

1.1 Law and Society.

1.2 Meaning of law.

1.3 Branches of law.

1.4 What is business law?

1.5 Sources of business law in India.

STRUCTURE


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4 Self-Learning Material

Notes

1.1 Law and Society

Law pervades almost every part of human life. Without law there will be chaos and confusion insociety. No games, be it cricket, football or hockey can be played without rules to govern the

players. Traffic rules are important to regulate traffic. Knowledge of law is, therefore, necessary

for all persons who live in a society. Moreover, there is a familiar maxim ‘ignorantia juris non

excusat’ (ignorance of law is no excuse).

1.2 What is Law?

The Oxford English Dictionary defines the word ‘Law’ as the rule made by authority for the

proper regulation of a community or society or for correct conduct in life. The term law has been

defined by some of the legal scholars in the following words:

”A law is a rule of conduct imposed and enforced by the sovereign.” —Austin

“Law is the body of principles recognised and applied by the state in the administration of justice.”

—Salmond

“Law in its most general and comprehensive sense signifies a rule of action and is applied

indiscriminately to all kinds of actions whether animate or inanimate, rational or irrational.”

—Blackstone

“Law is rule of external human actions enforced by Sovereign Political authority.”

—Holland

Hence ‘law’ is a set of rules laying down rights and obligations, which the state enforces. It includes

rules and principles, which regulate our relations with other individuals and with the state.

1.3 Branches of Law

With the growth of civilisation, human being’s social and economic behaviour has assumed many

facets. It is therefore essential that multi-dimensional human activities should be controlled through

different set of rules and principles. Almost all civilised societies, therefore, provide and enforce

different set of rules and guiding principles for different kinds of social, economical, and political

objectives. Hence, there are several branches of law, such as International Law, Constitutional

Law, Criminal Law, Civil Law, Business or Mercantile Law.

1.4 What is Business Law?

The terms ‘Business’, ‘Commercial’, and ‘Mercantile’, in relation to law, are used in the same

sense. ‘Business Law’ is that branch of law, which comprises laws concerning trade, industry and commerce. Business law refers to those rules and regulations, which govern the formation and

execution of business transactions made by various persons in the society. These provisions comprise

the legal environment of business. Business law is intended to infuse the much needed ‘certainty’

in commercial dealings. Business law includes laws relating to contract, sale of goods, negotiable

instruments, partnership, company and many other economic laws having a bearing on trade,

industry, and commerce.

1.5 Sources of Business Law in India

The main sources of business law in India are shown in the table and briefly discussed thereafter:


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1.5.1 English Law

Indian business law is modelled on the lines of English mercantile law, as India was under British

rule before its independence. The differences in the laws of India and England are primarily on

account of their different business environment, customs, and trade practices. The sources of

business law in India are generally the English laws which, in turn, have their roots in the following:

a) English Common Law: It refers to a system of law based upon English customs, usages,

and traditions, which were developed over centuries by the English Courts. These are

unwritten or the non-statutory laws. These are found in the reported decisions of the courts

of law.

b) Equity: It refers to that branch of the English Law, which was developed separately from

the common law. It is based on the principle of ‘fairness’, and concepts of justice developed

by the judges whose decisions became precedents.

c) Law Merchant or Maritime Usage: It refers to the usages or customs of merchants and

traders that have been ratified by the courts of law. The object is to protect the interest of

trade. The courts in these cases assume that the parties have dealt with each other on the

footing of customs or usages prevailing generally. This law, thus, gets incorporated into the

common law and the courts honour it.

d) Statute Law: The statute law refers to the law laid down in the Acts of Parliament. It is

superior to and overrides any rules of the common law, equity or law merchant. The courts

of law interpret the meaning of such enactments and apply them.

1.5.2 Judicial Decisions or Case Law

The judicial decisions, usually referred to as precedents, are binding on all courts having jurisdiction

lower to that of the court, which gave the judgement. This is also called judge made law.

1.5.3 Customs and Usages

Customs or usages of a particular trade also guide the courts in deciding disputes arising out of

mercantile transactions. Such a custom or usage must be widely known, certain and reasonable,

and must not be opposed to any legislative enactment. But, where a statute specifically provides

that the rules of law contained therein are subject to any well-recognised custom or usages of

trade, the latter may override the statute law.

Sources of Business Law in India

English Law Judicial Decisions

or Case Law

Indian StatutesCustoms and

Usages

English Common

Law

Equity Statutes LawLaw Merchant or

Maritime Usage

Check Your Progress

1. Define ‘Law’

2. What is Business Law?

3. What are the different

Branches of Law?

4. From where does the

Indian Business Law is

derived from?


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Notes

1.5.4 Indian Statutes

The constitution of India confers power to enact law on its parliament and legislatures of states.When a bill is passed by the parliament/state legislatures and assented to by the President or

Governor of a state, it becomes an ‘Act’ or ‘Statute’. The bulk of Indian Mercantile Law is statute

law. The Indian Contract Act, 1872, The Negotiable Instruments Act, 1881, The Sale of Goods

Act, 1930, The Indian Partnership Act, 1932, The Companies Act, 1956 are instances of the statute

law.

1.5.5 Business Law and Managers

Knowledge of relevant aspects of law is necessary for proper functioning of any business. Managers

may face a variety of situations that would involve legal issues. A broad understanding of business

law or legal aspects of business is necessary for managers. Knowledge of business law enables

them to arrive at correct decisions, and this is one of the essential functions of managers. Thus, law

is a major factor in decision making. Therefore, it is necessary that all managers have a working

knowledge of the important business laws and the legal system.

Summary

Law permeates every part of human activity. No civilised society can exist without a legal order.

Ignorance of law is no excuse for any human being. Law is a rule of conduct imposed and enforced

by authority. There are various branches of law like International Law, Constitutional Law, Criminal

Law, Civil Law, Business Law or Mercantile Law. The terms Business, Commercial or Mercantile

Law are used in the same sense. Business law refers to rules and regulations concerning Trade,

Industry, and Commerce. The main sources of business law in India are English law, Judicial

decisions (or Case law), Customs and Usages, and Indian statutes. Knowledge ofbusiness law is

necessary so that various managerial decisions, which managers are required to take in their day-

to-day activities, are within the boundaries of law.

Review Questions

True or False

State with reasons whether the following statements are True or False:

1. Law is the body of Principles enforced by Judiciary.

2. Business Law in India is primarily an adaptation of the English Law.

3. Business Law is applicable to businessmen only.

4. Business Law is one of the branches of law.

5. Business Law relates to trade only.

6. Customs and Usages are an important source of Business Law.

7. Statutes are the only source of Business Law.

8. There is no difference between a Bill and an Act.

9. Managers can function effectively without any knowledge of law.

10. Managers can come to proper decisions when they have working knowledge of law.

Check Your Progress

5. What do you

understand by statute

law?

6. How law and business

are related?


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Notes

Test Questions

1. What is Law? What is teh need for the knowledge of law?2. Elaborate different sources of law.

3. What is the scope of ‘Business’ or ‘ Mercantile’ law?

4. What does the term ‘Business Law’ include?

5. How does English Law affect Business Law in India?

Short Questions

1. ‘Law and business are closely related disciplines.’ Comment.

2. ‘Ignorance of law is no excuse.’ Give your views on this statement.

3. Discuss the different sources of business law in India.4. Define ‘Law’. What is the need for managers to know about Law?

5. What is Business Law? How it is relevant for managers?

Answers to “True or False”

1. True, 2. True, 3. False, 4. True, 5. False, 6. True, 7. False, 8. False, 9. False, 10. True

Answers to “Check Your Progress”

Following are the answers to “Check Your Progress”, indicating respective paragraphs for reference.

1) 1.2 2) 1.4 3) 1.3 4) 1.5 5) 1.5.4 6) 1.5.5


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Notes

2.1 Introduction to the law of contract.

2.2 Basis and extent of the law of contract.

2.3 Meaning of a contract.

2.4 What is an agreement?

2.5 What is enforceability of an agreement?

2.6 Essential elements of a valid contract.

2.7 Classification of contracts.

2.8 Proposal (offer) and Acceptance.

2.9 Communication of proposal, acceptance and revocation.

2.10 Consideration.

2.11 Capacity of parties.

2.12 Free consent.

2.13 Legality of object and consideration.

2.14 Void agreement.

2.15 Contingent contract.

2.16 Quasi contract.

2.17 Performance of contract.

2.18 Discharge of contract.

2.19 Remedies for breach of contract.

2.20 Indemnity and guarantee.

2.21 Bailment and Pledge.

2.22 Agency

Section

2

Law of Contract

“No cause of action arises from a bare promise.”

— Legal M axim

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2.1 Introduction

The law of contracts is the basis upon which the super structure of all business is built. It affectsevery person in one way or the other, as all of us enter into some kind of contract every day. All

contracts are based on agreements, which are either express or implied. Everyone of us enters into

a number of contracts almost everyday. Most of the time we do so without realising what we are

doing from the view point of law. A person seldom realises that when he gives clothes for drycleaning,

or when he buys milk, bread or biscuits, or when he goes to the auditorium to see a movie, he is

entering into a contract. In business transactions, normally, first promises are made followed by

performance. If parties were free to go back on their promises without incurring any liability, it

would be impossible to carry on any trade, industry or commerce. Hence, the law of contract was

made laying down rules for performance and discharge of a contract, and the remedies available to

the aggrieved party in case of breach of contract. Explaining the object of law of contract, Sir

William Anson observes that “The law of contract determines the circumstances in which promises

made by the parties to a contract shall be legally binding on them. It is intended to ensure that what

a man has been led to expect shall come to pass, and that what has been promised to him shall be

performed”. Besides, the law of contract furnishes the basis of the other branches of Business

Law. The enactments relating to sale of goods, negotiable instruments, monopolies, restrictive

trade practices, and intellectual property are all founded upon the general principles of contract

law. That is why the study of the law of contract precedes the study of all other laws relating to

trade and industry.

2.2 Basis and Extent of The Law of Contract

In India, the law of contract is contained in the Indian Contract Act, 1872, hereinafter referred toas the Act. It extends to whole of India except the State of J&K and came into force on the first

day of September, 1872. The Act is not exhaustive. It does not deal with all the branches of the

law of contract. There are separate Acts which deal with contracts relating to negotiable instru-ments, transfer of property, sale of goods, partnership, insurance, etc.

2.3 Meaning of Contract

The word ‘contract’ is derived from the Latin ‘Contractum’ meaning drawing together. Accord-

ing to the Act, “An Agreement enforceable by law is a contract” 1. Some authors have defined

contract in the following words:

“Every agreement and promise enforceable at law is a contract”. — Sir F rederi ck Pollock

“An agreement creating and defining obligations between the parties”. — Salmond

“A contract is an agreement enforceable at law made between two or more persons, by which

rights are acquired by one or more to acts or forbearances on the part of the other or others”. — Sir Will iam Anson

An analysis of these definitions would show that a contract must have the following two ele-

ments:

(a) An agreement, and

(b) Its enforceability (legal obligation)

In the form of an equation, it can be shown as under:

Contract = An agreement + its enforceability

Now the question arises, what is an agreement? and what is enforceability of an agreement?

2.4 What is an Agreement?

According to the Act, “Every promise and every set of promises forming the consideration for


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each other, is an agreement.”2

Now the question is, What is a Promise? According to the Act, “A proposal when accepted be-

comes a promise”3

.Example - Ram offers to sell his car to Shyam for Rs. 2,00,000/-. Shyam accepts the offer. This

offer after acceptance becomes promise and this promise is treated as an agreement between Ram

and Shyam.

Thus an agreement consists of a proposal (offer) by one party and its acceptance by the other. In

the form of an equation it can be shown as under:

Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer)

An analysis of the definition of the term agreement shows the following two characteristics of

agreement:

(a) Plurality of Person: There must be two or more persons to make an agreement.

(b) Consensus-ad-idem: Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.

2.5 What is an Enforceability of Agreement?

An agreement is enforceable by law if it creates some Legal Obligation. In other words, the

parties to an agreement must be bound to perform their promises. In case of social or domestic

agreements, the usual presumption is that the parties do not intend to create legal relations.

Example - Madhur invites his friend Vidur to a dinner and Vidur accepts the invitation. If Vidur

fails to turn up for dinner, Madhur cannot go to the Court to claim his loss.

In commercial or business agreements the usual presumption is that the parties intend to create

legal relations. Example - Vikreta offers to sell his car to Kreta for Rs. 1 lakh. Kreta accepts the

offer. Such an agreement is a contract because it creates legal obligation, i.e. a duty enforceable bylaw. From this, it will be clear that all contracts are agreements, but all agreements are not contract.

Salmond has rightly observed “The Law of Contracts is not the whole law of agreements, nor is it

the whole law of obligations. It is the law of those agreements which create obligations and those

obligations which have their source in agreements.”

2.6 Essential Elements of A Valid Contract

We have seen that a contract is an agreement enforceable by law. To be enforceable by law, an

agreement must possess the essential elements of a valid contract. The Act (sections 10, 29 and 56)

provides that all agreements are contracts if they are made by the free consent of the parties,

competent to contract, for a lawful consideration, with a lawful object, are not expressly declared

to be void, and where necessary, satisfy the requirements of any law as to writing or registration.The essential elements of a valid contract are the following:

a) Proposal (offer) and Acceptance

b) Intention to Create Legal Relations

c) Lawful Considerations

d) Capacity of Parties

e) Free Consent

f) Lawful Object

g) Writing and Registration

h) Certainty

i) Possibility of Performance

j) Agreement not expressly declared void

Check Your Progress

1. Why the ‘law of

contract’ precedes the

study of any branch of

law?

2. Is the ICA, 1872

enforceable throughout

India?

3. Define a ‘Contract’.


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Notes

2.6.1 Proposal and Acceptance

There must be a ‘lawful proposal’ and a ‘lawful acceptance’ of that proposal, thus resulting in anagreement. The word ‘lawful’ before offer and acceptance signifies that proposal and acceptance

must satisfy the requirements of the law of contract. There must be two parties to an agreement, i.e.

one party making the proposal and the other party accepting it. The terms of the proposal must be

definite and the acceptance of the proposal must be absolute and unconditional. The acceptance

must also be according to the mode prescribed and must be communicated to the proposer.

2.6.2 Intention to Create Legal Relations

There must be an Intention among the parties that the agreement should be attached by legal

consequences and create legal obligations or legal relationship. If there is no such intention on the

part of the parties, there is no contract between them. Agreements of a social or domestic nature do

not contemplate legal relationship. As such they are not contracts.

Illustration:

A husband promised to pay his wife a household allowance of $30 every month. Later the parties

separated and the husband failed to pay the amount. The wife sued for the allowance. Held,

agreements such as these were outside the realm of contract altogether.4

In commercial and business agreements, an intention to create legal relations is presumed. But this

presumption is rebuttable, which means that it must be shown that the parties did not intend to be

legally bound.

Illustration:

There was an agreement between R Company and C Company by means of which the former was

appointed as the agent of the latter. One clause in the agreement was: This agreement is not entered

into... as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts.

Held, there was no binding contract as there was no intention to create legal relationship.5

2.6.3 Lawful Consideration

An agreement must be supported by lawful considertion. Consideration’ means an advantage or

benefit moving from one party to the other. It is the essence of a bargain. In simple words, it means

‘something in return’. The agreement is legally enforceable only when both the parties give something

and get something in return. A promise to do something, getting nothing in return, is usually not

enforceable by law. Consideration need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing something) or promise to do or not to do something. It may be

past, present or future. But it must be real and lawful {Secs. 2(d), 23 and 25}. Consideration must

be lawful, i.e. not forbidden by law. (This has been elaborated in paragraph 2.10)

2.6.4 Capacity of Parties

The parties to an agreement must be competent to contract, otherwise it cannot be enforced by a

court of law. In order to be competent to contract the parties must be of the age of majority and of

sound mind and must not be disqualified from contracting by any law to which they are subject.6

This has been discussed in paragraph 2.11.


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Notes

2.6.5 Free Consent

It is essential to the creation of every contract that there must be a free and genuine consent of the parties to the agreement. The consent of the parties is said to be free when they are of the same

mind on all the material terms of the contract. The parties are said to be of the same mind when they

agree about the subject-matter of the contract in the same sense and at the same time.7 Consent is

said to be free when it is not caused by (i) Coercion, (ii) Undue influence, (iii) Fraud, (iv)

Misrepresentation, or (v) Mistake.8 (See paragraph 2.12).

2.6.6 Lawful Object

The object of an agreement must be lawful. The object is considered lawful unless it is forbidden

by law or is fraudulent or involves or implies injury to the person or property of another or is

immoral or is opposed to public policy.9 Thus, when a landlord knowingly lets a house to a prostitute

to carry on prostitution, he cannot recover the rent through a court of law. (See paragraph 2.13).

2.6.7 Writing and Registration

A contract may be oral or in writing. As regards the legal effects, there is no difference between a

contract in writing and a contract made by word of mouth. It is, however, in the interest of the

parties that the contract should be in writing. There are some other formalities also which have to

be complied with in order to make an agreement legally enforceable. In some cases, the document

in which the contract is incorporated is to be stamped. In some other cases, a contract, besides

being a written one, has to be registered. Thus where there is a statutory requirement that a contract

should be made in writing or in the presence of witnesses or registered, the required

statutory formalities must be complied with.10 Example, the law requires that an agreement to pay

time barred debts, or arbitration agreement must be in writing. Similarly, the law makes it compulsoryfor all agreements relating to transfer of immovable property to be registered.

2.6.8 Certainty

In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain.

If it is vague and it is not possible to ascertain its meaning, it cannot be enforced. Example - Amar

agrees to sell Bharat “hundred tons of oil”. This agreement is void on the ground of uncertainty

because it is not clear what kind of oil is intended to be sold.

2.6.9 Possibility of Performance

An agreement to do an impossible act is void (Sec. 56). Example - X agrees with Y to enclose someareas between two parallel lines and Y agrees to pay Rs. 1000/- to X. This agreement is void

because it is an agreement to do an impossible act.

2.6.10 Agreement not Expressly Declared Void

The agreement must not have been expressly declared to be void, under the Act11. Example -

Agreement in restraint of marriage, agreement in restraint of trade, agreement in restraint of legal

proceedings and agreement by way of wager have been expressly declared void. (See paragraph

2.14)

Check Your Progress

4. What are the essential

elements of a valid

contract?

5. What do you

understand by

‘Possibility of

Performance”?6. Are orally made

contracts enforceable

by law?

7. When the consent is

said to be ‘free’?


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Notes

2.7 Classification of Contracts

Contacts may be classified as follows:

2.7.1 On the Basis of Enforceability

a) Valid Contracts: Contracts which satisfy all the essential elements of a valid contract,12 are

enforceable in a court of law.

b) Void Contract: A contract which ceases to be enforceable by law becomes void when it

ceases to be enforceable.13 A void contract is a nullity from its inception. No rights accrue

thereunder.

c) Voidable Contract: An agreement which is enforceable by law at the option of one or more

of the parties thereto, but not at the option of the other or others, is a voidable contract.14 A

contract is voidable when one of the parties to the contract has not exercised his free consent.

One of the essential elements of a formation of a contract is free consent. All voidable

contracts are those which are induced by coercion, undue influence, fraud or

misrepresentation.

d) Illegal Contracts: It is contrary to law and hence void ab initio.

e) Unenforceable Contracts: An unenforceable contract is a valid contract in law, but due to

the fact that it is incapable of proof, or because of some technical defect therefore it cannot

be enforced in a Court of Law.

2.7.2 On the Basis of Mode of Creation

a) Express Contract: When the terms of a contract are reduced in writing or are agreed upon

by spoken words at the time of its formation, the contract is express.

b) Implied Contract: The terms of a contract are inferred from the conduct or dealings between

the parties. When the proposal or acceptance of any promise is made otherwise than in

words, the promise is said to be implied. Such an implied promise leads to an implied

contract. Example - A boards a bus. It is implied from his conduct that A has entered into an

implied promise to purchase a ticket.

c) Quasi Contract: Constructive or Quasi contracts arise out of obligations enjoyed by one

person from the voluntary acts of the other which are intended to be performed only on the

happening of some future uncertain event.(See paragraph 2.16)

2.7.3 On the Basis of the Extent of Execution

a) Executed Contract: Where both the parties have performed their obligations, it is an

executed contract. Even when one party to the contract has performed his share of the

obligation, the contract is executed, though the other party is still under an outstanding

obligation to perform his part of the promise.

b) Executory Contract: Where neither party to the contract has performed his share of the

obligation, i.e. both the parties have yet to perform their promises, the contract is executory.

c) Contingent Contract: A contingent contract is one in which a promise is conditional and

the contract shall be performed only on the happening of some future uncertain event. (See

paragraph 2.15)


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Notes

2.8 Proposal (Offer) and Acceptance

2.8.1 Meaning of Proposal

‘Proposal’ of the Act is synonymous with the term ‘offer’ of the English Law. The words ‘proposal’

and ‘offer’ are used inter-changeably.

“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’.”15

The first step towards creating a contract is that one person shall signify or make a proposal to the

other, with a view to obtaining the assent or acceptance of that another to that act or abstinence. A

proposal is then said to be made.

In order to constitute a contract, a person should offer to do something. This offer must be sufficiently

communicated to the person for whom he intends to do something with a view to obtaining his

assent to it. The person who makes such an offer or proposal is called the ‘Offerer’ or ‘Proposer’,the person to whom the proposal or offer is made is called the ‘Proposee’ or ‘Offeree’ and the

person accepting it is called the ‘Promisee’ or ‘Acceptor’.

2.8.2 Essentials of a Proposal

The definition of the word proposal given in the Act reveals the following three essentials of a

‘proposal’.

a) The expression of willingness to do or to abstain from doing something.

b) This expression must be to another person.

c) This must be made with a view to obtaining the assent of the other person.

2.8.3 Legal Rules Regarding a Valid Proposal

A valid proposal must be in conformity with the following rules:

a) Express or Implied: A proposal may be made either by words or by conduct. A

proposal which is expressed by spoken or written words, is an ‘express proposal’

and the one which is inferred from the conduct of a person or the circumstances of the case

is called an ‘Implied Proposal’.

Illustration:

i. A says to B that he will sell hs car to him for Rs. 80,000. This is an express proposal.

ii. The Delhi Transport Corporation (D.T.C) runs Omni buses on different routes

to carry passengers at the scheduled fares. This is an implied proposal by the DTC.

b) Terms Certain & Not Loose or Vague: If the terms of a proposal are vague or

indefinite, its acceptance cannot create any contractual relationship.

Illustration:

i. X says to Y “I will sell you a car”. X owns three different cars. The proposal is

not definite.

ii. T offered to take a house on lease for three years at $ 285 per annum if thehouse was “put into thorough repair and drawing rooms handsomely decorated


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Notes

according to the present style.” Held, the proposal was too vague to result in

a contractual relation.16

c) To give Rise to Legal Consequences and be Capable of Creating Legal Relations: A proposalwill not become a promise even after it has been accepted unless it was made with a view to

create legal relations, e.g. invitation to a dinner which has no intention to create legal

relationship.

d) An Invitation to Proposal is not a Proposal: Display of goods by a shopkeeper in his

window, with prices marked on them, is not an offer but merely an invitation to the public

to make a proposal to buy the goods at the market price. Likewise, quotations, catalogues,

advertisements in a newspaper for sale of an article, or circulars sent to potential customers

do not constitute a proposal. They are instead an invitation to the public to make a proposal.

Similarly, a declaration by a person that he intends to do something gives no right of action

to another.

e) May be ‘Specific’ or ‘General’: A proposal is ‘specific’ when it is made to a definite person

or persons. Such a proposal can be accepted only by the person or persons to whom it is

made. On the other hand, proposal is ‘general’ when it is made to the world at large or

public in general and may be accepted by any person who fulfills the requisite conditions.

Illustration:

The leading case on the subject of ‘general offer’ is that of Carlill vs. Carbolic Smoke Ball Co. In

the above case, the Carbolic Smoke Ball Co. issued an advertisement in which the Company offered

to pay £100 to any person who contracts influenza, after having used their Smoke Balls three times

daily for two weeks, according to the printed directions. Mrs. Carlill, on the faith of the advertisment,

bought and used the Balls according to the directions but she, nevertheless, subsequently suffered

from influenza. She sued the company for the promised reward. The company was held liable.17

f) Communicated to the Proposee: A proposal is effective only when it is

communicated to the proposee. As Lord Lindlay puts it, “A state of mind not

communicated cannot be regarded as dealings between man and man.” This is

applicable to both specific as well as general offers.

Illustration:

The defendant’s nephew absconded from home. He sent his servant, the plaintiff, in search of the

boy. After the servant had left, the defendant announced a reward of Rs. 501 to anybody giving

information relating to the boy. The servant, before seeing the announcement, had traced the boy

and informed the defendant. Later, on reading the notice of reward, the servant claimed it. His suit

was dismissed on the ground that he could not accept the offer, unless he had knowledge of it.

18

g) Should not Contain a Term the Non-compliance of Which Would Amount to

Acceptance: A proposer cannot say that if acceptance is not communicated up to

a certain date, the proposal would be presumed to have been accepted. If the

proposee does not reply, there is no contract, because no obligation to reply can

be imposed on him, on the grounds of justice.

h) Can be Made Subject to Any Terms and Conditions: A proposer may attach any

terms and conditions to the proposal he makes. He may even prescribe the mode

of acceptance. The proposee will have to accept all the terms and conditions of

the proposal.

i) Two Identical Cross-offers do not Make a Contract: When two parties make identical

offers to each other, in ignorance of each others offers, the offers are ‘cross-

offers’. They do not constitute acceptance of one’s offer by the other and as such

there is no completed agreement.


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Notes

2.8.4 Lapse and Revocation of Proposal

A proposal lapses and becomes invalid in the following circumstances:a) An offer lapses after stipulated or reasonable time.19

b) A proposal lapses by not being accepted in the mode prescribed, or if no mode is prescribed,

in some usual and reasonable manner.20

c) A proposal lapses by rejection by the proposee.

d) A proposal lapses by the death or insanity of the proposer or the proposee before acceptance.

e) A proposal lapses by recovation by the proposer before acceptance.21

f) Revocation by non-fulfillment of a condition precedent to acceptance.22

g) A proposal lapses by subsequent illegality or destruction of subject matter.

2.8.5 Acceptance

A contract as already observed, emerges from the acceptance of an offer. Acceptance is defined

when the person to whom a proposal is made signifies his assent thereto the proposal is said to be

accepted. A proposal when accepted becomes a promise.23 The person making the proposal is

called the Promisor, and the person accepting the proposal is called the Promisee.24 Performance of

the conditions of a proposal, the acceptance of any consideration for reciprocal promise which may

be offered with a proposal is an ‘acceptance’ of the proposal (Sec. 8). An acceptance need not

always be expressed in words. Performance of the conditions of a proposal is an acceptance of the

proposal. In order that there must be a binding contract, there must be absolute and unconditional

acceptance of the terms of a proposal.

Illustration:

A offers to sell his house for Rs. 2,50,000 to B. B accepts the offer to purchase the house for Rs.

2,50,000. This is acceptance.

2.8.6 Essentials of a Valid Accptance

Sections 7 and 8 of the Act lays down following rules to convert a proposal into a promise:

a) Acceptance Must be Absolute and Unqualified: Acceptance of a proposal with conditions,

variations and reservations is no acceptance at all. Acceptance with variations is a counter-

proposal and there is no contract until this counter proposal is accepted by the original

proposer. To constitute a valid acceptance, it should be unqualified. This means that the

parties to the contract must be consenses-ad-idem that is, consenting on the same thing in

the same sense. Conditions imposed by the offerer that the proposal shall be accepted only

on payment of deposit or earnest money or on executing a certain document will lapse the

proposal, if such a condition is not accepted by the offeree.

b) Acceptance Must be Expressed in Some Usual and Reasonable Manner - Mode of Accept

ance: Acceptance may be made either by words or by conduct. It may also be expressed by

post or by telegram. If the proposer prescribes the manner in which the proposal is to be

accepted and the acceptance is not made in such manner, the proposer may, within a rea

sonable time after the acceptance is communicted to him, insist that his proposal shall be

accepted in the prescribed manner, and not otherwise; but if he fails to do so; he accepts the

acceptance. Usual and reasonable manner would mean the parties intended to perform the

contract in the ordinary course of trade or business. The proposer has the right to prescribe

the manner in which the proposal can be accepted but not the manner in which it may be

refused.

Check Your Progress

8. What are the essentialelements of a ‘pro-

posal’?

9. Discuss the significance

of communication in proposal.


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Notes

c) Mental Acceptance is not Sufficient in Law: Silence cannot amount to acceptance. Mere

uncommunicated or mental acceptance is not enough. Acceptance to be complete must be

communicated by words or conduct by an offeree to the proposer. There must be someexternal manifestation (overt act) of that intent by speech, writing or other act.

Illustration:

A tells B that he intends to buy C’s office, but does not tell anything to C of his intention. This is no

contract.

d) Acceptance Must be Communicated to the Proposer: It should be signified and

communicated to the proposer himself. If the acceptance is not communicated to

the proposer, no contract is created. Intentions must be communicated. A draft

agreement relating to the supply of coal was sent to the manager of a Railway

Company for his acceptance. The Manager wrote the words ‘approved’ on the

agreement but by oversight, the document remained in the drawer. It was held that there was no contract. Acceptance and intimation of acceptance are both

necessary to result in a binding contract. In the case of proposal and acceptance

by te leph one conver sa tion , cont ra ct is made at a pl ace where acceptance is

received.

e) Acceptance Must be Given Within Reasonable Time and Before the Proposal Lapses and/

or is Revoked: To be legally effective acceptance must be given within the specified time

limit, if any, and if no time is stipulated, acceptance must be given within a reasonable time.

Again, the acceptance must be given before the proposal is revoked or lapses by reason of

proposee’s knowledge of death or insanity of the proposer.

f) Acceptance of the Proposal: Acceptance of the proposal is the acceptance of all the terms

even though the proposee is ignorant of some of the terms of the proposal, except where the

terms are not apparent on the face and no resonable cautionis taken to draw attention of theacceptor, e.g. a ticket issued by the Railways with the terms and conditions printed over

leaf. Even if the proposee does not read the terms and conditions, it will be assumed that the

proposee has accepted the terms and conditions of travel, provided the terms and condi

tions are legible and if reasonable notice thereof is given.

Illustration:

A who travels by a ship sustains injury on account of the negligence of the crew. The Shipping

Company raised a plea that the terms and conditions were printed overleaf and the liability of the

company was limited in various ways. However, the clause limiting the liability of the Shipping

Company was obscured by the words stamped across in red ink. The company did not take reasonable

care to make the conditions legible and therefore, A was entitled to recover damages. If the termsand conditions had not been so obliterated, then the company would not have been held liable.

g) Acceptance of the Proposal Need not Always be Expressed in Words: Performance

of the conditions of a proposal is an acceptance of the proposal. 25 Where the

insurance company accepts the cheque as per the terms of the proposal towards

the premium, encashment of cheque is a sufficient acceptance of the proposal.26

h) Acceptance Must be by a Certain Person: A proposal may be made to an

unascertained number or to the world at large but no contract can arise until it

has been accepted by a certain person who first gives information either by words

or by conduct. Such an offer is called a ‘general offer.’ The general offer is closed

as soon as it is accepted by a definite person.


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Notes

Illustration:

A gives an advertisement in the newspaper offering Rs. 10,000 to one who gives information of hislost son. B gives the information. B is entiled to the reward of Rs. 10,000.

i) If the Act is done in Ignorance of the Proposal, it is no Acceptance of the Proposal: Act

done in ignorance of the proposal is no acceptance, because to anuncommunicated

offer, there can be no consent or assent.

Illustration:

A advertises a reward of Rs. 10,000 to anyone who gives information of his lost son: B gives the

information but is ignorant of the reward. After some time, he claims the reward. It was held that B

is not entitled to the reward as he gave the information without being aware of the offer.

2.9 Communication of Proposal, Acceptance and Revocation

The communication of proposal and acceptance must complete so as to bind the concerned parties

because as soon as the communication is complete the parties loose the right of withdrawal or

revocation. The legal provisions relating to the communication of proposal, acceptance and

revocation are as under:

a) Communication of an Proposal: The communication of proposal is complete when it

comes to the knowledge of the person to whom it is made, i.e. when the letter containing

the proposal reaches the proposee.

b) Communication of an Acceptance: The communication of acceptance is complete at dif

ferent times for the proposer and acceptor. The communication of acceptance is

complete:i. as against the proposer, when it is put in a course of transmission to him, so as

to be out of the power of the acceptor, i.e. when the letter of acceptance is duly

posted.

ii. as against the acceptor, when it comes to the knowledge of the proposer i.e.

when the letter of acceptance is received by the proposer.

c) Communication of a Revocation: The term ‘revocation’ means ‘taking back’ or

‘withdrawal’. The communication of revocation is complete:

i. as against the person who makes it, when it is put into a course of transmission

to the person to whom it is made, so as to be out of the power of the person

revoking, i.e. when the letter of revocation is posted, and

ii. as against the person to whom it is made, when it comes to his knowledge, i.e.when the letter of revocation is received by him.

d) Time During Which an Offer or Acceptance can 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.

2.10 Consideration

2.10.1 Meaning of Consideration

Consideration is one of the essential elements of a valid contract. When a person promises to do


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Notes

something, he must get ‘something’ in return. If he does not get ‘something’ in return, the contract

is, generally, not valid. This ‘something’ is known as consideration. In other words, consideration

is the price for which the promise of the other party is bought. The Act defines consideration as

“when at the desire of the promisor, the promisee or any other person has done or abstained from

doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such

act or abstinence or promise is called a consideration for the promise.”27

llustration:

A agrees to sell his house to B for Rs. 5,00,000. Here A’s promise to sell his house is for B’s

consideration to pay Rs. 5,00,000. Similarly, B’s promise to pay Rs. 5,00,000 is for A’s consideration

to sell his house to B.

Thus the essential condition for the enforceability of the contract is consideration. The rule is

expressed by the Latin maxim “ex nudo-pacto non-oritur actio”, i.e. “out of a bare promise no

cause of action can arise.” Therefore, a gratuitous promise, such as a promise to make a gift or charity for no return is not supported by consideration. Hence it is unenforceable by the promisee.

The basis of consideration is that of reciprocity. A promisee would be able to enforce the promise

only if he has given or promised to give or unless the promisor has obtained or has been promised

something in exchange of it. The word ‘consideration’ implies something in return for the promise

or the price of promise or quid pro quo. According to Sir Frederick Pollock, “an act or forbearance

of one party of the promise thereof, is the price for which the promise of the other is bought and the

promise thus given for value is enforceable.” Blackstone defines consideration as “the recompense

given by the party contracting to the other.”

2.10.2 Essentials of a Valid Consideration

The essentials of consideration are as follows:a) Consideration Must Move at the Desire of the Promisor: The act or abstinence forming the

Consideration must be done at the desire or request of the promisor. If it is done at the

instance of the third party or without the desire of the promisor it is not consideration.

Example - Amar sees Bhushan’s house on fire and helps in extinguishing it. Amar cannot

demand payment for his services because Bhushan never asked him to come for help.

b) Consideration May Move from the Promisee or any other Person: The consideration need

not move from the promisee alone but may proceed from any third person. Thus, as long as

there is a consideration for a promise, it is immaterial who has furnished it. This means that

even a stranger to the consideration can sue on a contract, provided he is a party to the

contract. This is also called as ‘Doctrine of Constructive Consideration’. For example - X

by a deed of gift transferred certain property to her daughter Y with a direction that Y

should pay Z an annuity. Y executed a deed in writing in favour of Z and agreed thereby to pay the annuity. Later Y refused to pay annuity on the plea that no consideration had

moved from Z. It was held that Z was entitled to maintain suit because a consideration

need not necessarily move from the promisee, it may move from any other person (i.e. X in

the present case).28

c) Consideration may be past, present or future.

d) Consideration Must be ‘Something of Value’(The consideration need not be adequate to

the promise but it must be of some value in the eye of the law).

e) Consideration must be legal.

f) Consideration may be doing something, or abstaining from doing something (positive

or negative act) or a promise to do something.

Check Your Progress

10. How can a proposal be

revoked?

11. Are there any excep-

tions to the rule

- ‘No Consideration NoContract’?

12. When the considerationis said to be valid?


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Notes

2.10.3 No Consideration No Contract

The general rule is that “an agreement made without consideration is void”. But there are a fewexceptions to this rule. These exceptions are as follows:

a) Agreement Made on Account of Natural Love and Affection: An agreement made

without consideration is enforceable if, it is

i. Made on account of natural love and affection.

ii. Between parties standing in a near relation to each other.

iii. Expressed in writing.

iv. Registered as per law.

b) Agreement to Compensate for past Voluntary Service: Example - A finds B’s purse and

gives it to B. B promises to give A Rs. 100/-. This is a Contract.

c) Agreement to Pay a Time Barred Debt: Where there is an agreement, made in writingand signed by the debtor or his authorised agent, to pay wholly or in part a debt barred

by the law of limitation, the agreement is valid even though it is not supported by any

consideration.

d) Completed Gift: A completed gift does not require consideration in order to be valid.

e) Contract of Agency: No consideration is necessary to create an agency.29

f) Remission by the Promisee, of Performance of the Promise: For compromising a due

debt, i.e. agreeing to accept less than what is due, no consideration is necessary.30

g) Contribution to Charity: A promise to contribute to charity, though gratuitous, would be

enforceable, if on the faith of the promised subscription, the promisee takes definite

steps in furtherance of the object and undertakes a liability, to the extent of liability

incurred, not exceeding the promised amount of subscription.

2.11 Capacity of Parties

2.11.1 Who is Competent to Contract?

According to the Act31 every person is competent to contract, who:

a) is of the age of majority, according to the law to which he is subject,

b) is of sound mind, and

c) is not disqualified from contracting by any law to which he is subject.

2.11.2 Who is a Minor?

As per the Indian law,32 a person domiciled in India, who is under 18 years of age is a minor.

Accordingly every person who has completed the age of 18 years becomes a major. Only when a

person is under the guardian ship of court of wards or under a person appointed under the Guardians

and Wards Act, then he attains majority on completion of 21 years of age.

2.11.3 Position of Agreements by Minor

The law regarding minor’s agreements may be summed up as under:

a) An Agreement by a Minor is Absolutely Void and Inoperative as Against Him: Law protectsthe rights of the minors, because their mental faculties are not mature -they donot possess


20/218


Notes

the capacity to judge what is good or bad for them. In the leading case of Mohori Bibi vs.

Dharam das Ghose,33 a minor executed a mortgage for Rs. 20000/- and received Rs. 8000/-

from the mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and

for sale of the property in case of default. It was held that an agreement by a minor was

absolutely void as against him and therefore the mortgagee could not recover the mortgage

money nor could he have the minor’s property sold under his mortgage.

b) No Restitution Except in Certain Cases: A minor cannot be ordered to make compensation

for a benefit obtained under a void agreement. However, under the Specific Relief Act,

196334, a minor may be asked to restore any benefit which he may have received from

other party.

c) Beneficial Agreements are Valid Contracts: Any agreement which is of some benefit to the

minor and under which he is required to bear no obligation, is valid. In other words, a

minor can be a beneficiary.

d) No Ratification on Attaining the Age of Majority: Ratification means the subsequent

adoption and acceptance of an act or agreement. A minor’s agreement being a nullity and void ab-initio, has no existence in the eyes of law. It cannot be ratified by the minor on

attaining the age of majority.

e) The Rule of Estoppel does not Apply to a Minor: A minor is not estopped from pleading

minority in a suit against him, even in those cases, where he had earlier misrepresented

himself as a major to the other party.

f) Minor’s Liability for Necessaries: Minor’s property is liable for reimbursing the person

who has supplied necessaries to a minor (Sec. 68).

g) Specific Performance: Specific performance means the actual carrying out of the

contract as agreed. Only a contract entered on behalf of a minor, by his guardian

is binding on the minor and can be specifically enforced by or against the minor.

Other than this, no other minor’s agreement can be ordered for a specific performance.

h) Minor Agent: A minor can be an agent.35 He binds his principal by his acts but is

not liable to him in any manner for losses suffered by the principal.

i) Minor Partner: A minor being incompetent to contract cannot be a partner in a

partnership firm. But he can be admitted as a partner for the benefits of partnership

(only for sharing of profits and not losses).

j) Minor and Insolvency: A minor cannot be declared insolvent as he is not competent to

contract.

k) Contract by Minor and Adult Jointly: Where a minor and an adult jointly enter into an

agreement with another person, the minor has no liability but the contract as a whole can be

enforced against the adult.

l) Surety for a Minor: When an adult stands surety for a minor, the adult is liable under the

contract, and the minor is not.

m) Position of Minor’s Parents: The parents of a minor are not liable for agreements made by

a minor, whether the agreement is for the purchase of necessaries or not. The parents can be

held liable only when the child is contracting as an agent for the parents.

n) Minor Shareholder: A minor, being incompetent to contract, cannot be a shareholder of the

company. A company can also refuse to register transfer of shares in favour of a minor

unless the shares are fully paid, and articles of association of the company do not prohibit

minor to hold shares.


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Notes

2.11.4 Persons of Unsound Mind

For a valid contract, it is necessary that each party to it must have a ‘sound mind’.

2.11.5 What is a ‘Sound Mind’?

The Act provides “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 judgement as

to its effects upon his interests. A person who is usually of unsound mind but occasionally of sound

mind may make a contract when he is of sound mind. A person who is usually of sound mind but

occasionally of unsound mind may not make a contract when he is of unsound mind.”36

2.11.6 Position of Agreement with Persons of Unsound Mind

a) Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He suffers from intermittent intervals of sanity and insanity. He can

enter into contracts during the period when he is of sound mind.

b) Idiots: An idiot is a person who has completely lost his mental powers. Idiocy is permanent

whereas lunacy denotes periodical insanity with lucid intervals. An agreement of an idiot is

void.

c) Drunken/Intoxicated Persons: A drunken or intoxicated person suffers from temporary

incapacity to contract, i.e. at the time when he is so drunk or intoxicated that he is incapable

of forming a rational judgement. The position of a drunken or intoxicated person is similar

to that of a lunatic.

d) Agreements Entered into by Persons of Unsound Mind are Void: However, there is one

exception. Persons of unsound mind are liable for necessities supplied to them or to anyone

whom they are legally bound to support. But even in such cases, no personal liability attaches

to them. It is only their estate (property) which is liable.37

2.11.7 Persons Disqualified by Law

The third type of incompetent persons are those who are ‘disqualified from contracting by any law

to which they are subject’. They are:

a) Alien Enemies: An alien (citizen of a foreign state) is a person who is not a citizen of India.

When there is a war between India and another country, that country’s citizen becomes an

alien enemy and cannot enter into contract.

b) Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those

contracts in our courts but they cannot be sued in our courts without the sanction of theCentral Government unless they choose to submit themselves to the jurisdiction of our courts.

c) Convict: A convict is one who is found guilty by a court and is undergoing sentence of

imprisonment. During the period of his imprisonment, he is incompetent to contract and

also to sue on contract made before conviction.

d) Company or Corporation: A company/corporation is an artificial person created by law. It

cannot enter into contract outside the powers, conferred upon it by its Memorandum of

Association (object clause) or by the provisions of its Special Act.

e) Insolvents: When a person’s debts exceed his assets, he is adjudged insolvent and his property

stands vested in the Official Receiver or Official Assignee appointed by the court. Such a

person cannot enter into contracts relating to his property.


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Notes

2.12 Free Consent

2.12.1 Meaning of Consent

Consent means an act of assenting to an offer. Two or more persons are said to consent when they

agree upon the same thing in the same sense.38

2.12.2 Free Consent

Consent is said to be free when it is not caused by:

a) Coercion, or

b) Undue Influence, or

c) Fraud, or d) Misrepresentation, or

e) Mistake.39

2.12.3 Effect of Absence of Free Consent

When there is consent but it is not free (caused by coercion, undue influence, fraud or

misrepresentation), the contract is voidable, at the option of the party whose consent was so caused.

When consent is caused by ‘bilateral mistake’ as to a matter of fact essential to the agreement, the

agreement is void.

2.12.4 Coercion

Coercion means compelling a person to enter into a contract under a pressure or a threat. The Act

defines ‘Coercion’ as follows:

“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.”40

Example - A Hindu widow was forced to adopt a boy under threat that her husband’s dead body

would not be allowed to be removed if she does not adopt the boy, She adopted the boy. Here,

Widow’s consent has been obtained by co-ercion because preventing the dead body from being

removed for cremation is an offence under section 297 of the Indian Penal Code. (Ranganayakamma

V. Alwar Setti).

2.12.5 Essentials of Co-ercion

To constitute coercion the following are the essential features:

a) Coercion may proceed from any person and it is not necessary that it must be exercised by a

party to the contract.

b) It may be directed against any person and not necessarily against the other contracting party.

c) Coercion may be an act causing physical hardship or unlawful detention of property belonging

to another. It may also include those cases where the party is subjected to mental agony.

2.12.6 Undue Influence

The Act defines the term ‘Undue Influence’ as follows:

Check Your Progress

13. When can a minor besaid to be competent to

contract?

14. Which persons are

disqualified by law to

be competent to

contract?


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Notes

“A contract is said to be induced by “undue influence” where the relations subsisting between the

parties are such that one of the parties is in a position to dominate the will of the other, and uses that

position to obtain an unfair advantage over the other.”41

The Act further lays down that a person is deemed to be in a position to dominate the will of

another.

a) If he holds a real or apparent authoring over the other (e.g. the relationship between father

and son, or master and servant).

b) If he stands in a fiduciary relation to the other (e.g. the relationship between doctor and

patient, spiritual guru and disciple, lawyer and client).

c) Where he makes a contract with a person whose mental capacity is temporarily or permanently

affected by reason of age, illness or mental or bodily distress (e.g. old illiterate persons).42

2.12.7 Distinction Between Coercion and Undue Influence

2.12.8 Fraud

According to the Act, “Fraud means and includes any of the following acts committed by the party

to a contract, or with his convinance, or by his agents, with intent to deceive another party there to

or his agent, or to induce him to enter into the contract:

a) The suggestion as a fact, of that which is not true, by one who does not believe it to be true;

b) The active concealment of a fact by one having knowledge or belief of the fact;

c) A promise made without any intention of performing it;

d) Any other act fitted to deceive; and

e) Any such act or ommission as the law specially declares to be fraudulent.”43

2.12.9 Essential Elements

Essential elements of fraud are as follows:

a) The fraud must be committed by a party to a contract or by anyone with his connivance or by

his agent.

b) There must be a false representation and it must be made with the knowledge of its falsehood.

c) The representation must relate to a fact.

d) The fraud must have actually deceived the other party.

e) The party acting on the representation must have suffered loss.

It is mainly of physical

character.

It is moral character.2. Nature

Distinction

Points of Coercion Undue Influence

Distinction

1. Basis Consent is obtained by threat of

an offence. In this, the person is

forced to give his consent.

Consent is obtained by the dominating

will of the other. Consent is given in

good belief, but under moral influence.

Confidence is reposed but betrayed.

It is of violent character. It is most subtle in Character.3. Character


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Notes

2.12.10 Misrepresentation

The Act, defines the term ‘misrepresentation’, as follows:“Misrepresentation” means and includes -

a) The positive assertion, in a manner not warranted by the information to 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 anyone claming under him, by misleading another to his prejudice or to the

prejudice of anyone claiming under him.

c) Causing, however innocently, a party to an agreement, tomake a mistake as to the substance

of the thing which is the subject of the agreement.”44

2.12.11 Essential Elements

Essential Elements of misrepresentation are as follows:

a) By a Party to a Contract: The representation must be made by a party to a contract or by

anyone with his connivance or by his agent.

b) False Representation: These must be a false representation and it must be made without

knowledge of its falsehood.

c) Representation as to Fact: The representation must relate to a fact. In other words, a mere

opinion, a statement of expression or intention does not amount to misrepresentation.

d) Object: The representation must be made with a view to inducing the other party to enter

into contract but without the intention of deceiving the other party.

e) Actually Acted: The other party must have acted on the faith of the representation.

2.12.12 Distinction between Misrepresentation and Fraud

The person making the

statement believes it to be true.

The person making the statement

does not believe it to be true.

3. Belief of the

person making

statement

4. Effects of

breach

It makes contract voidable at the

option of the party injured.

5. Effect of

discovering

the truth

The contract cannot be avoided

if the party whose consent was

so caused, had the means of

discovering the truth withordinary diligence.

Besides making the contract

voidable at the option of the party

injured, it gives right to an

independent action in tort.

This plea can not be raised in case

of fraud, except in cases when

silence amounts to fraud.

Distinction

Points of Misrepresentation Fraud

Distinction

1. Intention

to deceive

There is no intention to deceive. There is intention to deceive.

2. False

Statement

A false innocent statement without

any intention to deceive is

misrepresentation.

A fasle statement deliberately

made to deceive is fraud.


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Notes

2.12.13 Mistake

The Act does not define the term ‘mistake’. Mistake is an erroneous belief concerning something.The types of mistake are shown below :

2.12.14 Mistake of Indian Law

Does not vitiate a contract because everyone is supposed to know the law of his country. The

maxim ‘ignorance of law is no excuse’ applies.

2.12.15 Mistake of Foreign Law

Is treated as mistake of fact, i.e. the contract is void if both the parties are under a mistake as to a

foreign law because one cannot be expected to know the law of other country.

2.12.16 Mistake of Fact - Bilateral

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.45

2.12.17 Mistake of Fact - Unilateral

A contract is not voidable merely because it was caused by one of the parties to it being under a

mistake as to matter of fact.46

2.12.18 Remedies Available

Where a contract is caused by a mistake which is void, the remedies available are:

a) Any person who has received any advantage under the agreement is bound to restore it.47

b) A person to whom money has been paid or anything delivered by mistake must repay or

return it.48

2.13 Legality of Object and Consideration

The object and the consideration of an agreement must be lawful, otherwise the agreement is void.

According to the Act, the consideration or the object of an agreement is unlawful in the following

cases:

a) If it is Forbidden by Law: An act, action or thing is said to be forbidden (i.e. prohibited) by

As to Subject

Matter

Type of Mistake

Mistake of Law Mistake of Fact

Of Indian

Law

Of Foreign Law Bilateral Unilateral

As to Possibility

Performance

Identity of Persons

Nature of

Contract


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Notes

law when it is punishable under any enactment. For example -Rangeela, a Hindu already

married and his wife alive, entered into a marriage agreement with Kumari an unmarried

girl. This agreement is void because the second marriage is forbidden by Hindu Law.

b) If it is of such a Nature that, if Permitted it would Defeat the Provisions of any Law: Such an

agreement is void. For example - Nirdhan borrowed Rs. 1 lakh from Kuber and agreed not

to raise any objection as to the limitation and that Kuber may recover the amount even after

the expiry of limitation period (i.e. three years). This agreement is void as it defeats the

provisions of Limitation Act.

c) If it is Fraudulent: An agreement whose object or consideration is to defraud others, in

unlawful and hence void. For example - A, B and C enter into an agreement of the division

among them of gains acquired by them by fraud. The agreement is void, as its object is

unlawful.

d) If it Involves or Implies Injury to a Person or Property of Another: If the object or consid

eration of an agreement is injury to the person or property of another, it is void, being an

unlawful agreement. Example - An agreement to put certain property to fire is unlawful and void.

e) If the Court Regards it as ‘Immoral or Opposed to Public Policy: If the object or considera

tion of an agreement is immoral or opposed to public policy, the agreement is void. Any

agreement which interferes with marital relations of persons is regarded as immoral. When

ever an agreement is harmful to the public welfare or any established interest of society, it

would be void as being against public policy.49

Example - 1

X gave Rs. 1 lakh to Y a married woman to obtain a divorce from her husband. X agreed to marry

her as soon as she obtained a divorce. It was held that X could not recover back the amount because

the agreement was void as its object was immoral.

Example - 2

A agrees to pay B, a major in the Army, Rs. 50,000 if he will assist his brother to desert the army.

The object of the agreement is opposed to public policy and hence void.

2.14 Void Agreement

“An agreement not enforcable by law is said to be void”50. Thus a void agreement does not give rise

to any legal consequences and is void ab-initio.

2.14.1 Void Agreement Already Discussed

The following type of void agreements have already been discussed:

a) Agreements by or with a person incompetent to contract. (paragraph 2.11)

b) Agreements made under a bilateral mistake of fact material to the agreement.

(paragraph 2.12.15)

c) Agreements made without consideration. (paragraph 2.10)

d) Agreements the meaning of which is uncertain. (paragraph 2.6.8)

e) Agreements of which the consideration or object is unlawful. (paragraph 2.13)

f) Agreements to do impossible acts. (paragraph 2.6.9)

Track Your Learning

15. Why insurance is not awagering agreement?


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Notes

2.14.2 Expressly Declared Void Agreements

One of the essential elements of a valid contract is that it must not be one which is ‘expresslydeclared’ to be void under the Act. The following agreements have been expressly declared to be

void:

a) Agreements in Restraint of Marriage: Every individual enjoys the freedom to marry.

According to the Act, “Every agreement in restraint of the marriage of any person, other

than a minor, is void”.51 The restraint may be general or partial. An agreement agreeing

not to marry at all, or a certain person, or a class of persons, or for a fixed period is void.

A promise to marry a particular person, does not imply any restrain of marriage and is a

valid contract. For example - Preeti agrees with Sambandh for good consideration that

she will not marry Kurup. It is void agreement.

b) Agreements in Restraint of Trade: The constitution of India guarantees the freedom of

trade and commerce to every citizen. According to the Act, “Every agreement by which

any one is restrained from exercising a lawful profession, trade or business of any kind, isto that extent, void”52. There are some exceptions to this rule like sale of goodwill, partner’s

agreements, trade combinations or negative stipulations in service agreements where in

some reasonable restrictions on trade are permitted in law.

c) Agreements in Restraint of Legal Proceedings: According to the Act53, the following

agreements amount to restraint of legal proceedings and are thus void to that extent:

i. Ag reemen ts Restr ic ti ng En forcemen t of Ri gh ts : An agreement by which any

party is res tricted absolutely from enforc ing his legal rights under or in respect

of any contract is void to that extent. Example - A clause in a contract provided

that no action should be brought upon it in case of breach. Such a clause is void

because it restricts both the parties from enforcing their legal rights.

ii. Agreements Limiting the Period of Limita tion: An agreement which limits thetime within which an action may be brought so as to make it shorter than that

prescribed by the law of limitation, is void. For example - A clause in a contract

provides that no action should be brought after two years. Such a clause is void

because it limi ts the period of limi ta tion to two years which is less than the

period of limitation (i.e. three years) prescribed by the law of limitation.

Exceptions - Agreements or clause referring the dispute to arbitration or subject to one court’s

jurisdiction are valid.

d) Wagering Agreements: The word ‘wager’ means ‘a bet’. A wagering agreement is

an agreement between two persons under which money or money’s worth is

payable, by one person to another on the happening or non-happening of a future

uncertain event. Example - X promises to pay Rs. 1,000 to Y if it rained on a

particular day, and Y promises to pay Rs. 1,000 to X if it did not. Such agreementis a wagering agreement and thus void.54

The essentials of wagering agreements are:

i. There must be a promise to pay money.

ii. Promise must be conditional on event happening or not.

iii. The event must be an uncertain, i.e. not in their hands.

iv. Each party must stand to win or loose.

v. No party should have a proprietary interest in the event.

An insurance contract which seems to have a trace of speculation is not a wagering contract. There

is an insurable interest in an insurance contract while there is no such interest in a wagering contract.


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Notes

2.14.3 Distinction Between Insurance and Wagering Agreements

2.15 Contingent Contract

2.15.1 Meaning

“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”.55 Example - A contracts to indemnify B upto Rs. 20,000 in

consideration of B paying Rs. 1,000 annual premium, if B’s factory is burnt. This is a contingent

contract. Contracts of insurance and contracts of indemnity and guarantee are other examples of

contingent contracts.

2.15.2 Essentials of Contingent Contract

The essential features of a contingent contract are as follows:

a) Dependence on a Future Event: The performance of a contingent contract depends upon

the happening or non happening of some future event. b) Collateral Event: The event must be collateral (i.e. incidental) to the contract.

c) Uncertain Event: The event must be uncertain.

2.15.3 Rules Regarding Contingent Contracts

a) Enforcement of Contracts Contingent on Happening of a Future Uncertain Event:56

Contingent contracts to do or not to do anything if an uncertain future event

happens can be enforced only when the event happens.

Illustration:

A makes a contract with B to buy B’s house if A survives C. This contract cannot be enforced by

law unless and until C dies in A’s life time.

These are valid contracts. These are void agreements as

they are opposed to public

policy.

3. Validity

4. Types of contract These are contracts of

indemnity except life

insurance contracts which

are contingent contracts.

These are conditional contracts.

DistinctionPoints of Distinction Insurance Agreement Wagering Agreements

1. Insurable Interest There is an insurable

interest

There is no insurable interest.

2. Interest of the Parties Both parties are interested

in the subject matter.

Neither party has any interest

in the happening or non-

happening of an event.


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Notes

b) Enforcement of Contracts on the Non-happening of a Future Uncertain Event: 57

Contingent contracts to do or not to do anything if an uncertain future event

does not happen can be enforced only when the happening of the event becomes

impossible, and not before.

Illustration:

A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract

can be enforced when the ship sinks.

c) Contracts Contingent on Future Conduct of a Living Person:58 If the future event

on which a contract is contingent is the way in which a person will act at an

unspecified time, the event shall be considered to become impossible when such

person does anything which renders it impossible that he should so act within

any definite time, or otherwise than under future contingencies.

Illustration:

A agrees to pay B a sum of money if B marries C. C married D. The marriage of B to C must now

be considered impossible although it is possible that D may die and that C may afterwards marry B.

d) Contracts Contingent on a Specified Event Happening Within a Fixed Time:59

Contracts contingent to do or not to do anything if a specified uncertain event

happens within a fixed time would become void if, at the expiration of the time

fixed, such event does not happen or if before the time fixed, such event becomes

impossible.

Illustration:

A promises to pay B a sum of money if a certain ship returns within a year. The contract may be

enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.

e) Enforcement of Contingent Contracts on Specif ied Event not Happening Within a

Fixed Time: 60 Contingent contracts to do or not to do anything if a specified

uncertain event does not hapen within a fixed time, may be enforced when such

event has not happened, or shall not happen within the time fixed.

Illustration:

A promises to pay B a sum of money if a certain ship does not return within a year. The contract

may be enforced if the ship does not return within the year, or is burnt within the year.

f) Agreements Contingent on Impossible Event s:61 Contingent agreements to do or

not to do anything if an impossible event happens, are void.

Illustration:

A agrees to pay B Rs. 1,000 if B will marry A’s daughter, C.C was dead at the time of the agreement.

The agreement is void.


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Notes

2.15.4 Distinction Between a Contingent Contract and Wagering Contract

2.16 Quasi-Contract

2.16.1 Meaning of Quasi-Contract

A Quasi-Contract is not a contract at all because the essential elements for the formation of a

contract are absent. It is an obligation imposed by law upon a person for the benefit of another even

in the absence of a contract. It is based on the principle of equity (i.e. fairness, moral justice or

ethics), which means no person shall be allowed to unjustly enrich himself at the expense of another.Such obligations are called quasi-contracts or implied contracts because the outcome of such

obligations resemble those created by a contract.

2.16.2 Kinds of Quasi-Contracts

The various kinds of quasi contract (or quasi-contractual obligations) are given below:

a) Claim for Necessaries Supplied to a Person Incapable of Contracting or on his Account:

“If a person, incapable of entering into a contract, or anyone whom he is legally bound to

support, is supplied by another person with necessaries suited to his condition in life, the

person who has furnished such supplies is entitled to be re-imbursed from the property of

such incapable person.”62 [Refer to paragraphs 2.11.3(f) and 2.11.5(d)] Example - A supplies

the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A isentitled to be reimbursed from B’s property.

A contingent contract is not void Wagering contract is void.3. Void

agreement

2. Sole

Condition

Determination of an uncertain event

is not the sole condition of the

contingent contract.

There must be determination of an

uncertain event as the sole condi-

tion of the contract.

4. Interest of

the parties

These are contracts of indemnity

except life insurance contracts

which are contingent contracts.

The parties are not intersted in the

occurance or non-occurrence of the

event.

5. Future

event

The future event is merely collateral

or incidental to the contract.

The future event is the sole

determining factor of the contract.

DistinctionPoints of Contingent Contracts Wagering Contracts

Distinction

1. Mutual

promise as

a basis

It is not necessary that there should

be mutual promises. All contingent

contracts are not wagers. For

examples, insurance contracts,

contracts of indemnity and guaran-

tee.

It is agreement by mutual promises

each of them conditional on the

happening or not happening of an

unknown event. all wagers are

contingent but all contingent

contracts are not wagers.


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Notes

b) Reimbursement of Person Paying Money due by Another, in Payment of Which he is

Interested: “A person who is interested in the payment of money which another is bound by

law to pay, and who therefore pays it, is entitled to be re-imbursed by the other”.63 For

example - A, sub-tenant pays the arrears of rent due by the tenant to the landlord, in order to

save the tenancy from forefeiture. The subtenant is entitled to recover from the tenant, the

amount paid by him to the landlord, although there is no contract between the two.

c) Obligation of Person Enjoying Benefit of Non-gratuitous Act: “Where a person lawfully

does anything for another person, or delivers anything to him, not intending to do so

gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make

compensation to the former in respect of, or to restore, the thing so done or delivered”.64 For

example-A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his

own. B is bound to pay A for them.

d) Responsibility of Finder of Goods: “A person who finds goods belonging to another and

takes them into his custody, is subject to the same responsibility as a bailee”.65 For example

- X a guest found a diamond ring on a birthday party of Y. X told Y and other guests aboutit. He has performed his duty to find the owner. If he does not able to find the owner he can

retain the ring as bailee.

e) Liability of Person to Whom Money is Paid, or Thing Delivered by Mistake or Under

Co-ercion: “A person to whom money has been paid, or anything delivered by mistake or

under co-ercion, must repay or return it”.66 For example - A and B

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