Introduction to

Contract
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CHP 2 INTRODUCTION TO CONTRACT

By this Chapter, you’ll be learning:

 Difference between an Agreement and Contract

 What is a Contract
 Types of Contract
 Essentials of a Valid Contract

What is the first thing that comes to your mind when one says „contract‟? Can it be used interchangeably with
words like „promise‟ or „agreement‟?
We enter into various contracts in our day to day lives without even realizing! The smallest of our actions
result into binding agreements. Buying vegetables from a vendor or groceries from a shop also culminate into
a contract. Hence, it is safe to say that Contract law permeates our lives. From dawn to dusk, we enter into a
number of Contracts, such as purchasing books and clothes, engaging a plumber to set right a leaking tap,
giving clothes for dry cleaning, renting a flat or hiring a motorcar etc. Each time, we are actually making a
Contract.
Contract law is an essential part of the legal curriculum and is dealt in the Indian Contract Act 1872.
However, the Act alone doesn‟t cover all the aspects relating to contracts and there are other branches of the
same in the form of Transfer of Property Act, Negotiable Instruments Act, Partnership Act, Sale of Goods
Act, etc.,

The law of Contract lays down the legal rules relating to:
 Agreements which culminate into contracts
 The essentials of a valid contract
 The formation of Contract
 Their performance and
 Their enforceability

The entire idea of having Contract Act is to determine which agreements or promise can be enforced by the
Courts and to determine the rights and liabilities of the contracting parties.

For example, I promise to kill „X‟ for „Y‟, if he gives me 50,000 Rs. is an agreement but not a contract.
Because an agreement is where both the parties agree on the same thing. But a Contract is one which can be
taken to the Court to be enforced. Now in this case, If I murder „X‟, but „Y‟ refuses to give me the decided
amount, I can‟t to the Court to get the agreement enforced.
Hence, a contract is different from a mere promise or agreement. The term agreement is wider than term
Contract. Every Contract is an agreement but every agreement is not a Contract. Only agreements which are
legally enforceable and gives rise to legal obligation constitutes Contract.

Think Tank!
Can you give such similar examples to differentiate between a contract and an agreement?

DEFINITION OF CONTRACT

Now that we understand the basic idea about a contract, let‟s look at its different definitions:
Pollock - Every agreement and promise enforceable at law is a Contract.
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Salmond -A Contract is an agreement creating and defining obligation between the parties.

Sec 2(h) of Indian Contract Act 1872 - defines Contract as “an agreement enforceable by law”

Hence,

Legal Obligation: It basically implies a duty enforceable by law. For the formation of a Contract, there must
exist an agreement which gives rise to legal obligations between the parties.

Whereas,

Hence, to summarise, we can say that it is evident that a Contract requires

 Plurality of persons as well as mutuality of parties. Where Plurality implies requirement of at least
two persons and mutuality implies equality of rights between the parties. i.e both the parties have
equal rights to enforce the Contract.
 Consensus-ad-idem means meeting of minds. Both the parties should think of the same thing in the
same manner at the same time.

TYPE OF CONTRACTS:

Contracts can be of various types depending on the basis of differentiation. Some of them are given as
follows:

1. Contracts on the basis of Creation:

A contract can differ on the basis it is concluded. It can either be through express communications or through
conduct but without express communication. Another type under this head relates to Quasi-Contracts.

 Express Contract: It is one, which is made by words spoken or written. In this, both the parties
expressly give their will to be a part of the Contract. For eg., You ask me if I want to buy 10 pens
from you and I say or write to you, “Yes, I‟ll buy 10 pens from you”. This is an express contract.
 Implied Contract: It is one, which can be inferred from the conduct of a person or the circumstances
of a case. Implied Contracts are further divided into Implied- in -fact and Implied-in-law Contracts.
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Implied-in-fact means Contracts which are formed on the basis of conducts and acts of the parties.
Whereas the Contracts-implied-in law are formed on the basis of conduct of the parties as well as on
the basis of law.
An example of this can be when I send goods to you for the purpose of sale and accept the delivery.
Here, your conduct shows assent to the offer even though you haven‟t said it expressly.
 Quasi or Constructive Contract: These contracts are covered under Section 68 – Section 72 of the
Contract Act. Such Contracts don‟t arise by virtue of any agreement between the parties but law
infers or recognizes a Contract under special circumstances. Basically, here the parties haven‟t
entered into any contract as such but there circumstances are such that law gives it the cover of a
contract. For example: Where you leave your bag of wheat at my place and I use it, now the law will
look at it as a contract and I will be obligated to pay the price of the wheat bag to you.

2. Contracts on the basis of Enforceability:

An agreement which is enforceable by law is a contract. Rests are mere agreements and hold no value in the
eyes of law. On the basis of enforceability, these are the following types:

 Valid Contract: It is a Contract, which satisfies all the attributes and the essential elements
prescribed by law. It is enforceable at the option of both the parties. For example, a contract to buy a
television set between a consumer and the shopkeeper is a valid contract.
 Void Contract: A Contract which ceases to the enforceable by law is void. This type of Contract is a
nullity and doesn‟t create any legal obligation. For example, a contract entered into under mistake, a
contract with a minor are all void contracts.
 Voidable Contract: An agreement which is enforceable by law at the option of one party but not at
the option of other party is a voidable Contract. It is a valid Contract unless repudiated by the party
entitled to exercise the option of enforceability. For example, a contract entered under
misrepresentation is voidable.
 Unenforceable Contract: It is one which is valid in itself but is not capable of being enforced
because of some technical defect or error. For example: Contracts which are required to be in written
form or where its registration is necessary. An example of this can be found under the Transfer of
Property Act. Such contracts if concluded orally are not enforceable.
 Illegal or unlawful Contract: The term illegal implies anything contrary to law. Where the term
illegal Contract is inappropriate as it would mean an agreement which is contrary or against law but
enforceable by law at the same time. While term illegal agreement is appropriate as the agreement
which is against law cannot be enforceable by law. For example, a contract to hit a person, to cause
harm to the property of another person, etc. The term void agreement is wider in scope than illegal
agreement. All illegal agreements are void but all void agreements are not illegal.
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For example:
A) Agreement with minor is void but not illegal.
B) Agreement to sell drugs is illegal and void.

ESSENTIALS OF A VALID CONTRACT:

Since, a valid contract is one which is enforceable, here are the important essentials of the same:

1. Offer and Acceptance: There must be a 'lawful offer' and a 'lawful acceptance'. Offer and
Acceptance should be made in order to create legal obligations.

2. Intention to Create Legal Relations: Both the parties to a Contract must contemplate legal
consequences. For example: A offering to take B out for a movie is not an agreement intended to
create legal relations

3. Lawful Consideration: Consideration is the price paid for the promise of the other. It may be past,
present or future.
For example: Robert promises to supply 10 quintal of wheat for a consideration of Rs.5000/-.

4. Capacity of Parties: The parties to an agreement must be competent to Contract. i.e.

 The parties must be major
 The parties must be mentally sound
 The parties must not be disqualified from Contracting by law.

5. Free Consent: Both parties to a Contract must enter into it out of their free will and consent. Consent
is said to be "free", when it is not affected by reasons like Coercion, Undue influence, Fraud,
Misrepresentation, Mistake.

6. Lawful object: Object means purpose. The Act lays down that the object for which the agreement
has been entered into must not be fraudulent / illegal / immoral or opposed to public policy.
For example: A Contract made to kill someone is illegal and does not have a lawful object.

7. Writing and Registration: It must be clearly understood that Contracts need not necessarily be in
writing. It may be oral or implied.
However, Indian Contract Act lays down that in certain special cases, for a Contract to be valid, it
must only be in writing. Besides, it also needs to be registered.
For example: An agreement for a sale of immovable property must be in writing and registered.

8. Certainty: To ensure that a Contract is valid, the terms of it must be certain. In other words,
"agreements, the meaning of which is not certain or capable of being made certain are void".
For example: Mr. Sharma agrees to sell his car to Mr. Mukesh at "best competitive price", since the
price is not clearly ascertainable in this case, the agreement is void.

9. Possibility of Performance: The Contract Act lays down that "Agreement to do an impossible act is
void”. For example: Subhash agrees to bring a dead body alive in return for a crore of rupees. The
agreement is not enforceable.

10. Not Expressly Declared Void: The Contract Act has expressly declared certain agreements to be
void.
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Following are the cases:-

 Agreement in restraint of marriage

 Agreement in restraint of trade
 Agreement in absolute restraint of legal proceedings.
Thus, an agreement should not be expressly declared void by the Act.

Important Differences:

(a) The difference between Void and Voidable Contract is as under:-

Void Contract Voidable Contract

1. No obligation or right arises or accrues to A voidable Contract continues at the option of one
parties to the Contract from a void Contract. party; it is the desire of one party either to rescind it or
Such Contracts are not covered by law. continue; it is enforceable at the option of one party and
is covered by law.
2. A void Contract can give rise to no legal A voidable Contract remains valid until rescinded.
liability since transaction is nullity.
3. A void Contract cannot confer any right. A voidable Contract confers enforceable right till it is not
rescinded.
4. The Contract becomes void when it ceases to A Contract becomes voidable only when consent to
be enforceable. agreement is obtained by coercion, undue influence, fraud
or misrepresentation.
5. A void Contract cannot be made valid by A voidable Contract can be made valid by the party who
parties to the Contract by their consent. has a right to rescind it by giving up his right of
rescinding it.
6. Void Contract is defined in section 2 (j) and Voidable Contract is defined in section 2 (i) and such
such Contracts have been detailed in sections Contracts have been detailed in sections 19, 19A, 38, 39,
24-30, 32, 35, 36 and 56 of the Act. 55, 64 and 66 of the Act as also sections 14 to 18 of the
Act.

(b) The distinction between void and illegal Contract is as under:-

Void Contract Illegal Contract

1. A void Contract is that contract which is Illegal contract are the contracts contrary to law. The
discoverable to be void. The parties to a void parties to an illegal Contract are liable to be penalized.
Contract are not necessarily liable to penalty.
2. A void Contract is entered into on account ofVoidable Contracts are also entered into an account of
special reasons. special reasons but these reasons differ from the reasons
which make a Contract void.
3. In a void Contract, Collateral Contracts are In an illegal Contract, the Collateral Contracts are also
recognised. illegal.
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CHP 3 ELEMENTS OF CONTRACTS

By this Chapter, you’ll be learning:

 Important elements of Contract

 Offer
 Acceptance
 Consideration
 Capacity to Contract

A contract that is not a valid contract will have many problems for the parties involved. For this reason, we
must be fully aware of the various elements of a valid contract. The Indian Contract Act, 1872 itself defines
and lists the Essentials of a Contract.

OFFER [SEC 2(A)]

The offer or proposal is defined under section 2(a) of the Contract Act. For creating a contract the first
important element is a valid offer or proposal. The following are its ingredients:
 It must be made by one person to another person
 It must be an expression of willingness to do or abstain from doing something
 It must be made with a view to obtain the consent of the other person

Essential Elements for a Valid Offer:

1. An offer must give rise to legal consequences: An offer must be made with intention to create
legal obligations. If the agreement does not have a legal effect it is not a contract.

Case Law: BALFOUR Vs BALFOUR (leading case)

A husband agreed to send his wife 30 pounds every month, while he was away. After a while, as he failed to
pay the amount, his wife sued him for it. Held, she could not recover the amount, as it was a social agreement,
common in couples and the parties did not contemplate legal consequences.
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2. Certainty of Offer: To constitute a lawful offer, the terms Essentials of a Valid Offer
of the offer must be definite and not vague. For e.g.-A 1. Intention to create legal obligation
agrees to sell his bike for Rs 20000 or Rs 30000, there 2. Certainty of Offer
should be a certain price. Abatement of intention is not an 3. Communication of offer
offer.

Illustration- Rajeshwar in the course of his conversation mentioned to Rinku, that he plans to give Rs.10
lakhs to anyone marrying his daughter with his consent. The above statement is merely an intention, which
should not be mistaken for an offer.

A mere supply of information does not amount to an offer:

When a person supplies information or merely invites offers, he cannot be said to make an offer. Sometimes
there may be preliminary discussion or an invitation by one party to the other to negotiate terms or simply
declaration of intention. Such declaration merely indicates that an offer will be made in future.

Case Law: HARVEY Vs FACEY

X sent a telegram to Y asking, "Will you sell Bumper Hall Pen? Quote the lowest price". Y replied through a
telegram "Lowest price for Bumper Hall Pen is 900 pounds". X replied stating "I agree to buy Bumper Hall
Pen for 900 pounds". In a suit brought by X against Y, the Court held that quoting of price by Y is a merely a
supply of information and not an offer.

3. Communication of Offer: An offer is effective only when it is communicated to the Offeree. Until
the offer is made known to the Offeree, there can be no acceptance and no contract. Also, the
communication of offer is complete when it comes to the knowledge of the person to whom it is
made.

Case Law: LALMAN Vs GAURI DATT

A master sent his servant in search of his missing nephew. In the meantime, the master advertised in the
newspaper, promising a reward of Rs. 500 to anyone who traces the boy. The servant brought back the boy.
After a couple of days the servant came to know about the reward and claimed it. Held, that the servant was
not entitled to the reward, for doing anything in ignorance of an offer cannot be construed as acceptance.

4. General Offers and Specific Offers: A specific offer is made to specific individual while general
offer is made the public or world at large. An offer need not to be made to ascertain person but it must
be accepted by ascertain person to convert it into contract.

Case Law: CARLILL Vs CARBOLIC SMOKE BALL COMPANY

Carbolic smoke Ball Company, a pharmaceutical company, was interested in Types of Offer
testing a new drug in the market. They advertised in the paper promising a 1. Specific Offer
reward of 100 pounds to anyone, who used the drug and contracted the 2. General Offer
disorder called influenza. One Mrs. Carlill bought it and used it as per the 3. Cross Offer
instructions printed on the label. Upon contracting influenza, she contacted 4. Counter Offer
the company to claim the reward. The company refused to pay her the
promised sum. The Court held that the company was liable to pay Mrs. Carlill, as there a contract was created
between the lady and the company, as soon as she fulfilled the condition.

5. Cross Offers: Where two parties make identical offers to each other, in ignorance of each other‟s
offer, the offers are known as cross offers. „Cross offers‟ do not constitute acceptance of one‟s offer
by the other and as such there is no completed agreement.
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6. Counter Offer: A counter offer is an offer made in response to a previous offer by the other party
during negotiations for a final contract. It is a new offer made in response to an offer received. It has
the effect of rejecting the original offer, which cannot be accepted thereafter

7. Offer and Invitation to Offer: An offer must be distinguished from an "invitation to receive offer".
An offer is final expression of willingness by the offeror to be bound by his offer. Where a party
without expressing his willingness, proposes certain terms on which he is willing to negotiate, does
not makes an offer but merely invites the other party to make offer on same terms. Such invitations
for offers are, therefore, not offers in the eyes of law and do not become agreements by their
acceptance.

Illustration: Goods on display with prices marked, auction sale. All these are cases of invitations to receive
offer, hence if a customer asks for goods/ makes an offer, the seller is free to accept the offer or not.

8. Nemo Dat Quad Non Habet: The legal rule „Nemo dat quod non habet’ literally means „no one
gives what he doesn‟t have‟. It is equivalent to the civil rule Nemo plus iuris ad alium transferre
potest quam ipse habet which translates to „one cannot transfer to another more rights than he has‟. It
also has a jurisprudential aspect to it with regard to ownership and possession. For instance, if A
owns a car and he has a driver, the driver would only have the possession of the car during the course
of business, but he would not have the authority to transfer the title of the car because he only has the
title to possess the car during work hours. The title to transfer the ownership is a greater title than he
has and could only be performed by the owner because his title is authoritative.

Revocation of Offer

The Indian Contract Act lays out the rules of revocation of an offer in Section 5. It says the offer may be
revoked anytime before the communication of the acceptance is complete against the proposer/offeror. Once
the acceptance is communicated to the proposer, revocation of the offer is now not possible.
Illustration:
A accepts the offer and posts the letter on 10th July. B gets the letter on 14th July. But for B (the proposer) the
acceptance has been communicated on 10th July itself. So the revocation of offer can only happen before the
10th of July.

Other ways in which an offer gets revoked:

 Lapse of time: An offer lapses on the expiry of the time, if any, fixed for acceptance.
 By death or insanity of the offeror: An offer lapses on the death or insanity of the offer or provided
that the fact come to the knowledge of the offeree before he makes his acceptance.
 By failure to fulfill a Condition: When offer is subject to a precedent condition, it lapses if accepted
without fulfilling the condition.

ACCEPTANCE [SEC 2(b)]

When the person to whom the proposal is made signifies his assent thereto, in the manner prescribed or in a
reasonable manner, the proposal is said to be accepted. There are two essential requirements of valid
acceptance a) Acceptance should be communicated b) Acceptance should be absolute and unqualified

Essentials of Valid Acceptance:

1. Communication of Acceptance: Acceptance must be communicated by the offeree to offeror.

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Case Law: FELTHOUSE V. BINDLEY- Essentials of a Valid Acceptance-

For a valid contract the acceptance should be communicated and 1. Communication of the Acceptance
moreover such communication should be made to the offeror. must be made by the Offeree to the
Another point of law explained in the case was that the offeror Offeror only
cannot impose upon the offeree duty to reply and therefor an 2. Acceptance must be made in the
offeror cannot say that failure to reply will be deemed to be prescribed or reasonable manner
acceptance of the offer. 3. Acceptance must be given within a
reasonable time or before the offer
 Acceptance express or implied -It may be in the form of lapses
written or spoken words or may be signified through 4. Acceptance must be absolute and
conduct. There should be some external manifestation unqualified
mere mental determination to accept is not enough. Silence
can never amount to acceptance.
 Communication to Offeror Only- Communication of acceptance to any person other than offeror is
no communication in the eyes of law.
 Communication by Acceptor Only -Acceptance received from an unauthorized person will not
constitute agreement. But it can be communicated through an authorised agent.

Case Law: POWELL V. LEE

In order that an acceptance is treated as valid, it is necessary that the same must be communicated to the
offeror either by the offeree or by some duly authorized person on his behalf. If the communication is made
by an unauthorized person, it does not result in a contract.

Illustration:
Where „A‟ places an order with a Bakery thinking it is owned by „Y‟, but it is actually owned by „X‟ who
accepts the offer and delivers the cakes to „A‟, there‟s no valid contract and „A‟ can reject the delivery.

 Mode of Communication – The acceptance has to be made in the form and manner prescribed by the
proposer if not prescribed then in some usual or reasonable manner.
 Acceptance must be given within a reasonable time and before the offer lapses: 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.
 Acceptance must be communicated in the method specified by offerer: When an offer is made for
the same, acceptance must be communicated in the method specified by offerer.
 Completion of Communication of Acceptance – Generally when the parties are in presence of each
other the contract is concluded when acceptance is communicated to the proposer. But when the
parties are at distance and are contracting through messages or post, acceptance is complete when
The communication of acceptance has two parts. Let us take a look:
A. As against the Offeror: For the proposer, the communication of the acceptance is complete when he
puts such acceptance in the course of transmission. After this it is out of his hand to revoke such
acceptance, so his communication will be completed then. So, for example, A accepts the offer of B
via a letter. He posts the letter on 10th July and the letter reaches B on 14th For B (the proposer) the
communication of the acceptance is completed on 10th July itself.
B. As against the Acceptor: The communication in case of the acceptor is complete when the proposer
acquires knowledge of such acceptance. So, in the above example, A‟s communication will be
complete on 14th July, when B learns of the acceptance.

Note: In case of contract through telephone or telex that is when the acceptance is through medium of direct
or instantaneous communication, the contract is complete only when the acceptance is clearly heard and
understood. This situation is an exception to the contract made when the parties are at distance.
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2. Acceptance must be absolute and unqualified (Mirror Rule): In order to be legally effective
acceptance must be an absolute and unqualified acceptance of all the terms of the offer. Even the
slightest deviation from the terms of the offer makes the acceptance invalid. A valid contract arises
only if the acceptance is absolute and unconditional. It means that the acceptance should be in total
and without any condition.
 Counter Proposal – An acceptance with variation is no acceptance and is simply a counter proposal
which becomes a new offer for original offeror.
 Provisional Acceptance- An acceptance made provisionally and which is subject to final approval
does not bind either party.

Revocation of acceptance (Section 5):

An acceptance may be revoked at any time before the communication of the acceptance is complete as against
the acceptor but not after that. If the letter of acceptance and letter of revocation reach together, the
acceptance will be considered revoked, as against acceptor communication is complete when the acceptance
comes to the knowledge of proposer, thus acceptor may cancel acceptance before it comes into knowledge of
proposer.

Illustration
A proposes, by a letter sent by port, to sell his house to B. B accepts the proposal by a letter sent by post.
B may revoke his acceptance to any time before or at the moment when B posts his letter of acceptance, but
not afterwards.

CONSIDERATION [SEC. 2 (d)]

Definition of the Term "Consideration": Sec. 2 (d) of the Indian Contract Act, defines consideration as
follows "When at a desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing, something, such act or abstinence or promise is called a consideration
for the promise."
Thus consideration consists of
(a) Act (b) Abstinence (c) Promise

Which may be rendered in the

(a) Past (b) Present (c) Future

Example: A promises to deliver a piece of furniture to B and B promises to pay Rs 7,000 on delivery. In this
case, the consideration for each of these promises is as under:

PROMISE CONSIDERATION
For A's promise B's promise to pay Rs 7,000 on delivery
For B's promise A's promise to deliver furniture

I. ESSENTIALS OF VALID CONSIDERATION:

1. Consideration must move at the desire of the promisor: Thus, an act done voluntarily by the
promisee or at the desire of the third party will not constitute a valid contract.
Illustration: A voluntarily rescues B's son from drowning in the river. Here, A cannot claim
remuneration from B, because he has not done it at B's request.
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Case Law: DURGA PRASAD V. BALDEO- In the case it Essentials of a Valid Consideration –
was held that it is essential that the consideration must have 1. Consideration must move at the desire of
been given at the desire of the promisor, rather than merely the promisor
voluntarily or at the instance of some third party. 2. Consideration may move from Offeree or
any other person
2. Consideration may move from Offeree or any 3. Consideration need not benefit the
other Person: There must be some consideration Promisor
for a valid contract it is immaterial that its moves 4. Consideration must be real
from offeree himself or any other person. 5. Consideration need not be adequate
6. Consideration may be past, present or
Case Law: CHINNAYA Vs RAMMAYA future
An old lady transferred a property to her daughter. In
return, she wanted her daughter to pay an annuity to her
uncle (i.e.) the old lady's brother. Accordingly, the girl made a deed agreeing to pay a particular sum to her
uncle. After a while, she stopped paying the sum. Her contention was that since her uncle had not given her
any consideration, she was not obliged to hold on to her promise. The Court, however, held that consideration
had moved from her mother.

3. Need not benefit the promisor: It is not necessary contract is made for the benefit of parties to the
contract only but it can be for the benefit of third party also.

4. A stranger to a contract cannot sue: The Concept is also called The Doctrine of Privity of
Contract. According to the doctrine the contract is between parties only and third party cannot sue
upon it.

Case Law: DUNLOP PNEUMATIC TYRE CO. LTD. V. SELFRIDGE & CO. LTD.-
The concept of privity of contract under the English Law was explained in this case. It was observed that only
a person who is party to a contract can sue on it. Our law knows nothing of a Jus quaesitum tertio arising by
way of contract. However such a right may be conferred by way of property, for example under a trust, but
cannot be enforced on a stranger to a contract as a right to enforce the contract in personam.
But the consideration can be given by a third party also. As per the Indian Contract Act, 1872, the definition
of consideration in Section 2(d) states, consideration may be furnished by „the promisee or any other person‟
as long as it is „at the desire of promisor‟. Thus, the consideration may move from promisee, or some other
person, if the promisor has no objection, from any other person.

Case Law: DUTTON V. POOLE:

A son promised his father that, in return for his father not selling a wood, he would pay 1000 pounds to his
sister. The father refrained from selling the wood, but the son did not pay. It was held that the sister could sue,
on the ground that the consideration and promise to the father may well have extended to her on account of
the tie of blood between them.

An Indian case law on this matter is: VENKATA CHINNAYA V. VENKATARAMAYA GARU

5. Consideration must be real: Consideration must be real and not illusionary. It must be physically
possible, certain and legal.
Illustration: A promise to put life in X‟s dead body on B‟s promise to pay him Rs.1000. It is not real.

6. Consideration need not to be Adequate: Inadequacy of consideration does not invalidate the
contract it must be of some value in the eyes of law.
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Case Law: CHAPPELL & CO LTD V NESTLÉ CO LTD

“A contracting party can stipulate for what consideration it chooses. It need not be adequate but should have
some value in the eyes of law.”

7. Consideration may be past, present or future:

A. Past Consideration: When something is done or suffered before the date of the agreement, at the
desire of the promisor, it is called past consideration. For Example: Shyama shastri teaches music
to Bala Murugan's son at the latter's request from January to July. In September, Bala Murugan
promises to pay Shyama Shastri a sum of Rs.5000 for his services. The music lessons given by
Shyama shastri will be past consideration.
B. Present Consideration: Consideration which moves simultaneously with the promise is called
present consideration. Example: Harish sells and delivers a cycle to Rakesh, who promises to pay
on the 1st of the next month. The consideration moving from Harish is present consideration,
which is moving simultaneously with the promise of Rakesh.
C. Future Consideration: When the consideration on both sides is said to move at a future date, it
is called future consideration. Example: Satish promises to sell and deliver 10 bags of wheat to
Kamesh for Rs.8000 after a week, upon Kamesh's promise to pay the agreed price at the time of
delivery.

II. CONTRACTS WITHOUT CONSIDERATION:

Generally, a contract without consideration is void; however, in certain exceptional cases a contract may be
valid even if it is not supported by consideration as stated under Section 25 of the Contract Act, 1872.
Following are the exceptions to the general rule "No consideration, No contract".

 Nundum Pactum: Nudum pactum is a Latin term that translates as "naked agreement." In law, it is
an agreement in which there is no consideration. This means the agreement is not legally enforceable
by law because it is not "dressed" with consideration, as legally required. As a nudum pactum is not
legally binding or enforceable, it's best to be avoided. A nudum pactum may be in verbal or written
form. These agreements may not result in legal action, since they are naked contracts. This means that
the agreements do not fall within the specific categories of agreements that can provoke legal action.

A. Agreement made on account of natural love and affection: An Agreement made without
consideration is enforceable if, it is

 Made between parties in near relationships. (Ex: Husband and wife / Brother and sister).
 Out of love and affection
 In writing
 Also registered

Case Law: VENKATASWAMY VS RANGASWAMY

An older brother on account of natural love and affection, promised to pay the debts of his younger brother.
The agreement was in writing and registered. Held, the older brother was liable to the creditors.

Case Law: RAJLAKHY VS BHOOTNATH

A man promised to transfer a house property in favour of his wife. He put this agreement in the form of a
deed and also registered it. In the deed there was a mention of their frequent quarrels and arguments and
hence they had decided to live separately. Held, that the wife could not enforce the agreement because it was
not made out of love and affection.
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B. Agreement to compensate for past voluntary service: A promise made without consideration is
valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, or done something which the promisor was legally compellable to do.

Example: Seema rescued Vishnoo from drowning in the river. Raghu, Vishnoo's father, in gratitude for
Seema's service, promises to pay Rs.5000/- to Seema. This contract between Seema and Raghu is valid,
although it is not supported by consideration.

C. An agreement to pay time-barred debt: Where there is an agreement, made in writing and signed
by the debtor or by 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. A time barred
debt cannot be recovered and therefore a promise to repay such a debt is without consideration, hence
the importance of the present exception.

D. Promise may also form a consideration: A promise by a widow to adopt a person is good
consideration for the adoptee‟s agreement in favour of the widow to pay a certain sum of money for
maintenance and at times for arrangement of property.

CAPACITY TO CONTRACT Section 10 of the Contract Act states

–
The Section 10 of Indian Contract Act, 1872 requires that the parties “All agreements are contracts if they
must be competent to contract. Where Section 11defines who are are made by the free consent of
competent to contract. parties competent to contract, for a
lawful consideration and with a
Every person is competent to contract who is lawful object, and are not hereby
 Major (Age 18 or above) expressly declared to be void.”
 Not disqualified by law
 Sound mind

I. MINORS AGREEMENT

An agreement by a minor is absolutely void and inoperative. Where a minor is charged with obligations and
the other contracting party seeks to enforce those obligations against minor, the agreement is deemed void ab-
initio. But parents and guardian of the minor can enter into a contract on behalf of minor. Such contract must
be for the benefit of minor and is specifically enforceable.

Case Law: MOHIRIBIBI Vs DHARMODAS GHOSH

A minor borrowed a sum of money after mortgaging his property. The mortgagee moved the Court for
repayment of the sum borrowed. The Privy Council held that money advanced to a minor could not be
recovered because agreement with a minor is void. A minor can‟t be made to repay the money received under
the agreement in a suit for avoiding it, except where the minor induced the other party by misrepresenting
himself. It won‟t be repaid in case the vendor knew that the person was minor or vendor was negligent.

Effect of Minors Agreement

1. Minors Contract Cannot Be Ratified: Ratification means subsequent acceptance or adoption of an

act or agreement. Since a minor's agreement is void ab-initio, the minor on his attaining majority
cannot ratify the agreement entered during his minority.
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Case Law: ARUMUGAM CHETTI Vs DURAISINGA TEVAR

A minor had borrowed money during his minority. Upon attaining majority, he executed a promissory note in
favour of the creditor to repay the borrowed sum. It was held that the promissory note was unenforceable, as
ratification of a void agreement was not possible. Note: The loan transaction between the minor and the
creditor was a void agreement.

2. No Rule of Estoppel against Minors: Estoppel means, "When one person, by words spoken, written
or by conduct, leads another one to believe certain thing to be true, and the latter acts upon such
belief, he is prevented from denying the truth of that thing." A minor is not estopped from setting up
the plea of minority. In other words, he may plead infancy to escape from a liability.

What is the Rule of Estoppel?

When one person has, by his declaration, act or omission, intentionally caused or permitted another person to
believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any
suit or proceeding between himself and such person or his representative, to deny the truth of that thing.

Case Law: LESLIE Vs SHEILL

A minor boy borrowed funds, falsely representing that he was of full age. Later, he pleaded before the court
that he was only a minor and hence not in a position to repay. The court held that the rule of Estoppel does not
apply to minors and held that the boy was not liable.

The term "Estoppel," comes from an old-French word- "Estoupail" (or variation), which means "stopper
plug", referring to placing a brake on the imbalance of the situation. The rationale behind estoppel is to
prevent injustice owing to fraud or inconsistency. In its simplest sense, doctrine of Estoppels, precludes a
person from denying or to negate anything to the contrary of that which has been constituted as truth, either
by his own actions, by his deeds or by his representations or by the acts of judicial or legislative officers.
Estoppel is often described as a rule of evidence as indeed it may be so described. But the whole concept is
more carefully viewed as a rule of substantive law.
Promissory estoppel applies in cases of contracts with the governments and contains a number of features
which distinguish it from estoppel by representation of fact. First, in that the representation may be one of
intention and not one of fact; which raises the question whether it is inconsistent with the House of Lords
decision in Jordan v. Money. But the doctrine is now well established. Secondly, the requirement of detriment
to the representee is less stringent in the case of promissory estoppel. Financial loss or other detriment is of
course sufficient; but it seems that it is not necessary to show more than that the representee committed
himself to a particular course of action as a result of the representation. Thirdly, the effect of the estoppel may
not be permanent. The representator may escape from the burden of the equity if he can ensure that the
representee will not be prejudiced.

3. Minor's Liability for Necessaries: When a minor is supplied with the necessaries of life, by another
person, the one who so supplied it is entitled to be reimbursed from the property of the minor. (Sec -
68. Of Indian Contract Act) Note: The above rule is applicable to a person of unsound mind also.

4. Contracts beneficial to Minors: However, in a contract, if a minor is a beneficiary, the contract is

valid and enforceable, not only the parties even a minor in whose favor contract is made can enforce
the contract. Further minor has option from retiring from the benefit on attaining majority.

Case Law: RAGHAVA CHARIAR Vs SRINIVASA

In this case, a minor was the mortgagee. The minor had lent money to an adult mortgagor. The Madras High
Court held that where a minor is a beneficiary, the contract would be enforced in favour of the minor.
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5. Minor as a Partner: Minor, being incapable of contracting, cannot become a full-fledged partner.
However, Sec. 30 of the Indian Partnership Act permits a minor to be admitted to the benefits of
partnership firm.

6. Position of Minor's Parents: The parents of a minor are not liable for agreements made by a minor
unless the minor acts on behalf of the parents.

7. Minor and insolvency: A minor cannot be declared insolvent, as he is not personally liable for his
debts.

8. Minor and agency: A minor can be appointed as an agent. The principal will be responsible to third
parties for the acts of his minor agent. However, the principal cannot hold the minor agent personally
liable for any wrongful acts.

9. Minor as a member of a company: A minor cannot become a member of a company, as he is

incompetent to contract. He cannot purchase shares in the company. Where he inherits shares, the
name of the guardian will be entered in the Register of Members.

II. DISQUALIFIED PERSONS:

The persons who are disqualified from contracting by any law to which they are subject are incompetent to
enter into a contract. Following persons are considered as disqualified:

 Alien enemies: A person cannot enter into contracts with alien enemies
 Convict: During the period of imprisonment, a convict is incompetent
(a) to enter into contracts
(b) to sue on contracts made before conviction
 Insolvent person: An insolvent person is incompetent to contract with respect to his property.
 Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce them, but they
cannot be sued in our courts without the permission of the Central Government

III. PERSON 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 judgments as to its effect upon his interests. A person
who is usually of unsound mind, but occasionally of sound mind, can may a contract when he is of sound
mind. A person, who is usually of sound mind, but occasionally of sound mind, may not make a contract
when he is of unsound mind. Therefore, there cannot be a fixed standard of sanity for all transactions. A
person may appear to be normal, but if he is incapable of forming a judgement as to what is in his own
interest, the law would protect him.

The allegation of unsoundness of mind must be established by proof showing that the person was incapable of
understanding the business and of forming a rational judgement as to the effect of the transaction on his
interests.

Illustration: patient in lunatic asylum, who is of sound mind at some interval of time, may contract during
such interval.
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CHP 4 FREE CONSENT

By this Chapter, you’ll be learning:

 Meaning of Consent and Free Consent

 Factors vitiating Free Consent
 Meaning of Coercion, Undue Influence, Fraud, Misrepresentation and Mistake
 Effect of vitiated consent on a Contract

The parties to a contract must willingly and knowingly enter into an agreement. But how does the law
determine if the parties entered into the contract willingly? This is where the concept of free consent comes
in. One of the essential elements of a valid contract provided under Section 10 is that the parties entering into
the contract should do so with free consent. Where a contract is entered between the parties and if it appears
that the consent of one of party was not free, the contract is voidable at the option of such party.
The definition of Consent is given in Section 13, which states that “it is when two or more persons agree upon
the same thing and in the same sense”. So, the two people must agree to something in the same sense as well.
Let‟s say for example A agrees to sell his car to B. A owns three cars and wants to sell the Maruti. B thinks he
is buying his Honda. Here A and B have not agreed upon the same thing in the same sense. Hence there is no
consent and subsequently no contract.

Now Free Consent has been defined in Section 14 of the Act. The section says that consent is considered free
consent when it is not caused or affected by the following,
1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake

CONCEPT OF FREE CONSENT

According to section 14: Consent is said to be free when it is not caused by any of the following factors
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A. COERCION: [SEC. 15]

The Contract Act defines coercion as committing or threatening to commit, with the intention of causing any
person to enter into an agreement:
(i) Any act forbidden by the Indian Penal Code or
(ii) The unlawful detaining or threatening to detain, any property

For example:
 P unlawfully detains R, A‟s best friend, and thereby obtains A‟s consent to the contract, it would
amount to coercion.
 Consent obtained at the point of pistol or by threatening a person to cause grievous hurt.
 Threat to suicide amounts to coercion.

Status of Coercion: A Contract brought about by coercion is voidable at the option of the party whose
consent was obtained by coercion.

Case Law: CHIKKAM AMMIRAJU AND ORS. V. CHIKKAM SESHAMMA AND ANR

In this case, a husband threatened his wife and son to commit suicide if they did not release a sale added in
favor of his younger brother. They executed the deal but later filed a plea of coercion. Since the very act of
committing suicide is forbidden under the Indian Penal Code,1860.
Held that threat to commit suicide also amounts to coercion and the party who is affected by it has the right to
avoid the contract.

B. UNDUE INFLUENCE: [SEC. 16]

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.

Illustration: Say for example, „A‟ sold his gold watch for only Rs 500/- to his teacher B after his teacher
promised him good grades. Here the consent of A (adult) is not freely given, he was under the influence of his
teacher.
A person is said to be in a position to dominate the will of the other in the following cases –
1. Where he holds a real or apparent authority over the other, or
2. Where he stands in a fiduciary relation to the other, or
3. Where he makes a Contract with a person whose mental capacity is temporarily or permanently
impaired

Case Law: MANNU SINGH VS UMADATT PANDEY

A spiritual Advisor told his disciple that if the latter gives away all his properties to the Guru, he would attain
"Mukti". The disciple accordingly made out a release deed. Later, he sought to set it aside and the Court held
that the contract was affected by undue influence.

Status of Undue Influence: When consent to an agreement is caused by undue influence, the agreement is a
contract voidable at the option of the aggrieved party
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C. 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 another party thereto or his agent; or to induce him to enter
into the contract.
What all constitutes Fraud ?
 the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
 the active concealment of a fact by one having knowledge or belief of the fact;
 a promise made without any intention of performing it;
 any other act fitted to deceive;
 any such act or omission as the law specially declares to be fraudulent

Fraud includes any of the following acts:

(I) The suggestion that a fact is true when it is not true and the person making the suggestion do not
believe it to be true.

Illustration: Suman sells to Rekha a chain representing it to be a gold chain, while it is actually not. It
amounts to fraud.
Illustration: A bought a horse from B. B claims the horse can be used on the farm. Turns out the horse is lame
and A cannot use him on his farm. Here B knowingly deceived A and this will amount to fraud.

(II) The active concealment of a fact by the person having knowledge or belief of the fact
Illustration: A, a furniture dealer, conceals the crack in furniture and sells it to C. This would amount to fraud
through active concealment.

(III) A promise made without any intention of performing it.

Illustration: A man purchased some goods on credit knowing fully well that he will not be able to pay for it.

(IV) Any other act fitted to deceive

Illustration: It covers those acts which are meant to deceive but are not covered under the above
mentioned clauses.

(V) Any such act or omission, as the law specially declares to be fraudulent.
Illustration: Under the Transfer of Property Act, if a seller fails to reveal to the buyer any material defect of
which he is aware, it amounts to fraud.

UBERIMMA FIDES

Uberrimae fidei or "uberrima fides" literally means "utmost good faith" in Latin. The underlying principle
that governs this maxim is that all human acts should be backed by good faith. Talking about, contracture
uberrima fides, the phrase means that all kinds of contracts (commercial transactions) must be free from any
kind of concealment, fraud, and misrepresentation. It simply says that any contract where the material facts
are not disclosed on the part of either party to the contract stands null and void. The maxim majorly governs
the insurance contracts. A complete and clear declaration of all material facts is vital for validating a contract.
For instance, in a health insurance contract, the insured fails to disclose material facts like suffering from
asthma or some other kind of health issue, results in non-disclosure of material facts, and ultimately frees the
insurer from all liabilities of indemnifying the insured.
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In the case of LIC vs. G.M. Channabasamma (AIR 1991 SC 392) In a landmark judgment, the Apex Court
held that the onus of proving that the policyholder has failed to disclose material facts lies in the corporation.
It is the fundamental principle of insurance law that utmost good faith must be observed by the contracting
parties and good faith forbids either party from non-disclosure of the facts which the parties know.

Mere silence is no fraud

But there are certain circumstances under which silence amounts to fraud, which are as followed:

1. When the person keeping silence is under a duty to speak: this basically arises when one contracting
party puts trust and confidence in the other party.

Illustration: A father selling a horse to his son must tell him about the unsoundness of horse, if any, as the son
is likely to trust his father.

2. When silence in itself is equivalent to speech: then it‟s the duty of such a person to express it in a
bona fide manner.

Illustration: A buyer asks the seller whether the horse was of sound mind. The seller remains silent. It will
amount to fraud if the horse is unsound.

D. MISREPRESENTATION

Misrepresentation means misstatement of a fact material [important] to the contract. But the person making
such representation himself believes the facts to be true and does not intend to deceive the other party.

Illustration: A sells a camera to B, genuinely believing it to be made in America. However, it turns out to be
made in China. The buyer gets the right to cancel the contract, as B's consent has been affected by
misrepresentation.

A mere expression of opinion cannot be regarded as misrepresentation if the opinion turns out to be wrong.

Illustration: In a sale of land a mere general statement that the land is fertile and improvable whereas part of it
is abandoned as useless cannot be considered as misrepresentation.

Illustration: Ira said that her radio is in good condition and Ankita bought the radio from her because of the
trust she had in Ira. After some time the radio did not work properly and Ankita thought she was misled by
but Ira believed that her radio was in good condition and had no intention to deceive.

Comparison between Fraud & Misrepresentation: In both cases, the representation made is untrue.
In the case of fraud, the intention is mala fide, whereas, in the case of misrepresentation the intention is
bona fide.

Status of fraud and misrepresentation: In Both cases, the contract becomes voidable and the aggrieved
party may set it aside.
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E. MISTAKE

Consent obtained by mistake is also not a free consent. It may be defined as a wrong belief about something.

According to Section 20:

1. When both the parties to an agreement are mistaken

2. Their mistake is with regards to matter of fact, and
3. That fact is essential to the agreement.

Mistake of Law (Section 21): This section is based on the maxim- Ignorantia Juris non-exusant which
means ignorance of the law is no excuse. Hence it provides that a contract is not voidable because it was
caused by a mistake as to any law in force in India.

Exceptions to Mistake of Law:

1) Private Rights of Property- A party cannot fully know the private rights of the other party, therefore it is
excusable.
2) Mistake as to any foreign law is considered to be treated like a mistake of fact and is considered excusable
since knowledge of foreign laws is not necessary.

Mistake of Fact (Section 20): When there is a misunderstanding of fact by both or one of the parties, it is
considered to be a mistake of fact. The mistake of fact can be unilateral or bilateral.

Bilateral Mistake: When both parties to a contract are under a mistake of fact, essential to the contract, the
contract is rendered void. An agreement is void where there is a bilateral mistake as to the subject matter.

Illustration: Sohan agrees to buy from Rohan a cow. It turns out that the cow was dead at the time of the
bargain, though neither party was aware of the fact. The agreement is void.
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Unilateral Mistake: When only one party to a contract, makes a mistake, regarding facts related to the
contract, it is termed unilateral mistake. However in some circumstance under which unilateral mistake
renders a contract voidable as mistake is caused by fraud or misrepresentation.

Illustration: Satish sells a house to Ramesh, representing that it is in good condition, and free from defects.
Actually, the building had developed quite a few cracks, which were cleverly concealed by Satish by sealing
and painting them. In this case, if Ramesh buys the house, believing that the building is in good condition, he
can later on set aside the contract, if he learns the truth at a later date.

A few cases on Mistake of Fact:

Case law: BOULTON V. JONES

Jones sent an order to Brocklehurst for the purchase of certain goods. By the time the order reached,
Brocklehurst has sold his business to Boulton. Boulton supplies goods to Jones. Jones refused to pay on the
grounds that he had never placed an order with Boulton and never intended to make a contract with him. It
was held that since Jones never made any contract with Boulton he is not bound to pay.

Case Law: DULARIA DEVI V. JANARDAN SINGH (1990), The plaintiff an illiterate woman wanted to gift
her properties to her daughter. Her thumb impressions were taken on two documents which she believed were
gift deeds in favor of her daughter while in reality, the second deed was in favor of the defendants who were
executing the deed. Later she filed a suit for cancellation of the sale deed and it was held that the since the
woman had absolutely no idea of the nature of the second document,it was considered void.

Illustration: gift deed signed under the impression that it is only a power of attorney.
Status of mistake: Mistake makes an agreement void and is not enforceable at the option of either party.
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CHP 5 VOID AGREEMENT

By way of this chapter, you’ll be learning:

 What are void agreements?

 The types of void agreements
 Agreements expressly declared to be void

VOID AGREEMENTS

There are certain essential elements of a valid contract. And if those elements are not present, the contract
would then be void or voidable. However, there are certain agreements that are declared void by
the law itself.

They have been enumerated in the Indian Contract Act, 1872, itself.
A void agreement is an agreement not enforceable by law as per Sec.2 (g). Thus, a void agreement does not
give rise to any legal consequences and is void ab-initio i.e void form the very beginning. This means that
both the parties will not have any rights against each other or obligations towards each other and contract is a
nullity. The following are void contracts under the Indian Contract Act, 1872:

Section 11: Competency to Contract

As per Section 11, every person is competent to contract who is of the age of majority according to the law to
which he is subject,1 and who is of sound mind and is not disqualified from contracting by any law to which
he is subject. Hence, if one enters into a contract with a minor or with a person of unsound mind or someone
disqualified by law, the contract will be void.
With respect to a minor, the Indian Majority Act, 1875 declares the age of majority of all persons to be 18
years. Hence, where a person who enters into a contract with another person who is below the age of 18, then
such a contract will be void.

Case Law: MOHIRI BIBI V. DHARMODAS GHOSE:

In this case, a minor had borrowed some money from a money-lender by mortgaging his house.
The money-lender moved to take possession of the minor’s house when he defaulted payment. The court,
however, said since an agreement with minor parties is void, the money-lender could not enforce this contract.

Section 20:
As per this Section, an agreement is void where both the parties are under mistake as to matter of fact. The
mistake can be of subject matter, quality, quantity, etc.

Section 23 and Section 24:

It is essential for the validity of a contract that the consideration and object should be lawful. Lawful object
must be accomplished by lawful means. If the object of a contract is not lawful and is against the law of the
land it will be void or unlawful. A contract may fulfill all the essential requirements as free consent, parties
may be competent, consideration may also be lawful, but if the very purpose of agreement is unlawful or
illegal, the agreement is void.
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Thus, consideration or object of an agreement is considered lawful unless

1. If it is forbidden by law: When an agreement is made to do an act which is forbidden by law it is

unlawful.

Example: Sale of liquor without license or Agreement to pay money on commission of murder.

2. If it defeats the provisions of any law: Though object or consideration not directly forbidden by law
but if it would permitted would defeat the provisions of law.

Example: Hakim gives a loan of Rs 2 lakhs to Mr. Khan to celebrate his minor daughter's marriage. In this
case, giving a loan is lawful, but the purpose for which it is given is unlawful. [As it is against the Child
marriage restraint Act]

3. If it is fraudulent: An agreement made for a fraudulent purpose is not legal.

Example: Priti and Zeba agree to cheat Mr. Henry and share the gains equally.

4. If it involves injury to a person or property of another: An agreement to injure any person or

person’s property is illegal.

Example: Santhosh agrees to set important files belonging to Mukesh on fire provided Rajneesh pays him Rs.
50000/- The contract between Santhosh and Rajneesh is void.

5. If the Court regards it as immoral: An agreement, whose object or consideration is immoral, is

illegal and therefore void.

Example: A promise to marry married women after the death of her husband or after obtaining divorce is
immoral.

6. If the Court regards it as opposed to public policy: An agreement is unlawful, if the court regards
it as opposed to public policy. Public policy is that principle of law, which holds that no citizen can
lawfully do that which is injurious to the public or is against the interest of the society or the state.

Examples of Agreements against public policy:

• Agreement creating an interest opposed to public duty.
• Agreements interfering with the course of justice.
• Trading with an alien enemy.

Section 25:
Agreements without consideration are declared to be void unless they fall in any of the exceptions stated in
the Section itself. The same have been previously covered in the chapter of ‘Elements of a Contract’

Agreements expressly declared to be void:-

Following are some agreements which are expressly declared to be void under Indian Contract Act, 1872 -

A. Agreements in restraint of marriage [Sec. 26]: Under the Contract Act, an agreement in restraint of
the marriage of any person other than a minor is void. If an agreement specifies that X will marry
only Z and nobody else it will be void in nature.
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Example: Sunil promised to marry Rashi only and nobody else, and in default to pay Rs 20,000. Sunil
however married Sunita and Rashi sued Sunil for recovery of Rs 20,000. Held, Rashi could not recover the
amount as the agreement was in restraint of marriage.
Case Law: LOWE V. PEERS: In this case, the defendant contended that if he marries any other person
except the plaintiff, he would give her 1000 pounds within three months of his marriage. It was held that such
an agreement is void.

Case Law: RAO RANI V. GULAB RANI: The two parties

were the widows of the same man, Ram Adhar. After the Void Agreements
death of their common husband, a dispute had arisen 1) Agreements of which the consideration or
regarding the matter as to who would inherit THE object is not lawful
property. However, the dispute was amicably settled by 2) Agreements without consideration
the two parties by signing a compromise deed wherein it 3) Agreement in restraint of marriage
was stated that both of them would inherit equally but if 4) Agreement in restraint of trade
anyone would re-marry, the entire right over the property 5) Agreement which is ambiguous and uncertain
would shift to the other. The agreement was held to be 6) Agreement in Restraint of Legal Proceeding
valid because no direct prohibition to re-marry was 7) Agreement by way of wager
imposed by the compromise and the compromise was 8) Agreement to do an impossible act
arrived at in order to preserve the family properties and to
ensure their proper management

Exceptions: An agreement to prohibit the marriage of a minor till he/she remains a minor is valid.

B. Agreements in restraint of Trade [Sec 27]: An agreement where in a person is restrained from
pursuing a lawful profession, trade or business of any kind, is to that extent void.

Case Law: MADHUB CHUNDER V. RAJCOOMAR

In this case, the parties were businessmen in Calcutta. The defendant, Rajcoomar suffered loss due to the
plaintiff’s competition and entered into an agreement with the plaintiff that if he closed his business there, he
would pay him all the advances he had made to his workmen. When the defendant failed to pay, the plaintiff
filed a suit to recover the amount but failed to do so because it was an agreement in restraint of trade,
therefore not enforceable in a court of law.

Exception:

Sale of Goodwill:- The only exception mentioned in the proviso to section 27 is that relating to sale of
goodwill . Goodwill means the reputation or status of the firm in society. After a sale of goodwill, the seller
continues to enjoy the right to carry out a competing business. But, in case, it is agreed upon through a
contract that the seller will not enter into any such agreement, such rights extinguish. There are certain
conditions that make a restraint on trade during a sale of goodwill valid, these are:

1. The seller can be restrained only from carrying out a similar business.
2. The restraint can be applied only to certain local limits, provided that such limits appear to the Court
reasonable, regard being had to the nature of the business.
3. The limits/restraint should appear to be reasonable.

Partnership Act:- There are four provisions in the Partnership Act which validate agreements in restraint of
trade. For example, Section 11 enables partners during the continuance of the firm to restrict their mutual
liberty by agreeing that none of them shall carry on any business other than that of the firm. Similarly, Section
36 also lays down a restraint.
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There are certain exceptions which have been evolved through legal decisions. The same are as follows:

Exclusive Dealing Agreements: - Business practice in vogue is that a producer or manufacturer likes to
market his goods through a sole agent or distributor and the latter agrees in turn not to deal with the goods of
any other manufacturer.

Illustration: ‘A’ enters into a contract with ‘B’ that he will only buy goods from ‘B’ and ‘B’ will exclusively
sell goods to ‘A’.

Restraints Upon Employee: - An agreement of service often contain negative covenants preventing the
employee from working elsewhere during the period covered by the agreement. Trade Secrets, name of
customers etc. are also the property of master and servant is not supposed to disclose it to anyone else . An
agreement of this class does not falls within Section 27.

C. Agreements in restraint of legal proceedings [Sec 28]: An agreement by which a party is restricted
absolutely from taking usual legal proceeding in respect of any rights arising from a contract is void.
Any agreement which oust the jurisdiction of court is opposed to public policy and is void. An
agreement which limits the time within which one may enforce his rights ignoring the provisions of
the Limitation Act is void.

Exception: An agreement to refer a dispute to arbitrator is a valid agreement.

D. Agreements which are uncertain are Void [Sec 29]: Agreements the meaning of which are
uncertain and are capable of being made certain are void.

Example: A agrees to pay Rs 1,00,000 when he is in a position to pay. The agreement is void for its
uncertainty.

Example: A agrees to sell to B 100 kg of fruit. This is a void contract since what type of fruit is not
mentioned. But if A exclusively sells only oranges then the agreement would be valid because the meaning
would now be certain.

E. Agreements by way of Wager [Sec 30]: 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 is called a wagering event. Such agreements are chance-oriented and therefore,
completely uncertain.

Essentials of wagering agreement –

(i) Uncertain Event
(ii) Mutual chances of gain or loss
(iii) Neither Party has control over the event
(iv) No other interest in the event except the sum or money to be won or lost

Example: A agrees to pay Rs 10,000 to B if India wins a cricket match.

Illustration:
Shivani and Munish enter into an agreement that if Shivani resigns from her job, Munish will pay Rs. 20000
to Shivani and Shivani will pay Rs. 20000 to Munish if she does not resign from her job. Here Shivani has
control over her resignation and therefore will not constitute a wager.
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Exceptions to wager:

1. Contracts of Insurance are not wagers:

Insurance contracts are contracts of indemnity. They are entered into, to safeguard the interest of one
party to the contract. In this contract, the insured has insurable interest in the property or life Hence, it
is not a wager.
2. Skill Competitions are not wagers:
Skill plays a substantial part for the successful solution of certain competitions. For e.g., crosswords
competitions, picture, puzzles etc. Here, the prizes are awarded as per the merits of the solution. Such
competitions are not wagers. However, if prizes depend upon a chance, that is a lottery and therefore
a wager.

Illustration:
A crossword puzzle was given in a newspaper and it was stated in the newspaper that whose solution of the
crossword puzzle would correspond with the solution kept with the editor, he would be given the first prize.
This is a game of chance and therefore a lottery. And thus, is a wager.

3. Horse Race Competition is not wager:

Agreements to subscribe or contribute towards such prize or sum of money is also valid and
enforceable.
Exception in favour of prizes for horse racing-
Section 30 does not render unlawful any subscription or contribution, for or toward any plate, prize or sum of
money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of
any horse-race.

Illustration:
A entered into an agreement with the Race Course Authority who was permitted to conduct the race course
competition, to contribute Rs. 600 towards the money which was to be paid to the winner of the horse race to
be held on a particular day. This is not a wager.

4. Sports Competitions are not wagers:

Sports competitions such as Athletics, Wrestling, Indoor games, Boxing, Football, Cricket, Hockey
etc. are not games of chance. It is decided by skill. Hence, they are not wagers.

F. Agreement contingent on impossible events [Sec 31]: Contingent contract is a contract to do or not
to do something on the condition of happening or non-happening of some event.

Example: Rakesh promises Tarun to a give a loan of Rs. 10 lakhs, if the latter marries his sister, Rekha.
However, Rekha is dead at the time of agreement. The agreement is void

G. Agreement to do impossible acts is void [Sec 56]: A promise to do some act which is not feasible
and practically impossible constitutes a void agreement.

Example: Drona agrees to put life into the body of a dead horse in return for 5 lakhs.

Void due to the impossibility of its performance: A contract can also be void due to the impossibility of its
performance. E g: If a contract is formed between two parties A & B but during the performance of the
contract the object of the contract becomes impossible to achieve (due to action by someone or something
other than the contracting parties), then the contract cannot be enforced in the court of law and is thus void.
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Doctrine of Restitution

Section 65 of the Indian contract act 1872 mainly deals with the doctrine of restitution and it relates to the
obligation of the person who has received some advantage under void agreement or contract. This section
starts from the very basis that there being an agreement or contract and if there was no agreement or contract
then the doctrine of restitution cannot come into play. This doctrine is based on a very common rule of
consideration which means that a person pays consideration only when he gets something in return.

Mr. Deepak entered into a contract with M/S ABZ Pvt Ltd Delhi for a purchase of 20 tonnes of wheat.
Deepak paid an advance of Rs 50,000 which was 10% of the total value of the contract. Later at a future date,
ABZ Pvt ltd rescinded the contract due to some financial loss after which they were declared as insolvent and
decided to wind up their business. Now, in this case, the contract becomes void and ABZ ltd must return the
Rs. 50,000 to Mr. Deepak.
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CHP 6 QUASI CONTRACT

By this Chapter, you’ll be learning:

 Meaning of Quasi Contracts

 Quasi-Contractual Obligations
 Types of Quasi Contracts

QUASI CONTRACT

(Implied-in-law Contract or Constructive Contract)

Can there be a contract without offer, acceptance, consideration, etc? Well, yes there can be such a contract
based on social responsibility. We call such contracts quasi contract. Section 68 to 72 deals with “certain
relations resembling those which are created by contract”.

The word „Quasi‟ means pseudo. Hence, a Quasi contract is a pseudo-contract. When we talk about a valid
contract, we expect it to have certain elements like offer and acceptance, consideration, the capacity to
contract, and free will. But there are other types of contracts as well in respect of which there is no formal
agreement entered into by the parties. These promises are not legal contracts, but the Court recognizes them
as relations resembling a contract and enforces them like a contract.

Still, the law, from the conduct and relationship of the parties, imposes an obligation on one party and confers
rights on the other party. This obligation is called quasi contractual obligation.

Thus, quasi contract is based on the doctrine of unjust enrichment. The core principles behind a Quasi
Contract are justice, equity and good conscience. It is based on the maxim: “No man must grow rich out of
another persons‟ loss” which declares that a person should not be allowed to enrich himself unjustly at the
expense of another.

Case Law: MAHABIR KISHORE V. STATE OF MADHYA PRADESH, the requirements of the principle of
unjust enrichment were laid down by the Hon‟ble Supreme Court as follows:

 The defendant has been „enriched‟ by the receipt of a benefit.

 This enrichment is at the expense of the plaintiff
 And the retention of unjust of the enrichment is unjust.

Features of a Quasi Contract

1. It is usually a right to money and is generally (not always) to a liquated sum of money
2. The right is not an outcome of an agreement but is imposed by law.
3. The right is not available against everyone in the world but only against a specific person(s). Hence it
resembles a contractual right.
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QUASI-CONTRACTUAL OBLIGATIONS:
Section 68 – Claim for necessaries supplied to person incapable of contracting, on his account
Section 69 – Reimbursement for person paying money due by another, in payment of which he is interested
Section 70 – Obligation of person enjoying benefit of non gratuitous act
Section 71 – Responsibility of finder of goods
Section 72 – Liability of person to whom money is paid, or thing delivered, by mistake or under coercion

1. Claim for necessaries supplied to a person incapable of contracting or on his account: Any
person supplying necessities to other person who are incompetent to enter into a contract is entitled to
claim the price from the other person‟s property.

Example: Akrosh supplies Bobby a mentally unsound person, with necessaries suitable to his condition in
life. Akrosh is entitled to be reimbursed from Bobby's property.

Conditions, which need to be satisfied:

a. The minor or the person incapable of contracting is not personally liable.

b. Only his estates are liable.
c. The goods supplied or services rendered must qualify as necessaries.
d. Only reasonable amount can be claimed for the supply of necessaries.
e. Such necessaries should be supplied only to person incapable of contracting or his dependents.

2. Reimbursement of persons paying money due by another, in payment of which he is interested:

The Contract Act lays down that if one person who is interested in the payment of money which
another is bound to pay by law, pays it, he is entitled to be reimbursed by the latter.

Example: A sub-tenant pays the arrears of rent due by the tenant to the landlord, in order to save the tenancy
from forfeiture.

Conditions, which need to be satisfied:

a. Plaintiff should be interested in making payment to protect his interest and the interest should be
legally recognizable.
b. It is necessary that plaintiff is himself not bound to pay.
c. The defendant should have been bound by law to pay the amount.
d. The plaintiff should have made the payment to another person.

3. Obligation of Person Enjoying Benefit of Non-Gratuitous act: A gratuitous act is one that is done
for a person by another without the expectation of a return. When a person does something lawfully
to another, or delivers something to him, not intending to do so gratuitously, the other person enjoys
the benefits there of, he is bound to compensate the latter for the thing done or delivered.

Example: SM & Sons delivers a basket containing any fruits to Mr. Kishore by mistake. Mr Kishore and his
family consume it, despite knowing that the goods are not intended for them. Now, the family must
compensate SM & sons.

4. Responsibility of Finder of Lost Goods: When a person comes across things belonging to another
and takes them into his custody, he must restore it to the true owner. The finder of goods is subject to
same responsibility as that of a bailee.
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Responsibilities of a Bailee

 Duty to take reasonable care of goods

 Duty not to make unauthorized use of the goods
 Duty not to mix the goods with own goods
 Duty to return the goods
 Duty to deliver any increase or profit on the goods

Example: A finds a purse left behind by a passenger in a bus. If he takes custody of it, he is under an
obligation to restore it to its owner.

Rights of the finder of goods:

a. He can sue the owner for specific reward announced for the return of goods.
b. He is allowed to recover lawful charges incurred in preserving goods and to find the lawful owner.
c. He has right to sell goods if the goods are of perishable nature and when after due search the true
owner cannot be found.

5. Liability of Person to Whom Money is Paid or thing Delivered by Mistake or under coercion:
Any person to whom money has been paid or anything delivered by mistake or under coercion must
repay or return it.

Example: A and B jointly owe Rs 5000/- to C, A alone pays the amount to C, and B, not knowing this fact,
pays Rs 5000/- over again to C. C is bound to repay the amount to B.
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CHP 7 REMEDIES FOR BREACH OF CONTRACT

By way of this chapter, you’ll be learning:

 Breach of Contract and it’s remedies

 Frustration of a contract
 Novation of a contract

BREACH OF CONTRACT

A breach of contract occurs when a party thereto refuses his liability under it, or by his own act makes the
performance of his obligations impossible under it or totally or partially fails to perform such obligations. The
failure to perform or refusal may take place when the time for performance has arrived or even before that.
Thus, breach is of two kinds –

Anticipatory Breach: It occurs when prior to the due date of performance, the promiser absolutely refuses or
disables himself from the performance of his obligations. In other words, it is a declaration by one party of his
intention not to perform his obligations under the contract.

Present Breach: When the promiser indicates his refusal to perform his obligation at the time of
performance, it amounts to a present breach.

Breach of Contract vs. Frustration of Contract

Under breach of contract one of the parties to the contract refuses or fails to perform his obligation or does
any act which makes the performance of his obligation impossible though the contract comes into existence
but not comes to completion. Non completion of contract is mainly because of the fault of one of the parties.
Thus law binds the party at fault to perform his obligation or to compensate the aggrieved party. But in case
of Frustration of contract, the contract does not come to completion not because of the fault of one of the
party but because of some natural factors and happening of events out of the control of parties. In such cases
parties are excused from performing their obligations under the contract. For e.g. - Death of a party, change of
law etc.

FRUSTRATION OF CONTRACT

Frustration in general scenario means defeated and this term has been widely used in agreements and contract
between parties. The term frustration is being used to deal with unsuccessful transactions which could not be
completed due to any reason. As general rule parties to contract are having an intention towards the
fulfillment of their part and in case of breach, party breaching is liable to compensate for the same. But an
exception to this rule is laid down in Section 56 of the Indian contract act 1872.
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Section 56 deals with the doctrine of frustration as being acts which cannot be performed. Section 56 is based
on the maxim ―les non cogit ad impossibilia‖ which means that the law will not compel a man to do what he
cannot possibly perform.

Case Law: SATYABRATA GHOSE VS. MUGNEERAM

The basic idea upon which doctrine of frustration is based is that of the impossibility of performance of the
contract and the expression frustration and impossibility can also be used as synonyms.

Following are the well-recognized grounds of frustration on Grounds for Frustration of a Contract
which the doctrine of frustration may be applied by the courts: 1. Destruction of the subject matter of the
- contract
1. Destruction of the subject-matter of the Contract: 2. Non occurrence of a particular state of
Where the performance of the contract becomes things
impossible by the destruction of the specific thing 3. Death or incapacity of the party
essential to that performance, that contract is 4. Change of circumstances
discharged. 5. Legislative or Government intervention
6. Intervention of war

Example: TAYLOR VS. CALDWELL, is a good example for this ground. Caldwell (D) contracted to permit
Taylor (P) the use of the Musical Hall at Newington. Caldwell was to retain possession of the hall and Taylor
merely had the use of it for four days to present four concerts in exchange for 100 pounds per day. The
contract stated that the Hall must be fit for a concert but there was no express stipulation regarding disasters.
The Hall was destroyed by fire before the first concert was to be held and neither party was at fault. The
concerts could not be performed at any other location and Taylor sued for breach and sought
reimbursement. If contract performance depends on the continued existence of a person or thing, and that
person or thing ceases to exist, performance may be excused for impossibility of performance.

2. Non-occurrence of a particular state of things: The doctrine of frustration has also been applied in
cases of non-occurrence of a particular event which is essential for the performance of the contract.

Example: PARSHOTAM DAS VS. BATALA MUNICIPAL COMMITTEE – The municipal committee leased
out certain Tonga stands to the plaintiff for Rs. 50000 but no Tonga driver used the stands for whole year. The
contemplated event does not take place, the doctrine of frustration applied.

3. Death or Incapacity of the party: Where the performance of a contract depends upon the personal
services of a party, the death or incapacity of such a party may be treated to be a valid ground for
frustration of contract.

Example: ROBINSON VS. DAVISON - In this case, the defendant's wife was a famous piano-player. She
contracted for performing a concert but could not fulfill her promise because of a serious illness. The plaintiff
brought an action to claim damages for non-performance (breach) of contract. The Court held that in this case
the continued health of the pianist was a condition attached to the agreement. Her serious illness was a valid
ground on the basis of which she was discharged from her obligation under the contract.

4. Change of circumstances: If the change of circumstances makes the performance of the contract
impossible, the contract will frustrate and parties will be discharged from their obligations under the
contract. If, however, despite the change of circumstances, the performance is still possible, the
contract will not be deemed to have been discharged.
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Example: Where a ship was charted to carry some goods but before it could proceed there was an explosion
in ship boiler, making it impossible to complete journey in scheduled time, the change in circumstances led to
frustration of contract.

FORCE MAJEURE

Force majeure is a French term that literally means "greater force." It is related to the concept of
an act of God, an event for which no party can be held accountable, such as a hurricane or a tornado.
Force majeure also encompasses human actions, however, such as armed conflict. Generally
speaking, for events to constitute force majeure, they must be unforeseeable, external to the parties
of the contract, and unavoidable. The concept of force majeure originated in French civil law and is
an accepted standard in many jurisdictions that derive their legal systems from the Napoleonic Code.
In common law systems, such as those of the United States and the United Kingdom, force majeure
clauses are acceptable but must be more explicit about the events that would trigger the clause.
If an avalanche destroys a supplier's factory in the French Alps, causing long shipment delays and
leading the client to sue for damages. The supplier might employ a force majeure defense arguing
that the avalanche was an unforeseeable, external, and irresistible event—the three tests applied.

5. Legislative or Government Intervention: Yet another ground for frustration of contract is

legislative or Government intervention. A contract will be dissolved when legislative or
"administrative intervention has so directly operated upon the fulfillment of the contract for a specific
work as to transform the contemplated conditions of performance".

Example: The performance of a contract may also become legally impossible by the change in law as to
strike at the root of the agreement, and not merely to suspend or hinder its operation in part is good example
of legislative intervention.

6. Intervention of War: Intervention of war or warlike conditions in the performance of a contract has
often created difficult questions.

Case Law: TSAKIROGLOU & CO LTD VS. NOBLEE THORL G M B H:

The appellants agreed to sell to the respondents three hundred tons of Sudan groundnuts c.i.f. Hamburg. The
usual and normal route at the date of the contract was via Suez Canal. Shipment was to be in
November/December 1956, but on November 2, 1956, the canal was closed to traffic and it was not reopened
until the following April. It is stated that the appellants could have transported the goods via the Cape of
Good Hope.

NOVATION OF A CONTRACT

The term 'novation' has been defined by House of Lords as follows:

"That there being a contract in existence, some new contract is substituted for it either between the same
parties or between different parties, the consideration being mutually the discharge of the old contract."

Therefore, the essence of novation of a contract lies in the mutual desire of the parties to substitute a new
contract in place of old contract. Where there are material or substantial changes which go to the root of the
agreement then this has to be regarded in law as a new agreement. Both the subject-matter and the rate of
payment are material parts of any agreement for sale and change in either of these terms brings about a new
agreement.
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Novation takes place when-

1) There is a change of parties, the contract remaining the same.

2) A new contract is substituted for an existing one between the same parties

In Scarf vs. Jardine it was observed that novation involves either change of parties, or change of the contract
between the parties.

Novation that replaces a contract's party:

It is possible that by novation an obligation may be created for one party in place of another.

Illustration: If Anna owes Manoj Rs.100 and Manoj owes Rs.100 to Jose, novation could transfer Anna's debt
to Jose and have Manoj owe nothing.

Novation that replaces a contract's obligation:

The parties to a contract are free to alter the contract which they have originally entered into if they do so.
Their ability as regards the original agreement is extinguished, and in its place, they become bound by the
new altered agreement.
Illustration: Rani owes Hema 500 Rs. They decide to settle the debt with a piece of artwork they both agree is
worth Rs. 500 instead of with cash. This novation will replace the original obligation to pay Rs.500 in cash
with a new obligation to pay with the piece of artwork.

Conditions of Valid Novation

The following conditions are to be satisfied for valid novation-

1) To substitute new contract, the old contract must exist
2) The new contract must fulfill the Essentials of a valid contract. (as prescribed under section 10 of the
Indian Contract Act 1872)

REMEDIES FOR BREACH OF CONTRACT

The law provides an appropriate remedy for every type of breach of contract. When there is a breach of
contract, the injured party has one or more of the following remedies:

A. Rescission of Contract
B. Damages for Breach of Contract
C. Specific Performance
D. Injunction
E. Quantum Meruit
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A. Rescission of Contract

In contract law, the term ―rescission‖ refers to the undoing, or ―unmaking‖ of a contract between parties.
Rescission of a contract may be ordered by a court as an equitable remedy in a civil lawsuit, and is intended to
bring the parties as close to the same position they were in before they entered into the contract as possible.
Contract rescission requires that all parties give back any benefits they have received while the contract was
in force, and be returned to their original states, as though the contract had never been formed in the first
place.

B. Damages for Breach of Contract

It is the most common remedy available to the aggrieved party. Damages are a monetary compensation
allowed to the injured party for the loss or injury suffered by him as a result of the breach of contract. The
fundamental principle underlying damages is not punishment but compensation.
There are two types of damages, according to the Act,

 Unliquidated Damages (Section 73): Here the amount payable due to the breach of contract is
assessed by the courts or any appropriate authorities.

Illustrations:
1. A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be paid on delivery. A
breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by
which the contract price falls short of the price for which B might have obtained 50 maunds of
saltpetre of like quality at the time when the saltpetre ought to have been delivered.
2. A contracts to buy B’s ship for 60,000 rupees, but breaks his promise. A must pay to B, by way of
compensation, the excess, if any, of the contract price over the price which B can obtain for the ship
at the time of the breach of promise.
3. A contracts to repair B’s house in a certain manner, and receives payment in advance. A repairs the
house, but not according to contract. B is entitled to recover from A the cost of making the repairs
conform to the contract.

 Liquidated Damages (Section 74): Sometimes the parties to a contract will agree to the amount
payable in case of a breach. This is known as liquidated damages.

Illustrations:
1. A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs.
500 on that day. B is entitled to recover from A such compensation, not exceeding Rs. 1,000, as the
Court considers reasonable.
2. A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain day. He
forfeits his recognizance. He is liable to pay the whole penalty.
3. A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that,
in default, of payment of any instalment, the whole shall become due. This stipulation is not by way
of penalty, and the contract may be enforced according to its terms.
4. A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly instalments of Rs.
40, with a stipulation that, in default of payment of any instalment, the whole shall become due. This
is a stipulation by way of penalty

Generally, compensation commensurate the injury or loss sustained, arising naturally from the breach of
contract. In fact, if actual loss is not proved, no damages will be awarded.
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Different Kinds of Damages on the basis of loss suffered: -

1) Ordinary Damages
2) Special Damages
3) Exemplary Damages
4) Nominal Damages
5) Damages for inconvenience and discomfort

1. Ordinary Damages: These are damages, which arise naturally and directly in the usual course of
things, from the breach of contract itself. In other words, ordinary damages are restricted to the direct
and proximate consequences of the breach of contract. Hence, the innocent party may only recover
damages for loss suffered as a result of the breach provided it is not too remote. The aim of damages
is to put him in the position as he would have been had the contract been properly performed.

Case law: HADLEY VS. BAXENDALE

The plaintiff was a mill owner. He entrusted a broken shaft, to the defendant, who was a carrier, to be
delivered to the maker as a pattern for a new one. The defendant was only told that the broken shaft was a part
of the machinery and ought to be replaced. Due to some neglect on the part of the defendant, the delivery of
the shaft was delayed. As a result, the mill remained closed and the plaintiff lost profits, which he would
otherwise have made. The plaintiff claimed the loss of profits as a part of damages. It was held that the
plaintiff was only entitled to recover damages, which arose in the usual course of things from such breach.
Thus, the plaintiff was entitled to recover damages for the delay in delivering the broken shaft. Since the
defendant was not informed, that the mill had to be kept idle, till the shaft was replaced, the plaintiff was, not
justified in claiming loss of profits.

2. Special Damages: These damages arise on account of the special/unusual circumstances affecting the
plaintiff. They are such remote losses, which are not the natural and probable consequences of the
breach of contract. These can be claimed only if the special circumstances, which would result in
special loss in case of breach of contract are brought to the notice of the other party, at the inception
of the contract itself.
Note: Subsequent knowledge of the special circumstances will not create any special liability on the
other party.

Case law: GOVINDA RAO VS. MADRAS RAILWAY COMPANY

G was a tailor and consigned through rail some sewing machines to a place in Tamil Nadu. He planned to take
part in a village fair, where he hoped to stitch garments and make profits. However, the train reached the
town, after the fair concluded. Hence G could not participate in the fair. He sued the Railway Company for
loss of profits. It was held that he could not recover compensation, as the special circumstances were not
brought to the notice of the Railway Company in the beginning itself.

3. Exemplary or Vindictive Damages: These damages are the exceptions to the rule that damages are
not to be in the nature of punishment, but only compensation for the loss sustained. These damages
will be awarded:

(a) In suit for breach of promise of marriage and the amount will depend upon the extent of injury to the
lady's feeling.
(b) In suit against bank for wrongfully dishonouring customer's cheque. The customer, though has sustained
no pecuniary damage, may recover substantial damage for injury to his credit.
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4. Nominal Damages: These damages are quite small in amount, e.g., a rupee. They are never granted
by way of compensation for the loss. In such cases, usually the actual loss is very negligible. They are
awarded simply to recognize the right of the party to claim damages for the breach of the contract.

5. Damages for inconvenience and discomfort: Damages can be recovered for substantial
inconvenience of discomfort resulting from breach of contract.

C. Suit for Specific Performance

It is an equitable relief given by the Courts under Specific Relief Act, 1963. Specific performance means the
actual and exact performance of contractual obligation as agreed. It is a direction given by the court to the
defendant to actually perform the promise that he has made. It is a remedy, which is sparingly used.

Example: A agrees to sell a house to B. Later, A refuses to sell. Now B can file a suit against A for specific
performance. The court may order A to perform what he had basically agreed, to do that is to sell the house.
Specific performance is not granted as a rule in the following cases: -
i. Where the contract is for personal services
ii. Where one of the parties to the contract lacks the capacity to contract.
iii. Where the court cannot supervise the actual execution of the contract
iv. Where monetary compensation is an adequate remedy

D. Suit for Injunction

Injunction is an order of a court restraining a person from doing a particular act. Thus, injunction is more of a
preventive relief and is provided in cases of anticipatory breach of contract. Injunction may be of temporary
or permanent nature.

Example: X is trying to put up an illegal construction on the third floor of his house. Y, his immediate
neighbour objects to it, as ventilation to his house is affected. Y can now move the court for injunction against
X to stop the construction.

E. Quantum Meruit

The term Quantum Meruit means to compensate as much as is earned or in proportion to work done. It is an
obligation imposed by law on a party where that party has taken the benefit of the work done or goods
supplied or services rendered by another party. When a party has performed some part of his obligation, he is
entitled to recover the value of what he has done.

Example: The defendant a publisher hired an Author Plaintiff to write a book and agree to pay Rs 1000 on its
completion. After a Plaintiff had written some part of it, the defendant discontinued the publication. It was
held that the plaintiff should be paid for the work he has done.
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CHP 7 SPECIAL CONTRACT

By this chapter, you’ll be learning:

 Meaning of Special contracts

 Contract of Indemnity
 Contract of Guarantee
 Contract of Bailment
 Contract of Pledge
 Contract of Agency

A special contract is an express or explicit contract, one which clearly defines and settles the reciprocal rights
and obligations of the parties, as distinguished from one which must be made out, and its terms ascertained,
by the inference of the law from the nature and circumstances of the transaction.

I. CONTRACT OF INDEMNITY (Section 124)

According to Section 124 of the Indian Contract Act, 1872 “A contract by which one party promises to save
the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other
person, is called a contract of indemnity.” Example: P contracts to indemnify Q against the consequences of
any proceedings which R may take against Q in respect of a certain sum of money. The objective of entering
into a contract of indemnity is to protect the promisee against unanticipated losses.
A contract of indemnity has two parties.
1. The promisor or indemnifier : He is the person who promises to bear the loss.
2. The promisee or the indemnified or indemnity-holder: He is the person whose loss is covered or who will
be compensated.
In the above-stated example, P is the indemnifier or promisor as he promises to bear the loss of Q. Q is the
promisee or the indemnified or indemnity-holder as his loss is covered by P.

New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others, 1997, A Contract of
indemnity is a direct engagement between two parties thereby one promises to save the other harm. It does not
deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do
not or may not depend on the conduct of indemnifier or any other person.

ESSENTIAL ELEMENTS:-

The following are the essentials of the Contract of Indemnity:-

1. There must be a loss.
2. The loss must be caused either by he promisor or by any other person.
3. Indemnifier is liable only for the loss.

Thus it is clear that this contract is contingent in nature and is enforceable only when the loss occurs.

RIGHTS OF INDEMNITY HOLDER

The promisee in a contract of indemnity acting within the scope of his authority is entitled to recover from the
promisor so under Section 125 of the Act defines the rights of an indemnity holder which are as under :-
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1. Right of recovering Damages: - All the damages that he is compelled to pay in a suit in respect of
any mater to which the promise of indemnity applies.
2. Right of recovering Costs: - All the costs that he is compelled to pay in such suit if in bringing o
defending it he did not contravene the orders of the promisor and has acted as it would have been
prudent for him to act in the absence of the contract of indemnity or if the promisor authorised him in
bringing or defending the suit.
3. Right of recovering sums :- All the sums which he may have paid under the terms of a compromise
in any such suite if the compromise was not contrary to the orders of the promisor and was one which
would have been prudent for the promisee to make in the absence of the contract of indemnity.

II. CONTRACT OF GUARANTEE:

Contract of Guarantee means a contract to perform the promises made or discharge the liabilities of the third
person in case of his failure to discharge such liabilities. As per section 126 of Indian Contract Act, 1872, a
contract of guarantee has three parties: –

Surety: A surety is a person giving a guarantee in a contract of guarantee. A person who takes responsibility
to pay a sum of money, perform any duty for another person in case that person fails to perform such work.

Principal Debtor: A principal debtor is a person for whom the guarantee is given in a contract of guarantee.

Creditor: The person to whom the guarantee is given is known as the creditor.

For example, Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promise that in case Mr. Y fails to repay
the loan, then he will repay the same. In this case of a contract of guarantee, Mr. X is a Creditor, Mr. Y is a
principal debtor and Mr. Z is a Surety.

Kinds of Guarantees

A contract of guarantee may be for an existing liability or for future liability. A contract of guarantee can be a
specific guarantee (for any specific transaction only) or continuing guarantee.

Specific Guarantee: A specific guarantee is for a single debt or any specified transaction. It comes to an end
when such debt has been paid.

Continuing Guarantee: A continuing guarantee is a type of guarantee which applies to a series of transactions.
Section 129 of the Contact Act, continuing guarantee means a guarantee which extends to a series of
transactions without creating a new guarantee for another transaction is called continuing guarantee.
Illustration:- A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the period of one
month. B delivers sacks to C and C pays for it. Later on B delivers 4 more sacks but C fails to pay. A’s
guarantee is not a continuing guarantee and so he is not liable to pay for the 4 sacks.

There is a difference between the two special types of contracts, contract of indemnity and contract of guarantee
which is as follows: –

1. In a contract of guarantee, there are three parties to a contract namely surety, principal debtor and
creditor whereas in case of indemnity there are only two parties to a contract, promisor, and promisee.
2. In case of the contract of guarantee, the liability of the surety is secondary whereas in a contract of
indemnity the liability of promisor is primary.
3. Surety provides guarantee only when requested by the principal debtor in a contract of guarantee.
Indemnifier is not required to act at the request of the debtor, in a contract of indemnity.
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4. In a contract of guarantee, there is an existing liability for debt or duty, surety guarantees the
performance of such liability. In a contract of indemnity, the possibility of incurring a loss is
contingent against which indemnifier undertakes to indemnify.
5. Surety is eligible to proceed against the principal debtor on payment of debt, in case principal debtor
fails to pay the debt. Indemnifier cannot sue third parties in his own name.

III. CONTRACT OF BAILMENT (Section 148)

Contracts of Bailment are a special class of contract. These are dealt within Chap. IX from S.148 to 181 of the
Indian Contract Act, 1872. It implies a sort of one person temporarily goes into the possession of another for a
purpose. There are many instances of bailment in our daily lives like when we give our clothes for laundry,
when we give our watch for repairing, parking a car in parking spot etc. In all of these we deliver our goods to
another person or leave them in the possession of another person for a purpose and expect to receive the
goods back when purpose has been accomplished.

Definition of Bailment

Section 148 of Indian Contract Act, 1872 defines bailment as “the delivery of goods by one person to another
for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them”.

The person delivering the goods is called the 'bailor'; the person to whom they are delivered is called the
'bailee'.

Example: A hires a motorcar from T for a trip to Mahabalipuram. T is the bailor and A is the bailee.

Nature of Bailment
Bailment is a type of special contract and thus all basic requirements of contract like competency, consent of
parties etc. are applicable to the contract of bailment. In bailment neither the property nor the ownership in the
goods is transferred, only the temporary possession of goods is transferred from bailor to bailee.

Essential Elements of Bailment

1. Delivery of Goods
The possession of goods must transfer from one person to another. Delivery is not same as custody.
For example, a servant holding his master's umbrella is not a bailee but only a custodian. The goods
must be handed over to the bailee for whatever is the purpose of the bailment.

2. Delivery upon Contract

For a valid bailment, the delivery must be done upon a contract that the goods will be returned when
the purpose is accomplished. If the goods are given without any contract, there is no bailment.

In Ram Gulam vs Govt. of UP AIR 1950, plaintiff’s ornaments were seized by police on the
suspicion that they were stolen. The ornaments were later on stolen from the custody or police and the
plaintiff sued the govt. for returning the ornaments. It was held that the goods were not given to the
police under any contract and thus there was no bailment.

3. Conditional Delivery
The delivery of goods is not permanent. The possession is given to the bailee only on the condition
that he will either return the goods or dispose them according to the directions of the bailer after the
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purpose for which the goods were given is complete. For example, when the stitching of garment is
complete, the tailor is supposed to return the garment to the bailor. If the bailee is not bound to return
the goods to the bailor, then the relationship between them is not of bailment.

Duties of the Bailee

i. Duty to take reasonable care of goods delivered to him.
ii. Duty not to make unauthorized use of goods entrusted to him.
iii. Duty not to mix goods bailed with own goods
iv. Duty to return the goods
v. Duty to deliver any accretion to goods.
Gratuitous and non-gratuitous Bailment
Gratuitous Bailment is one with no consideration as neither the bailor nor the bailee is entitled to any sort of
reward or remuneration. Non-gratuitous bailment on contrary to the gratuitous bailment will be for a reward
as it involves some consideration between the bailor and the bailee.

Duties of the Bailor

i. Duty to disclose faults in goods bailed
ii. Duty to repay necessary expenses in case of gratuitous bailment
iii. Duty to receive back the goods
iv. Duty to indemnify bailee
Illustration: If A gives a piece of cloth to tailor for stitching a suit. Then Taylor is entitled to keep
the suit with him until A pays him for the cost of stitching.
v. Duty to repay any extra ordinary expenses in case of non-gratuitous bailment

IV. CONTRACT OF PLEDGE (Section 172)

The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The
bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. Pledge is a variety or specie of
bailment.

Example: A lends money to B against the security of jewellery deposited by B with A. This bailment of
jewellery is a pledge as it is a security for lending the money. B is a pawnor and A is a pawnee.

ESSENTIALS OF PLEDGE:

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the
pledge. Apart from that, the other essentials of the pledge are:

a. There shall be a bailment for security against payment or performance of the promise
b. The subject matter of pledge is goods
c. Goods pledged for shall be in existence
d. There shall be the delivery of goods from pledger to pledge
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DIFFERENCE BETWEEN PLEDGE & BAILMENT

PLEDGE BAILMENT

1. Pledge is a species of bailment. 1. Bailment is a genus.

2. Pledge is bailment of goods as security for the 2. Bailment is a delivery of goods by one person to
payment of debt or for the performance of a another for some purpose upon a contract.
promise. 3. In the contract of bailment after the
3. Moveable property is subject-matter of pledge accomplishing of the purpose the goods are to be
under the contract Act. returned or otherwise disposed of according to the
directions of the Bailor.

V. CONTRACT OF AGENCY

Chapter X of the Indian Contract Act, 1872 deals with the laws relating to Agency. When one party delegates
some authority to another party whereby the latter performs his actions on behalf of the first party, the
relationship between them is called an agency. Agency can be express or implied. Agency is the relationship
that subsists between the principal and agent, who has been authorized to act for him and to represent him in
dealing with others. Thus, in Agency there can be two types of Contract: a) Contract between the principal
and agent, b) Contract made between the principal and third party through the agent.

Contract of Agency is based on the legal maxim Qui Facit Per Alium Per Se: He who acts through another
does the act himself. Thus, the principal can be bound and held liable for the acts done by his agent on the
behalf of principal.

An agent is a person employed to do any act for another or represent another in dealings with third persons.
The person so represented is called the principal. Under a contract of agency, the agent is authorized to
establish privity of contract between the principal and a third party.

Who can appoint an agent?

According to Section 183, any person who has attained the age of majority and has a sound mind can appoint
an agent. In other words, any person capable of contracting can legally appoint an agent. Minors and persons
of unsound mind cannot appoint an agent.

Who may be an Agent?

According to Section 184, the person who has attained the age of majority and has a sound mind can become
an agent. However, a minor can also be an agent but he is never personally responsible to the principal.

Case Law: Chairman L.I.C v. Rajiv Kumar Bhaskar

In this case, as per the salary saving scheme of L.I.C, the employer was supposed to deduct the premium from
the employee’s salary and deposit it with L.I.C. Upon the death of the employee, it was found by his heirs that
the employer has defaulted in doing so, causing the policy to lapse. A clause in the acceptance letter was
referred to, in which the employer had said that he would act as the agent of the employee and not as that of
L.I.C. It was held that the employer was acting as the agent of the company, thereby making the company
(L.I.C) responsible as a Principal due to the fault of the Agent (the employer).
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Creation of Agency

 By Express or Implied Contract- A principal may implicitly or expressly employ an agent. The
appointment may be expressed in writing or it may be oral.
 By Conduct of Party or Situation - E.g. Estoppel- Whereby a person allows another to act for him
to such an extent that a third party reasonably believes that an agency relationship exists between the
two.
 By Ratification - Assent is given either to an act done by someone who had no previous authority to
act or to an act that exceeded the authority granted to an agent.
 By Necessity - A person acts for another in an emergency situation without express authority to do
so.

Classes of Agents
There are two categories of agents
a) Sub-agent
b) Substituted Agent

a) Sub-Agent: He is a person employed by and acting under the control of the original agent in the business
of the agency. He acts under the control of the original agent and between the agent and sub-agent; the
relationship of principal-agent subsists. Sub-agent discharges functions authorized by the agent in the course
of his agency business. For example, stock brokers appoint clerks to transact business on behalf of their
clients.
Where a sub-agent is properly appointed, the principal is, so far as regards third persons, represented by the
sub-agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the
principal.

Note: The sub-agent is responsible for his acts to the agent, but not to the principal, except in cases of fraud
or wilful wrong

b) Substituted Agent: Sometimes, the principal may ask the agent to name another person to act for the
principal in carrying out a part of the business of agency. Such a person is known as the Substitute Agent. For
example, Ravindran appoints Suresh as his agent to collect rent from his tenants. One tenant defaults and
Ravindran wants to initiate legal action against the defaulting tenant. He asks Suresh to refer him to a
competent lawyer. Suresh names one Mr. Vishwanath, an established lawyer to represent Mr. Ravindran. Mr.
Vishwanath can be termed as substituted agent.

Agent's Duty in naming such Person: In selection of a substituted agent for his principal, an agent is bound
to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and
if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected.

c) Agency between husband and wife: Generally, there exists no agency between a husband and wife,
except in cases where it has expressly or impliedly been sanctioned that either of them would do certain acts
or transactions as the agent of the other. That is, a relationship of agency can come into existence between the
two through contract, appointment, or ratification.
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SALIENT FEATURES OF AGENCY

1. "He, who does through another, does by himself": It means 'the acts of the agent are, for all legal
purposes, the acts of the principal.'

Example: X purchases from Z goods worth Rs. 10000 on credit on behalf of Y. Now Z can proceed against
both X and Y if the amount is not paid.

2. A Delegate cannot further delegate: It means that an agent, being himself a delegate of his
principal, cannot pass on that delegated authority to someone else.

Note: There are however certain exception under this rule.

3. An agent is duty bound to follow principal's direction or customs:

Case law: LILLEY VS. DOUBLE DAY

A principal instructed his agent to lodge his goods in a particular warehouse. The agent however deviated
from the instructions. The agent put the goods in another warehouse, where the goods perished due to fire.
Held, the agent was liable.

4. An agent should not deal on his own account: It means that he must not himself buy from or sell to
his principal goods he is asked to sell or buy on behalf of his principal, without obtaining the consent
of his principal.

Example: Muthiaya directs Ramu his agent to buy a certain house for him. Ramu tells Muthiaya that it
cannot be brought and buys the house for himself. Muthiaya may, on discovering that Ramu has bought the
house, compel him to sell it to him at the price he bought it for.

5. Principal’s liability for the acts of the agent: The principal is liable for all acts of the agent done
within the scope of his actual and apparent authority. The principal is even liable for the
misrepresentation made or fraud committed by the agent acting within the scope of his actual or
apparent authority during the course of the agency business.

Vicarious Liability of the Principal

Section 238 of the Contract Act states –
 Misrepresentation made, or frauds committed, by agents acting in the course of their business for
their principals, have the same effect on agreements made by such agents as if such
misrepresentations or frauds had been made or committed by the principals;
 But misrepresentations made, or frauds committed, by agents, in matters which do not fall within
their authority, do not affect their principal.

TERMINATION OF AGENCY:

An agency can be terminated or is terminated in 5 different ways:

1. When the agent’s authority is revoked by the Principal
2. When the agent renounces the business of the agency
3. When the business of the agency is completed
4. When either of the parties dies or becomes mentally disabled
5. When the Principal is adjudicated an insolvent
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Distinction between Agent and Servant

Agent Servant
An agent is authorized to act on behalf of his A servant does not have the authority to create
principal and create contractual obligations between contractual obligations between the principal and a
the principal and a third party. third party.
The principal has the authority to direct the agent as The master can direct a servant as to what has to be
to what he has to do but he cannot direct how it is to done and also how it should be done
be done.
An agent is paid in terms of commission A servant gets his salary or wages.
An agent can work for different principals at the A servant usually works under one master at a given
same time point of time.
The agent offers and accepts new proposals from the A servant cannot create any such legal relations
third party on behalf of his principal and thus new
legal relations are created in law of agency.

Distinction between Agent and Sub- Agent

Agent Sub-Agent
An agent is appointed by a principal and is under his A sub-agent is appointed by an agent and as such is
control. under the control of the agent.
An agent acts under the principal. A sub-agent acts under an agent.
A privity of contract exists between a principal and No privity of contract exists between a principal and
an agent a sub-agent.
An agent can ask for remuneration from the A sub-agent cannot ask for remuneration from the
principal. principal.

Distinction between Sub-Agent and Substituted Agent

Sub-Agent Substituted Agent

An agent appoints a sub-agent and therefore a sub- A substituted agent is only named by the agent but
agent is under the control of an agent. is under the control of the principal.
A sub-agent acts under the agent. A substituted agent acts independently for his
principal.
A sub-agent cannot be held liable by the principal, A substituted agent can be held liable by his
except in case of fraud. principal.
A sub-agent is not entitled to any remuneration from A substituted agent can ask for his remuneration
the principal. from his principal.
No contract exists between a sub-agent and the A contractual relationship exists between the
principal. substituted agent and the principal.