SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.

8867328228 1

UNIT - I
I. ESSENTIALS OF CONTRACT
Introduction:
The law of contract is the most important part of business law in India. It determines the circumstances in
which the promises made by the parties to a contract shall be binding on them and provides for the remedies
available against a person who fails to perform his promise. The law of contract is contained in the Indian
Contract Act, 1872, which deals with the general principles of law governing all contracts and covers the
special provisions relating to contracts like bailment, pledge, indemnity, guarantee and agency.
Before 1930, this Act also contained the special provisions relating to contracts of sale of goods and
partnership. In 1930, however, these provisions were repealed and separate Acts called the 'Sale of Goods
Act' and the 'Indian Partnership Act' were passed governing the contracts of sale of goods and partnership
respectively. Similarly, there are separate Acts for contracts relating to negotiable instruments, insurance,
carriage of goods, etc.

Let us now study the exact nature of a contract and the other important aspects relating to it.

WHAT IS A CONTRACT
Broadly speaking, a contract is an agreement made between two or more persons to do or to abstain
from doing a particular act. A contract invariably creates a legal obligation between the parties by which
certain rights are given to one party and a corresponding duty is imposed on the other party. A contract has
been defined by different authorities in various ways. Some of the important definitions are as follows:

A contract is an agreement, creating and defining the obligation between parties. - Salmond

A contract is an agreement enforceable at law made between two or more persons by which rights are
acquired by one or more to acts or forbearance on the part of others. - Sir William Anson

Every agreement and promise enforceable at law is a contract. - Pollock's

The definition as given in the Contract Act is based on Pollock's definition. Section 2(h) of the Act
states that an agreement enforceable by law is a contract. On analysing this definition of contract, you
will notice that a contract essentially consists of two elements:
(i) an agreement, and (ii) its enforceability by law.

Let us discuss these two elements in detail.

i) Agreement
 Section 2(e) of the Contract Act defines agreement as every promise 'and every set of promises
forming the consideration for each other.
In this context a promise refer to a proposal (offer) which has been accepted. For example, Ramesh
offers to sell his scooter for Rs. 8,000 to Shyam. Shyam accepts this offer. It becomes a promise and lrcdted
as an agreement between Ramesh and Shyarn. in other words, an agreement consists of an offer by one party
and its acceptance by the other.
Thus, Agreement = Offer + Acceptance.
From the above analysis it is clear that there must be at least two parties to an agreement, one making an
offer and the other accepting it. No person can enter into agreement with himself.

 There is another important aspect. Relating to an agreement i.e., the parties to an agreement must have
an identity of minds in respect of the subject matter. They must agree on the same thing in the same
sense. This is also called consensus-ad-idern.
Suppose A has two houses, one situated in South Delhi and the other in North Delhi. He offers
to sell his North Delhi house to B wliile B is under the impression that he is buying the South Delhi
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 2

house. Here., there is no identity of minds. Both the parties are thinking about different houses. Hence
there Is no agreement.

ii) Legal Obligation

 In order that an agreement may be regarded as a contract, it must give rise to alegal obligation i;e., it
must be enforceable by law. Any obligation (duty) which isnot enforceable by law is nbt regarded as a
contract. Social, moral or religious . agreements do not create any legal obligation.
For example, an agreement to take lunch together or to go to a picnic is not a contract because it
does not create a duty enforceable by law. Such agreements are purely of a social nature where thereis
no intention to create legal relationship. Hence, they do not result in contracts.
 In case of business agreements, however, the usual presumption is that the parties intend to create a legal
relationship.
For example, an agreement to sell a scooter for Rs. 8,000 is a contract because it gives rise to an
obligation enforceable by law. In this agreement if there is default by either party, an action for breach of
contract can be enforced through a court of law provided all the essentials of a valid contract are present
in the. agreement.
 You must also note that every obligation which is enforceable by law is not automatically regarded as a
contract. The obligations which do not arise out of agreements but from source's 'such as wrongful acts,
judicial decisions or decree of e a court, husband and wife relationship are not regarded as contracts.
 Thus, the law of contract is concerned with only those obligations which arise out of agreement.
Salmond has rightly said about the law of contract that “It is the law of those agreements which create
obligations, and those obligations which have their source.in agreements."

CLASSIFICATION OF CONTRACTS
Contracts can be classified on a number of bases. They are:
1) On the basis of creation.
2) On the basis of execution.
3) On the basis of enforceability.

1) On the Basis of Creation A contract may be

(i) made in writing or by word of mouth or
(ii) inferred from the conduct of the parties or circumstances of the case. The first category of contract is
termed as 'express contract' and the second as 'implied contract' '

i) Express Contract: An express contract is one where the terms are clearly stated in words, spoken or
written. For example, A wrote a letter to B stating "I offer to sell my car for Rs. 30,000 to you ", B accepts
the offer by letter sent to A. This is an express contract. Similarly, when A asks a scooter mechanic to repair
his scooter and the mechanic agrees, it is an express contract made orally by spoken words.

ii) Implied Contract: A contract may be created by the conduct or acts of parties (and not by their words
spoken or written). It may result from a continuing course of conduct of the parties. For example, where a
coolie in uniform carries the luggage of A to be carried out of railway station without being asked by A to
do so and A allows it, the law implies that A has agreed to pay for the services of the coolie. This is a case of
an implied contract between A and the coolie. Similarly, when A boards a D.T.C bus, an implied contract
comes into being. A is bound to pay the prescribed fare.
'There is another category of implied contracts recognised by the Contract Act known as quasi -
contracts (Sections 68 to 72). Strictly speaking, a quasi -contract cannot be called a contract. It is regarded as
a relationship resembling that of r contract. In such a contract the rights and obligations arise not by an
agreement between the parties but by operation of law. For example, A, a trader, left certain goods at B's
house by mistake. B treated the goods as his own and consumed it. In such'a situation, B is bound to pay for
the goods even though he has not asked for the goods.
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 3

2) On the Basis of Execution : On the basis of the extent to which the contracts have been performed, we
may classify them as (i) executed contracts, and (ii) executory contracts.

i) Executed Contracts: It is a contract where both the parties have fulfilled their respective obligations
under the contract. For example, A agrees to sell his book to B for Rs. 30. A delivers the book to B and B
pays Rs. 30 to A. It is an executed contract.

ii) Executory Contracts: It is a contract where both the parties to the contract have still to perform their
respective obligations. For example, A agrees to sell a book to B for Rs. 30. If the book has not been
delivered by A and B has not paid the price. the contract is executory.
A contract may sometimes be partly executed and partly executory. It happens where only one of the
parties has performed his obligation. In the example given above, if A has delivered the book to B but B has
not paid the price. the contract is executed as to A and executory as to B.
On the basis of execution, a contract can also be classified as unilateral or bilateral.
 A unilateral contract is one in which only one party has to perform his obligation, the other party
had fulfilled his part of the obligation at the time of the contract itself. For example, A buvs a ticket
from the conductor and is waiting in the queue for the bus.
 A contract is created as soon as the ticket is purchased. The other party is now to provide a bus
wherein he could travel. 'A bilateral contract is one in which the obligations on the part of both the
parties are outstanding at the time of the formation of the contract.

3 On the Basis of Enforceability: From the point of view of enforceability a contract may be
(i) valid, (ii) void, (iii) voidable, (iv) illegal or (v) unenforceable.
These terms shall be used quite frequently in this course. Hence, you must form a clear idea about their
respective meanings.

i) Valid Contract: A contract which satisfies all the conditions prescribed by law is a valid contract. (These
conditions are discussed in Section 1.8.) If one or more of these elements is/are missing, the contract is
either void, voidable, illegal or unenforceable.

ii) Void Contract: According to Section 2 (j) A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable. It is a contract without any legal effects and is a nullity. You should
note that a contract is not void from its inception. It is valid and binding upon the parties when made, but
subsequent to its formation, due to certain reasons, it becomes unenforceable and so treated as void. A
contract may become void due to impossibility of performance, change of law or some other reasons.
For example, A promised to marry B. Later on, B dies. This contract becomes void on the death
of B. A void contract should be distinguished from void agreement. Section 2(g) says that an agreement nor
enforceable by law is said to be void. In the case of void agreement no contract comes into existence. Such
an agreement confers no rights on any person and creates no obligations. It is void ab-initio i.e., from the
very beginning. For example an agreement with a minor is void because a minor is incompetent to contract.
Now it should be clear to you that a void agreement is not the same thing as a void contract. A void
agreement never matures into a contract, it is void from the very beginning. A void contract, on the other
hand, was valid when it was entered into, but subsequently, because of one reason or the other, became void.
A contract cannot be void ab-intio, it is only an agreement which can be void ab-initio.

iii) Voidable Contract: According to Section 2(i) of the Contract Act, An agreement which is enforceable
by law at the option of one or more of the parties thereon, but not at the option of the other or others, is a
voidable contract. Thus, a voidable contract is one which can be set aside or repudiated at the option of the
aggrieved party. Until it is set aside or avoided by the party entitled to do so, it remains a valid contract. A
contract is usually treated as voidable when the consent of a party has not been free i.e., it has been obtained
either by coercion, undue influence, misrepresentation or fraud. The contract is voidable at the option of the
party whose consent has been so caused.
For example, A threatens to shoot B if he does not sell his new scooter to A for Rs. 5,000. B
agrees. Here the consent of B has been obtained by coercion. Hence, the contract is voidable at the option -
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 4

of B, the aggrieved party. If, however, B docs not exercise his option to set aside the contract within a
reasonable time and if in the meanwhile a third party acquires a right in relation to the subject matter for
some consideration, the contract cannot be avoided.
For example, A obtains a ring by fraud. Here, B's consent is not free and therefore he can cancel
this contract. But if, before this option is exercised by B, A sells the ring to C' who acquires ii after paying
the price and in good faith, contract cannot be avoided. You should note that the option to set aside the
contract on this ground is not available to the other party. Hence, if the aggrieved party chooses to regain the
contract, it remains enforceable by Ian. If however, the aggrieved party avoids the contract, the other party is
also freed from his obligation to perform the contract and if the party avoiding the contract has received any
benefit under the contract, he must restore such benefit to the person from whom it was received (Section
64).

iv) Illegal or unlawful contract: The word illegal' means contrary to law. You know that contract is an
agreement enforceable by law and therefore, it cannot be illegal. It is only the agreement which can be
termed as illegal or unlawful. Hence, it is more appropriate to use the term 'illegal agreement' in place of
'illegal contract'.
An 'illegal agreement' is one which has been specifically declared to be unlawful under the
provisions of the Contract Act or which goes against the provisions of any other law of the land. Such
agreement cannot be enforced by law.
For example, A agrees to pay R;. 50,000 to B if B kills C. This is an illegal agreement because its
object is unlawful. Even if B kills C, he cannot claim the agreed amount from A.
The term 'illegal agreement' is wider than the term 'void agreement'. All illegal agreements are
void but all void agreements are not necessarily illegal. For example, an agreement to sell a scooter to the
minor i,e void but it is not illegal because the object of this agreement is not unlawful. The other important
difference between the illegal and the void agreement relates to their effect on the transactions -which are
collateral to the main agreement. In case of illegal agreements even the collateral agreements become void.
For example, A engages B to shoot C. To pay B, A borrows Rs. 10,000 from D who is aware of
the purpose of the loan. In this case, there are two agreements - one between A and B and the other between
A and D. Since the main agreement between A and B is illegal the agreement between A and D which' is
collateral to the main agreement is also void. D cannot recover the money from A. Take another example. A
borrows money from D to pay off his wagering (betting) debts to B. Here the main agreement is void (not
illegal). Hence the agreement between A and D being a collateral agreement shall not be affected even
though D was aware of the purpose of the loan. From these examples, it should be clear to you that the
agreements collateral to the illegal agreements are also void but the transactions collateral to void
agreements are not affected in any way, they remain valid.

v) Unenforceable contract: It is a contract which is actually valid but cannot be enforced because of some
technical defect. This may be due to non -registration of the agreement, non -payment of the requisite stamp
fee, etc. Sornetitnes, the law requires a particular agreement to be in writing. If such agreement has not been
put in writing, it becomes unenforceable. For example, an oral agreement, for arbitration are unenforceable
because the law requires that an arbitration agreement must be in writing. It is important to note that in most
cases, such, contracts can be enforced if the technical defect involved is removed. For example, if the
document which embodies a contract is under stamped, it will i become enforceable if the requisite stamp is
affixed.
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 5

ESSENTIALS OF A VALID CONTRACT

You have learnt that am agreement enforceable by law is a contract. An agreement in order to be
enforceable must have certain essential elements. According to Section 10 - All agreements are contracts if
they are made by the free 'consent of the parties competent to contract, for a lawful consideration and with a
lawful object, and are not hereby expressly declared to be void. Thus, an agreement becomes a valid contract
if it has the following elements.
1) Proper offer and its proper acceptance
2) Intention to create legal relationship
3) Free consent
4) Capacity of parties to contract
5) Lawful consideration
6) Lawful object .
7) Agreement not expressly declared void
8) Certainty of meaning
9) Possibility of performance
10) Legal formalities
Let us now discuss these essential elements one by one.

1) Proper offer and proper acceptance: In order to create a valid contract it is necessary that there must be
at least two parties, one making the offer and the other accepting it. The law has prescribed certain rules for
making the offer and its acceptance that must be satisfied while entering into an agreement. For example, the
offer must be definite and duly communicated to the other party. Similarly, the acceptance must be
unconditional and communicated to the offerer in the prescribe mode, and so on. Unless such conditions
with regard to the offer and the acceptance are satisfied the agreement does not become enforceable.

2) Intention to create legal relationship: There must be an intention among the parties to create a legal
relationship, If an agreement is not capable of creating a legal obligation it is not a contract. In case of social
or domestic agreements, generally there is no intention to create legal relationship. For example, in an
invitation to dinner there is no intention to create legal relationship and therefore, is not a contract. Similarly,
certain agreerments between husband and wife do not become contracts because there is no intention to
create legal relationship.
This point can well be illustrated by the famous case of Balfour v. Balfour. Mr. Balfour had promised
to pay f 30 per month to his wife living in England when she could not accompany him to Caulon where he
was employed. Mr. Balfour failed to pay the promised amount. Mrs. Balfour filed a suit against her husband
for breach of this agreement, It was held that she could not recover the amount as it was a social agreement
and the parties never intended to create any legal relations.
In commercial. or business transactions the usual presumption is that the parties intend to create legal
relations. However, this presumption may' be negatived by express terms to the contrary. The case of Rose
& Frank Co. v. Crompton Brothers is relevant here. In this case there was an agreement between Rose &
Frank Company and Crompton Brothers Ltd. whereby the, former was appointed as selling agents in North
America. One of the clauses iri the agreement read, "This agreement is not entered into as a formal or legal,
agreement and shall not be subject to legal jurisdiction in the law courts." It was held, that this agreement
was not a legally binding contract as there was no intention to create legal relations.
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You must note that whether intention to create legal relationship exists in an agreement or not is a
matter for the court to decide which may look at the terms and conditions of the agreement and the
circumstances under which the agreement was made

3) Free consent: For a contract to be valid, it is essential that there must be free and genuine consent of the
parties to the contract. They must have made the contract of their own free will and not under any fear or
pressure. According to Section 14, consent is said to be free when it is not caused by
(i) coercion,' (ii) undue influence, (iii) fraud, (iv) misrepresentation, or (v) mistake.
In case the consent is obtained by any of the first four factors, the contract would be voidable at the option of
the aggrieved party. But if the agreement is induced by mutual mistake which is material to the agreement, it
would be void.
4) Capacity of parties: The parties to an agreement must be competent to contract i.e., they must be capable
of entering into a contract. If any party to the contract is not competent to contract, the contract is not valid.
Now the question arises as to who are competent to contract? Answer to this question is provided by Section
1 I of the Act which says that every person is competent to contract who is of the age of majority
according to the law to which he is subject and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject.
From this section you will notice that in order to be competent to enter into a , contract, the person
should be a major (adult), should be of sound mind and he must not be declared disqualified from
contracting by any law to which he is subject. Thus, the flaw in capacity may be due to minority, lunacy,
idiocy, etc. If a party to a contract suffers from any of these flaws, the agreement, with a few exceptions, is
not enforceable at law.

5) Lawful consideration: An agreement must be supported by consideration, Consideration means

something in return. It is also defined as the price paid by one party to buy the promise of the other.
However, this price need not always be in terms of money.
For' example, A agrees to sell his book to B for Rs. 20. Here the consideration for A is Rs. 20,
and for B it is the book. Essentials of Contract The consideration may be an act (doing something) or
forbearance (not doing something) or a promise to do or not to do something, The consideration may be
past, present or future, consideration must be real i.e., it must have some value in the eyes of law. However,
the consideration need not be adequate.
For example, A sells his car worth Rs. 50,000 to B for Rs. 10,000 only. This is a valid promise
provided the consent of A is free. . For a contract to be valid, the consideration. should also be lawful. The
consideration is considered lawful unless it is forbidden by law, or is fraudulent, or involves or implies
injury to the person or property of another; or is immoral, or is opposed to public policy (Section 23).

6) Lawful object: The object of an agreement must be lawful. An agreement made for any act which is
prohibiyed by law will not be valid. For example, if A rents out a house for use as a gambling den, the
agreement is void because the object of the agreement is unlawful. If the object is unlawful for any of the
reasons mentioned in Section 23, the agreement shall be void, Thus, the consideration as well as the
object ,of the agreement should be lawful.

7) Agreement not expressly declared void: The agreement must not have been expressly declared void
under Contract Act. Sections 24 to 30 specify certain types of agreements which have been expressly
declared void. They are agreement in restraint of marriage, agreement in restraint of legal proceedings,
agreement in restraint of trade and agreement by way of' wager. For example, A agreed to pay Rs. 1,000 to
B if he (B) does not marry throughout his life. B promised not to marry at all. This agreement shall not be
valid because it is in restraint of marriage which has been expressly declared void under Section 26. You
should note that if an agreement possesses all other essential elements of a valid contract but is belongs to
the category of such agreements that have been expressly declared void by the Contract Act, no power on
earth can make it a valid contract.
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8) Certainty of meaning: Section 29 of the Contract Act provides that Agreements, the meaning of which is
not certain or capable of being made certain, are void. Thus to make a valid contract it is absolutely essential
that its terms must be clear and not vague or uncertain.
For a example, A agreed to sell 100 tonnes of oil to B. Here it is not clear what kind of oil is
intended to be sold. Therefore, this agreement is not valid on the ground of uncertainty. If, however, the
meaning of the agreement could be made certain from the circumstances of the case, it will be treated as a
valid contract. In the example given above if we know that A and B are dealers in mustard oil only, then the
agreement shall.be enforceable because the meaning of the agreement could be easily ascertained from the
circumstances of the case.

9) Possibility of performance: The terms of the agreement must also be such as are capable of
performance. An agreement to do an act impossible in itself is void. (Section 56.) If the act is impossible of
performance, physically or legally, the agreement cannot be enforced by law. The reasoning is very simple.
We make an agreement with a view to perform it and if the performance is not possible, what is the fun of
making such agreements?
For example, A promises to B that he will enclose some area between two parallel lines or that he
will run at a speed of 200 kms. per hour or that he will bring gold from the sun. All these acts are such which
are impossible of performance and therefore the agreement is not treated as valid.

10) Legal formalities: You have learnt that an oral agreement is as good as is a written agreement. The
Contract Act does not require that a contract must be in writing to be valid. But, in some cases the Act has
specified that the agreement must be made in writing.
For example, a promise to pay a time barred debt must be in writing and an agreement for a sale
of immovable property must be in writing and registered under the Transfer of Property Act, 1882. In such a
situation, the agreement must comply with the necessary formalities as to writing, registration, etc. If these
legal formalities are not carried out, then the contract is not enforceable by law. After discussing the
essential elements of a valid contract, it should now be clear to you that all these elements must be present in
an agreement so that it becomes .a valid contract. If any one of them is missing or absent, the agreement will
not be enforceable by law.

II. OFFER AND ACCEPTANCE

OFFER/Proposal
Introduction:
A n agreement enforceable by law is a contract and that an agreement to become
enforceable by law must have certain essential elements. You also learnt that there must be at least two
parties to an agreement, one making an offer and the other accepting that offer. Thus, an offer and its
acceptance are the starting points in the making of an agreement. In this unit you will learn about the various
rules regarding a valid offer and a valid acceptance. You will also learn how an offer and its acceptance are
to be communicated and when they can be revoked.

Definition and meaning:

You have learnt in Unit 1 that for making a valid contract there must be a lawful offer and a lawful
acceptance of that offer. An offer is also called "Proposal'. The words 'proposal' and 'offer' are synonymous
and are used interchangeably. Section 2(a) defines the term 'proposal' as follows:

"When one person signifies to another his willingness to do or to abstain from doing anything, with a view
to obtaining the assent of that other to such act or abstinence, he is said t.0 make a proposal. "

From the above definition of offer you will notice that an offer involves the . following elements.
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i) It must be an expression of readiness or willingness to do or to abstain from doing something. Thus,

it may involve a 'positive' or a 'negative' act. For example, A offers to sell his book to B for Rs. 30. A is
making a proposal to do something i.e., to sell his book. It is a positive act on the part of the proposer A. On
the other hand, when A offers not to file a suit against B if the latter pays A the outstanding amount of Rs.
1,000, the act of A is a negative one i.e., he is offering to abstain from filing a suit.

ii) It must be made to another person. There ban be no 'proposal' by a person to himself,

iii) It must be made with a view to obtain the assent of that other person to such act or abstinence .
Thus a mere statement of intention- "I may sell my furniture if I get a good price" is not a proposal.
The person making the offer is called the 'offerer' or the 'promisor' and the person to whom it is
made is called the 'offeree'. When the offeree accepts the offer, he is called the 'acceptor' or the 'promisee'.
For example, Ram offers to sell his scooter to Prem for Rs. 10,000 This is an offer by Ram. He is the offerer
or the promisor. Prem to whom the offer has been made is the offeree and if he agrees to buy the scooter for
Rs. 10,000 he becomes the acceptor or the promisee.

An offer can be made by any act which has the effect of communicating it to the other. An offer may either
be an 'express offer' or an 'implied offer'
 Express Offer: When .an offer is made by words, spoken or written, it is termed as an express offer.
When A says to B that he wants to sell his book to B for Rs. 20, it is an express offer. Similarly,
when A writes a letter to B offering to sell his car to him for Rs. 40,000, it is also an express offer by
A. The oral offer may be made either in person or over telephone. Section 9 of the Contract Act
reads: "In so far as the proposal or acceptance of any promise is made in words, the promise is said
to be express."

 Implied Offer: It is an offer which is not made by words spoken or written. An implied offer is one
which is inferred from the conduct of a person or the circumstances of the particular case. For
example, public transport like DTC in Delhi or BEST in Bombay runs buses on different routes to
carry passengers who are prepared to pay the specified fare. This is an implied offer. Similarly, when
a coolie picks up your luggage to carry it from railway platform to the taxi, it means that the coolie is
offering his service for some payment. This is an implied offer by the coolie. A bid at an auction is
an implied offer to buy. Section 9 says that "In so far as such proposal or acceptance is made
otherwise than in words, the promise is said to be implied."

 Cross Offers: Two offers which are similar in all respects, made by two parties to each other, in
ignorance of each other's offer are known as 'cross offers". Cross offers do not amount to acceptance
of one's offer by the other and as such no contract is concluded. For example, A of Delhi, by a letter
offers to sell his house to B of Bombay for Rs. 10 lakh. At the same time, B of Bombay also makes
an offer to A to buy A's house for Rs. 101 lakh. The two letters cross each other. There is no
concluded contract between A and B because both the parties are making offers. If they want to
conclude a contract, at least one of them must send his acceptance to the offer made by the other.

 Standing Offers Sometimes an offer may be of a continuous nature. In that case it is known as
standing offers, A standing offer is in the nature of a tender. Sometimes a person or a department or
some other body requires certain goods in large quantities from time to time. In such a situation, it
usually gives an advertisement inviting tenders. An advertisement inviting tenders is not an offer but
a mere invitation to offer. It is the person submitting the tender to supply goods or services who is
deemed to have made the offer, when a particular tender is accepted or approved, it becomes a
standing offer. The acceptance or approval of a tender does not however, amount to acceptance of
the offer. It simply means that the. offer will remain open during a specified period and that it will be
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accepted from time to time by placing specific orders for the supply of goods. Thus each order
placed creates a separate contract.
The offerer can however withdraw his offer at any time before an order is placed with
him. Similarly, the party who has accepted the tender is also not bound to place any order unless
there is an agreement to purchase a specified quantity. For example, A agrees to supply coal of any
quantity to B at a certain price as will be ordered by B during the period of 12 months. It is a
standing offer. Each order given by B will be an acceptance of the offer and A will be bound to
supply the ordered quantity of coal. A can however, revoke the offer for future supplies at any time
by giving a notice to the offeree.
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Legal Rules/Essentials for a Valid Offer

An offer or proposal made by a person cannot legally be regarded as an offer unless it satisfies the following
conditions.
1) Offer must intend to create legal relations:
An offer will not become a promise even after it has been accepted unless it is made with a
view to create legal obligations. It is so because the very purpose of entering into an agreement is to make it
enforceable in a court of law. A mere social invitation cannot be regarded as an offer because if such an
invitation is accepted it will not give rise to any legal relationship. For example, A invites his friend B to a
dinner and B accepts the invitation. If B fails to turn up for dinner, A cannot go to the court to claim his loss.
In social agreements the presumption is that the parties do not intend to create legal relationship.
This point is very well illustrated by the case of Balfour v, Balfour. In business agreement, however,
it is presumed that it will be followed by legal consequences. But if the parties to . a business agreement also
agree that none of them shall go to court in case of its breach, then even such an agreement will nut be
treated as a contract (refer to the case of Rose & Frank Co, v. Crompton Brothers-Section I. of Unit 1).

2)Terms of offer must be certain, definite and not vague:

No contract can be formed if the terms of the offer are vague, loose and indefinite. The reason is
quite simple. When the offer itself is vague or loose or uncertain, it will not be clear as to what exactly the
parties intended to do. A vague offer does not convey what it exactly means. For example, A promises to
buy one more horse from B if the horse purchased earlier proves lucky. This promise cannot be enforced
because it is loose and vague. Similar is the case when A agrees to sell his car to B for Rs. 30,000 after
making necessary repairs. What are necessary repairs is a debatable question and as such the offer is not
valid.
If, however, the terms of the offer are capable of being made certain, the offer is not regarded as
vague. For example, A offers to sell to B "a hundred quintals of oil". The offer is uncertain as there is
nothing to show what kind of oil is intended to be sold. But, if A is a dealer in coconut oil only, it is quite
clear that he wants to sell coconut oil. Hence, his offer is not vague. It is a valid offer.
Sometimes, the parties agree to enter into a contract on some future date, Such agreement is not valid
because the terms of the offer are uncertain and they are yet to be settled. The law does not allow making of
an agreement to agree in future. In the case of Loftus v. Roberts, an actress was engaged for a provincial
tour. The agreement provided that if the party went to London, the actress will be engaged at a salary to be
mutually agreed upon. It was held that there was a contract as the terms were not definite.

3) The offer must be distinguished from a mere declaration of intention:

Sometimes a person may. Make a statement without any intention of creating a binding
obligation. Such statement or declaration only indicate that he is willing to negotiate and an offer will be
made or invited in future. For example an auctioneer advertised in a newspaper that a sale of office furniture
will be held on a certain date. A person with the intention to buy furniture came. from a distant place for the
auction, but the auction was cancelled. He cannot file a suit against the auctioneer for his loss of time and
expenses because the advertisement was merely a declaration of intention to hold auction, (Harris v. W
Nieversion).
Similarly, a notice thal goods will be sold by tender does not amount to an offer. When a person
calls for tenders, it is only an attempt to ascertain whether an offer can be obtained within such a margin as
the seller is willing to adopt (Spencer v. Harding).
The teriderers by submitting their tenders make offers and it is for the person inviting tenders to
accept them or not. In case of Farina v. Fickus, a father wrote to his would be son-in-law that his daughter
would have a share of what he left. It was held that the letter was a mere statement of intention and not an
offer.

4) Offer must be distinguished from an invitation to offer: An offer must be distinguished from an
invitation to receive an offer or to make on offer or to negotiate. In the case of invitation to offer there is no
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intention on the part of the person sending out the invitation to obtain the assent of the other party to such
invitation. On the other hand, offer is a final expression of willingness by the offerer to be bound by his
promise, should the other party choose to accept it.
In case of an invitation to offer, his aim is to merely circulate information of his readiness to
negotiate business with anybody who on such information comes to him, An invitation to offer is not an
offer in the eyes of law and does not become a promise on acceptance. You must have noticed that
shopkeepers generally display their goods in showcases with pride tags attached.
In the case of Pharmaceutical Society of Great Britnin v. Boots Case Chemists Ltd., goods were
displayed in the shop for sale with price tags attached on each article. The customers used to select goods
and take them to the cashier for the payment of the price. It was held, that in this case there was only an
invita,tion to offer and not an offer itself. The shopkeeper cannot be compelled to sell the goods at the price
indicated. The-contract was made, not when the customer selected the goods, but when the cashier accepted
the offer to buy and receive the price. Similarly, a prospectus issued by a company for subscription to its
shares by the members of the public is only an invitation to offer. When a person fills up the form and
deposit it with the bank along with the application money, he is simply making an offer to buy shares. Now
it is for the company to accept his offer in full or partially, or reject it outright.

5) The offer must be communicated: An offer must be communicated to the person to whom it is made.
the first part of the definition of proposal emphasises this fact by saying that When one person signifies to
another his willingness to or to abstain .............. ." It means that an offer is complete only when it is
communicated to the offeree. You should note that a person can accept the offer only when he knows about
it. An offer accepted without his knowledge does not confer any legal rights on the acceptor. There can be
no valid acceptance unless there is knowledge of the offer.
In the case of Fitch v. Snedakar, S offered a reward to any one who returns his lost dog. F
brought the dog without any knowledge of the offer of reward. It was held that F was not entitled to the
reward because F cannot be said to have accepted the offer which he was not aware of.
In another important case of Lalman Shukla v. Gauri Datt, G sent his servant E to trace his lost
nephew. When the servant had left, G announced a reward of Rs. 501 to anyone who traces the boy. L found
the boy and brought him home. When E came to know of the reward, he decided to claim it. It was held that
L was not entitled to the reward because he did not know about the offer when he found the missing boy. It
is also necessary that till offer is communicated by the offerer himself or by his authorised agent. If a person
comes to know about the offer from some other source, he cannot make it a binding contract by accepting it.
For example, A writes a letter to B at Bombay offering to sell his house. This letter is misplaced and it never
reaches B. But, a common friend P had informed B about the said letter of A containing the offer. B sends
his letter of acceptance to A. In such a situation, no contract will be formed.

6) Offer should not contain a term the non-compliance of which would amount to acceptance: The
offer should not impose on the offeree an obligation to reply. While making the offer the offerer cannot say
that if the offer is not accepted before a certain date it will be presumed to have been accepted. Unless till
offeree sends his reply, no contract will arise.
For example, A .writes to B "I offer to sell my scooter to you for Rs. 7,000. If I do not receive a
reply by Wednesday next, I shall assume that you have accepted the offer." If B does not reply, it shall not
imply that he has accepted the offer. Hence, there will be no contract. However, till offerer can lay down the
mode by which the acceptance is to be communicated.

7) Special terms or conditions in an offer must also be communicated: The offerer is free to lay down
any terms and conditions in liis offer, and, if the other party accepts the offer then he will be bound by those
terms and conditions. The important point is that if there are some special terms and conditions they should
also be duly .communicated, The question of special terms arises generally in case of standard form of
contracts.
For example, the Life Insurance Corporation of India has printed form of contracts containing large
number of terms and conditions. Similarly, standard contracts are made with railways, shipping companies,
banks, hotels, drycleaners etc. Such big companies are in a position to exploit the weakness of the individual
by including certain terms and conditions in the contract which limit their liability. In order to protect the
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interest of the general public it is provided that the special terms of the offer must be duly brought to the
notice of the offeree. If this is not done the offeree will not be bound by those terms. This can be done either
by expressly communicating the special terms of by giving a reasonable notice about the existence of the
special terms i.e., by drawing his attention to them by printing in red ink or bold letters 'for' conditions see
back' or 'P.T.O.' on the face of the printed form or ticket.
If this is not done, the offeree will not be bound by them. The leading case on this point is that of
Handerson v. Stenvcns. In the case A purchased a steamer ticket for travelling from Dublin to Whitehaven
and this fact was printed on the face of the ticket. On the back of the ticket . Certain conditions were printed,
one of which excluded the liability of &e company for loss, injury or delay to the passenger or his luggage.
A never looked at the back of the ticket and there was nothing to draw his attention to the conditions printed
on the back side. His luggage was lost due to the negligence of the servants of the shipping company. It was
held that A was entitled to claim compensation for this loss of his luggage in spite of the exemption clause
because there was no indication on the face of the ticket to draw his attention to the special terms printed on
the back of the ticket. You must note that if the special terms and conditions have been brought to the notice
of the offeree, he will be bound by them even if he has not read them or is an illiterate.
In the case of Parket v. South Eastern Railway Company, P deposited his bag in the
cloakroom at a railway station. On the face of the receipt the words "see back" were printed. One of the
conditions printed on the back limited the liability of the railway company for any package to f 1. The bag
was lost and P claimed f 24. Sh. 10, the actual value of the bag. P admitted knowledge of the conditions
printed on the back side denied having read it. It was held-that P was bound by the print on the back side
even though he had not read them because the railways had given reasonably sufficient notice on the face of
the ticket as to the existence of conditions. Therefore, P could recover f 10 only. The same rule is applicable
even where the special conditions are printed in a language which the acceptor does not understand provided
his attention has been drawn to them in a reasonable manner. In such a situation, it is the acceptor's duty to
ask for the translation of the conditions before accepting the offer and if he did not ask, he is presumed to
know them and he will be bound by them.
You must also note that the special terms and conditions should be brought to the knowledge of
the offeree before the contract is concluded and not afterwards. A subsequent communication will not bind
the acceptor unless he himself agrees thereto,, For example, a couple hired a room in a hotel for a week.
When they entered the room they found a notice on the wall disclaiming the owners liability for damage,
loss or theft of articles. Some of their items- were stolen. The owner of the hotel vas held liable since the
notice was not a part of the contract as it came to the knowledge of the client after the contract has been
entered into. (olley v. Marlborough Court Ltd.) Finally, the terms and conditions must be reasonable. A
term is considered to be unreasonable if it defeats the very purpose of the contract or if it is against the
public policy. Thus, if the terms and conditions in a standardised contract are unreasonable, then the other
party will not be bound by them. For example, if a drycleaner limits his liability to 20 per cent of the market
price of the article in case of loss, the customer will not be bound by this conditions because it means that
the drycleaner can purchase garments at 20 per cent of their price.

LAPSE OF AN OFFER
You have learnt that the acceptance must be given before the offer lapses or is revoked. Now the
question arises as to how long an offer remains open or upto what time it can be accepted. You must
know this because the offer must be accepted before it lapses. Once an offer lapses it cannot be accepted.
Let us now discuss the circumstances leading to lapse.
They are as follows:
1) By lapse of stipulated or reasonable time: The offeree must accept the offer within the time
prescribed in the offer and if no time is prescribed, it must be accepted within a reasonable time. Thus,
the offer lapses if it is not accepted within the time prescribed in the offer or within a reasonable time.
What is a reasonable time depends upon the circumstances in each case. In the cage of Ramsgate
Victoria Hotel Co. v. Montefiore, M offered to buy shares of a company on June 8. The Company
informed him about the allotment on November 23. M refused to accept the shares. It was held that M's
offer to buy shares had lapsed because it was not accepted within a reasonable time.
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2) By death or insanity of the offerer or the offeree before acceptance: An offer lapses by the death
or insanity of an offerer if the fact of his death or insanity comes to the knowledge of the acceptor before
he makes his acceptance.. But if the offer is accepted in ignorance of the death or insanity of the offerer,
there will be a valid contract. This means that the death or insanity of the offerer does not terminate the
offer automatically. The offer lapses only when this fact comes to the knowledge of the offeree before
acceptance. Our law is different in this respect from English law where the death of the offerer
terminates the offer even if acceptance is made in ignorance of the death.
There is no provision in the Act about the effect of the death of an offeree before acceptance. But
it is an established rule that the offer comes to an end on the death of the offeree, because an offer can be
accepted only by the offeree and not by any other person. It cannot be accepted by the legal heirs of the
offeree.

3) By failure to fulfil condition precedent to acceptance: When there is a condition in the offer which
must be fulfilled before the acceptance of the offer, the offer lapses if the acceptance is given without
fulfilling that condition. For example, A offered to sell his scooter to B for Rs. 10,000 subject to the
condition that B should pay Rs. 2,000 before a certain date. B accepted the offer but did not pay the
money. In this case the acceptance has no validity and the offer stands terminated.

4) By rejection of offer by the offeree: An offer lapses as soon as it is rejected by the offeree. Once an
offer is rejected, it cannot be revived subsequently. An offer is said to be rejected, if the offeree
expressly rejects it or accepts it subject to certain conditions.

5) If it is not accepted in the prescribed or usual mode: Sometimes, the offerer prescribes the mode of
acceptance. In such a situation the offer must, be accepted in that very manner and if it is not accepted in
the prescribed mode the offer stands lapsed. For example, A offers to sell his house to B and writes to
B .'send your acceptance by telegram'. Now if the acceptance is sent by some other mode, then A may
not be bound by the acceptance. You have learnt about it in detail in Sub-section 2.3.4 of this unit.

6) By counter offer by the offeree: Counter offer means making a fresh offer instead of accepting the
original offer. A counter offer amounts to the rejection of the original offer. Hence, as soon as the
counter offer is made, the original offer stand lapsed. If the person who makes a counter offer changes
his mind and wishes to accept the original offer, he cannot do so. For example, A offered to sell his
bicycle to B for Rs. 200. B said that he would buy it for Rs. 170. Here B's offer to buy for Rs. 170 is
counter offer and terminates the original offer of A. If later on B wants to buy the cycle for Rs. 200, it
will bc a case of a fresh offer and not an acceptance of the original offer.

7) By revocation: If the offerer revokes the offer before its acceptance by the offeree, the offer stands
lapsed. According to rules, an offer can be revoked, at any time before it is accepted by communicating a
notice of revocation to the offeree. For example, at an auction sale, the highest bidder can revoke his
offer to buy before the fall of the hammer.

8) By subsequent illegality or destruction of subject-matter: An offer lapses if it becomes illegal

before it is accepted. For example, A of Delhi offered to supply 100 bags of rice to B at Lucknow on a
certain date. But, before this offer is accepted by B, the Government has issued an order prohibiting the
inter-state movement of food grains. Automatically the offer made by A comes to an end. Similarly, if
the subject-matter of the offer is destroyed before acceptance, the offer lapses.

ACCEPTANCE
Definition: You have learnt that when an offer is accepted, it results in an agreement. Let us now study what
exactly an acceptance is. Acceptance is an expression by the offeree of his willingness to be bound by the
terms of the offer. This results in the establishment of legal relations between the offerer and offeree.
Section 2(b) of the Indian Contract Act defines the term 'acceptance' as "when the person to whom the
proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 14

accepted becomes a promise. "For example, A offers to sell his book to B for Rs. 20. B agrees to buy the
book for Rs. 20. This is an acceptance of A's offer by B.

Who Can Accept?

An offer can be accepted only by the person or persons to whom it is made. An offer made to a
particular person (specific offer) can be accepted only by him and none else. The rule of law is that if A
wants to enter into a contract with B, then C cannot substitute himself for B without A's consent. In the case
of Boulton v. Jones, A sold his business to B but this fact was not known to an old customer C. C sent an
order for goods to A by name. B supplied the goods to C. It was held that there was no contract between B
and C because C never made any offer to B. If an offer is made to the world at large (general offer) any
person can accept the offer provided he has the knowledge of the offer.
You have seen in Carlill v. Carbolic Smoke Ball Co's case' that the lady accepted the offer by
using the smoke balls. Similarly, in case a reward has been offered for giving information about missing
person or a lost article, any person who gives the necessary information first, shall be entitled to the reward.

How is an Acceptance Made?

You know that an offer may be either express or implied. Similarly, the acceptance may also be either
express or implied. When the acceptance is given by words spoken or written, it is called an 'express
acceptance'. For example, A offers to sell his book to B for Rs. 20. B may accept this offer by stating so
orally or by writing letter to A. The acceptance may also be implied by conduct. For example, A offers a
reward of Rs. 100 to anyone who traces his lost dog. B, who was aware of this offer, finds the dog, he is
entitled to the reward as he accepted the offer by doing the required act. Take another example. A enters into
DTC bus for going to Rajghat. This is an implied acceptance by A and he is bound to pay the fare.

Legal Rules for a Valid Acceptance

The acceptance of an offer to be effective must fulfil certain conditions. These are:
1) Acceptance must be absolute and unqualified :
Section 7 (1) of the Indian Contract Act provides that 'In order to convert a proposal into a
promise, the acceptance must be absolute and unqualified . . . . .' This is so because a qualified. and
conditional acceptance amounts to a counter offer leading to the rejection of the original offer. No variation
should be made by the offeree in the terms of offer. If while giving acceptance, any variation is made in the
terms of the offer the acceptance will not be valid and there will be no contract.
For example, A offers to sell his scooter to B for Rs. 8,000 and B agrees to buy it for Rs. 7,500. It is
a counter offer and not an acceptance. If, later on, B is ready to pay Rs. 8,000 A is not bound to sell his
scooter, because E's counter offer has put an end to the original offer. Further an offer must be accepted in
toto. If only a part of the offer is accepted the acceptance will not be valid. For example, G offers to sell 10Q
quintals of wheat to B at a certain price. B accepts to buy 70 quintals only. It is not a valid acceptance since
it is not for the whole of the offer. Thus, an offer should be accepted as it is, without any reservations,
variations or conditions. Any variation, howsoever unimportant it may be, makes the acceptance invalid.
Sometimes, a person may accept the offer "subject to a contract" or "subject to formal contract" or
"subject to contract to be approved by the solicitors ". In such cases no contract arises because a condition
remains to be performed in the future. For example, A's bid was provisionally accepted at an auction sale.
The acceptance was 'subject to confirmation'. Before confirmation, however, A withdrew his bid. It was held
that because acceptance was not absolute, it was subject to confirmation, A can withdraw his bid before it is
confirmed.

2) Acceptante must be in the prescribed manner :

Where the offerer has prescribed a mode of acceptance, it must be accepted in that very manner. If
the offer is not accepted in the prescribed manner it is up to the offerer to accept or reject such acceptance.
But when the acceptance is not in the prescribed manner and the offerer wants to reject it, he must inform
the acceptor within a reasonable time that he is not bound by acceptance since it is not in the prescribed
manner. If he does not do so within a reasonable time, he will be bound by the acceptance.
For example, A makes an offer to B and says "send your acceptance by telegram ". B sends his
acceptance by a letter. A can refuse this acceptance on the ground that it was not accepted in the prescribed
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 15

manner. But, if A fails to inform B within a reasonable time he will be deemed to have accepted the
acceptance by ordinary letter and it will result in the formation of a valid contract: If, however, no mode has
been prescribed, it should be accepted in some usual and reasonable manner.

3) Acceptaanee must be communicated:

You have learnt in the definition of acceptance that it should be signified. In other words, the
acceptance is complete only when it has been communicated to the offerer. A mere mental acceptance, not
evidenced by words or conduct, is no acceptance. In Brogen v. Metropolitan Railway Co.'s case an offer
to supply coal to the railway Co. was made. The manager wrote on the letter 'accepted', put it in his drawer
and forgot all about it. It was held that no contract was made because acceptance was not commumicated.
Comunication of acceptance does not mean that the offerer must come to know about the
acceptance. Even if the letter of acceptance is lost in transit or delayed, the offerer is bound by the
acceptance because the acceptor has done all that is required of him.
You should note that the offerer, while making an offer, cannot impose a burden on the other party
to communicate his refusal or rejection. He can certainly prescribe the manner in which the offer is to be
accepted. But, he cannot lay down the manner in which it is to be refused.
For example, the offerer cannot say that if he does not hear anything from the other party within
seven days, the offer will be deemed to have been accepted. This point can be illustrated by the well -known
case of Felthouse v. Bindley. In this case, F offered by a letter to buy his nephew's horse for £ 30 saying, "If
I hear no more about him, I shall consider the horse is mine ". The nephew sent no reply at all but told
Rindley, his auctioneer, not to sell that particular horse as he intends to sell it to his uncle. Bindley, however,
sold the horse by mistake. F sued the auctioneer for conversion. It was held that F will not succeed as his
nephew had not communicated acceptance and hence there was no contract.

4) Acceptance must be communicated by a person who has the authority to accept:

For an acceptance to be valid it should be communicated by the offeree himself or by a person who
has the authority to accept. Thus, if acceptance is communicated by an unauthorised person, it will not give
rise to legal relations. The case of Powell v. Lee can be mentioned in support of this point. In this case P
applied for the post of a headmaster in a school. The managing committee passed a resolution appointing P
to the post but this decision was not communicated to P. However, a member of the managing committee, in
his individual capacity and without any authority, informed P about the decision. Subsequently, the
managing committee concelled its resolution and appointed someone else. P filed a suit for breach of
contract. It was held that he was not informed about his appointment by some authorised person, hence there
was no communication of acceptance.

5) Acceptance must be made within the time prescribed or within a reasonable time:
Sometimes the offerer while making the offer fixes the period within which the offer should be
accepted. In such a situation, the acceptance must be given within the prescribed time and if no time is
prescribed, it should be accepted within a reasonable time. What is the reasonable time depends upon the
facts of the case. Where an offer to buy shares of a company was made in June but the acceptance was
communicated in November, it was held that because acceptance was not give11 within a reasonable time
the offer had elapsed. (Ramagate Victoria Hotel Co. v. Montefiore).

6) Acceptance must be given before the offer lapses or is withdrawn:

The acceptance must be given while the offer is in force. Once an offer has been withdrawn or stands
lapsed, it cannot be accepted. For example, A offered, by a letter, to sell his car to B for Rs. 40,000.
Subsequently, A withdraws his offer by a telegram, which was duly received by B: After the receipt of the
telegram, B sends his acceptance to A. This acceptance is not valid. You will learn about the rules relating to
lapse of an offer later in this unit.

COMMUNICATION OF OFFER AND ACCEPTANCE

You have learnt that offer and acceptance have to be communicated. Unless an offer is
communicated it cannot be accepted. Similarly, an acceptance which is not communicated does not create
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any legal relations. Now the question arises as to when the communication of offer and acceptance is
regarded as complete so as to bind the concerned parties.
When the contracting parties are face to face, there is no problem regarding communication,
because there is instantaneous communication of the offer and its acceptance. The problem arises when
parties are at a distance from each other and they have to do it through post. In such a situation, it is very
important for us to know the exact time when communication of the offer and acceptance is complete
because as soon as the communication is complete the parties loose the right of withdrawal or revocation.
Let us now take up the rules regarding the communication of the offer and acceptance.

 Communication of Offer
According to section 4 of the Contract Act, the communication of an offer is complete when it comes to the
knowledge of the person to whom it is made i.e., when the letter containing the offer reaches the offeree. For
example, A of Delhi sends a letter by post to B of Bombay offering to sell his house for Rs. 10 lakh. The
letter is posted on April 5, and this. letter reaches B on April 7. The communication of the offer is complete
on April 7. In the above example, if the letter containing the offer never reaches B, but B comes to know
about the proposal from some other source and sends his acceptance, it will not amount to proper
communication of the offer and so no contract will arise.

 Communication of Acceptance
The rules regarding communication of acceptance have to be studied from the point of view of offerer
and as. well as the offeree because the communication of acceptance is complete at different times for the
offerer and the offeree.
According to Section 4 of the Contract Act, "the communication of acceptance is complete :
(a) as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of
the acceptor, and
(b) as against the acceptor, when it comes to the knowledge of the proposer. Thus, the offerer becomes
bound by the acceptance as soon as the letter of acceptance is duly posted by the acceptor, but the
acceptor is bound by his acceptance only when the letter of acceptance reaches the offerer. It is quite
interesting to note that a valid contract arises even if the letter of acceptance is lost in transit or is delayed.
You should remember that the offerer will be bound by the acceptance only when the letter of acceptance
was correctly addressed, properly stamped and actually posted. Thus, if the acceptance letter is not correctly
addressed, it will not be binding upon the offerer.
From the above rules, it must be amply clear that so far as the acceptor is concerned, he is not bound
by acceptance till it reaches the offerer. You must have noted that there is a time gap between the two dates,
the date on which the letter of acceptance is posted and the date on which the offerer actually receives it.
This time gap can be utilised by the acceptor to withdraw his acceptance by a speedier means of
communication. In the above example if B of Bombay sends his acceptance by post on April 10 the
communication of acceptance is complete against A on April 10 i.e., when the letter of acceptance is posted,
but the communication of acceptance shall be complete as against B only when this letter reaches A.
Suppose A receives the letter of acceptance on April 12, at 11 a.m. then B will be baund by his acceptance
on April 12 only. 1n.other words, the law has given a chance to the acceptor to withdraw his acceptance.

Contracts over, Telephone

A contract by telephone is treated on the same principle as an oral agreement made between two parties
when they are face to face with each other. Thus, when offers of acceptance are made on phone, the parties
are in direct contact and no contract is concluded until the offerer actually receives or hears the acceptance
i.e., the contract is made only when the acceptance, is clearly heard and understood by the offerer. The
acceptor must ensure that his acceptance is properly received by the offerer. Normally when the parties
disconnect they usually utter such words as 'Bye', 'O.K.', etc. This indicates that the parties have heard what
they wanted to communicate. But, if the conversation is interrupted before acceptance has been given, the
contract is not concluded. For example, A made an offer to B over telephone. While B was conveying his
acceptance, the line suddenly went dead and A could not hear anything. Thus, no contract was concluded.
Then, B makes another attempt and this time he could convey his acceptance. The contract is said to be
concluded on the second attempt.
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REVOCATION OF OFFER AND ACCEPTANCE

The term 'revocation' simply means 'taking backJ or 'withdrawing'. Both offer and acceptance can be
revoked or withdrawn. But, it is possible only upto a certain stage. Let us now study the rules regarding the
revocation of offer and acceptance.

 Revocation of Offer
According to Section 5 of the Contract Act "a proposal may be revolted at any time before the
communication of its acceptance is complete as against the proposer, but not afterwards. " You know
that communication of acceptance is complete as against the offerer when it is put in a course of
transmission so as to be out of his power. Hence, an offer can be revoked at any time before the letter of
acceptance has been posted. For example, A offers by letter to sell his car to B at a certain price. A may
revoke his offer at any time before B posts his letter of acceptance, but not afterwards.
Once the letter of acceptance has been posted, the offer cannot be revoked. Therefore, when the
offerer wishes to revoke his offer, he must do so by a speedier mode of communication so that the
revocation notice reaches the offeree before he posts his letter of acceptance. Revocation must always be
expressed and move from the offerer himself or a duly authorised agent. Notice of revocation of a
'general offer' must be given through the same channel by which the original offer was made.

 Revocation of Acceptance
Section 5 of the Contract Act further provides that 'an acceptance may be revoked at any time
before the communication of the acceptance is complete as against he acceptor, but not afterwards.' You
have already learnt that the communication of acceptance is complete as against the acceptor when it
comes to the knowledge of the offerer. Hence, the acceptor can revoke his acceptance at any time before
his letter accepting the offer reaches the offerer. Once the letter acceptance reaches the offerer, the
acceptance cannot be revoked. Thus, for effective revocation of acceptance it is necessary that the
acceptor should adopt some speedier mode of communication so that his revocation reaches the offerer
before the letter of acceptance. For example, A offers by a letter dated February 2, sent by post, to sell
his house to B at a certain price. B accepts the offer on February 6 by a letter sent by post. The letter
reaches A on February 8 at 2 p.m. Here B may revoke his acceptance at any time before 2 p.m. on
February 8, but not afterwards.
Sometimes, an interesting situation may arise. The letter of acceptance and the telegram
containing revocation of acceptance may be delivered to the offerer at the same time. In such a situation
the formation of a contract is a matter sf chance. Which one is opened first by the offerer will decide the
issue. Generally it is presumed that a man of ordinary prudence will first read the telegram. Hence, the
revocation will be quite effective. When the parties at distant places communicate over telephone or
telex, the question of revocation does not arise because there is instantaneous communication of the offer
and its acceptance. The offer is made and accepted at the same time. In brief you should remember that
an offer can be revoked at any time before the letter of acceptance' is posted and an acceptance can be
revoked before it reaches the offerer.

 Communication of Revocation
The communication of revocation is complete at different times for the person who makes it and the
person to whom it is made. According to Section 4 the communication of revocation is complete.
i) As against the person who makes it, when it is put into a course of transmission to the person to
whom it is made, so as to be out of the power of the person who make it.
ii) As against the person to whom it is made, when it comes to his knowledge. .
Example: A proposes by letter to sell his house to B at a certain price. B accepts the proposal by a letter
sent by post. If A revokes his offer by telegram, then revocation of offer is complete as against A, when
the telegram is sent and for B it is complete when B receives the telegram. If B revokes his acceptance
by telegram the revocation of acceptance is complete for B when the telegram is sent and as against A,
when it reaches him.
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III. CONSIDERATION
INTRODUCTION
In Unit 1 you learnt about the essentials of a valid contract. One such essential, as per Section
10 of the Indian Contract Act, is 'lawful consideration'. In this unit you will learn about the meaning of
consideration, rules of a valid consideration, effect of inadequate consideration on ,the validity of an
agreement, enforceability of agreements without consideration and the circumstances under which
consideration is regarded as unlawful. You will also study about the agreement which are declared opposed
to public policy.

Definition and meaning

In Mercantile law, the term 'consideration' is used in the sense of quid pro quo which in turn means
'something in return'. This 'something' may be some benefit. right, interest or profit that may accrue to one
party or it may be some forbearance, detriment, loss or responsibility upon the other party.
This explanation of consideration was given in a very popular English case of Currie v. Misa.
Another simple and good description of 'consideration' is available in Sir Pollock's definition. In his book
'Pollock on Contracts', he says, "consideration is the price for which the promise of the other is bought, and
the promise thus given for value is enforceable".
Section 2(d) of the Indian Contract Act defines consideration as when at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or to abstain porn doing something, such act or abstinence or promise
is called a consideration for the promise.

Examples
1: A agrees to sell his house to B for Ks. 10,00,000. Here B's promise to pay Rs. 10,00,000 is the
consideration for A's promise to sell the house and A's to sell, the house is the consideration for B's promise
to pay Rs. 10,00,000.

2. X promises his debtor Y not to file a suit against him for one year on \C's agreeing to pay him Rs. 100
more. Here the abstinence of X is the consideration for Y's promise to pay.

Thus, all contracts consist of two clearly separable parts

(i) the promise, and (ii) the consideration for the promise.
A person who makes a promise to do or to abstain from doing something usually does so as a return
for some loss, damage, or inconvenience that may have or may have been occasioned to the other party in
respect of the promise. The benefit so received or the loss, damage or inconvenience so caused is regarded in
law as the consideration for the promise. It should be noted, that a promise without consideration is purely
gratuitous and, however, sacred and morally binding it may be, it cannot create a legal obligation . "No
consideration, no Contract" is the rule of' law.
The following two cases prove this point.
 Abdul Aziz v. Mazum Ali: In this case a person verbally promised the Secretary of the Mosque
Committee to subscribe Rs.500 for rebuilding of a mosque. Cater, he declined to pay the said amount.
Held, there was no consideration and hence the - agreement was void.
 Kedarnath v. Gorie Mohammad; In the Case the defendant had agreed to subscribe Rs. 100 towards
the construction of a Town hall at Howrah. On the faith of the promise, the Secretary called for plans
and entrusted the work to contractors and undertook liability to pay them. Held, the agreement was
enforceable being one supported by consideration in the form of a detriment to the Secretary who had
undertaken a liability to the contractors on the faith of the promise made by the defendant.

LEGAL RULES/ESSENTIALS FOR VALID CONSIDERATION

If you analyse the definition of consideration as per Section 2(d), you may notice certain essential features
which are necessary for consideration to be valid and acceptable legally. These features are also known as
the legal rules for consideration. Let us now study such rules in detail.

1. Consideration must move at the desire of the promisor:

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To make a contract binding and enforceable, it is not sufficient that there is consideration but also
that consideration has been supplied at desire of the promisor. Thus, where an act is done at the desire of a
third party and not the promisor, that act cannot constitute valid consideration. For example, D constructed a
market at the instance of the Collector of a district. The occupants of the shops in the said market promised
to pay D a commission on articles sold through their shops. Held, there was no consideration because the
money was not spent by the plaintiff at the request of the defendants, but voluntarily for a third person and,
thus, the contract was void (Durga Prasad v. Baideo).
It does not mean, however, that a promisor must get the benefit person'ally. The consideration may
accrue to the third party at the request or desire of the promisor. For example, A, who owes Rs.20,000 to B,
persuadedrC to pass a promissory note for the amount in favour of B. C promised B that he would pay the
amount (by passing on a promissory note), and B credited. the amount to A's Account in his books. The
discharge of A's account was consideration for C's promise (through C the promisor had not the received
benefit) National Bank of Upper India v. Bansidhar.

2. Consideration may move from the promisee or any other person:

The second rule as to consideration is that the act which is to constitute consideration may be done by
the promisee himself or by any other person. "Any other person" (that is, a person other than the promisee)
is technically referred to as stranger to consideration. This is sometimes called as doctrine of constructive
consideration. It means, that, as long as there is a consideration for a promise, it is immaterial who has
furnished it.
The case of Chinnayya v. Ramayya is a good illustration on the point. In this, case, A by a deed of
gift transferred certain property to her daughter, with a direction that the daughter should pay an annuity to
A's brother, as had been done by A. On the same day the daughter executed a writing in favour of the
brother, agreeing to pay the annuity. Afterwards, she declined to fulfil her promise saying that no
consideration had moved from her uncle ('A's brother') The Court, however, held that the words 'the
promisee or any other person' in Section 2(d) clearly show that the consideration need not necessarily move
from the promisee, it may move from any other person. Hence. A's brother was entitled to maintain the suit

3 Consideration may be past, present or future.

The words used in Section 2(d) are "has done or abstained from doing" refer to past. Similarly, the words
"does or abstains from doing" refer to present, and the words "promises to do or to abstain from doing" refer
to future. Accordinglv in India, consideration may be past, prescnt or future.
 Past Consideration: Past consideration is something wholly done, forborne or suffered before the
making of' the agreement.
Examples
1. A, a minor, was given the benefit of certain services by the plaintiff. The plaintiff rendered those
services, not voluntarily but at the desire of A. These services were continued even after majority at
the request of A who subsequently promised to pay an annuity to the plaintiff. It was held that the
past consideration was a good consideration. (Sindhc v. Abraham)
2. A renders some services to B at B's request in the month of November. In December B promises
to pay A a sum of Rs. 100 for his services. The services of A will be past consideration. A can
recover the past amount. But under English Law past consideration is no consideration'. Thus, if
the above promise was made in England, it could not have been enforceable.

 Present Consideration : Consideration which moves simultaneously with the promise is called
present consideration. 'cash sales' is an excellent example of the present consideration.

 Future Consideration: When the consideration is to move at a future date, it is called future or
executory consideration. It takes the form of a promise to be performed in the future. For example, A
promises B to deliver him 100 bags of wheat at a future date. B promises to pay for it on delivery.

4 Consideration must be of some value:

Consideration as defined under Section 2(d) of the Indian Contract Act means some act, abstinence
or promise on the part of the promisee or any other person which has been done at the desire of the
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promisor. Should it mean that even a worthless act will be sufficient to make a good consideration if it is
only done at the promisor's desire?.
If for example, promises to give is new Maruti car to B, provided B will fetch it from the
garage. ,The act of fectching the car cannot by any stretch of imagination be called a consideration for the
promise. Yet it is the only act the promisor desired the promisee to do. Such an act no doubt, satisfies the
words of the definition, but it does not catch its spirit.
In Chidambara v. P.S. Ranga, .Justice Subba Rao of Supreme Court observed that consideration
shall bc "something" which not only the parties regard but the law can also regard as having some value.
Similarly, in Kulasekaraperumal v Pathakutty, Justice Srinivasan of Madras High Court observed that
though the Indian Contract Act does not 'in terms-so require, consideration must be good or valuable. It must
be real and not illusory. For example, A promises to pay an existing debt punctually if B, the creditor, gives
him, some discount. The agreement is without consideration as the - discount cannot be enforced as
consideration being unreal and illusory.

5 Consideration must be Legal: Consideration which is not legal, naturally, has no value in the eyes of the
law and, therefore, cannot be a real consideration Thus, the main points of Legal Rules for Consideration are
as follows:
1 Consideration must move at the desire of the promisor 2 Consideration may be supplied by the promisee
or any other person 3 Consideration may be past, present or future 4 Consideration must be of some value,
i.e., it must be real and not illusory 5 Consideration must be legal.

6.consideration need not to be adequate

In fact, adequacy of consideration is always the lookout of the promisor. Courts do not see whether
every person making the promise has recovered full return for the promise. Thus, if 'A' promises to sell a
house worth Rs. 8,00,000 for Rs. 80,000 only, the inadequacy of the price in itself shall riot render the
transaction void. But where a party pleads coercion or undue influence or fraud, inadequacy of consideration
will also be a piece of evidence to be looked into.
For example, B agrees to sell a horse worth Rs. 1,000 for Rs. 10, B denies that his consent to the
agreement w& freely given. .The inadequacy of consideration is a fact which the Court should take into
account in considering whether or not B's consent was freely given. Section 25 (Explanation 2) of Indian
Contract Act also states that an agreement to which the consent of the party is freely given is not void
merely because the consideration is inadequate; but the inadequacy of the consideration may be taken
into account by the Court in determining the question whether the consent of the promisor was freely
given.

7. Performance of existing duty

EXCEPTIONAL TO CONSIDERATION
As discussed earlier, as per Section 10 of the Indian Contract Act consideration is an important element for a
contract to be valid. Section 25 echoes this view and declares a contract without consideration as void.
However, it also recognises certain, exceptions, Besides, section 185 also provides for a case where a
contract without consideration shall be valid. Thus, the circumstances under which a contract, in spite of no
consideration, may be enforceable are stated below:
1 Agreements due to natural love and affection: An agreement made without consideration is valid if it
is.:
a)expressed in writing,
b) registered (under the law for the time being in force for registration of documents),
c) made on account of natural love and affection, and
d) is between parties standing in a near relation to each other.
For example, an elder brother, on account of natural love and affection, promised to pay the debts of
his younger brother. The agreement was put to writing and was registered. Held, the agreement was, valid.
(Venkataswamy v. Rangaswamy)
You should note that for an agreement to be valid under this clause, the agreement must be the result
of natural love and affection. Natural of relation by itself does not necessarily import natural love and
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affection. Thus, where a Hindu husband by a registered document, after referring to quarrels and
disagreements between himself and his wife, promised to pay his. Wife a sum of money for her maintenance
and separate residence, it was held that the promise was unenforceable Rajlakhi Devi v. Bhootnath.

2 Promise to compensate -Section 25(2) : A promise made without consideration is valid.if .

a) it is a promise to compensate (wholly or in part).
b) the person to be compensated has already done something voluntarily,.or has done something which the
promisor was legally co'mpellable to do.

Examples
i A finds B's purse and gives it to him. B promises to give Rs. 100 to A, This is a valid contract even though
A was not engaged for the purpose by B and. therefore, consideration did not move at the desire of B, the
promisor.
ii A supports B's infant son without asking. B promises to pay A's expenses for so doing. Once again, this is
a contract.

3 Promise to pay a debt barred by limitation act -Section 25(3): A promise to pay a debt barred by
Limitation Act shall be valid without consideration because legally it remains no longer claimable. You
‘should know that a debt becomes barred under the Limitation Act, if the same is not claimed within a
period of 3, years. However, a promise to pay a time barred debt (wholly or in part) shall be valid if
i) the promise is put into writing
ii) signed by the debtor or his agent, and
iii) relates to a debt which the creditor might have enforced payment off but for the law of limitation. For
Example, X owes Y Rs. 800, but the debt is time barred. X signs a written promise to pay Rs. 600 on
account of the debt. This is a valid contract (Section 25).

4 Completed gifts: The rule no consideration, no contract does not apply to completed gifts. These need not
be the result of natural love and affection or near relation, but the gifts must be complete. (Explanation 1 to
Section 25). Completed gifts mean gifts made and accepted. However a promise to gift is not valid.

5 Agency: For creation of an agency, no consideration is required. You should + note that, however, if no
consideration has passed to the agent, he is only a gratuitous agent and is not bound to do the work entrusted
to him, although if he begins the work he must do it to, the satisfaction of his principal (Section 185).

6. Charity: If a person promises to contribute to charity and on this faith the promisee undertakes a liability
to the extent not exceeding the promised ' subscription, the contract shall be valid (Kedarnath v. Gorie
Mohammad).

Unlawful consideration and effects

In most of the cases, the words 'Object' and 'Consideration' mean the same thing. But in sotne cases they
may be different. For example, where money is borrowed for the purpose of the marriage of a minor, the
consideration for the contract is the loan and the object is the marriage. We have already noted that an
agreement will not be enforceable if its object or the consideration is unlawful. According to section 23 of
the Act, the consideration and the object of an agreement are unlawful in following cases :

1 If it is forbidden by law: If the object or the consideration of an agreement is the doing of an act
forbidden by law, the 4greement is void. An act or an undertaking is forbidden by law when it is punishable
by the criminal law of the country or when it is prohibited by special legislation derived from the legislature.
Examples
i) A loan granted to the guardian of a minor to enable him to celebrate the minor's marriage in contravention
of the Child Marriage Restraint Act is illegal and cannot be recovered back (Srinivas v. Raja Ram
Mohnn).
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 22

ii) A promises to drop prosecution which he has instituted against B for robbery, and B promises to restore
the value of the things taken. The agreement is void, as its object is unlawful (Illustration (h) to Section 23).

2 - If it defeats the provisions of any law: If it is of such a nature that if permitted, it would defeat the
provisions of any law. In other words if the object or the consideration ofla11 agreement is of such a nature
that, though not directly forbidden by law, it would defeat the provisions of the law, the agreement is void.
For example, A's estate is sold for arrears of revenue under the provisions ' of an Act of the Legislature, by
which the defaulter is prohibited from purchasing the estate. B, upon the understanding with A, becomes the
purchaser and agrees to convey the estate to A for the price which B has paid. The agreement is void as it
renders the transaction, in effect, a purchase by the defaulter, and would so defeat the object of the law
(IIlustration (i) to Section 23).

3 If it is fraudulent: An agreement with a view to defraud others is void. For example, A, B and C enter
into an agreement for the division among them of gains acquired or to be acquired, by them by fraud. The
agreement is void as its object is unlawful.

4 If it involves or implies injury to the person or property of another. If the object of an agreement is to
injure the person or property of another, it is void. For example, A borrowed Rs. 100 from B. A executed a
bond promising to work for B without pay for 2 years and in case of default agreed to pay interest at a very 1
exorbitant rate and the principal amount at once. Held, the contract was void (Ralm Saroop v. Bansi).

5 If the Court regards it as immoral or opposed to public policy: An agreement whose obiect or
consideration is immoral or is opposed to the public policy, is void. For example, A let a cab on hire to B, n
prostitute, knowing that it would be used for immoral purposes. The agreement is void (Pearc'e v. Brooks).

Partial Illegality
Section 24 of the Indian contract Act provides that if any part of a single consideration for one or
more objects, or any one or any part of any one of several consideration for a single object, is unlawful, the
agreement is void. For example, A promises to supervise the business on behalf of B, a licensed
manufacturer of some permissible chemicals and some contraband items. B promises to pay A a salary of
Rs. 10,000 per month. The agreement is void, the object of A's promise and the consideration for B's
promise being in part unlawful. It is well settled that if several distinct promises are made for one and the
same lawful consideration, and one or more of them be such as the law will not enforce, that will not of
itself prevent the rest from being enforceable. The test is whether a distinct consideration which is wholly
lawful can be found for the promise called in question. According to Justice Wiles, the general rule is that,
where you cannot sever the illegal from the legal part of a convenient, the contract is altogether void; but
where you can sever them, whether the illegally be created by statute or by the common law, you may reject
the bad part and retain the good.

Privity of contract/ STRANGER TO A CONTRACT AND S,TRANGER TO CONSIDERATION

You have learnt that in India, consideration is permitted to be supplied by any person and it need not
necessarily be supplied by the promisee himself. Thus, the concept of 'stranger to consideration' is a valid
and acceptable concept.
However, a stranger to the consideration must be distinguished from a stranger to a contract. A stranger
to a contract means a person who is not a party to the contract. Such a person cannot even in India, bring a
valid suit.
For example, A who is indebted to B, sells his property to C and C promises to pay off the debt to B. In
case C fails to pay, B has no right to sue C being stranger to the contract.

Exceptions: The aforesaid rule that a stranger to a contract cannot sue is, however, subject -to certain
exceptions. In other words, even a stranger to a contract may enforce a claim in the following cases : .

1 In the case of trusts, the beneficiary may enforce the contract. In Khwaja Muhammad v. Mussaini
Begum, H sued her father-in-law K to recover Rs. 15,000 being the arrears of allowance called Kharchi-i-
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Pandan-betel box expenses (Pin money) payable to her by K under an agreement made between K ant H's
father, in consideration of H's marriage to K's son D. Both H and D were minors at the time of marriage. The
Privy Council held the promise to be enforceable by H.
2 On the same principle, the provision of marriage expenses of female members of a Joint. Hindu Family
entitle the female member to sue for such expenses on a partition between male members (Rakhmanbai v.
Govind).
3 In the case of an acknowledgement of liability or by past performance thereof. . Where X receives money
from Y for paying it to Z and X admits to Z the receipt-of that amount, then X becomes the agent of Z and
will be liable to pay the amount to him.
4 In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of
the family who originally had not been parties to the settlement, may enforce the agreement. Shuppu v.
Subramanium.
5 In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee
can enforce the contract. Kishan La1 Sadhu v. Pramlla Bale Dasi.
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UNIT – II
I. Capacity to contract
INTRODUCTION
You learnt in that the parties to a contract must be competent to contract. If any one of them is
incompetent to contract, the agreement shall be void, i.e., it cannot be enforced by law. In this unit, you will
learn as to who are competent to contract and what shall be the exact position of a contract in case any one
of the parties thereto is incompetent of contracting.
WHO IS COMPETENT TO CONTRACT
Section 11 of the Indian Contract Act clearly states as to who shall be competent to contract. It
provides that every person is competent to contract (i) who is of the age of majority according to the law to
which he is subject, (ii) who is of sound mind, and (iii) who is not disqualified from contracting by any law
to which he is subject. Thus, a person to be competent to contract should not be
i) a minor, or
ii) of an unsound mind, or
ii) disqualified from contracting Let us now consider each of the aforesaid elements of competency to
contract.

I)POSITION OF A MINOR –
Who Is a Minor?
According to Section 3 of the Indian Majority Act, a person is deemed to have attained majority
(i) when he completes 18 years or
(ii) where a guardian of person or property or both. has been appointed by a Court of Law (or where his
property has passed under the superintendence of the Court of Wards), he attains majority on completion of
21 years.

In other words, normally a person shall be treated as minor if he has not attained the age of 18 years. In the'
following two cases, however, he is treated as minor until he attains the age of 21 years.
i) where a guardian of a minor's person or property is appointed under the guardians and Wards Act, 1890,
or ii) where the superintendence of minor's property is assumed by a Court of Wards.

Position of Agreements by a Minor

According to Section 11, as stated earlier, no person is competent to contract who is not of the age
of majority. In other words, a minor is not competent to contract. In fact, the law acts as the guardian of
minors and protects their rights because they are not mature and may not possess the capacity to judge what
is good and what is bad for them. Hence the minor is not bound by any promises made by him under an
agreement. The position with regard to minor's contracts may be summed-up as follows:

1) A contract with or by a minor is absolutely void and the minor therefore cannot bind himself by a
contract: The Privy Council in the case of Mohiri Bibee v. Dharmodas Ghosh held that a minor's
agreement is altogether void. The facts of the case were: Dharmodas a minor, entered into a contract for
borrowing a . sum of Rs. 20,000. The lender advanced Rs. 8,000 to him and Dharmodas executed a
mortgage of his property in favour of thee1ender. Subsequently, the minor sued for setting aside the
mortgage. The Privy Council held that sections 10 and 11 of the Indian Contract Act make the minor's
contract void and therefore the mortgage was not valid. Then, the mortgagee, prayed for refund ' of Rs.
8,000 by the minor. The Privy Council further held that as a minor's contract was void, any money advanced
to him could not be recovered.

2) Fraudulent representation by a minor: Will it make any change in case minor is guilty of deliberate
misrepr6sentation about his age thereby inducing the other party to contract with him? No it will make no
change in the status of the agreement. The contract shall continue to remain void because if such a thing is
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permitted, unscrupulous people while dealing with a minor shall, as a first thing, ask him to sign a
declaration that he is of the age of majority. It will thus defeat the whole objective of protecting his interests.
In the case Leslie v. Sbeill. S, a minor by fraudulently representing himself to be a major, induced L to
lend him f 400. He refused to repay it and L sued him for the money. Held, that the contract was void and S
was not liable to repay the amount due. The same decision was endorsed in the case of Kanhya La1 v.
Girdhaai Lal and the minor was not held liable on the promissory note executed by him,
But, should it mean that those younger in age have liberty to cheat the seniors and retain the benefits.
The Lahore High Court (prior to partition) in Khan Gul v. Lakha Singh held that where the contract is set
aside the status quo ante should be restored and the court may direct the minor, on equitable grounds, to
restore the money or property to the other party. Thus, in such cases, if money could be traced, the court
would, on equitable grounds, ask the minor for restitution. Sections 30 and 33 of the Specific Relief Act.
1963 provide that in case of a fraudulent misrepresentation of his age by the minor, inducing the other party
to enter into a contract, the court may award compensation to the other party.

3) Ratification of a contract by n minor on attaining the age of majority: A minor's agreement is void
abinitio. Hence, there can be no question of its being ratified even after he attains majority. In Eudrmn
Rikamaswamy v. Anthaopa a person gave a promissory note in satisfaction of one executed by him for
money borrowed when he was a minor. The Court held that the claim thereunder could not be enforced
because there was no fresh consideration. Consideration given during minority is not a good consideration.
It-however, where a person on attaining majority actually pays the debt incurred by him during minority, it
is treated as valid. In law it is to be regarded on the same footing as a gift ( Anant Rai v. Whagwan Rai).
You should note that an agreement with a minor is merely void and not unlawful and so the sum paid cannot
be sued for subsequently.

4) Minor's contact with major person: Documents jointly executed by a minor and an adult major person
would be void vis-a-vis the minor. But they can be enforced against the major person who has jointly
executed the same provided there is a joint promise to pay by such a major person (Jumna Bai v. Vasaaata
Rino).

5) Minor as a partner: A minor cannot be a partner in a partnership firm. However, a minor may, with the
consent of all the partners for the time being, be admitted to the benefits of partnership (Section 30 of the
Partnership Act, 1932). This means he can share the profits without incurring any personal liability for
losses.

6) Minor as an agent: A minor can act as an agent and bind his principal by his acts without incurring any
personal liability.

7) Minor as a shareholder: There has been a strong controversy as to whether a minor call become a
shareholder/member of a company. In view of the provisions of the Indian Contract Act and the Privy
Council's decision, a minor cannot become a member of the company (Palaniaga v. Pnsupati Bank). Thus,
if a minor acquires partly paid shares the company will not be able to recover . the uncalled amount from the
minor. It however, there are contrary decisions wherein it has been held that a minor can become a
subscriber to the memorandum of association and can acquire shares by allotment.
In Laxon Co.'s case, it was held that a minor can be a shareholder unless the articles of association OF
the company prohibit it. In Dewan Singh v. Minewe Films Ltd., the Punjab High Court held that there was
no legal bar to a minor becoming a member of a company by acquiring shares (i.e., by way of transfer)
provided the shares were fully paid up and no further obligation or liability was attached to them. It may
thus be concluded that a minor can become a shareholder/ member of a company provided that the shares
held by him are fully paid shares and the articles of association do not prohibit it.

8) A minor cannot be declared insolvent because he is incapable of contracting debts.

Exceptions
i) Contract for the benefit of a minor: A person incompetent to contract may accept a benefit and be a
transferee, although a sale or mortgage of property by a minor is void, a duly executed transfer by way of
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 26

sale or mortgage in favour of a minor who has paid to valid consideration is not void. Such a transaction
shall be enforceable by him or any other person on his behalf, A minor, therefore, in whose favour n deed of
sale is executed is competent to sue for possession of the property conveyed thereby. It was held by a Full
Bench of the Madras High Court that a mortgage executed in favour of a minor who has advanced the
mortgage money is enforceable by him or by any other person on his behalf (Raghva v. Srinivasa, 1917).
Similar:, a minor can be the payee of a cheque nr any other negotiable instrument and claim payment
hereon. Also, where a minor sel!s goods tcj another major person, he shall bs entitled to recover its price
from him.

ii) Contract by Guardian: A contract may be entered into on behalf of a minor by his guardian or manager
of his estate. In such a case the contract can be enforced by or against the minor provided that the contract
(a) is within the scope of the authority of the guardian or manager, and
(b) is for the benefit of the minor (Subramanyam v. Subba Rrao).
Thus, a contract entered into by a parent or certified guardian of a minor for the sale of property belonging
to the minor can be enforced by either party since it may be for the minor's benefit. However, all contracts
made by a guardian on behalf of a minor are not valid. For instance, the guardian of a minor has no power to
bind the minor by a contract for the purchase of immovable property (Bholanath v. Balbhadra Prasad).
Similarly, a guardian of a minor cannot enter into a valid contract of service on his/her behalf (Raj Rani v.
Brem Adib).

iii) Contract for Supply of Necessaries: A Contract for supply of necessaries to a minor or to those who
are dependent on him can be enforced against him, not personally, but so far as his property may extend.
Section 68 in this regard reads as follows:
If a person, incapable of entering into a contract, or anyone whom he is legally bound to support,
is supplied by another person with necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the property of such incapable person.
It may not be possible to draw an exhaustive list as to what shall constitute 'necessaries'. In fact,
what may be 'necessaries' for one, may be a luxury for another. Buttons, for example, are a normal part of
clothing and may therefore be treated as 'necessaries', but not the gold or diamond buttons (a prince may be
an exception). 'Necessaries' must, therefore, be understood in relation to the social status of the person
concerned. 'Necessaries' normally include articles required to maintain a particular person in the state,
degree and station in life in which he is. The English Sale of Goods Act defines necessaries as goods
suitable to the condition in life of the minor, and ta his actual requirements at the time of sale and delivery
(Section 2). Thus, an item will not be treated as necessaries if a person is already sufficiently supplied with
things of that kind. It is immaterial whether the other party knows this or not. In the case of Nash v. Inman a
minor who was a B. Corn. student, bought eleven fancy coats from , N. He was, at that time, adequately
provided with clothes. Weld, not even a single coat, was a necessity.
His properties could not, therefore, be attached for its payment. In India, be5ides food, clothing and
shelter the education and marriage of a female have also been held to be necessaries. Any supply of such
items or loans for the same shall, therefore, qualify for claim under Section 68. However, you should note
that the payment for necessaries supplied to a minor can only be claimed out of the properties belonging to
the minor. He cannot be held personally liable for the same, i.e., he cannot be asked to expend labour in
exchange, nor can his income, if any, be attached.
This rule is equally applicable to the necessary services rendered to him. Thus, the lending of money
to a minor for the purpose of defending a suit on behalf of a minor in which his property is in jeopardy, or
for defending him in prosecution, or for saving his property from sale in execution of a decree is deemed to
be a service rendered to the minor. Other examples of necessary services rendered to a minor , are: provision
of education, medical and legal advice, provision of a house on rent to a minor for the purpose of living and
continuing his studies. It should also be noted that he parent or guardian of a minor cannot be held liable
unless those goods are supplied (or services rendered) to a minor as the agent of the parent or guardian, that
is, the minor has collected them on behalf of his parent or guardian.

II) AGREEMENTS BY PERSONS OF UNSOUND MIND

Who is a Person of Sound Mind?
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 27

You know that a person while making a contract should be of a sound mind otherwise the contract will have
no validity in the eyes of law. Who is a person of sound mind has been amply clarified by Section 12 of the
Indian Contract Act which reads a person is said to be of sound mind for the purpose of making a . contract,
if at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to
its effect upon his interests. Thus soundness of mind of a person depends on two facts:
i) His capacity to understand the terms of the contract, and
ii) His ability to form a rational judgement as to its effect upon his interests. If a person is incapable of both,
he suffers from unsoundness of mind. Idiots, lunatics and drunken persons are examples of those having an
unsound mind

Section 12 further states that A person who is usually of unsound mind, but occasionally of sound mind,
may make a contract when he is of sound mind. A person who is usually of sound mind, but
occasionally of unsound mind, may not make a contract when he is of unsound mind.

Examples
1) A patient in a lunatic asylum, who is it intervals of sound mind may contract during those intervals.
2) A sane man, who is delirious from fever or who is SO drunk that he cannot understand the terms of a
contract or form a rational judgement as to its effect on his interest, cannot contract whilst such delirium or
drunkenness lasts. Whether a party to a contract, at the time of entering into the contract, is of sound mind or
not is a question of fact to be decided by the court.

Burden sf Proof
The following rules may be noted in this regard:
1) Where a person is usually of sound mind, the burden of proving that he was of unsound mind at the time
of execution of a document lies on the person who challenges the validity of the contract (Tiliuk Chanad v.
Mahandu),

2) Where a person is usually of unsound mind, the burden of proving that at the time he was of sound mind
lies on the person who affirms it.

3) In cases of drunkenness or delirium from fever or other causes, the onus lies on the party who sets up that
disability to prove that it existed at the time of the contract.

Position of Agreements by Persons of Unsound Mind

1) Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other.persona1
experience. However, he has some intervals of sound mind. He is not liable for contracts entered into while
he is of unsound mind. However, as regards contracts entered into during lucid intervals, he is bound. His
position in this regard is identical with that of a minor.
2) Idiots: An idiot is a person who is permanently of unsound mind. Idiocy is a congenital defect. Such a
person has no lucid intervals. He cannot make a valid contract. In Inder Singh v. Parmeshwardhari Singh
a property worth about Rs. 25,000 was agreed to be sold by a person for Rs. 7,000 only. His mother proved
that he was a congenital idiot, incapable of understanding the transaction. Holding the sale to be void,
Justice Sinha of Patna High Court stated that "it is not necessary that a man must be suffering from lunacy to
disable him from entering into a contract. A person may, to all appearances, behave in a normal fashion but
at the same time, he may be incapable of forming a judgement of his own as to whether the act he is about to
do is in his interest or not. In the present case he was incapable of exercising his own judgement"
3) Drunken Persons: Drunkenness is on the same footing as lunacy. A contract by drunken person is
altogether void. It should be noted that partial or ordinary drunkenness is not sufficient to avoid a contract. It
must be clearly shown that, at the time of contracting, the person pleading drunkenness was so intoxicated as
to be temporarily deprived of reason and was not in a position to give valid consent to the contract.
Illustration (b) to Section 12 of the Indian Contract Act reads: A same man is delirious from fever or who
is so drunk that he cannot understand the terms of a contract or form a rational judgement as to its
effects on his interest cannot contract while such delirium or drunkenness lasts.
Exceptions
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 28

A contract with a person of unsound mind is subject to the same exceptions as the contract with a minor is.
Thus a person of unsound mind (i) may enforce a contract for his benefit, and (ii) his properties, if any, shall
be attachable for realisation of money due against him for supply of necessaries to him or to any of his
dependents.

III PERSONS DHSQUALIFIED BY LAW

Besides minors and persons of unsound mind, there are some &her persons who have been declared
incompetent of contracting, partially or wholly, so that the contracts of such persons are void. Incompetency
to contract may arise from political status, corporate status, legal status, etc.
Alien Enemy: An alien is a person who is the citizen of a foreign country. Thus, in the Indian
context an alien may be (i) an alien friend, or (ii) an alien enemy. An alien friend, (i.e., a foreigner) whose
country is at peace with the Republic of India, has usually the full contractual capacity of a natural born
Indian subject. But, he cannot acquire property in Indian ship or be employed as Master or any of other
Chief Officer of such a ship. In the case of contracts with an alien enemy (i.e., an alien whose country is at
war with India) the position may be studied under two heads: (i) contracts during the war and (ii) contracts
made before the war.

During the subsistence of the war, an alien can neither contract with an Indian subject nor can be
sued in an Indian Court except by licence from the Central Government. As regards contracts entered' into
before the war breaks out, they are either dissolved of merely suspended. All contracts, which are against the
public policy or are such that may benefit the enemy, stand dissolved. The contracts which are not against
public policy are merely suspended for the duration of the war and revived after the war is over, provided
they have not already become time-barred under the law of limitations. It may be observed that an Indian,
who resides voluntarily or who is carrying on business in a hostile territory will be treated as an alien enemy.

Foreign Sovereigns and Ambassadors: Foreign sovereigns and accredited representatives of a foreign state
(Ambassadors) enjoy some special privileges. They cannot be sued in our courts unless they choose to
submit themselves to the jurisdictions of our courts. They can enter into contracts and enforce those
contracts in our courts, but they cannot be proceeded against in Indian Courts without the sanction of the
Central Government. The aforesaid immunity of a sovereign continues even if he engages in trade. But, an
ex-king is not entitled to this privilege and can thus be sued against in our courts. If, however, a foreign
sovereign, etc. enter into a contract through an agent residing in India, the agent shall be held liable on the
contract.

Convicts: A convict is not competent to contract during the continuance of sentence of imprisonment. This
inability comes to an end with the expiration of the period of sentence. A convict can, however, enter irlto,
or sue on, a contract when on parole or when he has been pardoned by the court.

Company under the Companies Act or Statutory Corporation under special Act of Parliament: A
company or a corporation is an artificial person. It exists only in contemplation of law, its contractual
capacity, is determined by its constitution. The contractual capacity of a statutory corporation is expressly
defined by the statute creating it. The contractual capacity of a company registered under the Companies Act
is determined by the objects clause of its memorandum of association. Any act done in excess of the powers
given in the memorandum is ultra-vires and void.

Insolvents: When a debtor is adjudged insolvent, his property stands vested in the Official Receiver or
Official Assignee appointed by the Court. He cannot enter into contracts relating to his property and sue, and
be sued, on his behalf. This disqualification of an insolvent is removed after he is discharged.
 SHUBADA COACHING CENTER HUBBALLI CONTRACT I BY:RAGHAVENDRA SALI PH.NO.8867328228 29

II. Free consent

Introduction: You have learnt that there are some essentials of a valid contract and one of them is that the consent
of the contracting parties must be free. If the consent is not free, the contract shall be treated as void or voidable
depending upon the factor which affected the consent. In thiS unit you will learn about the meaning of consent and
the various factors that affect the consent viz., coercion, undue influence, fraud, misrepresentation, and mistake.
You will also learn how far the validity of an agreement is affected by each of these factors.

MEANING OF CONSENT

You have learnt that when two parties enter into a contract they should give their consent. The consent of the
parties means that they understand the same thing in the same sense. There must be no misunderstanding between
the parties about the subject matter of the contract. Section 13 of the Indian Contract Act defines the term 'Consent'
as Two or more persons are said to consent when they agree upon the same thing in the same sense. Thus, consent
involves identity of minds in respect of the subject matter of the contract. In English Law, this is called 'consensus-ad-
idem'. If the parties are not ad-idem on the subject matter of the contract, then there is no real agreement between
them. When two pesons enter into a contract concerning a particular person or a thigg and it turns out that each of
them had a different person or thing in mind, no contract would exist between them. For example, A has two Maruti
cars, one is blue and the other red. He wants to sell his red Maruti car. B who knows of only A's blue car, offers to
buy A's car for Rs. 60,000. B accepts the offer thinking it to be an offer for his red Maruti car. Here the two parties
are not thinking in terms of the same subject matter. Hence, there is no consent and the contract will not be valid. In
Foster v. Mackinnon, the defendant has purported to endorse a bill of exchange which he was told was a guarantee.
The court held that he was not liable as his mind did not go with that writing and he never intended to sign a bill of
exchange. There was no consent and consequently no agreement arose.