UNIT – I

1. ALL CONTRACTS ARE AGREEMENTS, BUT ALL ARGUMENTS ARE NOT CONTRACTS. EXAMINE THE STATEMENT
AND DISCUSS ESSENTIALS OF A VALID CONTRACT.
Ans. Contract according to Section 2(h) of the Indian Contract Act is “An agreement enforceable by law”. A Contract
is therefore, an agreement, the object of which is to create legal obligation i.e. a duty enforceable by law.

Salmond defines Contract as ‘an agreement defining and creating obligations between the parties’.

There are basically two elements of Contract: a) Agreement b) Legal Obligation

Agreement: Section 2(e): Every promise and every set of promises forming the Consideration for each other is
an agreement. An agreement comes into existence when one party makes a proposal (offer) and the other party
accepts or given assent to it. The acceptance should be agreement on the same subject matter it the same sense
and same time.
Legal Obligation: The agreement should give rise to legal obligation i.e. enforceable by law. If the agreement is
not enforceable by law then it cannot be called a Contract. Therefore all Contracts are agreements but all
agreements are not Contracts. Agreements of moral nature or religious or social are not Contracts as they are
do not create legal obligations. The agreements should be in the purview of the law of Contract. It is binding on
all the parties and if not fulfilled creates breach of Contract which can be enforced by court of law.

ESSENTIALS OF A VALID CONTRACT

Section 10 gives the various essential of a valid Contract.
1) Offer and acceptance
2) Intention to create Legal Obligations
3) Lawful Consideration
4) Lawful Object
5) Capacity of Parties
6) Certainty
7) Free Consent
8) Writing and Registration
9) Possibility of Performance
10) Not expressly declared Void

1) Offer and acceptance

Section 2(a) gives the definition of Offer: When a person signifies to another his willingness to do or
abstain to do anything with a view to obtain the assent of the other to such an act or abstinence.
The person making the offer is an ‘offeror’. The person to whom the offer is made is ‘promisee’.
The offer should be definite and made with an intention to bind the other party by rights and
obligations.
There must be a lawful offer i.e. the offer should satisfy the requirements of Contract Act.

According to Section 2(b) Acceptance means when the person to whom the offer is made, gives his
assent to the offeror.
There must be lawful acceptance i.e. satisfy the requirement of Contract Act.

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2) Intention to create Legal Obligations
There must be an intention among the parties that the agreement should be attached by legal
consequences and create legal obligations.
Agreements of moral or domestic nature do not create legal relations.
E.g. A man promises his wife to give her a saree if she sang a song. The wife sang the song but he did not
bring the saree. The wife cannot bring an action against her husband in court as it lacked the intention
to create legal obligation.

3) Lawful Consideration
Section 2 (d): Consideration is an essential element for a valid Contract. Consideration is the ‘price paid
by one party for the promise of the other’. Consideration is therefore an act (do something) or
abstaining (not doing something) or a promise to do or not to do something. It is the give and get
something.
The Consideration can be present, past or future.
Valid Consideration are those that are lawful, and not forbidden by the law, or is fraudulent, or involves
injury to person or property or another or is immoral, or opposed to public policy.
An agreement without Consideration is void, or empty Contract (Nadum Pactum) and as such not
enforceable by law.

4) Lawful Object
Section 23: The parties should agree on a lawful object and not an illegal object.
Illegal object is that which is forbidden by the law, or is fraudulent, or involves injury to person or
property or another or is immoral, or opposed to public policy.
If the object is illegal then the Contract is void.
E.g. Giving the house on rent to a terrorist knowingly. The person cannot recover the rent through a
court of law.

5) Capacity of Parties
Section 11: The Parties should have the capacity to enter into a legal Contract i.e. competent to
Contract.
It entails that the person entering the Contract should be of age of Majority and not a minor. Should be
of sound mind and disqualified by law. It the Contract is made by a minor, or of unsound mind, lunatic,
drunkard then the Contract is void.

6) Certainty
Section 29: The agreement should be clear and the meanings should be certain.
The agreement should not be vague or uncertain. Section 29 says that the “agreements, the meaning of
which is not certain or capable of being made certain are void”.
E.g. A agrees to sell B hundred tons of oil. There is nothing whatever to show what kind of oil was
intended. The agreement is void for uncertainty.

7) Free Consent
Section 14: There should be consensus (ad-idem) between the parties i.e. agree on same thing and same
sense, same time – Unity of Mind.
It should not be caused by coercion, undue influence, fraud, misrepresentation or mistake.
If the agreement is vitiated by any of the first four factors, the Contract would be voidable and cannot
be enforced by the party guilty of coercion, undue influence, etc. The other party (i.e. the aggrieved
party) can either reject the Contract or accept it, subject to the rules laid down in the Act.

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8) Writing and Registration
Section 25: According to the Indian Contract Act, a Contract may be oral or in writing. But in certain
special cases it lays down that the agreement, to be valid, must be in writing or/and registered.
The Pay time barred debt, Gift of natural love and affection must be in writing and registered.
The other documents that need to be in writing and registered: Arbitration agreement according to
Arbitration and Conciliation Act, 1996. Agreement for Sale according to Transfer of Property Act, 1882.
Memorandum of Association.

9) Possibility of Performance
Section 56: Contract should be capable of performance.
If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.
E.g. A agrees with B to discover treasure by magic. The agreement is not enforceable.

10) Not expressly declared Void

The agreement must not be expressly declared void under the Act. Section 24-30 specify certain types of
agreements which have been expressly declared to be void. E.g. an agreement in constraint of marriage,
an agreement in restraint of trade, and an agreement by way of wager are void.

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2. DEFINE CONSIDERATION. EXPLAIN ITS IMPORTANCE IN A CONTRACT. EXAMINE THE ESSENTIALS OF LAWFUL
OR VALID CONSIDERATION? “NO CONSIDERATION, NO CONTRACT” - EXPLAIN THIS RULE WITH EXCEPTIONS.
Ans. Consideration is one of the essentials of a valid Contract.
Section 2(d) gives the definition of Consideration. “When at the desire of the promisor, the promise or any other
person has done or abstained from doing or does or abstains from doing, or promises to do or to abstain from
doing, something, such act or abstinence or promise is called a Consideration for the promise”.

Consideration has four components:

a. The act or abstinence or promise which forms the Consideration for the promise, must be done at the desire
of the promisor.
b. It must be done by the promisee or any other person.
c. It may have been already executed or is in the process of being done or may be still executory.
d. It must be something to which the law attaches a value.

E.g. A agrees to sell his house to B for Rs. 10000. Here B’s promise to pay the sum of Rs. 10000 is the
Consideration for A’s promise to sell the house, and A’s promise to sell the house is the Consideration for B’s
Promise to pay the sum of Rs. 10000.

A promises his debtor B not to file a suit against him for one year on B’s agreeing to pay him Rs. 100 more. The
abstinence of A is the Consideration for B’s promise to pay.

Importance of Consideration in Contract:

 Consideration is one of the essential elements of a valid Contract.
 It is an important element, for it provides in a measure the safeguard of deliberation.
 It helps to distinguish those promises by which the promisor intends to legally bound from those which are
not seriously meant.
 There is no Contract without a valid Consideration. It has no force of law. It would be a gratuitous promise
and a gratuitous promise cannot be redressed by legal remedies.
 Blackstone says that “A Consideration of some sort or other is so necessary to the forming of a Contract,
that a nudum pactum, or agreement to do or pay something on side, without any compensation on the
other, will not at law support an action, and a person cannot be compelled to perform it. The law supplies
no means nor affords any remedy to compel the performance of an agreement made without
Consideration. It has no force of law.”

Essentials of a Valid Consideration:

1. Consideration must move at the desire of the promisor.
2. Consideration may move from the promisee or any other person.
3. Consideration may be past, present or future.
4. Consideration must be ‘something of value’.

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

 The act or abstinence forming the Consideration for the promise must be done at the desire or request
of the promisor.
 Any act done voluntarily or at the desire of a third party, will not amount to valid Consideration to
support a Contract.
 E.g. If A sees Bs’ house on fire and helps in extinguishing it. He cannot demand payment for his services
because B never asked him to come for help.

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  In case of Durga Prasad v/s Baldev D built at his own expense a market at the request of the collector.
The shopkeepers were supposed to pay him commission on the products sold by them. D sued the
shopkeepers for the commission, it was held that the promise to pay commission did not amount to a
Contract for want of Consideration, because D had constructed the market to please the collector and
not at the request of the shopkeepers.

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

 In Section 2(d) the Consideration need not move from the promisee alone but may proceed from a
third person.
 As long as there is a Consideration for a promise it does not matter who has furnished the
Consideration.
 Therefore, even a stranger to a Consideration can sue on a Contract, provided he is a party to the
Contract.
 It is also called “Doctrine of Constructive Consideration”.
 Case: Chinayya v/s Ramayya – in the above case A, an old lady, by a gift deed, made over certain
property to her daughter R, with a direction that the daughter should pay an annuity A’s brother C, as
has been done by A. Accordingly, on the same day R, the daughter, executed a writing in favour of her
maternal uncle C agreeing to pay the annuity. Afterwards she declined to fulfil her promise saying that
no Consideration had moved from her maternal uncle i.e. the promisee. It was held that the words
‘the promisee or any other person’ in Section 2(d) clearly show that a stranger to a Consideration may
maintain a suit. Hence the maternal uncle, though a stranger to the Consideration (as the
Consideration indirectly moved from his sister) was entitled to maintain the suit. In the above case, it
will be observed, that although C, the maternal uncle, was a stranger to the Consideration, he was not
a stranger to the Contract as there was a separate Contract between him and R, the daughter. The
maternal uncle could not have sued on the basis of ‘gift deed’ executed by A in favour of R because he
was not a party to it.
 But a stranger to a Contract cannot sue. A person may be stranger to the Consideration but he should
not be stranger to the Contract because ‘privity of Contract’ (Privity of Contract is the relation between
the parties in a Contract which entitles them to sue each other but prevents a third party from doing
it) is essential for enforcing any of the rights arising out of the Contract. It is the fundamental principle
of the law of Contracts that a “stranger to a Contract cannot sue, only a person who is a party to the
Contract can sue on it”. E.g. A mortgages his property to B in Consideration of B’s promise to A to pay
debt to C, C cannot file a suit against B to enforce hi promise, C being no party to the Contract
between A and B. There are various exceptions to this rule that a stranger to a Contract cannot sue.
They are:
a. In a Trust the beneficiary can sue in his own right to enforce his rights under the trust, though he
was not a party to the Contract between the settler and the trustees.
b. In a family settlement, where a provision is made in a partition or family arrangement for
maintenance or marriage expenses of female members, such members, though not parties to the
agreement, can sue on the footing of the arrangement.
c. When the defendant constitutes himself, as the agent of the third party.
d. In case of agency: when a Contract is entered by an agent, the principal can sue on it.
e. In case of assignment of rights under a Contract in favour of a third party either voluntarily or by
operation of law, the assignee can enforce the benefits of the Contract. E.g. the assignee of an
insurance policy or the official assignee on the insolvency of a person can sue on the Contract even
though originally they were not parties to it.

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 3. Consideration may be past, present or future.
The words, “the promise or any other person has done or abstained from doing or does or abstains from
doing, or promises to do or to abstain from doing, something” used in the definition clearly indicates that
the Consideration may consist of either something done or not done in the past, or done or not done in
present and promise to do or not do in the future.
Past Consideration: When something is done or suffered before the date of the agreement, at the desire of
the promisor, is called past Consideration. E.g. A teaches the son of B at B’s request in the month of January
and in February B promises to pay A a sum of Rs. 200 for his services. The services of A will be past
Consideration.

Present Consideration: Consideration which moves simultaneously with the promise, is called ‘present
Consideration’ or ‘executed Consideration’. E.g. A sells and delivers a book to B, upon B’s promise to pay for
it at a future date. The Consideration moving from A is present or executed Consideration since A has done
his Act of delivering the book simultaneously with the promise of B.

Future Consideration: when the Consideration on both sides is to move at a future date, it is called ‘future
Consideration’ or ‘executory Consideration’. E.g. A promises to sell a sack of wheat to B after a week and in
return b promises to pay the agreed price at the time of delivery.

4. Consideration must be ‘something of value’.

The fourth and the last essential of valid Consideration is that it must be ‘something’ to which the law
attaches a value. The law insists only on the presence of Consideration and not on the adequacy of it.
People have to make their own bargain. But the consent should not be got through coercion, undue
influence, etc. In such case the court will treat inadequacy of Consideration as an evidence in support of
such allegation and will declare the Contract void.

Consideration must be real and valid: The Consideration must have some value i.e. it must be real and
competent. When Consideration is physically impossible, illegal, uncertain or illusory, it is not real and
therefore and therefore shall not be a valid Consideration. This includes:
a. Physically impossible: a promise to do something which is physically impossible e.g. to make a dead
man alive or to run at a speed of 100 kms does not form a valid Consideration.
b. Legally impossible: a promise to do something illegal e.g. to kill someone, to steal, etc..
c. Uncertain Consideration: a promise to do something which is too vague and uncertain.
d. Illusory Consideration: illusory or deceptive Consideration does not amount to a valid Consideration

However, in the following cases Consideration has been regarded as real and valid:
a. Forbearance to sue: forbearance to sue, at the instance of the debtor, is sufficient Consideration. A has
right to sue his debtor B for Rs. 5000, but in fact forbears as B agreed to pay Rs. 100 more.
b. Compromise of pending suit: The compromise of a disputed or doubtful claim is a good Consideration
for the fresh agreement of compromise.

“NO CONSIDERATION, NO CONTRACT” - EXPLAIN THIS RULE WITH EXCEPTIONS.

Consideration being one of the essential elements of a valid Contract, the general rule is that “an agreement
made without Consideration is void”. But there are few exceptions to it:
1. Agreement made on account of natural love and affection:
Section 25(1). An agreement made without Consideration is enforceable if, it is:
a. Expressed in writing
b. Registered under the law

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 c. Made on account of natural love and affection
d. Between parties standing in a near relation to each other.
E.g. A for natural love and affection, promises to give his son B Rs. 1000. A puts his promise in writing
and registers it. This is a Contract.

2. Agreement to compensate for past voluntary service:

Section 25(2). A promise made without Consideration is also valid, if it is a promise to compensate,
wholly or partly, a person who has already voluntarily done something for the promisor, or done something
which the promisor was legally compellable to do.
E.g. A finds B’s purse and gives it to him. B promises to give Rs. 50. This is Contract.
A rescued B from drowning in the river, and B appreciating the service that has been rendered,
promises to pay Rs. 1000 to A. There is a Contract between A and B.

In order to get this exception, the following points should be noted:

a. The service should have been rendered voluntarily for the promisor. If it is not voluntary but done at
the desire of the promisor, then it comes under past Consideration.
b. The promisor must be in existence at the time the service was rendered.
c. The Promisor must be made to compensate a person who has himself done something for the
promisor and not to a person who has done nothing for the promisor.
d. The intention of the promisor ought to be to compensate the promisee.
e. The promisor to whom service is rendered need not be competent to Contract e.g. Minor.
f. The service rendered must be legal.

3. Agreement to pay a time-barred debt:

Section 25(3). When there is an agreement, made in writing and signed by the debtor or by his
authorized agent, to pay wholly or in part a debt barred by the law of limitation, the agreement is valid
even though it is not supported by any Consideration.
A time barred debt cannot be recovered and therefore a promise to repay such a debt is without
Consideration, hence the importance of the present exception.
But before the exception can apply, it is necessary that:
a. The debt must be such of which the creditor might have enforced payment but for the law for the
limitation of suits;
b. The promisor himself must be liable for the debt. So a promissory note executed by a widow in her
personal capacity in payment of time barred debt of her husband cannot be brought within the
exception.
c. There must be ‘express promise to pay’ a time barred debt as distinguished from a mere ‘acknowledge
of a liability’ in respect of a debt. “I owe you Rs. 1000 on account of my time-barred promissory note”
is not a Contract. There must be distinct promise to pay.
d. The promise must be in writing and signed by the debtor or his agent.

4. Completed Gift:
A gift (which is not an agreement) does not require Consideration in order to be valid. As between doner
and done, any gift actually made will be valid and binding even though without Consideration. The gift must
be complete.

5. Contract of Agency:
Section 185 of the Contract Act lays down that no Consideration is necessary to create an agency.

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6. Remission by the promisee, of performance of the promise:
For compromising a due debt, i.e. agree to accept less than what is due, no Consideration is necessary.
Creditor agrees to give up a part of his claim and there need be no Consideration for such an agreement.

7. Contribution to Charity:
A promise to contribute to charity, though gratuitous would be enforceable, in on the faith of the promised
subscription, the promisee takes definite steps in furtherance of the object and undertakes a liability, to the
extent of liability incurred, not exceeding the promised amount of subscription. E.g. Kedarnath v/s Gorie
Mohammad the defendant had agreed to subscribe Rs. 100 towards the construction of a Town hall at
Howrah. The plaintiff on the faith of the promise entrusted the work to a Contractor and undertook liability
to pay. The defendant was held liable to pay him.

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3. EXPLAIN OFFER AND ACCEPTANCE? DISCUSS LEGAL RULES REGARDING A VALID OFFER AND VALID
ACCEPTANCE.
Ans. In the making of a valid contract there must be a lawful offer and a lawful acceptance.
A. OFFER OR PROPOSAL
 Section 2(a) of Indian Contract Act defines an offer as “when one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal or offer”.
 Offer has three essentials. They are:
1. It must be an expression of the willingness to do or abstain from doing something.
2. It must be made to another person, not himself.
3. It must be made with a view to obtaining assent of the other.
 The person making the offer is ‘offeror’ or ‘promisor’. The person to whom the offer is made is
‘acceptor’ or ‘promisee’.
 Legal Rules regarding a valid offer
1. An offer may be express or implied.
- An offer may be either by words or by conduct. If it is expressed by words, spoken or written
then it is ‘express offer’. If it is inferred by conduct of a person than it is ‘implied offer’.
- E.g. A says to B that he is willing to sell his cycle to him for Rs. 5000. This is an express offer.
- E.g. A shoe shiner starts polishing someone’s shoe, without being asked to do so, he expects
to be paid for this, he makes an implied offer.

2. An offer must give rise to legal consequences and be capable of creating legal relations.
- If the offer does not intend to give rise to legal consequences, it is not a valid offer in the
eyes of the law. An offer to a friend to dinner is not a valid offer as there is no binding
agreement. The parties should intend legal consequences to follow the breach of agreement.
Thus any agreement that does not confer on either of the parties a right to enforce the
agreement in a court of law, there is no contract.

3. The terms of the offer should be certain, clear and not vague or loose.
- If the terms of the offer are not definite, certain, then it does not amount to a lawful offer.
Maugham L.J., has rightly observed: “Unless all the material terms of the contract are agreed,
there is no binding obligation”.
- E.g. A offers to B lavish entertainment, if B does his work. A’s offer does not amount to lawful
offer being vague and uncertain.

4. An invitation to offer is not an offer.

- An offer must be distinguished from an ‘invitation to receive offer’. The person sending out
the invitation does not make an offer, but only invites the other party to make an offer. It is
only an information that he is willing to deal.
- Advertisement for sale of goods by auction is not an offer to hold such sale. It merely invites
offers. Actual bids made at the auction are ‘offers’. If auction is not held, there is no legal
right to complaint.
- Quotations, catalogues or prices or display of goods with prices marked are not an offer.
They are invitation to offer. Customer sees the goods and then makes offer, the shopkeeper
is free to accept or reject.
- A notice that goods will be sold by ‘tender’ does not amount to an offer.

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5. An offer may be ‘specific’ or ‘general’.
- If an offer is made to a particular or definite person than it is ‘specific’. Such an offer can be
accepted by the person to whom it is made.
- When an offer is made to the world at large or public in general is ‘general offer’. Such offer
can be accepted by any person who fulfills the requisite conditions. Leading case of Carlill v/s
Carbolic Smoke Ball Co. In this case the company issued an advertisement in which the
company offered to pay 100 Dollars to any person who contracts influenza after having used
their smoke balls three times daily for two weeks. On the faith of the advertisement Mrs.
Carlill bought the smoke ball and as directed used them. She contracted influenza. She sued
the company for the promised reward. The company was held liable.

6. An offer must be communicated to the offeree.

- An offer is effective only when it is communicated to the offeree. Until it is done so there is
no acceptance and no contract. If it is not communicated then there is no ‘consensus of
wills’. This applies to both specific and general offers.
- E.g. A without knowing the reward being offered for the arrest of a particular criminal
catches the criminal and gives the information to the police. He cannot recover the reward as
he cannot be said to have accepted the offer when he was not aware of it.
- Communication of special Terms and Conditions:
It is with regards to communication of the special terms and conditions contained in a ticket,
receipt, or ‘standard form documents. The rules are:
a. If the acceptor or the promisee had no knowledge of special terms, before or at the time
of the contract, they are not binding upon the acceptor.
Handerson v/s Stevenson, the plaintiff bought a steamer ticket. On the back of it were
special terms excluding liability of good lost, injury or delay of the luggage. The plaintiff
did not look behind and no one told him. The plaintiff’s luggage was lost in shipwreck.
He claimed for damages. His petition was allowed.
b. If the acceptor or the promisee had the knowledge or may be presumed to have the
knowledge; because of reasonably sufficient notice has been given to him on document
before the time of contract. Then it is binding. In Parker v/s South Eastern Railway Co.
the ticket had written ‘see back’. On the back there were the terms and conditions. P’s
bag was lost and he claimed the actual value of the bag. But it was printed behind that
only $10 would be paid. So he got only that.
It has to be brought to the notice of the acceptor before or at the time of contract.
If it is in a language he does not understand he has to get clarification. If no then he has
to suffer ignorance.

7. An offer should not contain a term the non-compliance of which would amount to acceptance.
- An offeror cannot say that if the acceptance is not communicated within a certain period
then it would be presumed as been accepted.
- If the acceptance is not communicated then there is no contract, because no obligation to
reply can be imposed on him, on the grounds of justice.

8. An offer can be made subject to any terms and conditions.

- An offeror can attach any terms and conditions to the offer he makes. He may even prescribe
the mode of acceptance.
- The offeree will have to accept all the terms and conditions of the offer. And if he accepts he
has to fulfill the obligations, if not then the offeror can decline to accept that acceptance.

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 9. Two identical cross-offers do not make a contract.
- When two parties make identical offers to each other in ignorance of each other is called as
‘cross-offer’. Cross offers do not constitute acceptance of one’s offer by the other and as
such there is no completed agreement.
- E.g. A wrote to B offering to sell 100 tons of iron at 25,000 per ton. B writes to A offering to
buy 100 tons of iron at 25,000 per ton. Letter crossed in the post. There is no contract. There
is no acceptance to each other’s offer.
-
 Lapse and Revocation of offer.
An offer lapses and becomes invalid in the following circumstances.
1. An offer lapses after stipulated or reasonable time.
- If acceptance is not communicated within the time prescribed in the offer, or if the no time is
prescribed, within a reasonable time then the offer lapses.
- Reasonable time depends on the circumstances of each case. For example if an offer is made
by telegram then it suggests that it is urgent and if the offeree delays the communication
even by a day or two then the offer will be considered to have lapsed.

2. An offer lapses if not made in prescribed mode, or if no mode is prescribed, in some usual and
reasonable manner.
- According to Section 7, if the offeree does not accept the offer according to the mode
prescribed, the offer does not lapse automatically. It is for the offeror to insist that his
proposal shall be accepted only in the prescribed manner, and if he fails to do so he is
deemed to have accepted the acceptance.

3. An offer lapses by rejection.

- It may be expressed in words or in writing, or implied that the person is not interested in the
offer.
- Implied rejection is one: where either the offeree makes a counter offer or where the offeree
gives a conditional acceptance.
- E.g. A offered to sell his house for Rs. 90,000. B offered Rs. 80,000 which A refused to sell.
The contract is cancelled.
- Rejection is effective only when it comes to the knowledge of the offeree.

4. An offer lapses by the death of insanity of offeror or offeree before acceptance.

- If the offeror dies or becomes insane before acceptance, the offer lapses provided the fact of
his death or insanity comes to the knowledge of the acceptor before acceptance. If
acceptance is made in Ignorance is valid acceptance and gives rise to contract.
- An offeree’s death or insanity before accepting the offer puts an end to the offer and his
heirs cannot accept for him.

5. An offer lapses by revocation.

- An offer is revoked when it is taken back by the offeror.
- An offer can be revoked any time before acceptance, by the communication of notice of
revocation by the offeror to the other party. For example in an auction A makes a highest
bid. But he withdraws the bid before the fall of hammer. There cannot be a concluded
contract.

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 - Further, an offer agreed to be kept open for a definite period, may be revoked even before
the expiry of that period, unless there is some consideration for so keeping it open. A
promise to keep an offer open, supported by consideration, is called an ‘option’. An ‘option’
is in effect a separate contract making the promisor liable for breach if he revokes the offer
before the expiry of agreed time. E.g. M offers to sell his house to N for Rs. 1,40,000. N says
to M that if he agrees to keep the offer open for 10 days he will pay him Rs. 1000. M agrees.
M cannot revoke the offer before the expiry of the date, if he does so he can be sued for
breach of option.
- Keeping an offer open, unsupported by consideration is ‘bare pact’. Hence not binding on the
promisor (Dickinson v/s Dodds).
- Revocation of standing offer or tender: Standing offer is the offer to supply specific goods,
stated quality, quantity, rate and period. A standing offer is in the nature of an open or
continuing offer. An acceptance of offer remains open during the period specified and that it
will continue to be accepted from time to time by placing order for specific quantities.

6. Revocation by non-fulfilment of a condition precedent to acceptance.

- An offer stands revoked if the offeree fails to fulfil condition precedent to acceptance. Thus,
when A offers to sell his scooter to B, for Rs. 4000, if B joins the Lions Club within a week, the
offer stands revoked and cannot be accepted by B, if B fails to join the Lions Club.

7. An offer lapses by subsequent illegality or destruction of subject matter.

- An offer lapses if it becomes illegal after it is made, and before it is accepted. Thus, where an
offer if made to sell 10 bags of wheat for Rs. 6500, and before it is accepted, a law prohibiting
the sale of wheat by private individuals is enacted, the offer comes to an end.
- In the same manner, an offer may lapse if the thing, which is subject matter of the offer, is
destroyed or substantially impaired.

B. ACCEPTANCE
 Section 2(b) of Indian Contract Act states that “A proposal when accepted becomes a promise” and
‘acceptance’ as “when the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted”.

 Legal Rules regarding a valid acceptance

1. Acceptance must be given only by the person to whom the offer is made.
- An offer can be accepted only by the person or persons to whom it is made and with whom it
imports an intention to contract; it cannot be accepted by another person without the
consent of the offeror.
- E.g. A sold his business to his manager B without disclosing the fact to his customers. C, a
customer had a running account with A, sent an order for the supply for goods to A by name.
B received the order and executed the same. C refused to pay the price. It was held that
there was no contract between B and C because C never made any offer to B and as such C
was not liable to pay the price to B.

2. Acceptance must be absolute and unqualified.

- In order to be legally effective it must be an absolute and unqualified acceptance of all the
terms and conditions of the offer. Even the slightest deviation from the terms of the offer
makes the acceptance invalid.

CONTRACT 1 | 12
 - E.g. L offered to M his scooter for Rs. 4000. M accepted the offer and tendered Rs. 3900 cash
down, promising to pay Rs. 100 in the evening. There is no contract, as the acceptance was
not absolute and unqualified.

3. Acceptance must be expressed in some usual and reasonable manner, unless the proposal
prescribes the manner in which it is to be accepted.
- If the offeror prescribes no mode of acceptance, the acceptance must be communicated
according to some usual and reasonable mode. The usual modes of communication are by
word of mouth, by post or telegram it is called ‘express acceptance’. When the acceptance is
given by conduct, it is called an ‘implied’ or ‘tacit acceptance’.
- If the offeror prescribes the mode of acceptance, the acceptance has to be given accordingly
even if it is funny. If the acceptor or offeree deviates from the prescribed mode then the
offeror may within reasonable time communicate to him, insist that his proposal be accepted
in prescribed format, and if he does not then he accepts the deviated acceptance.
- E.g. if A prescribes that the acceptance be by telegram and the offeree sends by messenger,
there is no acceptance of the offer. The offeror has to tell the offeree to send it by prescribed
mode (telegram); if the offeror does not do so then it is presumed he accepts it.
- Law does not allow an offeror to prescribe ‘silence’ as the mode of acceptance. He can’t say
that if I don’t hear you by Sunday I shall presume you have accepted the offer.
- Mental acceptance is ineffectual. Acceptance must be communicated to the offeror
otherwise it has no effect. If in an oral communication over phone, if the phone goes dead
before acceptance is spoken, there is no effect of acceptance. E.g. A received an offer and he
wrote a acceptance letter but forgot to post it and later forgot about it. The acceptance is not
complete.

4. Acceptance must be communicated by the acceptor.

- For an acceptance to be valid, it must not only be made by the offeree but must also be
communicated by him or with his authority by another.
- E.g. In Powell v/s Lee P was a candidate for the post of headmaster in a school. The
managing committee of the school passed a resolution selecting him for the post. A member
of the managing committee, acting in his individual capacity informed P that he had been
selected, but P received no other intimidation. Subsequently the resolution was cancelled
and P was not appointed to the post. P filed a suit against the committee for breach of
contract. The court held that no authorized communication from the committee was not
binding contract.

5. Acceptance must be given within a reasonable time and before the offer lapses or is revoked.
- To be legally effective acceptance must be given within the specified time limit, if any, and if
no time is stipulated, acceptance must be given within a reasonable time because an offer
cannot be kept open indefinitely.
- Acceptance must be given before offer lapses or is revoked by reason of offeree’s death or
insanity.

6. Acceptance must succeed the offer.

- Acceptance must be given after receiving the offer. It should not precede the offer.

CONTRACT 1 | 13
 7. Rejected offers can be accepted only if renewed.
- An offer once rejected cannot be accepted again unless a fresh offer is made (Hyde v/s
Wrench).

C. COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION

 When the contracting parties are face to face and negotiate in person, there is immediate
communication of offer and acceptance and a valid contract comes into existence. But very often
the offeror and offeree are staying far away and the services of post office or other means are
used, it is difficult to ascertain the exact time at which the offer is made and acceptance is
revoked. In such cases the following rules are to be followed:
1. Communication of an offer.
- The communication of an offer is complete when it comes to the knowledge of the person to
whom it is made.
- The letter must reach the offeree.

2. Communication of an Acceptance.
- The communication of an acceptance has two aspects. As against the proposer and as against
the acceptor.
- As against the proposer: when it is put in the course of transmission to him, so as to be out of
power of the acceptor.
- As against the acceptor: when it comes to the knowledge of the proposer i.e. when the letter
of acceptance is received by the proposer.
- E.g. A proposes by letter to sell a house to B for Rs. 80,000. The letter is posted, on 6 th
instant. The letter reaches B on the 8th instant. The communication of offer is complete when
B, the offeree receives the letter on the 8th.
- B accepts A’s proposal, in the above case, by a letter sent by post on 9 th instant. The letter
reaches A on 11th instant. The communication of the acceptance is complete: as against A,
when the letter is posted on 9th and against B when the letter is received by him on 11th.

3. Communication of a revocation.
- The communication of a revocation is complete:
- As against the person who makes it, when it is put in the course of transmission to him, so as
to be out of power of the person revoking i.e. when the letter is posted.
- As against the person to whom it is made, when it comes to his knowledge i.e. when the
letter or revocation is received by him.
- E.g. A proposes by letter to sell a house to B for Rs. 80,000. The letter is posted, on 6 th
instant. The letter reaches B on the 8th instant. The communication of offer is complete when
B, the offeree receives the letter on the 8th.
If in this case A revokes his offer by letter on 8th instant. The letter reaches B on 10th instant.
The revocation is complete. When the letter of revocation is received by him.
- E.g. B accepts A’s proposal, in the above case, by a letter sent by post on 9 th instant. The
letter reaches A on 11th instant. The communication of the acceptance is complete: as against
A, when the letter is posted on 9th and against B when the letter is received by him on 11th.
If in this case B revokes his acceptance by letter on 10th instant. The letter reaches A on 12th
instant. The revocation is complete as against B on 10th, the date the letter of revocation is
posted and as against A on 12th the date on which the letter reaches him.

CONTRACT 1 | 14
 Time during which an offer or acceptance can be revoked.
- A proposal can be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards. An acceptance may be revoked at any
time before the communication of the acceptance is complete as against the acceptor but
not afterwards.

 Effects of delay or loss of acceptance in postal transit.

- So far as the offeror is concerned, he is bound by the acceptance the moment the letter of
acceptance is posted, although the letter is delayed or wholly lost through an accident of the
post and the letter never reaches him. But in order to bind the offeror, the letter of
acceptance must be correctly addressed, properly stamped and actually posted. If these are
not done then it will be considered as no communication at all. But if the wrong address is
given by the accepter himself then he is bound if it does not reach him.
- So far as the acceptor is concerned, he is not bound by the letter of acceptance till it reaches
the offeror. Until the letter of acceptance reaches the offeror, the contract remains voidable
at the instance of the acceptor. He can revoke any time before the acceptance reaches the
offeror.
- What if both the letter of acceptance and revocation reach the offeror at the same time? In
such a situation it depends on chance. If the offeror reads the letter of acceptance first then
the contract is binding and if he reads the revocation first then there is no binding effect.

 Contracts over the Telephone.

- In contracts over the telephone both the parties must hear the voice of the other. Here there
is instant offer and acceptance.
- The offer should be accepted or rejected at once. But if the telephone gets dead before
acceptance then the contract is not complete and the contract is not binding.
- In such contracts there is no question of revocation as the offer and acceptance is made at
the one and same time. Acceptance is to an offer what a lighted match is to a train of
gunpowder. It produces something which cannot be undone or recalled.

CONTRACT 1 | 15
 UNIT – II
4. WHO IS COMPETENT TO CONTRACT? EVALUATE MINOR’S AGREEMENT.
Ans. Section 10 says, that an essential ingredient of a valid contract is that the contracting parties must be
‘competent to contract’.

Section 11 lays down 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”.

Thus, the below mentioned persons are incompetent to contract under the following conditions:
a. If he is a minor
b. If he is of unsound mind
c. If he is disqualified from contracting by any law to which he is subject.

MINORS AGREEMENT
1. Who is a Minor? According to Section 3 of Majority Act, 1875, as amended by the Majority (Amendment)
Act, 1999, a person, domiciled in India, who is under 18 years of age is a minor. Therefore any person who
has completed the age of 18 years becomes a major.
 Section 11 defines that the age of Majority is determined by the ‘law to which he is subject’. It is based
on law of domicile and not law of place where contract is entered into.
 For contract of ordinary mercantile transaction – age of majority by the law of the place where the
contract is made.
 For Contract relating to land – age of majority where the land is situated.

2. Minor’s Agreement:
1. An agreement by a minor is absolutely void and inoperative as against him.
2. Agreements beneficial to the Minor are valid contracts.
3. No ratification on minor attaining the age of majority.
4. The rule of estoppel does not apply to a minor.
5. Minor’s liability for necessaries have to be reimbursed.
6. Minors agreements - no Specific performance.
7. Minor Partner
8. Minor agent
9. Minor and insolvency.
10. Contract by Minor and Adult.
11. Surety for a Minor
12. Position of Minors Parents.
13. Minor shareholder.
14. Minors Liability in tort.

1. An agreement by a minor is absolutely void and inoperative as against him.

 A minors faculties are not mature therefore he has no capacity to judge between good and bad
therefore his contract is void.
 Any agreement by a minor is deemed as void-ab-initio.
 In a leading case of Mohori Bibi v/s Dharma Dos Ghosh a minor executed a mortgage for Rs.
20000 and received Rs. 8000 from the mortgage. The mortgagee filed a suit for the recovery of

CONTRACT 1 | 16
 his mortgage money and for sale of the property in case of default. The Privy Council held that
an agreement by a minor was absolutely void as against him and therefore the mortgagee
could not recover the mortgage money or could be have the minors’ property sold under his
mortgage.
 The minor is not bound to make an restitution as the agreement is void, but where a minor is
plaintiff the Court will compel him to restitute. E.g. If a minor sells a house for Rs. 50000 and
later on files a suit to set aside the sale on the ground of minority, he may be directed by the
court to refund the purchase money received by him. The court said that “one who seeks
equity must do equity”.

2. Agreements beneficial to the Minor are valid contracts.

 The court protects the rights of minors. Any agreement which is of some benefit to the minor
and under which he is required to bear no obligation, is valid. He can be a beneficiary.
 Money advanced by a minor can be recovered by him by a suit because he can take benefit
under a contract. E.g. when a minor purchaser of immovable property was, subsequent to his
purchase, disposed by a third party, it was held that the minor could recover from his vendor
the sum which he has paid as purchase money. A minor purchaser of immovable property was
held entitled to recover possession of property purchased from his vendor, when refused by
vendor.
 Contracts of apprenticeship and service by a minor.
A contract of apprenticeship stands on a different footing than an agreement of service by a
minor. A contract of apprenticeship is valid and binding upon a minor. The minor is protected
by Apprenticeship Act, 1961. The Act provides that the minor should not be under 14 years of
age and the contract must be entered on behalf of the minor by his guardian. This helps the
children to learn trades, crafts, etc. so that in the future they can earn their livelihood.
Agreement to service by minor is void because a minors promise to serve would supply no
consideration for the promise of the defendant to pay him/her a salary (Raja Rani v/s Prem
Adib).

3. No ratification on minor attaining the age of majority.

 Ratification means the subsequent adoption and acceptance of an act or agreement.
 A minor’s agreement being a nullity and void ab-initio in the eyes of law cannot be ratified by
the minor on attaining the age of majority, for a void ab-initio agreement cannot be made valid
by subsequent ratification (Mohendra v/s Kailash).
 If a minor promises to pay an amount after he attains majority is not enforceable.
 A void deed cannot form a good consideration for a fresh contract made by the minor on
attaining majority.

4. The rule of estoppel does not apply to a minor.

 Section 115 Indian Evidence Act explains Estoppel as follows, “Where one person has, by his
declaration, an act or omission, intentionally caused or permitted another person to believe a
thing to be true and to act upon such belief, neither he nor his representatives shall be
allowed, in any suit or proceeding between himself and such person or his representative, to
deny the truth of that thing”.
 Estoppel arises when you are precluded (prohibit) from denying the truth of anything, which
you have represented as a fact, although it is not a fact.

CONTRACT 1 | 17
  The rule of estoppel does not apply to a minor i.e. a minor is not estopped from pleading his
infancy in order to avoid a contract, even if he has entered into an agreement by falsely
representing that he was of full age (Sadiq Ali Khan v/s Jai Kishore).
 If an infant represents fraudulently or otherwise that he is of full age and thereby induces
another to enter into contract with him, then in an action founded on the contract, the infant
is not estopped from setting up infancy.
 If anything is found with minor that is got through fraud then he has to restore on the basis of
“minors have no privilege to cheat man”. But he cannot be made to repay what has been
consumed or spent.

5. Minor’s liability for necessaries have to be reimbursed.

 In case necessaries are supplied to a minor then section 68 of the Indian Contract Act provides
that “if a person, incapable of entering into a contract, or any one 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.”
 E.g. A supplies to B a lunatic, with necessaries suitable to his condition of life. A is entitled to
be reimbursed from B’s property. A supplies to the wife and children of B a lunatic with
necessaries to their condition of life. A is entitled to be reimbursed from B’s property.
 Section 68 confers a quasi-contractual right on the supplier of necessaries to a person
incapable of entering into a contract, or to any one whom he is legally bound to support. But a
minor is not personally liable, his property is liable.
 Necessaries are not just food, clothing and it also includes infants lodging, medical expenses,
education, civil or criminal proceedings on behalf of minor, etc.

6. Minors agreements - no Specific performance.

 Specific performance means the actual carrying out of the contract as agreed.
 Since minor’s agreement is absolutely void, the contract will never direct ‘specific
performance’ of such an agreement by him.
 But a contract entered into on behalf of the minor by his guardian or by the manager of his
estate, is binding on the minor and can be specifically enforced by or against the minor
provided: the contract is within the authority of the guardian or manager; it is for the benefit
of the minor.

7. Minor Partner
 A minor being incompetent to contract cannot be partner in a partnership firm, but under
section 30 of the Indian Partnership Act, he can be admitted to the benefits of partnership
with the consent of all the partners by an agreement executed through his lawful guardian
with the other partners. Such a minor will have right to such share in profit or property, but he
can’t participate in the management of the business, not share losses, is not personally liable.

8. Minor Agent
 Minor can be agent (section 184) but not personally liable for negligence or breach of duty.
The principle runs the risk.

CONTRACT 1 | 18
 9. Minor and Insolvency.
 A minor cannot be adjudicated as insolvent, for he is incapable of contracting debts. Even for
necessaries supplied to him, he is not personally liable, only his property is liable (Sec. 68).

10. Contract by Minor and Adult.

 In a contract between Minor and Adult, the adult is liable. The minor is not liable (Jamnabai
v/s Vasanta Rao). In Sain Das v/s Ram Chand, where there was joint purchase by two
vendees, one of whom was minor, the court held that the vendor could enforce the contract
against the major vendee.

11. Surety for a Minor.

 Where there is contract of guarantee, an adult stands surety for a minor, the adult is liable
under the contract, although the minor is not. In fact there can’t be a contract of guarantee in
the true sense. In Manju Mahadeo v/s Shivappa Manju was held that…if a minor could not
default the liability of the guarantor being secondary, does not arise at all.

12. Position of Minors Parents.

 Parents are not liable for contract made by minor. Parents liable only when the child is
contracting as an agent for the parents.

13. Minors Shareholder.

 Minor, being incompetent to contract, cannot be a shareholder of the company.
 A company can also refuse to register transfer or transmission of shares in favour of a minor
unless the shares are fully paid.
 A minor can become a shareholder acting through his lawful guardian, in case of transfer or
transmission of fully paid share to him.

15. Minors Liability in tort.

 A minor is liable for his tort, unless the tort is in reality a breach of contract.
 Where a minor hired a horse for riding and injured it by overriding, he was not held liable. But
if the wrongful action is of a kind not contemplated by the contract, the minor may be held
liable for tort. Where a minor hired a horse and expressly told not to jump, he was held liable
when he lent the horse to his friend who jumped it, whereby he was injured and died.

PERSON OF UNSOUND MIND

1. What is sound mind? According to Section 12 of Indian Contract Act “a person is said to be sound mind for
the purpose of making of contract, if, at the time when he makes it, he is capable of understanding it and of
forming a rational judgment as to its effect upon his interests”.
 There are two ingredients: capable of understanding, can form rational judgment for his interest
 The section further states that:
a. A person who is usually of unsound mind, but occasionally of sound mind can contract when he is
of sound mind. E.g. A lunatic can contract during intervals when he is of sound mind.
b. A person who is usually of sound mind, but occasionally of unsound mind may not contract when
he is of unsound mind. E.g. A same man, who is delirious due to high fever or drunk cannot
contract when he is in that state.

CONTRACT 1 | 19
 In Halsbury’s Law of England, it is stated: “The general theory of the law in regard to acts done,
contracts made by parties affecting their rights and interests, is that in all cases there must be free and
full consent to bind the parties. The consent must be rational and deliberate. There cannot be a
contract when a person is of unsound mind.

2. From what does unsoundness of mind arise?

a. Idiocy: It is from birth and permanent with no intervals of saneness. The mental powers are
completely absent.
b. Lunacy or Insanity: It is a disease of the brain. A lunatic losses the use of his reason due to some
mental strain or disease.
c. Drunkenness: It produces temporary incapacity, till the drunkard is under the effect of intoxication. At
times if it is excessive then there can be suspension of reason for a time and create impotence of the
mind.
d. Hypnotism: It also produces temporary incapacity, till the person is under the person in under the
impact of artificially induced sleep.
e. Mental decay: This may arise due to old age, etc.. This has to be proved and unsoundness needs to be
established.

3. Effects of agreement made by persons of unsound mind?

An agreement entered by a person of unsound mind is treated on the same ground as that of a minor,
therefore the agreement is absolutely void and inoperative as against him but he can derive benefit under
it. The property of the person of unsound mind is liable for necessities supplied to him or to anyone whom
he is legally bound to support, under section 68 of the Act.

DISQUALIFIED PERSONS

 Who are disqualified persons? According to Section 11 of Indian Contract Act disqualified person are those
who are forbidden from contracting by any law they are subject to. They are:
a. Alien Enemies: An alien (citizen of a foreign Country) living in India can enter into contracts with
citizens of India during peace time only and under restriction from Government in that respect. On
declaration of war, he becomes an alien enemy till the war remains and therefore cannot contract
during this time. When the war is suspended or over then he can contract.
b. Foreign Sovereigns and ambassadors: One has to be cautious while entering into contracts with
foreign sovereigns and ambassadors, because they can sue but cannot be sued on contract. For suing
them prior permission of the Central Government is needed.
c. Convict: a convict is one who is found guilty and is imprisoned. During the period of imprisonment a
convict is incompetent a) to enter into contracts, b) to sue on contracts made before conviction. Once
he is free, he can enter into any contract.
d. Married Woman: Married woman are competent to enter into contract with respect to their separate
properties (stridhan) provided they are major and of sound mind. They cannot enter into contract with
respect to husband’s property. A married woman however can act as an agent of her husband and
bind her husband’s property for necessaries supplied to her, if he fails to provide her with these.
e. Insolvent: An adjudged insolvent (before an order of discharge) is competent to enter into certain
types of contract i.e. he can incur debts, purchase property or be an employee but he cannot sell his
property which vests with the official receiver.

CONTRACT 1 | 20
f. Joint Stock company and corporation incorporated under a special Act:
A company/corporation is an artificial person created by law. It cannot enter into contracts outside the
powers conferred upon it by its Memorandum of Association or by the provisions of its special Act as
the case may be. It cannot enter into contract of personal nature e.g. marriage, etc.

CONTRACT 1 | 21
5. WHAT IS FREE CONSENT AND WHAT ARE THE FACTORS AFFECTING FREE CONSENT?
Ans. In a contract free consent of all the parties to an agreement is one of the essentials elements of a valid contract.
 Section 13 of the Contract Act defines consent. “Two or more persons are said to consent when they agree
upon the same thing in the same sense.”
 Free consent involves identity of minds or consensus ad-idem i.e. agreeing upon the same thing in the same
sense. If, there is no consensus ad-idem among the parties then there is no real consent and hence no valid
contract.
 Section 14 lays down that free consent to be free it not be caused by:
a. Coercion (section 15)
b. Undue influence (section 16)
c. Fraud (section 17)
d. Misrepresentation (Section 18)
e. Mistake (Sections 20,12,22)
 To bring a case under this section, the party that alleges that his consent has been caused by any of the
above elements which vitiate consent, and that if he had known the truth, or had not been forced to agree,
he would not have entered into the contract.
 In such cases the contract may be either void or voidable depending upon the nature of the flaw of
consent. If the agreement is caused by coercion, undue influence, misrepresentation, fraud, then it is
voidable at the option of the aggrieved party. If it is a mistake as to matter of the fact essential to the
agreement, the agreement is void. There is no consent at all.

COERCION (Section 15):

 Coercion is committing or threatening to commit any forbidden act in IPC or unlawful detaining or
threatening to detain any person or property causing person to enter into agreement. The explanation of
the Section further adds that “it is immaterial whether the IPC is or is not in force in the place where the
coercion is employed.
 The above definition can be analyzed as follows:
1. Coercion has two ingredients
a. Committing or threatening to commit any act forbidden by IPC.
b. Unlawful detaining or threatening to detain any person or property causing person to enter into
agreement.
E.g. A Madarasi gentlemen died leaving a young widow. The relatives threatened her to adopt a
boy otherwise they would not allow her to remove the dead body of her husband for cremation.
The widow adopted the boy. The court later held that her consent was not free and induced by
coercion and any person who obstructed a dead body from being removed for cremation would
be guilty of an offence under section 297 of the IPC. The Adoption was set aside.
(Ranganaykamma v/s Alwar Setti)
L threatens to shoot M if he does not let out his house to him. M agrees to let out the house to L.
The consent of M has been induced by coercion.
2. The act constituting coercion may be directed at any person, and not necessarily at the other party.
Likewise it may proceed even from a stranger to the contract.
E.g. A threatens to shoot B, a friend of C, if C does not let out his house to him. C agrees to do so. B’s
consent has been caused by coercion.
3. It does not matter whether the Indian Penal Code is or is not in force in the place where the coercion is
employed. If the suit is filed in India, the above provision (Section 15) will apply.
E.g. A on board of English ship on high seas causes B to enter into an agreement by the act amounting
to criminal intimidation under IPC. A later sues B for breach of contract at Calcutta. Coercion is not an

CONTRACT 1 | 22
 offence in law of English and section 506 of IPC was not in force, at the time, or place where the act
was done. A has employed coercion.
 Threat to file a Suit: To threaten a criminal or civil prosecution does not constitute coercion because it is
not an act forbidden by the Indian Penal Code. But a threat to file suit on a false charge constitutes
coercion, for such an act is forbidden by the IPC (Ashok Mirza v/s Bibi Jai Kishori)
 Threat to commit suicide: Neither ‘suicide’ nor ‘threat to commit suicide’ is punishable under the IPC; only
‘an attempt to commit suicide’ is punishable under it. In Chikkam Ammiraju v/s Chikkam Seshamma there
arose a question as to whether ‘a threat to commit suicide’ amounts to coercion, and their Lordships of the
Madras court answered the question in the affirmative holding that this amounts to coercion. In that case a
person, by a threat to commit suicide, induced his wife and son to execute a release deed in favour of his
brother in respect of certain properties which they claimed as their own. The transaction was set aside due
to coercion. It was held that ‘a threat to commit suicide even though not punishable must be deemed to be
forbidden by that code, as an attempt to commit suicide’.
 Duress: The term duress is used in English Law to denote illegal imprisonment or either actual or
threatened violence over the person (body) of another party of his wife or children with a view to obtain
the consent of that party to the agreement. In short, of ‘duress’ the act or threat must be aimed at the life
or liberty of the other party to the other party to the contract or the members of his family. Threat to
destroy or detain property is not duress.
 Effects of Coercion: A contract brought about by coercion is voidable at the option of the party whose
consent was so (Section 19). This means that the aggrieved party may either exercise the option to affirm
the transaction and hold the other party bound by it, or repudiate the transaction by exercising a right of
rescission.
As per section 64, if the aggrieved party opts to rescind (withdraw, cancel) a voidable contract, he must
restore any benefit received by him under the contract to the other party from whom received.
The burden of proof that coercion was used likes on the party who wants to set aside the contract on the
plea of coercion.

UNDUE INFLUENCE (Section 16):

 Definition: Section 16(1) defines undue influence as “a contract is said to be induced by undue influence
where, (i) the relations substituting between the parties are such that one of the parties is in a position to
dominate the will of the other, and (ii) he uses the position to obtain an unfair advantage over the other”.
Both are necessary to constitute undue influence.
 The phrase ‘in a position to dominate the will of the other’ means (section 16(2))
a. Where he holds a real or apparent authority over the other e.g. the relationship between master and
the servant, police officer and the accused; or
b. Where he stands in fiduciary relation to the other. Fiduciary relation means a relation of mutual trust
and confidence. Such a relationship is supposed to exist in following cases: father and son, guardian
and ward, solicitor and client, doctor and patient. Guru and disciple, trustee and beneficiary.
c. Where he makes a contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness, or mental or bodily distress e.g. old and illiterate person.
 Presumption of undue influence:
In the above three relationships it is presumed to be under undue influence, there is no need of proving the
use of undue influence by the party whose consent was so caused. Merely status of the party is enough to
prove the existence of undue influence in these cases.

It is also presumed in case of contract by or with a pardanashin woman.

CONTRACT 1 | 23
 There is however, no presumption of undue influence in the following cases:
a) Husband and wife (in case of persons engaged to marry, the presumption of undue influence will arise)
b) Mother and daughter.
c) Grandson and grandfather.
d) Landlord and tenant.
e) Creditor and debtor.
In these cases, undue presumption has to be proved by the party alleging that undue influence existed.
 Burden of Proof and rebutting the presumption:
In cases where there is a presumption of undue influence the burden of proving that the person who was in
a position to dominate the will of another, did not use his position to obtain an unfair advantage, will lie
upon the person who was in a position to dominate the will of the other person.

He can rebut or oppose the presumption by arguing (i) that full disclosure of facts was made, (ii) that the
price was adequate, (iii) that the other party was in receipt of competent independent advice and his
consent was free.
E.g. A man enfeebled by disease or age is induced, by B’s influence over him as his medical attendant to
agree to pay B an unreasonable sum for his professional service, B employs undue influence. On a petition
by A alleging undue influence, it lies on B, the doctor, to prove that the contract was not induced by undue
influence.
An old illiterate woman made a gift to her nephew of her property, who was managing her estate. On
petition by the old lady for setting aside the gift deed on the ground of undue influence, the onus lies on
the nephew to prove that the transaction is bona fide, well understood and free from undue influence,
because undue influence is presumed in such a case.
 Effects of Undue influence:
A contract by undue influence is voidable at the option of the party whose consent was so caused.
E.g. A’s son has forged B’s name to a promissory note. B under threat of prosecuting A’s son, obtains a
bond from A for the amount of the forged note. If B sues on this bond, the Court may set the bond aside.
A, a money lender advances Rs. 100 to B, an agriculturist and by undue influence, induces B to execute a
bond for Rs. 200 with interest at 6 percent per month. The court may set the bond aside, ordering B to
repay the Rs. 100 with such interest as may seem just.

Under Section 19-A also declares a contract brought about by undue influence voidable at the option of the
aggrieved party, just as Section 19 so declares in case of a contract brought about by coercion,
misrepresentation or fraud. In this section if a contract procured by undue influence is set aside, the court
has discretion to direct the aggrieved party for refunding the benefit whether in whole or in part or set
aside the contract without any direction for refund or benefit.

Undue influence does not only have the aspect of lack of judgment, lack of knowledge of facts or facts or
absence of foresight. It implies mental and moral coercion so as to make the consent of one of the parties
to the contract unfree.
 Unconscionable Transactions:
Unfair or unreasonable bargains belong to the category of ‘unconscionable transaction’. In such
transactions the one who is in dominant position makes an exorbitant (excessive) profit of the others
distress.
High rate of interest is extracted from persons when lending money. In such cases the person has to prove
that (i) the money lender was in a position to dominate the will of the borrower. (ii) that the bargain is

CONTRACT 1 | 24
 unreasonable i.e. rate of interest is excessive without any valid reason. In such situation the law presumes
that the consent must have been obtained by undue influence and the burden of proving that there was no
undue influence lies on the creditor. Both the conditions should be met.
E.g. a poor Hindu widow borrowed Rs. 1500 from a money lender at 100% per annum rate of interest for
the purpose of enabling her to establish her right to maintenance. The lender has to prove there was no
undue influence. But these days the maximum rate of interest is fixed which provides greater protection to
debtors.
 Pardanashin Woman: There is a presumption of undue influence in case of a contract by or with a
‘pardahnashin woman’. She can avoid a contract. For proving the absence of undue influence, the other
party has to satisfy the court
1. That the terms of the contract were fully explained to her.
2. That she understood their implications and was free to have independent advice on the matter.
3. That she freely consented to the contract.

FRAUD (Section 17):

 Definition: Section 17, “Fraud means and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent, with intent to deceive or to induce another party thereto
or his agent to enter into the contract”.
1. The representation that a fact is true when it is not true by one who does not believe it to be true.
It is a false statement intentionally made. If the representor honestly believes that his statement is
true, he cannot be liable in deceit no matter how ill-advised, stupid or even negligent he may have
been.
2. The active concealment of a material fact is taken as much a fraud as if the existence of such fact was
expressly denied or the reverse of it expressly stated. Mere non-disclosure is not fraud, where there is
no duty to disclose. Caveat Emptor or buyer beware is the principle in all contracts of sale goods. As a
rule the seller is not bound to disclose to the buyer the faults in the goods he is selling.
E.g. A horse dealer, sells a mere to B. A knows that the mare has a cracked hoof which he fills up in such
a way as to defy detection or on enquiry from B. A affirms that the mare is sound. The defect is
subsequently discovered by B. This is fraud on the part of A and the agreement can be avoided by B as
his consent has been obtained by fraud.
A, sells by auction, to B a horse, which he knows to be unsound. A says nothing to B about the horse’s
unsoundness. This is not ‘fraud’ because A is under no duty to disclose the fact to B, the general rule of
law being ‘let the buyer beware’.
3. A promise made without any intention of performing it. If a person enters into a contract has no
intention to perform his promise, there is fraud on his part.
E.g. A man enters into marriage without any intention on the part of the man to regard it as a real
marriage. This is fraud.
4. Any other act fitted to deceive: All surprise, tricks, cunning, dissembling, and other unfair way that is
used to cheat anyone is considered fraud.
5. Any such act or omission as the law specially declares to be fraudulent: This refers to the provisions in
certain Acts which makes it obligatory to disclose relevant facts. Thus, for instance, under Section 55 of
the Transfer of Property Act, the seller of immovable property is bound to disclose to the buyer all
material defects in the property or in the seller’s title. The omission in this fact is fraud.
 Can Silence be fraudulent?
Section 17 explains that mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud unless:

CONTRACT 1 | 25
 1. The circumstances of the case are such that, regard being had to them, it is the duty of the person
keeping silence to speak
2. Silence is, in itself, equivalent to speech.
It follows that:
1. As a rule mere silence is not fraud because there is not duty cast by law on a party to a contract to
make a disclosure to the other party, of material facts of his knowledge.
2. Silence is fraudulent if the circumstances of the case are such that ‘it is the duty of the person keeping
silence to speak. Silence is fraudulent in contracts of ‘utmost good faith contracts’ uberrimae fidei.
These contracts are:
a. Fiduciary Relationships
b. Contract of Insurance
c. Contract of marriage engagement
d. Contracts of family settlement
e. Share allotment contracts
3. Silence is fraudulent where the circumstances are such that ‘silence is, in itself equivalent to speech’.
E.g. A says to B, ‘if you do not speak I shall consider it a yes’.
 Effect of Fraud:
A party who has been induced to enter into a contract by fraud, has the following remedies open to him:
1. He can rescind the contract i.e. he can avoid the performance of the contract; contract being voidable
at his option.
2. He can ask for restitution and insist that the contract shall be performed, and that he shall be put in the
position in which he would have been, if the representation made had been true.
3. The aggrieved party can also sue for damages. Fraud is a civil wrong, hence compensation is payable.
Special points for giving rise to an action for deceit, the following points deserve special attention:
a. Fraud by a stranger to the contract does not affect contract. It may be recalled that ‘coercion’ by a
stander to a contract affects the contract.
b. Fraudulent representation must have been instrumental in inducing the other party to enter into the
contract i.e. but for this, the aggrieved party would not have entered into the contract.
c. The plaintiff must have been actually deceived by fraudulent statement. A deceit which does not
deceive gives no ground for action.
d. The plaintiff must be thereby damnified. Unless the plaintiff has sustained a damage or injury, no action
will lie. It is a common saying that ‘there is no fraud without damages’.
e. In case of fraudulent silence, the contract is not voidable, if the party whose consent was so caused had
the means of discovering the truth with ordinary diligence.
 Loss of Right of Rescission:
We have just seen that a contract based on fraud, misrepresentation, coercion, undue influence can be
rescinded by the aggrieved party or can be affirmed. The right of rescission is lost in the following cases:
a. Affirmation: If after being aware of the right to rescind, the aggrieved party affirms the transaction by
words or acts which shows an interest to affirm it the right of rescission is lost.
b. Restitution not possible: If party seeking rescission is not in a position to restore the benefits he may
have obtained under the contract i.e. consumed or destroyed, the right to rescind cannot be exercised.
c. Lapse of Time: It may be treated as evidence of affirmation where the party misled fails to exercise his
right promptly on discovering the representation to be untrue or on becoming aware of the fraud or
coercion. It is lost by too long a delay.
d. Rights of third parties: When a person obtains goods by fraud and before the seller rescinds the
contract, disposes them off to a bona fide party, the seller cannot then rescind (Phillips v/s Brooks Ltd.)

CONTRACT 1 | 26
 MISREPRESENTATION (Section 18):

 Definition: Section 18, “A representation means a statement of fact made by one party to the other, either
before or at time of contract, relating to some matter essential to the formation of the contract, with an
intention to induce the other party to enter into the contract”.
 A representation wrongly made, either innocently or intentionally is misrepresentation. If it is made
innocently then it is misrepresentation and if it is made intentionally then it is fraud.
 Misrepresentation means and includes:
a. The positive assertion, which is not true, though he believes to be truth.
E.g. A says to B who intends to purchase his land. He says, ‘my land produces 10 quintals of wheat per
acre’. A believes the statement to be true, although he did not have sufficient grounds for the belief.
Later on, it transpires that the land produces only 7 quintals of wheat per acre. This is
misrepresentation.
Mere statement that land is fertile, cannot be held to amount to a positive assertion.
b. Any breach of duty, without an intent to deceive gains an advantage to the person committing it, or
anyone claiming under him, by misleading another to his prejudice or the prejudice of any one claiming
under him.
E.g. A before contract with B for the sale of business, correctly states that the monthly sales are Rs.
50000. Negotiations lasted for five months, when the contract of sale was signed. During the period the
sales dwindled to Rs. 5000 a month. A unintentionally keep quite. It was misrepresentation and B was
entitled to rescind the contract.
c. Causing, however innocently, a party to an agreement, to make a mistake as to the substance of the
thing which is the subject of the agreement.
E.g. In a contract of sale of 500 bags of wheat, the seller made a representation that no Sulphur has
been used in the cultivation of wheat. Sulphur has been used in 5 out of 200 acres of land. The buyer
would not have been purchased. This is misrepresentation.
 Essentials of Misrepresentation:
Four things are necessary for misrepresentation.
a. There should be a representation, made innocently with an honest belief of truth and no intention to
deceive.
b. The representation must relate to facts material to the contract and not to mere opinion or hearsay.
c. The representation must be, or must have become untrue.
d. The representation must have been instrument in including the other party to enter into a contract.

 Effects of misrepresentation:
In case of misrepresentation the aggrieved party has two alternatives:
a. He can rescind the contract, treating the contract as voidable
b. He may affirm the contract and insist that he shall be put in the position if which he would have been if
the representation made had been true. No interest on damages can be claimed.
The above remedy is lost, if the party whose consent was caused by misrepresentation had the means of
discovering the truth with ordinary diligence.

Mistake (Section 20, 21, 22):

 Definition: Mistake can be defined as erroneous belief concerning something. It may be of two kinds:
1. Mistake of Law
2. Mistake of Fact

CONTRACT 1 | 27
 Mistake of Law: There are two types of mistake of law. Mistake of law of the country and Mistake of
Foreign law.
Mistake of law of country: Everyone is deemed to know the law of his country and hence the maxim
‘ignorance of law is no excuse’. Mistake of law is no excuse and the parties cannot avoid contract. The
contract is not voidable (section 21) and no relief can be granted of mistake of law of the country.
Mistake of law of foreign country: Mistake of law of foreign country stands on the same footing as the
mistake of fact. The agreement is void of bilateral mistake.
 Mistake of Fact: Mistake of fact may be two types:
1. Bilateral Mistake and
2. Unilateral Mistake
1. Bilateral Mistake: where the parties to an agreement misunderstood each other, and are at cross
purpose. This is bilateral mistake. Each understands the contract in different way.
In this there is no agreement at all as there is absence of consent. Salmond has termed it as ‘error in
consensus’ as distinguished from error of causa i.e. where consent is not free due to coercion, etc.
The agreement is void ab-initio (section 20). Where both the parties to an agreement are under a
mistake as to a matter of fact essential to the agreement, the agreement is void. For declaring an
agreement void ab-initio the following three conditions must be fulfilled:
a. Both the parties must be under a mistake i.e. the mistake must be mutual. Both the parties should
misunderstand each other so as to nullify consent.
b. Mistake must relate to some fact and not to judgment or opinion, etc. An erroneous opinion as to
the value of the thing which forms the subject -matter of the agreement is not to be deemed a
mistake as to a matter of fact.
c. The fact must be essential to the agreement i.e. the fact must be such which goes to the very root
of the agreement. The mistakes covered are as follows:
1. Mistake as to the existence of the subject – matter of agreement. If at the time of agreement
and unknown to the parties the subject-matter has ceases to exist or if it has never been in
existence then the agreement is void.
2. Mistake as to the identity of the subject-matter. One party has one thing in mind and the
other has something else in mind.
3. Mistake as to the quantity of the subject-matter. The agreement is void.
4. Mistake as to the title of the subject-matter. The agreement is void.
5. Mistake as to the quality of the subject-matter. The agreement is void.
6. Mistaken assumption going to the root of the agreement.
2. Unilateral Mistake: When only one of the contracting parties is mistaken as to a matter of fact, the
mistake is a unilateral mistake. Regarding the effect of unilateral mistake on the validity of contract,
Section 22 provides that “a contract is not voidable merely because it was caused by one of the parties
to it being under a mistake as to a matter of fact”.
In unilateral mistake a contract remains valid unless the mistake is caused by fraud, misrepresentation
in which case the contract is voidable at the option of aggrieved party. In Judicial decision the unilateral
mistake can make an agreement void ab-initio.

Contract Valid: If a person due to his own negligence or lack of reasonable care does not ascertain
what he is contracting about, he must blame himself and cannot avoid the contract.

Contract Voidable: if the unilateral mistake is caused by fraud or misrepresentation, etc. on the part of
the other party, the contract is voidable and can be avoided by the injured party. E.g. If a horse has a
hole in the hoof. It is not reasonable to examine his hoofs. B buys it thinking it is good horse. A is guilty
of fraud.

CONTRACT 1 | 28
Agreement void ab-initio: The cases in which the consent given by a party under a mistake is
fundamental to the root of the agreement. It is seen in following unilateral mistakes:
a. Mistake as to the identity of person contracted with, where such identity is important.
b. Mistake as to the nature and character of a written document. E.g. illiterate woman signs deeds; in
fact it was power of attorney – to sell. It was not intended (Bala devi v/s Santi Mazumdar). Blind
man signs document of compromise, but it was a release. Therefore, it is void. (Hem Singh v/s
Bhagwati)

CONTRACT 1 | 29
 UNIT – III

6. WHAT IS VOID AGREEMENTS? DISCUSS BRIEFLY EXPRESSLY DECLARED VOID AGREEMENTS UNDER THE
INDIAN CONTRACT ACT.
Ans. Void agreements
 An agreement not enforceable by law is said to be void (Section 29(g))
 A void agreement does not give rise to any legal obligation/consequences and is void ab-initio. In the eyes
of the law it is no agreement at all from the beginning.
 There are various types of void agreements. They are:
a. Agreement by minors (Section 11);
b. Agreement made under bilateral mistake of fact material to the agreement (Section 20);
c. Agreements of which the consideration or object is unlawful (Section 23);
d. Agreements of which the consideration or object is unlawful in part and illegal part cannot be
separated from the legal part (Section 24);
e. Agreements made without consideration (Section 25).

 There are other void agreements that are expressly declared as void by the Indian Contract Act. These acts
are void ab-initio but not illegal, and therefore transactions collateral to such agreements are not made
void. In case of illegal agreements, transaction collateral to them are also tainted with illegality and hence
void. They are:
A. Agreements in restraint of marriage (Section 26).
B. Agreements in restraint of trade (Section 27).
C. Agreements in restraint of legal proceedings (Section 28).
D. Agreements the meaning of which is uncertain (Section 29).
E. Agreements by way of wager (Section 30).
F. Agreements contingent on impossible events (Section 36).
G. Agreements to do impossible acts (Section 56).

A. Agreements in restraint of marriage (Section 26).

- Every individual is free to marry and so according to Section 26 of the Contract Act ‘every
agreement in restraint of marriage of any person other than a minor is void’.
- The restraint may be partial or general, but the agreement is void.
- But restraint to marry a particular person does not imply any restraint of marriage and is,
therefore valid contract.
- E.g. A agrees with B for good consideration that she will not marry C. It is a void agreement.
E.g. A agrees with B that she will marry him only. It is a valid contract.

B. Agreements in restraint of trade (Section 27).

- The constitution of India guarantees the freedom of trade and commerce to every citizen and
therefore Section 27 declares ‘every agreement by which any one is restrained from exercising a
lawful profession, trade and or business of any kind, is to that extent void’.
- No person is free to deprive himself of the fruit of his labour, skill or talent, by any contract he
enters into.
- E.g. If a person agrees to close his business in consideration of a promise to pay a certain sum is
void agreement. The amount is not recoverable, is the other party fails to pay the promised sum
of money.

CONTRACT 1 | 30
- But agreements merely restraining freedom of action necessary for the carrying on of business
are not void, for the law does not intent to take away the right of a trader to regulate his business
according to his own discretion and choice.
E.g. An agreement to sell all the produce to a certain party, with a stipulation (condition) that the
purchaser was bound to accept the whole quantity, was held valid because it aimed at promoting
business and not restrain it.
- Exceptions: An agreement in restraint of trade is valid in the following cases:
a. Sale of Goodwill: The seller of the ‘good will’ of a business can be restrained from carrying on
a similar business, within specified local limits, so long as the buyer, or any person deriving
title to the good will from him, carries on a like business therein, provided the restraint is
reasonable in point of time and space.
E.g. A, after selling the goodwill of his business to B promises not to carry on similar business
“anywhere in the world”. As the restraint is unreasonable the agreement is void.
E.g. C a Seller of imitation jewelry in London sells his business to D and promises that for a
period of two years he would not deal a) in imitation jewelry in England, b) in real jewelry in
England, c) in real or imitation jewelry in certain foreign countries. The first promise alone was
held lawful. The others were void as unreasonable restraint of trade.
b. Partners agreements: An agreement in restraint of trade among the partners or between any
partner and the buyer of firm’s goodwill is valid if the restraint comes within any of the
following cases:
1. An agreement among the partners that a partner shall not carry on any business other
than that of the firm while he is in partner (Section 11 (2) of the Partnership Act).
2. An agreement by a partner with his other partners that on retiring from the partnership
he will not carry on any business similar to that of the firm within a specified period or
within specified local limits, provided the restrictions imposed are reasonable (Section
36(2) of the Partnership Act).
3. An agreement among the partners, upon or in anticipation of the dissolution of the firm
that some or all of them will not carry on a business similar to that of the firm within a
specified period or within specified local limits provided restrictions imposed are
reasonable (Section 54 of the Partnership Act).
4. An agreement between any partner and the buyer of the firm’s goodwill that such partner
will not carry on any business similar to that of the firm within a specified period or within
specified local limits, provided the restrictions imposed are reasonable (Section 55(3) of
the Partnership Act).
c. Trade Combinations: The agreement to regulate business and not restrain it is valid. Thus an
agreement in the nature of business combination between traders or manufacturers i.e. not
to sell their goods below a certain price, to pool profits or outputs and to divide the same in
an agreed proportion, does not amount to a restraint of trade and is perfectly valid.
Similarly an agreement amongst the traders of a particular locality with the object of keeping
the trade in their own hands is not void merely because it hurts a rival in trade. But if an
agreement attempts to create a monopoly, it would be void.
d. Negative stipulations in service agreements: An agreement of service by which a person
binds himself during the term of the agreement, not to take service with anyone else, is not in
restraint of lawful profession and is valid.
A chartered accountant employed in a company may be debarred from private practice or
from serving elsewhere during the continuance of service.
But an agreement of service which seeks to restrict the freedom of occupation for some
period, after the termination of service is void.

CONTRACT 1 | 31
C. Agreements in restraint of legal proceedings (Section 28).
- Section 28 as amended by the Indian Contract Act (Amendment) Act, 1996, declares the following
three kinds of agreements void.
a. An agreement by which a party is restricted absolutely from taking usual legal proceedings, in
respect of any right arising from a contract.
b. An agreement which limits the time within which one may enforce his contract rights, without
regard to the time allowed by the Limitation Act.
c. An agreement which provides for forfeiture of any rights arising from a contract, if suit is not
brought within a specific period, without regard to the time allowed by the Limitation Act.

- Restriction on legal proceedings: At stated above, Section 28 renders every agreement in

restraint of legal proceedings void. This is in furtherance of what we studied under the definition
of a contract, namely, agreement plus enforceable at law is a contract. Thus if an agreement
provides that no party shall go to the court of law, in case of breach, is no contract and the
agreement is void ab-initio. In this connection the following points have to be kept in mind.
a. The Section applies only to rights arising from a contract. It does not apply to cases of civil or
criminal wrongs or torts.
b. This Section does not affect the law relating to arbitration e.g. if the parties agree to refer to
arbitration any dispute which may arise between them under the contract, such a contract is
valid.
c. The Section does not affect an agreement whereby parties agree ‘not to file an appeal’ in a
higher court.
d. This Section does not prevent the parties to a contract from selecting one of the two courts
which are equally competent to try the suit.

- Curtailing the Period of Limitation: an agreement curtailing the period of limitation prescribed by
the Limitation Act is also void under section 28.
Thus, if a clause in an agreement between A and B provides that either party can sue for breach
within a year of breach only, the clause is void and despite the clause the parties have a right to
sue in case of breach by either party within the time allowed by the Limitation Act i.e. within
three years from the date of breach.
Exceeding the period of limitation prescribed by Limitation Act are also void, as the object will be
to defeat the provisions of the law.

- Forfeiture of contract rights: Under Clause (C) of Section 28 an agreement which provides for
forfeiture of any rights arising from a contract, if suit is not brought within a specified time (say 3
months) is also void. This clause was inserted by the Indian Contract (amendment) Act, 1996. This
was in connection to Insurance Companies where it provided that if a claim is rejected and a suit
is not filed within three months after such rejection, all benefits under the policy shall be
forfeited. The court held this violative of Limitation Act.

D. Agreements the meaning of which is uncertain (Section 29).

- “Agreements, the meaning of which is not certain, or capable of being made certain, are void”
(Section 29). The law ensures that the parties to a contract should be aware of the precise nature
and scope of their mutual rights and obligations under the contract. Thus if the words used by the
parties are vague and indefinite, the law cannot enforce the agreement.

CONTRACT 1 | 32
 E.g. A agrees to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil
was intended. The agreement is void.
E.g. A agrees to sell C one thousand kilos of rice at a price to be fixed by C. As the price is capable
of being made certain, there is no uncertainty here to make the agreement void.
- An agreement ‘to enter into an agreement in future’ is void for uncertainty unless all the terms of
the proposed agreement are agreed expressly or implicitly. Thus an agreement to engage a
servant sometime next year, at a salary to be mutually agreed upon is a void agreement.

E. Agreements by way of wager (Section 30).

- What is wager? It means a bet; something stated to be lost or won on the result of a doubtful
issue, and therefore wagering agreements are nothing but ordinary betting agreements.
E.g. If A and B mutually agree that if it rains today A will pay B Rs. 100 and if it does not rain than B
will pay Rs. 100 to A.
- In Thacker v/s Hardy Cotton L.J., described a ‘wager’ as: “the essence of gaming and wagering is
that one party is to win and the other to lose upon a future event which at the time of the
contract is of an uncertain nature – that is to say, if the event turn out one way A will lose, but if it
turns out the other way he will win”.
- In Carlill v/s Carbolic Smoke Ball Co. Hawkings J., there are various aspects of wager that are
explained. They are:
Wager is game of chance, where winning and losing depend on ‘uncertain event’.
The event may be not only because it is future event, but because it is not yet known to the
parties.
The parties to a wager must have no interest in the event’s happening or non-happening except
the winning or losing of the bet laid between them.

- Essential features of a wager are:

a. There must be a promise to pay money or money’s worth.
b. The promise must be conditional on an event happening or not happening.
c. The event must be an uncertain one. If one of the parties has the event in his own hands, the
transaction is not a wager.
d. Each party must stand to win or lose under the terms of agreement. An agreement is not a
wager if one party may only win and cannot lose, or if he may lose and not win, or he can
neither win nor lose.
e. No party should have a proprietary interest in the event. The stake must be only interest
which the parties have in the agreement.

- Agreements by way of wager, void: Section 30 lays down that ‘agreements by way of wager are
void; and no suit shall be brought for recovering anything alleged to be won on any wager, or
entrusted to any person to abide the results of any game or other uncertain event on which any
wager is made’.
If A and B enter into an agreement which provides that if England’s cricket team wins the test
match, A will pay B Rs. 100 and if it loses B will pay A Rs. 100. Nothing can be recovered by the
winning party under the agreement, it being a wager.
The section makes an exception in favor of certain prizes for horse racing by providing that “This
section shall not be deemed to render unlawful a subscription or contribution, or agreement to
subscribe or contribute, made or entered into for or toward any place, prize or sum of money, of
the value of Rs. 500 and above to be awarded to the winner or winners of any horse race”.
In Gujarat and Maharashtra wagering agreements are not only void, but also illegal.

CONTRACT 1 | 33
 - Special cases: Let us see if they are wagers.
a. Commercial Transactions: Agreements for sale and purchase of any commodity or share
market transaction, in which there is a genuine intention to do legitimate business i.e. to give
and take delivery of goods or shares, are not wagering agreements. But if the is genuine
intention and parties want to gamble on the rise and fall of the market by paying and
receiving the differences in prizes only, the transaction would be wagering and therefore void.
To be wagering contract, neither parties should intend to perform the contract itself, but only
to pay the differences’.
b. Lottery: A lottery is a game of chance. Hence the lottery business is a wagering transaction.
They are void and illegal because 249-A of the Indian Penal Code conduction a lottery is
punishable offence. If the Government has authorized it, then it is not criminal offence, but it
still remains a wager.
c. Crossword Puzzle: Where prizes depend upon chance, it is lottery and therefore wagering
agreements. In crossword puzzle, the prizes depends on correspondence of the competitor’s
solution with a previously prepared solution, is a wager. But if prizes depend on skill and
intelligence, it is valid transaction. Here effort is made to select the best competitor e.g.
picture puzzles, literary competitions and athletic competitions are not wagers.
d. Insurance Contracts: Insurance contracts are valid contracts even though they provide for
payment of money by the insurer on the happening of a future uncertain event. They differ
from wagering agreements in three aspects:

The holder of an insurance policy must have In wagering agreement there is no interest
an ‘insurable interest’ in the event upon to protect and the parties bet exclusively
which the insurance money becomes because they can thereby make some easy
payable. Thus contracts of insurance are money.
entered into to protect an interest.
Contracts of insurance are based on Wagering agreements are a gamble
scientific and actuarial calculation of risks. without any scientific calculation of risks.
Contracts of insurance are regarded as Wagering contracts do not serve any useful
beneficial to the public. purpose.

F. Agreements contingent on impossible events (Section 36).

- Contingent agreements to do or not to do anything, if an impossible event happens, are void,
whether the impossible of the event is known or not to the parties to the agreement at the time
when it is made.
- A agrees to pay B RS. 1000 as loan if two straight lines should enclose a space. The agreement is
void.

G. Agreements to do impossible acts (Section 56).

- An agreement to do an act impossible in itself is void.
- A agrees with B to discover treasure by magic. The agreement is void.

CONTRACT 1 | 34
7. WHAT IS CONTINGENT CONTRACT? DISCUSS THE RULE RELATING TO THE PERFORMANCE OF CONTINGENT
CONTRACTS?
WHAT ARE THE ESSENTIAL CHARACTERISTICS OF CONTINGENT CONTRACT
Ans.
 Section 31 of the Contract Act defines contingent contract as follows, “A contingent contract is a contract
to do or not to do something, if some event, collateral to such contract does or does not happen”
 Contingent contract is therefore based on happening or not happening of an uncertain event, collateral to
the contract. E.g. A contracts to indemnify B upto Rs. 20,000 in consideration of B paying Rs. 1000 annual
premium, if B’s factory is burnt. This is contingent contract.
 Any ordinary contract can be changed into a contingent contract, if its performance is made dependant on
the happening or non-happening of an event. It is based on a condition therefore it is also called
‘conditional contracts’.
E.g. A contracts to sell B 10 bales of cotton for Rs. 20,000, if Ship reaches safely
A promises to give loan to B of Rs. 1000 if he is elected as president of the Association.
 Contracts of Insurance and Indemnity and guarantee are popular instances of contingent contracts.
 For a contract to be contingent it is necessary that the event should be collateral event and not form the
consideration of the contract.
 Collateral Event - According to Pollock and Mulla, a ‘collateral event’ means an even which is ‘neither a
performance directly promised nor the whole of the consideration for a promise’. Where C contracts to pay
Rs. 100 to D for white-washing his house on the terms that no payment shall be made till the completion of
the work, it is not a contingent contract because the event (D’s completing the work) is not collateral to the
contract, it is integral part of the contract. The collateral event is one which does not form part of
consideration of the contract, and is independent of it. E.g. A contract with B to build his house and pay Rs.
50,000 provided the construction is approved by the Architect. It is contingent as approval of architect is
collateral event, which is independent of the consideration.

 Essentials of Contingent Contract: From the above discussion we get two essential of a contingent
contract:
a. The performance of such contract depends upon the happening or non-happening of some future non
certain or uncertain act.
b. The future uncertain event should be collateral i.e. incidental to the contract.

 Rules regarding the performance of contingent contract:

The rules regarding the performance of contingent contracts, a contained in Section 32 and 36 of the
contract Act are as follows:
a. Contingent contracts to do or not to do anything, if an uncertain future event happens, cannot be
enforced by law unless and until the event has happened. If the event becomes impossible, such
contract becomes void (Section 32).
E.g. A makes a contract with B to buy B’s horse if A survives C. The contract cannot be enforced by law
unless and until C dies in A’s lifetime.
E.g. A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been
offered, refuses to buy it. The contract cannot be enforced by law unless and until C refuses to buy the
horse.

b. Contingent contract to do or not to do anything, if an uncertain future event does not happen, can be
enforced by law unless when the happening of that event becomes impossible, and not before (Section
33).

CONTRACT 1 | 35
 E.g. A agrees to pay B a sum of money (insurance claim) if a certain ship does not return. The ship is
sunk. Contract can be enforced when the ship sinks and not before.

c. If the contract is contingent upon how a person will act at an unspecified time, the event shall be
considered to become impossible when such a person does anything which renders it impossible that
he should so act within any definite time, or otherwise than under further contingencies (section 34).
E.g. A agrees to pay a sum of money (as loan) if B marries C. C marries D. The marriage between B and C
is now impossible, although it is possible that D dies and C marries B. B if later actually marries C (D’s
widow) it will not revive the old obligation of A to pay the sum, because that came to an end when C
married D.

d. Contingent contract to d or not to do anything, if a specified uncertain event happens, within a fixed
time, becomes void, if at the expiration of the time fixed, such even has not happened, of if, before the
time fixed, such event becomes impossible (Section 35(1).
E.g. A promises to pay B a sum of money (as insurance claim) if a certain ship returns within a year. The
contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt
within the year or if the ship does not return within a year.

e. Contingent agreements to do not to do anything, if a specified uncertain event does not happens, within
a fixed time, may be enforced by law when the time fixed has expired and such event has not
happened, of, before the time fixed has expired, if it becomes certain that such event will not happen
(Section 35(2).
E.g. A promises to pay B a sum of money (as insurance) if certain ship does not return within a year. The
contract may be enforced if the ship does not return within a year, or is burnt within a year.

f. Contingent agreements to do not to do anything, if an impossible event happens, are void, whether the
impossibility of the event is known or not to the parties to the agreement at the time when it is made
(Section 36).
E.g. A agrees to pay b Rs. 1000 (as a loan), if two straight lines should enclose a space. The agreement is
void.
E.g. A agrees to pay Rs. 1000 if B will marry A’s daughter C. C was dead at the time of the agreement.
The agreement is void.

 Difference between Contingent contract and Wagering contract

CONTINGENT CONTRACT WAGERING CONTRACT

Contingent contracts are valid contracts Wagering contracts are absolutely void

The parties in contingent contracts have real The parties in wagering contract are not interested in the
interest in the occurrence or non-occurrence occurrence of the event, except for winning or losing the
of the event e.g. Insurable interest in the bet amount.
property insured.

In contingent contract the future event is In wagering contract the uncertain event is the sole
merely collateral. determining factor or the agreement.

CONTRACT 1 | 36
 UNIT – IV AND V

8. STATE THE VARIOUS RULES AS REGARDS PERFORMANCE OF CONTRACT.

Ans. Performance of contract means fulfilling of their respective legal obligations created under the contract by both
the promisor and promisee.
Performance is the happy end of a contract.
There are various rules as to performance of contracts. They are:

A. Who can demand Performance?

- Only the promisor can demand performance of the promise under the contract.
- Third party cannot demand performance of the contract even if it was made for his benefit.
- In case of death of promisee, his legal representatives are entitled to enforce the performance of the
contract against the promisor.
- E.g. A promises to B to pay C a sum of Rs. 1000. The person who can demand performance is B and not
C. A doesn’t pay the amount. C cannot take any legal action against A. Only B can take action.

B. By whom Contracts must be performed?

1. By the promisor himself. In case of a contract involving personal skill, taste or credit, the promisor
himself must perform the contract. If in the contract it was the intention of the parties that the
contract should be performed by the promisor himself, then he has to perform it.
2. By the legal representative. In case of death of the promisor before performance, the liability of
performance falls on his legal representative, unless a contrary intention appears from the contract
(Section 37 clause 2). They are personally liable. In case of contracts involving personal skill the heirs or
legal representative are not bound to perform the contract. Such contracts come to an end.
3. Performance by a third person. Section 41 lays down that if a promise accepts performance of the
promise from a third person, he cannot afterwards enforce it against the promisor. Thus, where a
promisee accepted lesser amount from a third party in full satisfaction of his claim, it was held that he
cannot enforce the promise against the promisor.

C. Performance of Joint promises

Joint promises may be as follows:
1. Where several joint promisors make a promise with a single promisee. E.g. A, B, C jointly promise to
pay Rs. 3000 to D.
2. Where singly promisor makes a promise with several joint promisees. A promises to pay Rs. 3000 to A,
B, C.
3. Where several joint promisors make a promise with several joint promisees. A, B, C promise to pay Rs.
3000 P, Q, R.
Who can performance of joint promises? (Section 45)
When a promise is made to several persons jointly, then, unless a contrary intention appears from the
contract, the right to claim performance rests with all the promisees jointly and a single promisee cannot
demand performance.
When any one of the promisee dies, right to claim performance rests with legal representatives of such
deceased person jointly with the surviving promisees. If all die then all the legal representatives jointly.
By whom joint promises must be performed? (Section 42 to 44)
1. All promisors must jointly fulfil the promise. Unless contrary intention. If one dies, then his legal
representative should fulfill the promise. In case of contracts of personal skill, etc., if the person dies

CONTRACT 1 | 37
 than legal representative not liable to perform. Whenever the legal representatives are made liable to
perform the promise, they are not personally liable. They are limited to the assets they inherit.
2. Any one or more of joint promisors may be compelled to perform. When two or more persons make a
joint promise, the promisee is entitled, in the absence of express agreement to the contrary, to compel
any one or more of such joint promisors to perform the whole of the promise (43 (1)). Their liability is
joint and several.
E.g. A, B, C promise to pay Rs. 3000 to D. D can compel either A or B or C or any one of them to pay Rs.
3000.
In case of death, if the debts falls upon a number of heirs, promisee must bring the suit against all heirs
collectively, because the liability is joint and not several in case of co-heirs. Co-heirs are not joint
promisors.
3. Right of contribution inter-se between joint promisors. If any one of the several joint promisors is made
to perform the whole contract, he may requires equal contribution from the other joint promisors,
unless a contrary intention appears from the contract (Section 43,2). E.g. if A is made to pay the whole
amount of Rs. 3000, he can realize from B and C Rs. 1000 each.
4. Sharing of loss by default in contribution. If any one of the joint promisors makes a default in making
contribution, if any, the remaining joint promisors must bear the loss from such default in equal shares
(Section 43, c).
5. Effect of release of one joint promisor. In case of joint promise, if one of the joint promisors is released
form his liability by the promisee, his liability to the promisee ceases but this does not discharge the
other joint promisors from their liability; neither does it free the joint promisor so released from his
liability to contribute to the other joint promisors (Section 44).
D. Assignment of contracts
Assignment of contract means transfer of contractual rights and liabilities to a third party with or without
the concurrence of the other party to the contract.
The Indian Contract Act does not have any specific provisions dealing with assignment of contract.
The rules laid down by courts are:
1. Contracts involving personal skill, taste and credit, e.g. marriage, cannot be assigned.
2. The obligation (i.e. liabilities) cannot be assigned except with the consent of the promisee, and when
such consent is given, it is novation resulting from a substitution of liabilities.
3. The rights and benefits under a contract are assignable unless the contract is of personal nature or the
rights are incapable of assignment either under the law or under an agreement between the parties,
and the assignee can demand performance against the other contracting party.
4. Assignment by operation of law takes place in cases of death and insolvency. Upon death, the rights
and liabilities under the contract go to the heirs or legal representatives. In case of insolvency, it goes
to the official assignee or receiver.
E. Order of performance of reciprocal promises
Promises which form the consideration for each other are called ‘reciprocal promise’ or ‘mutual promises’.
Each gives a promise, in return for a promise. A promises to sells goods and the other promises to pay the
price. Each is bound by an obligation to perform his promise.

Reciprocal promises may be classified into three categories:

1. Mutual and independent:
Each party must perform his promise independently without waiting for the performance.
Section 52 – such promise must be performed in order expressly fixed by contract and where the order
is not expressly fixed, they must be performed in that order which the nature of the transaction
requires.

CONTRACT 1 | 38
 E.g. A promises to deliver certain goods to B on 10th April, B promises to pay the price in advance on 1st
April. A must deliver goods on 10th even if B does not pay in advance.
2. Mutual and dependent:
When the performance of the promise by one party depends on the prior performance of the promise
by the other party, the promises are ‘mutual and dependent’.
Section 54 – if the promisor fails to perform it, he can’t claim the performance of the reciprocal
promise and he will have to compensate the other for any loss due to non-performance.
E.g. A contracts with B to build a house for fixed price, B will have to give him the scaffolding and wood
for the work. B refuses to give the scaffolding and wood and the work cannot be executed. A need not
execute the work, and B is bound to make compensation to A for any loss caused to him by the non-
performance of the contract.
3. Mutual and Concurrent:
Where two promises are to be performed simultaneously, they are said to be ‘mutual and concurrent’.
Section 51, in the case of such promises the promisor need not perform his promise unless the
promisee is ready and willing to perform his reciprocal promise.
E.g. A and B contract that A shall deliver goods to B to be paid by B on delivery. A will not deliver goods
if B will not pay on delivery.
4. Consequences where a party prevents performance:
When a contract contains reciprocal promises and one party to the contract prevents the other from
performing his promise, the contract becomes voidable at the option of party so prevented, and is
entitled to compensation.

F. Time and place for performance (Section 46 – 50 and 55)

a. Where prescribed by the promisee: If a promisee has prescribed the time and place, the performance
should be at the specified time and place.
b. Where no prescribed by the promise: where the time and place is not prescribed then the contract
must be performed –
- Within a reasonable time. It should be on working days and usual hours of business. This depends
on the particular case and special circumstances.
- At proper place. This also depends on the particular case and special circumstances.

G. Effects of failure to perform a contract within a stipulated time (Section 55)

1. Where time is the essence of the contract and failure to perform within fixed time the contract
becomes voidable at the option of promisee. He can rescind and sue for breach of contract.
When is the time the essence of the contract?
- If the parties to the contract have expressly agreed to treat it as such,
- Nature of transaction and intention of parties were such that the performance within a limited time
was necessary.
2. Where time is not the essence to contract, failure to perform within the specified time does not make
the contract voidable. Promise can’t rescind and he will have to accept the delayed performance. But
can claim compensation if any loss. It should not be delayed beyond reasonable time.
3. In case the promisee accepts the delayed performance he cannot afterwards claim compensation for
any loss caused by delay, unless he gives a notice to the promisor of his intention to do so.

H. Mode of performance (Section 50)

Performance of any promise may be made in any manner which the promisee prescribes or sanctions. The
promisor must perform the promise in strict accordance with the terms of the contract or instruction from

CONTRACT 1 | 39
 the promisee. He has no right to substitute for what he has been directed, something else, even if the
substitute may be more beneficial to the promise.

I. Appropriation of payment
When a debtor, who owes several debts to the same creditor, makes a payment which is insufficient to
satisfy the whole indebtedness, the question arises, as to which of the debt the payment is to be applied.
Section 59-61 gives the rules.
1. Debtors express instruction must be followed
2. Debtors implied intention must be followed.
E.g. If he pays 1,00,000. He has debt of 1,00,000; 2,00,000 and 5,00,000. Then it is to be applied for
1,00,000 or the nearest date of debt.
3. Appropriation by creditor. If not express, nothing implied then creditor apply to pay debt lawfully due,
including a debt which is barred by the limitation act.
4. Appropriation by law. If he pays 6,00,000. He has debt of 1,00,000; 2,00,000 and 5,00,000. Then apply
to the first, second and then remaining to the third.
5. When principal and interest both are due. Then apply to the interest firs then the principal so that the
person doesn’t have to pay more.

J. Contracts which need not be performed.

1. Section 62 – novation, rescission, alteration of original contract. As they are substituted by new or
altered.
2. Section 63 – agree to dispense or remit performance of contract – wholly or partly the original stands
discharged.
3. Section 64 - When a person at whose option a contract is voidable and he rescinds it. The other party
need not perform it.
4. Section 67 – Neglects or refuses to afford the promisor reasonable facilities for the performance of his
promise, the promisor is excused for the non-performance of the contract.

CONTRACT 1 | 40
9. WHAT IS DISCHARGE OF CONTRACT? HOW CAN A CONTRACT BE DISCHARGED?
Ans. When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged
or terminated.
A contract may be discharged in any of the following ways:
1. By Performance – actual or attempted
2. By Mutual Consent or Agreement.
3. By Subsequent or Supervening Impossibility or illegality.
4. By Lapse of Time.
5. By Operation of Law.
6. By Breach of Contract.

1. Discharge by Performance:
Performance of contract is the principal and most usual mode of discharge of a contract. Performance may
be Actual Performance or Attempted Performance.
 Actual Performance: When each of the parties to a contract fulfills his obligation arising under the
contract within the time and in the manner prescribed, it amounts to actual performance of the
contract and the contract comes to an end.
If only one party fulfills his part of the obligation then only he is discharged. Such a party get right of
action against the other party who is guilty of breach.
 Attempted Performance or Tender: When the promisor offers to perform his obligation under the
contract, but is unable to do so because the promisee does not accept the performance, it is called
attempted performance or tender.
Tender is not an actual performance but is only an ‘offer to perform’ the obligation under the contract.
A valid tender of performance is equivalent to performance and the contract comes to an end.

Essential of a valid Tender:

a. It must be unconditional. E.g. A who is debtor of company B, offers to pay if shares are allotted to
him. It is not a tender.
b. It must be made at a proper time and place: A tender made before or after the due date or place
other than agreed upon is not a valid tender. E.g. A is a tenant of B. He offers him rent at a
marriage party. B is not bound to accept as the tender is not made at a proper place.
c. It must be of the whole obligation contracted for and not just a part of it: Paying only the first
installment was not valid tender.
d. If the Tender relates to delivery of goods, it must give a reasonable opportunity to the promisee
of goods so that he may be sure that the goods tendered are of contract description.
e. It must be made by a person who is in a position and is willing to perform the promise: A Tender
by a minor or idiot is not a valid tender.
f. It must be made to the proper person: i.e. the Promisee or his duly authorized agent. Tender to a
stranger is invalid.
g. If there are several joint promisees, an offer to any one of them is valid tender: But the actual
payment should be made to all the joint promisees, and not to any one of them, for a valid
discharge of the contract, for, Section 45 provides that when a promise is made to two or more
persons jointly, the right to claim performance rests with all of them jointly.
h. In case of tender of money, exact amount should be tendered in the legal tender money:
Tendering a smaller amount is an invalid tender, E.g. giving 500 Rs. to ticket that is 10 Rs. is not
valid tender.

CONTRACT 1 | 41
 Effects of refusal to accept a valid Tender:
Section 38 - The effect of refusal to accept a properly made ‘offer of performance’ is that the contract
is deemed to have been performed by the promisor and the promisee can be sued for breach of
contract. A valid Tender discharges the contract.

Exception to this rule:

Tender of money, however does not discharge the contract. The money will have to be paid even after
the refusal of tender, of course without interest from the date of refusal. In case of suit, cost of
defense can also be recovered from the plaintiff, if tender of money is proved.

2. By Mutual Consent of Agreement:

Since the contract is created by an agreement, it may also be discharged by an agreement between the
parties.
Sections 62 and 63 deal with this subject and provide the following methods of discharging a contract by
mutual agreement.
1. Novation:
- Novation occurs when a new contract is substituted for an existing contract, either between the
same parties or between different parties, the consideration being the discharge of the old
contract.
- If it the same parties then the nature of the obligation must be changed substantially in the new
substituted contract. When the parties are the same it is not ‘novation’ but ‘alteration’.
- When the parties to a contract agree for novation then the original contract is discharged and need
not be performed.
- E.g. A has to pay B, and B has to pay to C. By mutual agreement A agrees to pay C the amount he
has to pay B in the place of B. This is a new contract and involves change of parties.
- A owes B Rs. 10,000. A mortgages his estate of Rs. 5000 to B. This is a new contract and
extinguishes the old.
- The following Points have to be kept in mind in connection with novation:
a. The novation cannot be compulsory, it can be with mutual consent of all the parties to
contract.
b. The new contract must be valid and enforceable.

2. Alteration: Alteration of a contract means change in one or more of the material terms of the
contract.
- If alteration in written contract is done by mutual consent, the original contract is discharged and
new contract takes its place.
- A material alteration is one which alters the legal effect of the contract e.g. a change in the amount
of money to be paid or a change in the rate of interest.
- Immaterial alteration e.g. correcting a clerical error in figures or the spelling of a name, has no
effect on the validity of the contract and does not amount to alteration in the technical sense.
- If any material alteration is made without the consent of the other party then the whole contract is
void.
- In alteration the parties are the same, whereas in novation the parties may be different.

3. Rescission:
- Rescission also means cancellation. A contract can be discharged before the date of performance,
by agreement between the parties to the effect that it shall no longer bind them.
- Both the parties abandon their rights under the contract.

CONTRACT 1 | 42
 - An act of rescission releases both the parties from their obligations rising out of the contract. They
cannot then have any legal proceedings or take legal action.
- But there can be no agreement not to sue for breach. Such agreement is void.
- There may be an implied rescission of a contract when there is non-performance over a long period
of time by both parties without complaint.

4. Remission
- Remission means ‘the acceptance of a lesser sum than what was contracted for or lesser fulfillment
of the promise made’.
- Section 63 deals with rescission of performance and says that promisee may remit or give up wholly
or part, the performance of the promise made to him, and a promise to do so is binding even
though there is no consideration for it.
- E.g. If the promisee A agrees to accept Rs. 2000 in full satisfaction of a claim of Rs. 5000 the
promise is enforceable and the promisee cannot in future bring a suit for the recovery of Rs. 5000.
- E.g. A owes B Rs. 5000, A pays and B accepts in satisfaction of the whole debt, Rs. 2000 paid at the
time and place at which the Rs. 5000 were payable. The whole debt is discharged.

5. Waiver:
- Waiver means a deliberate abandonment or giving up of a right which a party is entitled to under a
contract, whereupon the other party to the contract is released from his obligation.
- E.g. A promises to tailor a shirt of B if he will sing a song at his party and accordingly B sang the song
but afterwards B forbids A to tailor his shirt, to which A consents, the contract is terminated as
waiver.

3. By Subsequent or Supervening impossibility or illegality: (Doctrine of Frustration)

 Impossibility at the time of contract: An agreement to do an act impossible in itself is void.
There is no question of discharge of a contract that is obviously impossible. It is void ab-initio.
But if the impossibility is not obvious and the promisor alone knows of the impossibility or illegality
then existing or the promisor might have known as such after using reasonable diligence, such
promisor is bound to compensate to the promisee for any loss he may suffer.
E.g. A contract to marry B, already married to C, and can’t marry again as he is subject to polygamy. A
must make compensation to B for the loss caused to her by the non-performance of his promisee.
 Subsequent Impossibility or illegality: In fact, where the impossibility occurs after the contract has
been made, in this connection Section 56 Para 2 declares ‘A contract to do an act which, after the
contract is made, becomes impossible, or by reason of some event which the promisor could not
prevent, unlawful, becomes void when the act becomes impossible or unlawful.
In order that the Sections would apply the following conditions must be fulfilled:
a. That the act should have become impossible.
b. That impossibility should by reason of some event which the promisor could not prevent;
c. That the impossibility should not be self-induced by the promisor or due to his negligence.
Impossible means impractical, extremely hazardous, or useless from the point of view of object.
It is also called the doctrine of supervening impossibility.

Cases where the doctrine of supervening impossibility applies:

A contract will be discharged on the ground of supervening impossibility in the following cases:
a. Destruction of subject-matter: when the subject-matter of a contract, is destroyed without the
fault of the promisor or promisee, the contract is discharged.

CONTRACT 1 | 43
 E.g. A hall was let out for a concert. The hall caught fire the previous day. The plaintiff sued. The
court held that the contract had become void and the defendant was not liable.
b. Failure of ultimate purpose: When the ultimate purpose for which the contract was entered into
fails, the contract is discharged, although there is no destruction of any property affected by the
contract and the performance of the contract remains possible in literal sense.
A hired a room in London from B with the object as known by both parties, of using the room to
view the coronation of the King. King fell ill and the date was postponed. B filed suit for recovery of
rent. It was held that A need not pay the rent as the contract was discharged on failure of ultimate
purpose of postponement.
c. Death or personal incapacity of promisor: Where the performance of a contract depends upon
the personal skill or qualification or the existence of a given person, the contract is discharged on
the illness or incapacity or the death of that person.
E.g. A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The
contract becomes void.
An artist undertook to paint a picture for a certain price, but before he could do so, he met with an
accident and lost his right arm. The artist was discharged due to disablement.
d. Change of Law: A subsequent change of law may render the contract illegal and in such cases the
contract is deemed discharged. The law may forbid the act of contract.
E.g. A sold to B 100 bags of wheat for Rs. 1000 per bag. But before the delivery of goods the
Government declared the sale and purchase of wheat by private traders as illegal. The contract
was discharged.
e. Outbreak of War: All contracts entered into with an alien enemy during war are illegal and void
ab-initio. Contracts entered into before the outbreak of war are suspended during the war and
may be revived after the war is over provided they are not time-bound. If war is declared then only
the contract is suspended during war.

Cases not covered by doctrine of supervening impossibility:

The general rule is that “He that agrees to do an act must do it or pay damages for not doing”. Unless
the performance becomes impossible a person is bound to perform any obligation which he has
undertaken to perform.
There are some cases where impossibility of performance is not an excuse:
a. Difficulty of performance: Increased or unexpected difficulty and expense do not, as a rule, excuse
from performance.
E.g. A contracted with B to send certain goods from Bombay to Delhi in September. In August
transport companies went on strike and transport was available at high rates. This increase in
freight rates was not an excuse.
A agreed to give B 1000 tons of raw silk. On the day fixed he could not get the raw silk. This did not
excuse him from performance.
b. Commercial Impossibility:
When in transaction profits dwindle to a very low level or actual loss becomes certain, it is said
that he performance of the contract has become commercially impossible. This may occur due to
higher price of raw material or increase in the wage bill, etc. Commercial impossibility does not
discharge a contract.
c. Impossibility due to the default of a third person: The doctrine of supervening impossibility does
not cover cases where the contract could not be performed because of the impossibility created
by the failure of a third person on whose work the promisor relied.

CONTRACT 1 | 44
 E.g. A, a wholesaler, enters into a contract with B for the sale of certain goods ‘to be produced by
Z’ a manufacturer of those goods. Z does not manufacture those goods. A is liable to B for the
damages.
d. Strikes and Lock-outs: A strike by the workmen or a lock-out by the employer also does not excuse
performance because the former is manageable and the latter is self-induced.
e. Failure of one of the objects: When a contract is entered into for several objects, the failure of
one of them does not discharge the contract. E.g. A company agreed to let out a boat to B a) for
viewing a naval review on the occasion of the coronation of King Edward VII and b) to sail around
the fleet. Due to illness the Kings naval review was cancelled but the fleet was assembled. The
contract was not discharged as to sail around the fleet was equally basic object of the contract and
it was still capable of attainment.

4. Discharge by Lapse of Time:

 The Limitation Act lays down that in case of breach of a contract legal action should be taken within a
specified period, called the period of limitation, otherwise the promisee is debarred from instituting a
suit in a court of law and the contract stands discharged.
 In certain cases lapse of time may discharge a contract.
 The period of limitation for simple contracts is three years under the Limitation Act, and therefore on
default by a debtor if the creditor does not file a suit of recovery against him within three years of
default, the debt becomes time-barred on the expiry of three years and the creditor will be deprived of
his remedy at law.
 If ‘time is of essence’ in a contract, then if the contract is not performed at the fixed time then the
contract comes to an end, and the party not at fault need not perform his obligation and may sue the
other party for damages.

5. Discharge by Operation of Law:

 A contract terminates by operation of law in the following cases:
a. Death: Where the contract is of personal nature, the death of the promisor discharges the
contract. In other contracts the rights and liabilities of the deceased person pass on to other legal
representatives of the deceased.
b. Insolvency: A contract is discharged by the insolvency of one of the parties to it when an
Insolvency Court passes an “order of discharge” exonerating the insolvent from liabilities on debts
incurred prior to his adjudication.
c. Merger: Where an inferior right contract merges into a superior right contract, the former stands
discharged automatically. E.g. Where a part-time lecturer is made full-time lecturer the contract of
part-time lectureship is discharged by merger.
d. Unauthorized material alteration: A material alteration made in a written document or contract
by one party without the consent of the other, will make the whole contract void.

6. Discharge By Breach of Contract:

 Breach of contract by a party thereto is also a method of discharge of a contract, because ‘breach’ also
brings to an end the obligations created by a contract on the part of each of the parties. The aggrieved
party not at fault can sue for damages of breach of contract as per law.
 Section 39 of the Contract Act deals with anticipatory breach of contract and provides that: “when a
party to the contract has refused to perform or disabled himself form performing his promise in its
entirety, the promise may put an end to the contract, unless he has signified, by words or conduct, his
acquiescence in its continuance.”

CONTRACT 1 | 45
 Breach of contract are of two types: 1) Anticipatory breach and 2) Actual breach.
1. Anticipatory Breach: An anticipatory breach of contract is a breach of contract occurring before
the time fixed for performance has arrived. It may take place in two ways:
a. Expressly by words spoken or written: A contract with B to supply 100 bags of wheat for
60000 on 1st May. On 15 April A informs B that he will not be able to supply the wheat. This
is express rejection of contract.
To be a anticipatory breach, the offending party’s declaration that he will not perform the
contract when it becomes due must be unconditional and absolute.
b. Implied by the conduct of one of the parties: Here a party by his own voluntary act
disables himself from performing the contract. E.g. A agrees to sell a horse to B on 1 st June.
And before that date he sells the horse to somebody else. A agrees to marry B but before
that date he marries C. In both cases it is anticipatory breach and even though not
expressed is implied.
 Effects of Anticipatory Breach of contract: When there is an anticipatory breach of
contract, the promisee is excused from performance or from further performance. It gives
an option to the promisee (aggrieved party) whereby:
a. He may either treat the contract as rescinded and sue the other party for damages
for breach of contract immediately without waiting until the due date of
performance,
b. He may decide not to rescind but to treat the contract as still operative and wait for
the time of performance and then hold the other party responsible for the
consequences of non-performance.
2. Actual Breach: Actual breach may also discharge a contract. It occurs when a party fails to
perform his obligation upon the date fixed for performance by the contract.
It is important to note that there can be no actual breach of contract until the time for
performance has not yet arrived.

CONTRACT 1 | 46
10. WHAT ARE QUASI-CONTRACT? DISCUSS THE QUASI-CONTRACTS DEALT WITH IN THE INDIAN CONTRACT ACT.
DISCUSS THE QUASI-CONTRACT OBLIGATION.
Ans. Contracts is the result of an agreement enforceable by law. But in some cases there is no offer, no acceptance,
no consensus ad-idem and no intention on the part of the parties to enter into a contract still the law from the
conduct and relationship of the parties, implies a promise imposing obligations on the one party and conferring
a right in favour of the other.
 Under certain circumstances obligations resembling those created by a contract are imposed by law
although the parties have never entered into a contract. Such obligations imposed by law are referred to as
‘Quasi –Contracts’ or ‘constructive contracts’ under the English Law.
 Quasi contract resembles with a contract so far as result or effect is concerned but it has little or no affinity
with a contract in respect of mode of creation.
 It is based on the principle that a person shall not be allowed to enrich himself unjustly at the expense of
another. Duty not a promise or agreement is the basis of such contracts.
 Suit can be filed for quasi-contract similar to completed contracts.
 The Indian Contract Act deals with ‘quasi-contractual obligations’ under Section 68 to 72. They are:
a. Claim for necessaries supplied to a person incapable of contracting or on his account (Sec. 68). “If a
person, incapable of entering into a contract, or any one whom he is legally bound to support, is
supplied by another person with necessaries suited to his condition of life, the person who has
furnished such supplies is entitled to be reimbursed from the property of such incapable person. This is
seen in minor’s agreement. Their agreement is void ab-initio, but their property is liable. In these cases
following points need to be taken into account:
i. The section (68) does not create any personal liability but only the estates are liable.
ii. The things supplied should be ‘necessaries’ i.e. bare necessaries such as food, clothing, shelter
and also all those things that are reasonably necessary to the incompetent person having regard
to his status in society.
iii. Necessaries should be supplied only to such incompetent person or to some on whom he is legally
bound to support, such as wife, and children.
iv. Incompetent person’s property is liable to pay only a reasonable price for the goods and services
supplied to him and not the price which the incompetent person might have ‘agreed’ to pay.

b. Reimbursement of person paying money due by another, in payment of which he is interested (Sec.
69). “A person who is interested in the payment of money which another is bound by law to pay, and
who therefore pays it, is entitled to be reimbursed by the other”.
E.g. B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the
Government being in arrear, his land is advertised for sale by the Government. The consequence is that
the lease of B will be annulled. B to prevent the sale pays to the Government the sum due from A. A is
bound to make good the B the amount so paid.
In order to make Section 69 applicable the following conditions must be satisfied:
i. The plaintiff should be interested in making the payment in order to protect his own interest and
the payment should not be voluntary one. The payment must have been done in good faith and
not to manufacture evidence of title to land or any other thing.
E.g. A sub-tenant pays the arrears of rent due by the tenant to the landlord, in order to save the
tenancy from forfeiture. The sub-tenant is entitled to recover from the tenant, the amount paid
by him to the landlord, although there is no contract between the two.
ii. The payment must be such as the other party was bound by law to pay.
iii. The payment must not be such as the plaintiff himself was bound to pay. He should only be
interested in making the payment. The suit is only for reimbursement and not for contribution. If

CONTRACT 1 | 47
 it is joint liability and only one discharges the liability, no suit for contribution from the other
would be maintainable under this section.
E.g. A and B have been fined jointly Rs. 500 for selling adulterated ghee. A alone pays the amount
of fine in good faith. A cannot later claim contribution from B under Section 69. A can recover the
amount from B under section 43.

c. Obligation of person enjoying benefit of non-gratuitous act (Section 70): Section 70 lays down that,
“Where a person lawfully does anything for another person, or delivers anything to him, not intending
to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make
compensation to the former in respect of, or to restore, the thing done or delivered”.
For giving rise to this right of action under this Section, the following three conditions must be fulfilled:
i. The thing must have been done lawfully in good faith. This means the act done must be in
pursuance of the implied wishes and in the presence of the other party, giving him full choice to
reject the thing or service.
ii. The thing must have been done by a person not intending to act gratuitously i.e. it must have
been done with the intention of being paid for.
iii. The person for whom the act is done must have enjoyed the benefit of the act.
E.g. A, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay A
for them.
E.g. A saves B’s property from fire. A is not entitled to compensation from B if the circumstances
show that he intended to act gratuitously.

d. Responsibility of finder of goods: Section 71 lays down another circumstance in which also a quasi-
contractual obligations is to be presumed. It says: “A person who finds goods belonging to another and
takes them into his custody, is subject to the same responsibility as a bailee”. Thus an agreement is
implied by law between the owner and the finder of the goods.
Duties of finder of goods: He must try to find the real owner of the goods and must not appropriate
the goods for his own use. If the owner is traced, then he has to return it on demand. If he does not
take the measures, he will be guilty of criminal misappropriation of the property under Section 403 of
IPC. Till the owner is found he has to take care of the goods as a man of ordinary prudence would have
in similar circumstances, take care of his own goods of the same bulk, quality and value. He has to
return the surplus from the goods.
Rights of finder of goods: till the owner is found he can retain the goods. He in entitled to receive from
the true owner, all expenses incurred by him for preserving the good or finding the true owner. He has
lien on the goods for the money so spent. He is entitled to file a suit for the recovery of such sums. He
can file a suit for recovery of any reward, which was offered by the owner for the finder of the goods,
provided he came to know of it before finding the goods. No one except the real owner can claim
possession of goods from the finder. If anybody does so the finder can file a suit for damage of
trespass.
He can sell the goods if the owner of the goods cannot be found or if he refuses to pay the lawful
charge in the following situations only:
i. When the thing is in danger of perishing or losing the greater part of its value,
ii. When the lawful charges of the finder amount to at least two-thirds of the value of goods found.

e. Liability of person to whom money is paid, or thing delivered by mistake or under coercion (Section
72): Section 72 declares that, “A person to whom money has been paid or anything delivered, by
mistake or under coercion, must repay or return it”. Accordingly, if one party under a mistake pays to
another party money which is not due by contract or otherwise, that money must be repaid.

CONTRACT 1 | 48
E.g. A and B jointly owe Rs. 100 to C. A pays the amount to C. Later B not knowing that A has paid also
pays Rs. 100 to C. C is bound to repay the amount to B.
E.g. A fruit parcel is delivered under mistake to R who consumes them thinking them as birthday gift. R
must return the parcel or pay for the fruits.

CONTRACT 1 | 49
 UNIT – VI
11. DISCUSS BRIEFLY THE REMEDIES FOR BREACH OF CONTRACT? WRITE SHORT NOTES ON RESCISSION OF THE
CONTRACT; SUIT FOR DAMAGES; SUIT UPON QUANTUM MERUIT; SUIT FOR SPECIFIC PERFORMANCE OF THE
CONTRACT; SUIT FOR INJUNCTION.
Ans. Whenever there is a breach of a contract, the injured party becomes entitled to any one or more of the
following remedies against the guilty party:
1. Rescission of the contract
2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for injunction.
(The last two remedies stated above, the law is regulated by the Specific Relief Act, 1963.)

1. RESCISSION OF THE CONTRACT

 When there is breach of contract by one party, the other party may rescind the contract and need not
perform his part of obligation under the contract and may sit quietly at home if he decides not to take
any legal action against the guilty party.
 But in case the aggrieved party intends to sue the guilty party for damages for breach of contract, he
has to file a suit for rescission of the contract.
 When the court grants rescission, the aggrieved party is freed from all his obligations under the
contract; and becomes entitled to compensation for any damages
 E.g. A contracts to supply 100 Kg of tea leaves for Rs. 20,000 to B on 15th April. If A does not supply the
tea leaves on the appointed day. B need not pay the price. B may treat the contract as rescinded and
file suit for rescission and claim damages.

2. SUIT FOR DAMAGES

 Damages are a monetary compensation allowed to the injured party for the loss of injury suffered by
him as a result of the breach of contract.
 The Fundamental Principle underlying damages is not punishment but compensation. It is not to
punish the defaulter party but to put the injured party in the place which he would have been, had
there been performance.
 Compensation should be commensurate (Equal) with the injury or loss sustained, arising naturally
from the breach. If no actual loss is proved, no damages will be awarded.
 Assessment of Damages:
It is the extent to which a plaintiff is entitled to demand damages for breach of contract. The rule is
laid down in Section 73. Accordingly, an injured party is entitled to receive from the defaulter party:
a. Such damages which naturally arose in usually course of things from such breach. No
compensation is to be given for any remote or indirect loss sustained by reason of the breach
(Ordinary Damages)
b. Such damages which the parties knew when they entered into the contract, as likely to result from
the breach (Special Damages).
c. In estimating the loss or damage caused to a party by breach, the means which existed of
remedying the inconvenience caused by the breach must also be taken into account (Duty to
mitigate damage suffered).

CONTRACT 1 | 50
 Different Kinds of Damages:
Damages may be of four kinds.
1. Ordinary or General or Compensatory Damages – damages arising naturally from the breach.
2. Special Damages – damages in contemplation of the parties at the time of contract.
3. Exemplary, Punitive or Vindictive Damages.
4. Nominal Damages.

1. Ordinary or General or Compensatory Damages – damages arising naturally from the breach.
When a contract has been broken, the injured party can, as a rule, always recover from the guilty
party ordinary or general damages. These are such damages as may fairly and reasonably be
considered as arising naturally and directly in the usual course of things from the breach of
contract itself.
They are the direct or proximate consequences of the breach of contract and remote or indirect
losses, which are not the naturally and probable consequence of the breach of contract, are
generally not regarded.
E.g. In a leading case of Hadley v/s Baxendale which is said to be the foundation of modern law of
damages in England and India Section 73 is almost based on the rules laid down in this case), is an
authority on the point. In that case: H’s mill was stopped by a breakage of the crankshaft. H
delivered the shaft to B, a common carrier, to take it to the manufacturers at Greenwich as a
pattern for a new one. The only information given to B was that the article to be carried was the
broken shaft of the mill. It was not made known to B that delay would result in loss of profit. By
some neglect on the part of B the delivery of the shaft was delayed beyond a reasonable time. In
consequence the mill remained idle for a longer period than should have been necessary. H
brought an action against B claiming damages for loss of profits which would have been made
during the period of delay. It was held that B was not liable for loss of profits caused by the delay
because it was remote consequence, and only nominal damages were awarded. The Court
pointed out the B, the defendant, was never told that the delay in the delivery of the shaft would
entail loss of profits of the mill; the plaintiffs might have had another shaft, or there might have
been some other defect in the machinery to cause the stoppage, or for any other reason there
might have been loss actually. Accordingly it was not a direct consequence of the breach and
hence not recoverable.

In the case of contract for ‘sale and purchase’ the general rule as regards measure of damages is
that the damages is that the damage would be assessed on the difference between the contract
price and the market price at the date of breach and may subsequent increase or decrease in the
market price would not be taken note of. If there is no market price of the product the rule is to
take the market price of the nearest substitute. If there is no nearest substitute, then adding the
price at the place of purchase, the conveyance charges, plus the usual profit of the importer
(Hajee Ismail and Sons v/s Wilson & Co).
E.g. A agrees to sell to B 5 bags of rice at Rs. 1500 per bag, delivery to be given after two months.
On the date of delivery the price of rice goes up and the rate is Rs. 1550 per bag. A refuses to
deliver the bags to B. B can claim from A Rs. 250 as ordinary damages, being the difference
between the contract price and market price.
A contracts to buy B’s ship for Rs. 60,000 but breaks his promise. As a result of breach B sold the
ship in the open market and he could only get Rs, 52,000 for the ship. B can recover by way of
compensation Rs. 8,000 the excess of the contract price over the actual sale price.

CONTRACT 1 | 51
 Under a contract of ‘sale of goods’, if there is a breach of ‘warranty’ the seller is liable to pay all
damages which the purchaser has to pay to the person to whom the goods are sold by him,
whether the seller is aware of such a sale or not. E.g. A sells certain merchandise to B, warranting
it to be of a particular quality, and B, in reliance upon this warranty, sells it to C with a similar
warranty. The goods prove to be not according to the warranty, and B becomes liable to C a sum
of money by way of compensation. B is entitled to recover it from A.

2. Special Damages – damages in contemplation of the parties at the time of contract.

 Special damages are those which arise on account of the special or unusual circumstances
affecting the plaintiff. In other words, they are such remote loss which are not the natural
and probable consequence of the breach of contract.
 Unlike ordinary damages, special damages can’t be claimed as matter of right. These can be
claimed only if the special circumstances which would result in a special loss in case of breach
of contract are brought to the notice of the other party.
 Such special damages must be in thought of the parties at the time when the contract is
entered into. Subsequent knowledge of the special circumstances will not create any special
liability on the guilty party.
 E.g. A having contracted with B to supply B, 1000 tons of iron at Rs. 100 a ton, to be delivered
at a stated time, contracts with C for the purchase of 1,000 tons of iron at Rs 80 a ton, telling
C he does so for the purpose of performing his contract with B. C fails to perform his contract
with A, and A could not procure other iron, and B, in consequence rescinds the contract. C
must pay to A Rs. 20,000 being the profit which A would have made by the performance of
his contract with B. If C was not told of B’s contract then only the difference in contract price
and market price, if any, could be claimed.
 E.g. a builder, contracts to erect and finish a house by the first of January, in order that B may
give possession of it at that time to C, to whom B has contracted to let it. A is informed of the
contract between B and C. A builds the house so badly, that, before the first of January, it fall
down and has to be rebuilt by B, who, in consequence loses the rent which he was to have
received from C and is obliged to make compensation for the breach of contract. A must pay
to B, by way of compensation – i) cost of rebuilding the house, 2) for the rent lost, 3) for the
compensation made to C.

3. Exemplary, Punitive or Vindictive Damages.

These are such damages which are awarded with a view to punishing the guilty party for the
breach of contract and not by way of compensation for the loss suffered by the aggrieved party.
The principle rule for the law of damages for a breach of contract is to compensate the injured
party for the loss suffered and not to punish the guilty party. Therefore, there is no place in law of
contract for exemplary or punitive damages. However, there are two exceptions to this rule:
a. Breach of contract to marry: In this case the amount of the damages will depend upon the
extent of injury to the party’s feelings. One may be ruined, other may not mind so much.
b. Dishonor of Cheques by a banker when there are sufficient funds to the credit of the
customer: In this case the rule of ascertaining damages is, “the smaller the cheque, the
greater the damage”.

CONTRACT 1 | 52
 4. Nominal Damages.
Nominal damages are those which are awarded only for the name sake. These are neither
awarded by way of compensation to the aggrieved party nor by way of punishment to the guilty
party.
Nominal damages are awarded to establish the right to decree for breach of contract when the
injured party has not actually suffered any real damage and consists of a very small sum of
money.

 Duty to Mitigate (minimize/lessen) Damage suffered:

- It is the duty of the injured party to mitigate damage suffered as a result of the breach of contract
by the other party.
- He must use all reasonable mean of mitigating the damage.
- He cannot recover any part of the damage, which was caused by his own neglect to mitigate.
- The onus of proof is on the defendant to show that the plaintiff has failed in his duty of mitigating
and the plaintiff is free from the burden of proving that he tried his best to mitigate the loss.
- It is necessary that the plaintiff is put in the same position as if the contract had been performed.
- E.g. If a servant is dismissed, even though wrongfully it is his duty to mitigate the damage by
seeking other employment. He can recover only nominal damages if he refuses a reasonable offer
of fresh employment. But if it cannot be proved that he failed in his duty of mitigation, he will be
entitled to the full salary for the whole of the unexpired period of service, if the contract of
employment was for a fixed term.
- A took a shop on rent from B and paid one month’s rent in advance. B could not give possession
of the shop to A. A chose to do no business for 8 months though there were other shops available
in the vicinity. A sued B for breach of contract. It was held that he was entitled only for refund of
advance nothing else. He had failed in his duty to minimize the loss by not taking another shop in
the neighbourhood.

 Liquidated Damages and Penalty:

- Liquidated damages means a sum fixed in advance which is fair, genuine and pre-estimate of the
probable loss that is likely to result from the breach.
- Penalty means a sum fixed up in advance, which is extravagant and unconscionable
(unacceptable) in amount in comparison with the greatest loss that could conceivably be proved
to have resulted from the breach.
- Under Section 74 there is no distinction made between Liquidated damages or Penalty. It lays
down that the courts are not bound to treat the sum mentioned in the contract, either by way of
liquidated damages or penalty, as the sum payable as damages for breach. The courts are
required to allow reasonable compensation so as to cover the actual loss sustained, not exceeding
the amount so named in the contract.
- Exception: Only one in section 74 i.e. when any person enters a bailbond, recognizance or other
instrument of the same nature, or under the provisions of any law or under the orders of the
Government, gives any bond for the performance of any public duty or act in which the public are
interested, he shall be liable to pay the whole sum mentioned therein upon breach of the
condition of any such instrument.
- E.g. A contract with B to pay Rs. 1000 if he fails to pay B Rs. 500 on a given date. A fails to pay Rs.
500 on that day. B is entitled to recover compensation not exceeding Rs. 1000 as the court
considers reasonable.

CONTRACT 1 | 53
 - Stipulation regarding payment of interest: If the interest is too great an amount then it should be
considered as penalty and to be disallowed by courts. E.g. A gives B a bond for the repayment of
Rs. 1000 with interest of 12 percent per annum at the end of six months, with a stipulation that in
case of default interest shall be payable at the rate of 75 percent from the date of default. The
court said it was penalty and stuck down and gave what court considers reasonable.
Rules as regards interest:
a. Unless the parties have made a stipulation (condition) for the payment of interest, or there is
usage to that effect, interest cannot be recovered legally as damages.
b. Where a contract provides that the amount should be paid without interest by a particular
date and on default it will be payable with interest, such a stipulation may be allowed if the
interest is reasonable. If it is exorbitant then the court will give relief.
c. Payment of compound interest on default is allowed, only if it is not an enhanced rate.

 Earnest money:
- Money deposited as security for the due performance of contract is known as earnest money.
- Forfeiture of earnest money is allowed if the amount is reasonable.
- But if it is in the form of penalty then the court has jurisdiction to award what is reasonable, but
not exceeding the amount so agreed.
- The proportion the amount bears to the total sale price, the nature of the contract and other
circumstances have to be taken into account in ascertaining the reasonableness of the amount.

 Cost of Suit:
- The aggrieved party is entitled, in addition to the damages to get the costs of getting the decree
for damages from the defaulter party. The cost of suit for damages is in the discretion of the
court.
- Summary of the Rules Regarding the Measure of Damages:
a. The damages are awarded by way of compensation for the loss suffered by the aggrieved
party and not for the purpose of punishing the guilty party for the breach.
b. The injured party is to be placed in the same position, so far as money can do, as if the
contract had been performed.
c. The aggrieved party can recover by way of compensation only the actual loss suffered by him,
arising naturally in the usual course of things from the breach itself.
d. Special or remote damages, i.e., damages which are not the natural and probable
consequence of the breach are usually not allowed until they are in the knowledge of both
the parties at the time of entering into the contract.
e. The fact that damages are difficult to assess does not prevent the injured party from
recovering them.
f. When no real loss arises from the breach of contract, only nominal damages are awarded.
g. If the parties fix up in advance the sum payable as damages in case of breach of contract, the
court will allow only reasonable compensation so as to cover the actual loss sustained, not
exceeding the amount so named in the contract.
h. Exemplary damages cannot be awarded for breach of contract except in case of breach of
contract of marriage or wrongful refusal by bank to honour the customer’s cheque.
i. It is the duty of the injured party to minimize the damage suffered.
j. The injured party is entitled to get the costs of getting the decree for damages from the
defaulter party.

CONTRACT 1 | 54
3. SUIT UPON QUANTUM MERUIT
 Suit upon quantum Meruit is available in Sections 65 and 70.
 The third remedy to the injured party against the guilty party is to file a suit upon Quantum Meruit.
 The Term Quantum Meruit means ‘as much as is earned’ or ‘in proportion to the work done’.
 When a person has fulfilled his part of contract and due to the breach by the other party the contract
is discovered void or becomes void. This remedy may be availed of either without claiming damages
(i.e. claiming reasonable compensation only for the work done) or in addition to claiming damages for
breach (i.e. claiming reasonable compensation for part performance and damages for the remaining
unperformed part). The aggrieved party may file suit of quantum meruit and may claim payment in
proportion to work done or good supplied in the following cases:
1. Where work has been done in pursuance of a contract, which has been discharged by the default
of the defendant.
E.g. A engages B a contractor to build his three storied house. After a part is constructed A prevent
B from working any more. B the contractor, is entitled to get reasonable compensation for work
done under the doctrine of quantum meruit in addition to damages for breach of contract. In this
case the contract was wrongfully terminated by the defendant.
2. Where work has been done in pursuance of a contract which is ‘discovered void’ or ‘becomes void’
provided the contract is divisible (separable).
E.g. C was appointed as managing director of a company by the Board of Directors under a written
contract which provided for his remuneration. The contract was found void as the directors who
constituted the ‘Board’ were not qualified to make the appointment. C, nevertheless had rendered
services to the company and sued for the sums specified in the agreement on quantum meruit.
The court granted it.
E.g. A contracts with B to repair his house. After a part of the house was repaired the house is
destroyed by lightning. Although the contract becomes void due to destruction of house, A can
claim payment for work done on quantum meruit.
3. When a person enjoys benefit of non-gratuitous act although there exists no express agreement
between the parties. One of such cases is provided in section 70. It lays down that when services
are rendered or goods are supplied by a person (i) without any intention of doing so gratuitously,
and (ii) the benefit of the same is enjoyed by the other party, the latter must compensate the
former or restore the thing so delivered.
E.g. A, a trader, leaves certain goods at B’s house by mistake. B treats the goods as his own. He is
bound to pay A for them.
Where A ploughed the field of B with a tractor to the satisfaction of B in B’s presence, it was held
that A was entitled to payment as the work was not intended to be gratuitous and the other party
has enjoyed the benefit of the same.
4. A party who is guilty of breach of contract may also sue on a quantum meruit provided both the
following conditions are fulfilled:
a. The contract must be divisible
b. The other party must have enjoyed the benefit of the part which has been performed,
although he had option to refusing it.

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4. SUIT FOR SPECIFIC PERFORMANCE OF THE CONTRACT
 Specific performance means the actual carrying out of the contract as agreed.
 Under certain circumstances an aggrieved party may file a suit for specific performance, i.e. for a
decree by the court directing the defendant to actually perform the promise that he has made. Such a
suit may be filed either instead of or in addition to a suit for damages.
 A decree for specific performance is not granted for contracts of every description. It is only where it is
just and equitable so to do, i.e. where the legal remedy is inadequate or defective that the courts issue
a decree for specific performance. It is usually granted in contracts connected with land, buildings, rare
articles and unique goods having some special value to the party suing because of family association.
In all these cases monetary relief is not an adequate relief because the party will not be able to get an
exact substitute in the market.
 Specific Performance is not granted, as a rule, in the following cases:
a. Where monetary compensation is an adequate relief.
b. Where the court cannot supervise the actual execution of the contract e.g. building construction
contract.
c. Where the contract is for personal services, e.g. a contract to marry or paint a picture. In such
cases injunction is granted in place of specific performance.

d. SUIT FOR INJUNCTION

 Injunction is an order of a court restraining a person from doing a particular act.
 It is a mode of securing the specific performance of the negative terms of the contract. It means that if
a person is doing what he is told not to do, the court by issuing an injunction restrains him from doing,
what he promised not to do.
 Injunction is a preventive relief.
 E.g. A agreed to sing at B’s theater for three months from 1st April and to sing for one else during that
period. Later he contracted with C to sing there and refused to sing at B’s theater. On suit by B, the
court granted an injunction restraining A from singing elsewhere and pay damages to B to compensate
the loss.

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