PAPER II - 1.2.

Law of Contracts
Q1. Yash Singhania is the owner of a chain of restaurants. He is always on hunt for
properties. He comes to know about a very spacious piece of land near to a lake
which he finds very suitable for his new restaurant. He finds out the contact details of
the owner of the land and sends him a letter, offering to buy the land for 8 crore
rupees. The owner replies back, “Any amount below 10 crore is not acceptable.”
Yash consults his friend who is a real estate agent about the price, who informs him
that it is a very good deal for 10 crore rupees. Yash immediately sends a letter to the
owner stating he is ready to pay the said amount. Please specify- cash or cheque?
The owner however refuses to sell the property. Sanjay, institutes a suit against the
owner of the property for breach contract. Discuss and decide.
Ans As per the scenario provided, Yash Singhania offered to buy the land for 8
crore rupees, but the owner of the land demanded 10 crore rupees. Yash agreed to
pay the demanded amount and sent a letter stating his readiness to pay. However,
the owner refused to sell the property. This situation raises the question of whether a
valid contract existed between Yash and the owner of the land and whether the
owner's refusal to sell constitutes a breach of contract.
Under the Indian Contract Act, a contract is defined as an agreement that is
enforceable by law. For an agreement to be legally enforceable, it must satisfy
certain essential elements, including offer, acceptance, consideration, capacity, and
free consent. If all these elements are present, a contract can be said to exist.
In this case, Yash's letter offering to buy the land for 8 crore rupees can be
considered an offer. The owner's response, stating that he will not sell the land for
less than 10 crore rupees, can be considered a counter-offer. However, by accepting
the counter-offer and stating his readiness to pay the demanded amount, Yash
effectively created a valid contract.
Section 2(h) of the Indian Contract Act defines an agreement as a promise or set of
promises that form consideration for each other. In this case, Yash's promise to pay
10 crore rupees formed consideration for the owner's promise to sell the land.
Therefore, the agreement between Yash and the owner of the land was supported by
consideration, which is an essential element of a valid contract.
Now, the question is whether the owner's refusal to sell the land constitutes a breach
of contract. As per Section 37 of the Indian Contract Act, the parties to a contract
must either perform or offer to perform their respective promises unless such
performance is dispensed with or excused under the provisions of the Act or any
other law. In this case, since Yash had offered to pay the full amount of 10 crore
rupees, the owner was obligated to sell the land as per the terms of the contract. By
refusing to sell the land, the owner has breached the contract.
As a result, Yash can institute a suit against the owner for breach of contract and
claim damages for any loss suffered as a result of the breach. The relevant sections
of the Indian Contract Act that apply to this situation are Section 2(h), Section 37,
and Section 73, which deals with the consequences of breach of contract.
Alt Answer
In this scenario, there seems to be an issue concerning the formation of a valid
contract. Let's analyze the key elements and events in the interaction between Yash
Singhania and the owner of the land:
1. Offer and Counteroffer:
 Yash's initial letter to the owner of the land can be considered an offer to buy
the property for 8 crore rupees.
 The owner's response, stating that any amount below 10 crore is not
acceptable, can be seen as a counteroffer. A counteroffer operates as a
rejection of the original offer.
2. Acceptance:
 Yash, upon consulting his friend, decides to accept the counteroffer by
agreeing to pay the stated amount of 10 crore rupees.
 Yash specifies the mode of payment by asking, "Please specify - cash or
cheque?" This clarification is a common practice in contract negotiations to
determine the terms of payment.
3. Refusal to Sell Despite Yash's acceptance and readiness to pay the agreed
amount, the owner refuses to sell the property. This refusal to proceed with
the sale could potentially constitute a breach of contract.
Now, let's discuss the legal aspects:
 Formation of Contract Yash's initial offer and the owner's counteroffer
indicate a negotiation process. The acceptance by Yash creates a valid
contract if the essential elements are present.
 Mode of Payment Yash's question about the mode of payment ("cash or
cheque") is a reasonable query to finalize the details of the agreement. It does
not negate the formation of the contract but seeks clarity on the terms.
 Breach of Contract The owner's refusal to sell the property after Yash's
acceptance may constitute a breach of contract. If the elements of a valid
contract are met, including offer, acceptance, consideration, and intention to
create legal relations, the owner may be obligated to fulfill the contract terms.
 Specific Performance Yash, as the aggrieved party, may seek specific
performance in court, requesting a court order compelling the owner to sell
the property as per the agreed-upon terms.
 Damages Alternatively, Yash could seek damages for any losses suffered due
to the owner's refusal to sell. This would depend on the specific
circumstances and the extent of Yash's reliance on the contract.
 Defenses for the Owner The owner may raise defenses such as lack of
intention to create legal relations, mistake, misrepresentation, or undue
influence. However, based on the information provided, these defenses seem
unlikely.
In conclusion, if all the essential elements of a valid contract are present, Yash may
have a valid claim against the owner for breach of contract. Legal proceedings, such
as seeking specific performance or damages, may be pursued to enforce the terms
of the agreement. The specific outcome would depend on the facts presented and
the applicable contract law in the jurisdiction.
Q2. A is working with a company Panasonic Security Systems (PSS) which is into
the production of security equipments. A is working at a level where he becomes
privy to sensitive information related to the gadgets manufactured by the company. 2
The employment agreement between them provides that 1 (a) A is hired for a period
of 4 years. During this period he cannot work in any capacity for any company
dealing in security equipments. 1(b) Also he cannot work with any company doing
any type of business anywhere. 2 (a) At the end of 4 years he has a choice to
continue. If he decides to leave he has to give an advance notice of 3 months.
During this period he cannot come to the office and also cannot join any other
organization. He shall be entitled to his full salary during the said period. 2 (b) After
the notice period he can join his new employer immediately, provided the new
employer is not dealing in security equipments. If the new employer deals in security
equipments, he i.e. (A) cannot join for a further period of 3 month. However he is
entitled to his last drawn salary during the said period. Decide the legal validity of the
above mentioned clauses with the aid of relevant provisions of law and cases.
Ans The employment agreement between A and Panasonic Security Systems
(PSS) contains several restrictive covenants that limit A's ability to work for
competing companies or engage in any business activities during and after his
employment. To assess the legal validity of these clauses, we need to examine them
in light of the relevant provisions of the Indian Contract Act, 1872.
Clause 1(a) and (b) of the employment agreement provides that A cannot work in
any capacity for any company dealing in security equipment during the period of his
employment with PSS, and also cannot work with any company doing any type of
business anywhere. These clauses are an example of a restrictive covenant or a
negative covenant that seeks to restrict A's freedom to engage in certain activities.
Such covenants are legally valid as long as they are reasonable and necessary to
protect the interests of the employer.
Section 27 of the Indian Contract Act provides that any agreement that restrains a
person from carrying on any lawful profession, trade, or business is void to the extent
that it is unreasonable. However, a restraint of trade clause may be valid if it is
reasonable and necessary to protect the legitimate interests of the employer. In the
case of Perks v. Secretary of State for Work and Pensions (2009), the UK Supreme
Court held that a non-compete clause can be enforceable if it is no wider than is
reasonably necessary to protect the legitimate business interests of the employer.
In this case, the restriction on A's ability to work with any company dealing in security
equipment during his employment with PSS is reasonable and necessary to protect
the sensitive information that A has access to. The restriction on A's ability to work
with any company doing any type of business anywhere may be excessive and
therefore, invalid under Section 27 of the Indian Contract Act.
Clause 2(a) of the employment agreement provides that A must give three months'
notice if he decides to leave PSS. During this notice period, he cannot come to the
office and also cannot join any other organization. He shall be entitled to his full
salary during the said period. This clause is valid and enforceable as long as it is not
in violation of any statutory provision or public policy.
Clause 2(b) of the employment agreement provides that after the notice period, A
can join his new employer immediately, provided the new employer is not dealing in
security equipment. If the new employer deals in security equipment, A cannot join
for a further period of 3 months, but he is entitled to his last drawn salary during the
said period. This clause is also a restrictive covenant that seeks to protect the
interests of PSS.
The validity of this clause would depend on whether it is reasonable and necessary
to protect the interests of PSS. In the case of Perks v. Secretary of State for Work
and Pensions (2009), the UK Supreme Court held that a non-compete clause may
be enforceable if it is no wider than is reasonably necessary to protect the legitimate
business interests of the employer. Therefore, this clause may be valid as long as it
is reasonable and necessary to protect the legitimate interests of PSS.
In conclusion, the restrictive covenants in the employment agreement between A and
PSS are legally valid as long as they are reasonable and necessary to protect the
interests of the employer. The relevant provisions of the Indian Contract Act that
apply to this situation are Section 27 and Section 37, which deals with the
consequences of breach of contract.
Alt Answer
The legal validity of employment clauses often depends on their reasonableness and
adherence to principles of contract law. Let's analyze each clause in the employment
agreement between A and Panasonic Security Systems (PSS):
1(a) Non-Compete Clause:
 Prohibition: A is restricted from working in any capacity for any company
dealing in security equipment during the employment period.
 Legal Validity: Non-compete clauses are generally enforceable if they are
reasonable in scope, duration, and geographical area. However, the
reasonableness depends on factors such as the nature of the business, the
employee's role, and the industry.
1(b) General Non-Compete Clause:
 Prohibition: A is restricted from working with any company doing any type of
business anywhere.
 Legal Validity: This clause seems overly broad and may be considered
unreasonable. Courts often scrutinize such broad restrictions, and if they are
not necessary to protect the legitimate interests of the employer, they may be
deemed unenforceable.
2(a) Notice Period and Restriction:
 Prohibition: A must give a 3-month notice period before leaving. During this
period, he cannot come to the office or join any other organization, but he is
entitled to his full salary.
  Legal Validity: Notice periods are common in employment contracts.
However, the restriction on A from coming to the office and joining another
organization during the notice period may be subject to scrutiny for
reasonableness.
2(b) Further Restriction on Joining New Employer:
 Prohibition: If A's new employer deals in security equipment, A cannot join for
an additional 3 months. However, he is entitled to his last drawn salary during
this period.
 Legal Validity: Post-employment restrictions are allowed if reasonable. The
3-month restriction on joining a new employer dealing in security equipment
may be considered reasonable, especially with the provision for salary
continuation.
Relevant Legal Principles:
 Reasonableness: Courts often assess the reasonableness of restrictive
clauses, taking into account the nature of the business, the employee's role,
and the overall circumstances.
 Restraint of Trade Doctrine: Non-compete clauses are evaluated based on
the restraint of trade doctrine, and they must not be more extensive than
necessary to protect the employer's legitimate interests.
Cases and Precedents:
 Niranjan Shankar Golikari vs. The Century Spinning and Manufacturing
Co. Ltd. (AIR 1967 SC 1098): In this landmark case, the Supreme Court of
India emphasized the reasonableness of restrictions in employment contracts
and the importance of protecting the interests of both employers and
employees.
Conclusion: While some clauses, such as the non-compete clauses in 1(a) and
1(b), may raise concerns about their reasonableness, the enforceability of these
provisions would depend on the specific facts of the case and the applicable legal
principles. Clauses that are overly broad and go beyond what is necessary to protect
the employer's legitimate interests may be subject to challenge. It is advisable for
employers to carefully draft employment agreements to ensure that restrictive
clauses are reasonable and tailored to the specific circumstances of the employment
relationship. Employees should also seek legal advice if they have concerns about
the enforceability of such clauses.
Q3. An agreement opposed to public policy is void. But the courts must be
extremely careful in applying this doctrine, because “it is a very unruly horse, once
you get astride you never know where it will carry you”. Discuss the test laid down by
the courts for declaring an agreement void on account of public policy. Discuss the
various heads of public policy.
Ans Test for Declaring an Agreement Void on Account of Public Policy:
The doctrine of public policy serves as a broad and flexible principle that allows
courts to declare agreements void if they are against the public interest. However, as
noted by the cautionary statement, courts must exercise care in its application due to
its potential unpredictability. The test for declaring an agreement void on account of
public policy generally involves evaluating whether the agreement violates
established principles that are deemed essential for the well-being of society. The
key test often revolves around reasonableness and the impact on public welfare.
1. Illegal or Immoral Object or Consideration Agreements involving illegal or
immoral activities are considered against public policy. The test here is
whether the object or consideration of the agreement is contrary to law or
morality.
2. Injurious to the Public or Against Public Good Agreements that are
injurious to the public interest or against public good may be declared void.
Courts assess the potential harm or detriment that an agreement may cause
to society at large.
3. Interference with Administration of Justice Agreements that interfere with
the administration of justice or obstruct legal proceedings may be void. This
includes agreements to suppress evidence, bribe officials, or obstruct the
functioning of the legal system.
4. Interference with Public Duties Agreements that interfere with the
performance of public duties or encourage corruption in public offices may be
considered void. Contracts that seek to influence public officials improperly
may fall under this category.
5. Endangering Public Safety or Welfare Agreements that endanger public
safety or welfare may be declared void. For example, agreements promoting
harmful activities or endangering health and safety may be against public
policy.
Critical Analysis of Various Heads of Public Policy:
1. Restraint of Trade Public policy disfavors agreements that unreasonably
restrain trade. While some restraint of trade agreements may be reasonable
and enforceable, excessive restrictions are likely to be struck down.
2. Agreements in Restraint of Legal Proceedings Agreements that obstruct
access to justice or stifle legal proceedings are against public policy. This
ensures that individuals have the right to pursue legal remedies.
3. Agreements Contrary to Statute Agreements that violate statutes or public
laws are void. Courts ensure that agreements comply with existing legal
frameworks to maintain order and legality.
4. Agreements Encouraging Offenses Agreements that encourage criminal
offenses or unlawful activities are against public policy. Contracts facilitating
illegal conduct, such as agreements to commit fraud, are typically void.
5. Agreements against Marriage and Family Relations Agreements against
marriage or family relations may be void. Public policy promotes the stability
of family units and discourages agreements that undermine these
relationships.
Critical Analysis:
  Subjectivity in Determination: Public policy can be subjective, and what is
considered against public policy may vary based on societal values and
changing norms. This subjectivity can make the application of the doctrine
challenging.
 Balancing Act: The courts must strike a balance between upholding
individuals' freedom to contract and safeguarding broader societal interests.
This involves a delicate balancing act to avoid overreach.
 Evolution of Public Policy: Public policy is dynamic and can evolve over
time. What was considered against public policy in the past may not be so in
the present. Courts need to adapt to societal changes while applying this
doctrine.
 Potential for Judicial Activism: The broad nature of the public policy
doctrine may leave room for judicial activism, and there is a risk that courts
might unduly expand the scope of what is considered against public policy.
In conclusion, the doctrine of public policy is a powerful tool to protect societal
interests, but its application requires careful consideration. The courts must balance
competing interests and exercise restraint to avoid arbitrary outcomes. Critical
analysis of various heads of public policy helps ensure that the doctrine is applied
judiciously and in line with evolving societal values.
Q4. Explain the doctrine of frustration with the help of relevant cases and
provisions of law. Is it different from a force majeure clause in a contract? If yes then
explain.
Ans Doctrine of Frustration:
The doctrine of frustration is a legal principle that comes into play when an
unforeseen event occurs, making the performance of a contract impossible, illegal,
or radically different from what the parties initially contemplated. In such cases, the
contract may be considered frustrated, and the parties are relieved from further
performance of their contractual obligations. The doctrine is typically applied when
the event is beyond the control of the parties and not due to their fault.
Relevant Cases:
1. Taylor v. Caldwell (1863): In this landmark case, the court held that if the
subject matter of the contract is destroyed or becomes impossible to perform
due to events beyond the parties' control (in this case, the destruction of a
concert hall by fire), the contract is frustrated, and the parties are excused
from further performance.
2. Satyabrata Ghose v. Mugneeram Bangur & Co. (1954): The Indian
Supreme Court clarified that frustration occurs when a supervening event
occurs, rendering the contract impossible or radically different from what the
parties contemplated. The court emphasized the importance of impossibility
and the unforeseen nature of the event.
Provisions of Law:
While the Indian Contract Act, 1872, does not explicitly mention the doctrine of
frustration, Sections 32 and 56 are relevant to the concept:
 1. Section 32 (Enforceability of Contracts contingent on an event
happening): This section deals with contingent contracts, where performance
is contingent upon the happening or non-happening of an event. If the event
becomes impossible, the contract becomes void.
2. Section 56 (Agreement to do impossible act): Known as the doctrine of
frustration, this section states that an agreement to do an act impossible in
itself is void. Further, if an event occurs that renders the performance of the
contract impossible, the contract becomes void.
Difference from Force Majeure:
While the doctrine of frustration and force majeure are related concepts, they differ in
certain aspects:
1. Legal Basis: Frustration is a common law principle and is recognized under
the Indian Contract Act, 1872. Force majeure, on the other hand, relies on
specific contractual clauses that excuse non-performance in the event of
specified extraordinary circumstances.
2. Origin of Event Frustration typically arises due to unforeseen events beyond
the control of the parties. Force majeure, as specified in a contract, may cover
a broader range of events, including both foreseeable and unforeseeable
circumstances.
3. Contractual Nature The doctrine of frustration applies even in the absence of
a force majeure clause. It is a default legal principle. Force majeure, on the
other hand, depends on the specific terms of the contract.
4. Consequences Frustration leads to the automatic termination of the contract.
In contrast, a force majeure clause may specify the consequences, such as
temporary suspension of obligations or extension of time for performance.
In summary, the doctrine of frustration and force majeure clauses both address
situations where contractual performance becomes difficult or impossible due to
unforeseen events. However, they operate under different legal principles and have
distinct implications for the parties involved. While the doctrine of frustration is a
common law concept, force majeure is a contractual provision that must be
expressly included in the contract.
Q5. Explain the development of law with respect to mistake of identity of a party to
the agreement.
Ans Mistake of identity is a common issue that may arise in the formation of a
contract. It refers to a situation where one or both parties to the contract mistakenly
believe that they are contracting with a particular person or entity, but in reality, they
are contracting with someone else. The Indian Contract Act, 1872 deals with the
consequences of such mistakes.
Section 20 of the Indian Contract Act, 1872 defines mistake as "a mistake of fact as
to the existence of any subject-matter of the agreement" and Section 21 states that
"a contract is not voidable because it was caused by a mistake as to any law in force
in India; but a mistake as to a law not in force in India has the same effect as a
mistake of fact."
The development of law with respect to the mistake of identity can be traced back to
the case of Cundy v. Lindsay (1878) 3 App Cas 459. In this case, the plaintiff sold
goods to a person who fraudulently identified himself as a genuine customer of the
plaintiff. The defendant, who was unaware of the fraud, purchased the goods from
the fraudulent person and then resold them to a third party. The plaintiff sued the
defendant for the recovery of the goods, claiming that the contract was void as it was
entered into under a mistake of identity.
The House of Lords held that the contract was void as it was entered into under a
mistake of identity. The court held that the plaintiff intended to contract with a
genuine customer and not with the fraudulent person who had impersonated the
customer. As there was a mistake of identity, there was no meeting of minds
between the parties, and hence the contract was void.
Later, the case of Phillips v Brooks Ltd. (1919) 2 KB 243 provided a more refined
rule. In this case, the plaintiff, who owned a fur store, sold some furs to a person who
fraudulently identified himself as the Duke of York. The defendant, who was also a
fur dealer, purchased the furs from the fraudulent person and resold them to a third
party. The plaintiff sued the defendant for the recovery of the furs, claiming that the
contract was void as it was entered into under a mistake of identity.
The Court of Appeal held that the contract was not void as the plaintiff had intended
to contract with the person who had impersonated the Duke of York, and the
defendant had no reason to believe that the person was not the Duke of York. The
court held that the test was not whether the plaintiff intended to contract with a
particular person, but whether the plaintiff intended to contract with the person who
had actually entered into the contract.
In conclusion, the law with respect to the mistake of identity has evolved over time,
with courts adopting a more refined approach to determine whether a contract is void
due to a mistake of identity. The Indian Contract Act, 1872 provides for the
consequences of such mistakes. Frustration and force majeure clauses are distinct
concepts in contract law, with the former referring to an event that makes
performance impossible and the latter being a contractual provision that excuses
performance in certain circumstances.
Alt Answer
The development of law regarding the mistake of identity of a party to an agreement
has evolved over time, and legal systems have recognized the need to address
situations where a mistake in identity can affect the validity of a contract. The
principles governing this area are often associated with the broader category of
mutual mistake, but the specific context of mistake of identity involves errors related
to the identity of a contracting party.
Historical Perspective: In traditional contract law, a mistake that affected the
identity of a party to a contract was treated as a void contract ab initio (from the
beginning). If one party mistakenly believed they were contracting with one person
when, in fact, they were contracting with another, the contract could be deemed void
due to a lack of a meeting of minds. The emphasis was on the subjective
understanding of the parties.
Modern Development: Over time, legal systems have recognized the need for a
more nuanced approach, taking into account the objective intention of the parties
and the overall fairness of the situation. The development of the law in this area is
influenced by case law and statutory reforms.
1. Doctrine of Unilateral Mistake In some jurisdictions, the doctrine of
unilateral mistake may be applied. This doctrine allows a contract to be
voidable if one party makes a mistake and the other party is aware of that
mistake but still proceeds with the contract. If the mistake goes to the very
root of the contract and is material, the mistaken party may have the option to
void the contract.
2. Objective Test Modern contract law often adopts an objective test, focusing
on the outward expression of the parties rather than their subjective
intentions. If a reasonable person in the position of the mistaken party would
have understood that there was a mistake in identity, the contract may be
voidable.
3. Prevalence of Fraud and Misrepresentation Mistakes of identity are closely
linked to issues of fraud and misrepresentation. If the mistake is induced by
fraudulent conduct or misrepresentation by one party, the affected party may
have legal remedies, such as rescission or damages.
4. Relevant Statutory Provisions In some jurisdictions, statutory provisions
may specifically address mistakes in identity. For example, the Sale of Goods
Act in the United Kingdom contains provisions dealing with sales by
description and the impact of identity-related mistakes.
Case Law Examples:
1. Cundy v. Lindsay (1878) In this case, a company sold goods to a fraudster
who posed as a reputable business with a similar name. The court held that
there was a mistake as to the identity of the buyer, rendering the contract
void.
2. King's Norton Metal Co. v. Edridge, Merrett & Co. (1897) The court, in this
case, held that a mistake in the identity of the seller could render a contract
void if the mistake was fundamental and went to the root of the contract.
Conclusion: The development of law regarding the mistake of identity of a party to
an agreement reflects a shift from a strict subjective approach to a more balanced
consideration of the objective circumstances. Modern contract law recognizes the
importance of fairness and the reasonable expectations of the parties, especially
when mistakes are induced by fraudulent conduct or misrepresentation. Legal
developments aim to strike a balance between protecting innocent parties from
unfair contracts and upholding the stability of contractual relations.
Q6. Discuss the advantages and disadvantages of standard form contracts, and
critically examine the theory of fundamental breach applicable with respect to the
said contracts.
Ans. Standard form contracts, also known as adhesion contracts, are pre-drafted
agreements that are offered on a "take it or leave it" basis, with little to no room for
negotiation. These types of contracts are commonly used in a variety of industries,
including telecommunications, insurance, and banking. There are advantages and
disadvantages to standard form contracts, and the theory of fundamental breach is
often applied to these types of contracts.
Advantages of Standard Form Contracts:
1. Convenience: Standard form contracts are convenient because they save
time and effort for both parties. They are often available online and can be
accessed and signed quickly.
2. Clarity: Standard form contracts are usually written in clear and simple
language, making it easier for the parties to understand the terms of the
agreement.
3. Consistency: Standard form contracts are consistent, meaning that the terms
of the agreement are the same for all parties. This reduces the risk of disputes
and simplifies the process of enforcing the contract.
4. Time-saving: Standard form contracts save time for both parties since they
do not need to negotiate the terms and conditions of the contract from
scratch.
Disadvantages of Standard Form Contracts:
1. Imbalance of power: Standard form contracts are often drafted by the party
with greater bargaining power, leaving the other party with little to no
negotiation power.
2. Lack of customization: Standard form contracts are not tailored to the
specific needs of the parties, meaning that they may not fully address the
needs of either party.
3. Unfair terms: Standard form contracts may contain unfair terms, such as
terms that are overly restrictive or that limit the rights of one party.
4. Lack of bargaining power: Standard form contracts are drafted by one party,
usually the party with more bargaining power, and are often presented to the
other party on a "take it or leave it" basis. This can result in an unequal
distribution of power.
Theory of Fundamental Breach:
The theory of fundamental breach states that if one party breaches a fundamental
term of the contract, the other party is entitled to terminate the contract and seek
damages. A fundamental breach is a breach of a term that goes to the heart of the
agreement and is essential to its performance. In the context of standard form
contracts, the theory of fundamental breach is often applied to protect the weaker
party from unfair or unreasonable terms.
In India, the Indian Contract Act, 1872 governs contracts, and it recognizes the
doctrine of fundamental breach. Section 39 of the Act states that if a party fails to
perform a contract in a manner that goes to the root of the contract, the other party
may repudiate the contract and claim damages. However, the courts in India have
been cautious in applying the doctrine of fundamental breach to standard form
contracts. They have held that the mere fact that a term is unfair or unreasonable
does not make it a fundamental term.
In conclusion, standard form contracts have both advantages and disadvantages,
and the theory of fundamental breach is often applied to protect the weaker party.
However, the courts in India have been cautious in applying the doctrine of
fundamental breach to standard form contracts, and have emphasized the need to
balance the interests of both parties.
Q7. It is a settled law that a stranger to a contract cannot enforce it. This may
result in injustice in some situations. Explain the rationale behind the doctrine of
privity of contract and discuss the exceptions to the doctrine under the Indian law
with the help of important judicial decisions.
Ans Rationale behind the Doctrine of Privity of Contract:
The doctrine of privity of contract is a legal principle that stipulates that only parties
who are directly involved in a contract have rights and obligations arising from that
contract. In other words, a person who is not a party to a contract (a "stranger")
generally cannot enforce the terms of that contract or be bound by its terms. The
rationale behind this doctrine includes:
1. Freedom of Contract The principle supports the idea of freedom of contract,
allowing parties to negotiate and determine the terms of their agreement
without interference from external parties.
2. Certainty and Predictability Privity of contract enhances certainty and
predictability in contractual relations. It ensures that the parties involved know
who can enforce and be bound by the contract's terms.
3. Avoidance of Indeterminate Liability Allowing strangers to a contract to
enforce its terms could create indeterminate liability for parties, as they would
not know who might potentially assert rights under the contract.
While the doctrine provides a foundation for contractual relationships, there are
recognized exceptions to address situations where the strict application of privity
may lead to injustice or where legal policy supports allowing third-party enforcement.
Exceptions to the Doctrine of Privity of Contract under Indian Law:
1. Trusts:
 A beneficiary of a trust created under a contract may enforce the terms of the
contract against the trustee, even though the beneficiary is not a party to the
contract. This exception is rooted in the equitable principles of trusts.
 Case Law: In the case of Tweddle v. Atkinson, the court held that a contract
made for the benefit of a third party can be enforced by that third party if the
contract manifests an intention to benefit that party.
2. Covenants Running with the Land:
 When a contract includes covenants that "run with the land," subsequent
owners of the land can enforce those covenants, even if they were not parties
to the original contract.
 Case Law: In Hussainbhai v. Alath & Co., the Supreme Court of India
recognized the principle that restrictive covenants in a lease agreement could
bind future purchasers.
 3. Agency:
 A person who is not a party to a contract but is acting as an agent for one of
the parties may have the right to enforce the contract on behalf of the
principal.
 Case Law: In John v. Russell, the Privy Council recognized the right of an
undisclosed principal to enforce a contract made by an agent.
4. Family Arrangements:
 Contracts entered into as part of family arrangements, settlements, or
compromises may confer rights on individuals who are not direct parties to the
contract.
 Case Law: The Indian courts have recognized the enforceability of family
settlements, even by those who were not parties to the original agreements.
5. Assignment:
 If a contractual right is assignable, the assignee can enforce the contract
against the obligor, even though the assignee was not an original party to the
contract.
 Case Law: In LIC of India v. Raja Vasireddy Komalavalli Kamba, the
Supreme Court held that the right to claim under a life insurance policy could
be assigned, and the assignee could enforce the contract.
While these exceptions provide some flexibility, the general rule of privity of contract
remains fundamental to contract law. The court's approach in recognizing exceptions
is often guided by the principles of equity, justice, and the specific circumstances of
each case.
Q8. As per Section 27 of the Indian Contract Act an agreement in restraint of trade
is void. What are the reasons for enacting such a provision? Furthermore, when is a
restraint upon trade permissible in India and what factors are taken into
consideration by a court so to decide whether a restriction is permissible?
Ans. Reasons for Section 27 of the Indian Contract Act:
Section 27 of the Indian Contract Act, 1872, declares agreements in restraint of trade
as void. The underlying reasons for enacting this provision are:
1. Promotion of Free Trade To encourage and promote free trade and
competition in the market. The legislature recognizes the importance of
healthy competition for economic growth and consumer welfare.
2. Individual Freedom To safeguard the individual freedom of individuals to
engage in lawful professions, trades, or businesses. Restricting an individual's
right to work or trade freely is seen as an infringement on personal liberty.
3. Avoidance of Monopolies To prevent the creation of monopolies or
oligopolies that could stifle competition, limit choices for consumers, and
hinder economic development.
 4. Economic Development To foster economic development by allowing
individuals the flexibility to engage in various economic activities without
undue restrictions.
Permissible Restraint upon Trade in India:
While Section 27 renders agreements in restraint of trade void, it recognizes certain
exceptions where restraints are considered reasonable and therefore permissible.
The factors and circumstances under which a restraint upon trade may be
permissible include:
1. Sale of Goodwill Restrictive covenants in the context of the sale of goodwill
are often considered permissible. A seller may agree not to carry on a similar
business within specified local limits, provided it is reasonable in terms of
duration, geographical area, and nature of business.
2. Employment Agreements In employment contracts, reasonable restrictions
on post-employment activities are permitted to protect legitimate interests of
the employer, such as trade secrets, confidential information, and customer
relationships. The restrictions must be reasonable in scope, time, and
geographical extent.
3. Trade Secrets and Confidential Information Agreements restraining the
use or disclosure of trade secrets, confidential information, or intellectual
property may be permissible, provided the restrictions are reasonable.
4. Partnership Agreements Partners may agree to restrict a retiring partner
from carrying on a similar business within specified limits to protect the
business interests of the partnership.
5. Non-Compete Agreements in Commercial Transactions In certain
commercial transactions, parties may agree to non-compete clauses,
provided they are reasonable and necessary for the protection of legitimate
interests.
Factors Considered by Courts in Assessing Permissibility:
When assessing the permissibility of a restraint upon trade, Indian courts typically
consider the following factors:
1. Reasonableness The restriction must be reasonable in terms of duration,
geographical area, and the nature of the trade, business, or employment.
Overly broad or restrictive terms may render the agreement unenforceable.
2. Protection of Legitimate Interests The restraint should be designed to
protect legitimate business interests such as trade secrets, confidential
information, goodwill, or customer relationships.
3. Public Interest Courts consider whether the restraint serves the public
interest. Agreements that unduly restrict competition or lead to monopolistic
practices may be disfavored.
4. Freedom of Trade and Occupation The fundamental right to carry on any
trade, business, or occupation is protected by the Constitution of India. Any
restraint should not unreasonably curtail this right.
 5. Contra Proferentem Rule Ambiguities in the drafting of the restraint are
generally construed against the party seeking to enforce the restriction.
It's crucial for parties entering into agreements containing restraints upon trade to
carefully draft these clauses, ensuring they are reasonable, necessary, and serve a
legitimate purpose. A balance between protecting interests and maintaining a
competitive market is essential for the enforceability of such agreements.
Q9. Critically examine the postal rule of communication.
Ans. The postal rule, also known as the mailbox rule, is a principle of contract law
that determines the moment when an acceptance sent by mail becomes effective.
The rule was established in the context of offer and acceptance in contracts, and it is
particularly relevant in situations where parties are communicating at a distance.
While the postal rule has been widely recognized and applied, it has also faced
criticism and raises certain practical and theoretical concerns. Let's examine the
postal rule critically:
Advantages of the Postal Rule:
1. Practical Convenience The postal rule provides a practical solution to the
challenges of communication in contract formation, especially in situations
where parties are geographically distant.
2. Certainty and Predictability The rule provides a clear and predictable point
in time when an acceptance is effective. This can help in avoiding disputes
over the timing of contract formation.
3. Encouragement of Swift Transaction By fixing the moment of acceptance at
the time of posting, the rule encourages parties to communicate promptly and
facilitates the swift conclusion of transactions.
Critiques and Concerns:
1. Inconsistency with Modern Communication The postal rule was
established in an era when communication was primarily through mail. In
today's context, with the prevalence of instant communication methods such
as email, the rule may be criticized for not being in sync with modern
practices.
2. Unintended Contract Formation The rule may lead to unintended contract
formation. For instance, an offeror may not be aware that the offeree has
already accepted the offer by posting the acceptance, and this can create
complexities in contract management.
3. Inequitable Outcomes The rule can produce inequitable outcomes,
particularly if there is a significant delay in the postal system. An offeree may
revoke an acceptance during the postal transit period, leading to uncertainty
and potential unfairness.
4. Ambiguity in Revocation Timing The postal rule raises questions about the
timing of revocation. If an offeror sends a revocation before the offeree posts
an acceptance but the revocation arrives after the acceptance, the situation
becomes ambiguous.
 5. Lack of Control over Communication The rule places the timing of
acceptance in the hands of the postal service, over which the parties have no
control. This lack of control can be seen as a drawback in ensuring efficient
and reliable contract formation.
Potential Solutions and Modifications:
1. Modernization of Rules Legal systems may consider updating the rules to
better align with modern communication methods, acknowledging the
instantaneous nature of electronic communication.
2. Contractual Agreements Parties may include specific contractual clauses to
govern the timing of acceptance and revocation, providing more flexibility and
control.
3. Acknowledgment of Receipt An acknowledgment of receipt system, where
the effectiveness of acceptance is tied to the actual receipt by the offeror,
could be an alternative to the postal rule.
4. Application of the Rule with Caution Courts could apply the postal rule with
greater scrutiny in certain contexts, considering the circumstances of the
particular transaction and the parties involved.
In conclusion, while the postal rule has served as a practical solution in traditional
contract law, its application in the modern context has raised valid concerns. Legal
systems and parties may need to adapt or supplement the rule to address the
challenges posed by contemporary communication methods and to ensure fairness
and efficiency in contract formation. The rule's advantages in promoting predictability
and facilitating distant transactions must be weighed against its potential
shortcomings in today's rapidly evolving communication landscape.
Q10. What do you understand from the doctrine of promissory estoppel and when
does it apply?
Ans. The doctrine of promissory estoppel is a legal principle that prevents a
promisor from going back on their promise if the promisee has reasonably relied on
that promise to their detriment. It is an equitable doctrine that aims to prevent
injustice when one party makes a promise, and the other party relies on that promise
to their detriment.
Under the doctrine of promissory estoppel, if the following elements are present, the
promisor can be held legally bound by their promise, even if there is no valid
contract:
1. Clear and definite promise: The promisor must make a clear and
unequivocal promise to the promisee. It should be a statement or
assurance of future conduct or action.
2. Reasonable reliance: The promisee must reasonably rely on the promise
made by the promisor. The reliance should be substantial and foreseeable.
In other words, the promisee must have acted or refrained from acting
based on the promise.
 3. Detrimental reliance: The promisee must suffer a detriment or incur a loss
as a result of their reliance on the promise. This can include financial loss,
opportunity costs, or any other form of harm.
4. Injustice: Enforcing the promise is necessary to prevent injustice. If the
promisor were allowed to retract their promise, it would result in unfairness
or hardship to the promisee.
The doctrine of promissory estoppel is typically invoked in situations where there is
no enforceable contract due to a lack of consideration or other formalities required
for a valid contract. It serves as an exception to the general rule that a contract
requires mutual consideration.
Promissory estoppel can apply in various contexts, such as:
1. Contractual agreements: When parties enter into negotiations or preliminary
discussions, and one party makes a promise that the other party relies on to
their detriment.
2. Modifications of existing contracts: If parties agree to modify an existing
contract, and one party relies on the modification, promissory estoppel can
prevent the other party from reneging on the modified terms.
3. Promises to forbear: When one party promises to refrain from taking legal
action or pursuing a legal right, and the other party relies on that promise.
4. Charitable pledges: When individuals make promises to donate money or
assets to a charitable organization, and the organization relies on those
promises to plan and carry out projects.
It's important to note that the application of promissory estoppel may vary in different
jurisdictions, as the specific elements and requirements can differ. Courts generally
apply the doctrine cautiously and consider the equities of each case to determine
whether it should be invoked to prevent injustice.
Q11. Teach India is an organization devoted to the cause of promoting education in
rural India. They are looking for a building from where they can operate. They
approach Mr. Dhanpat Rai a rich business man known for his generosity and
commitment towards society. Mr. Rai’s friend has a building which is very suitable for
Teach India to operate. Mr. Rai agrees to help Teach India in getting this building. Mr
Sahai asks for an amount of 50 lakhs for the building. Mr. Rai agrees to pay the said
amount and tells Mr. Sahai to transfer the building in the name of Teach India. They
enter into an agreement which is signed by all the three parties. Due to some
reasons Mr. Sahai informs Mr. Rai that he has changed his mind. Teach India wants
to enforce this agreement. Can they enforce this agreement? What would be your
answer if the said agreement is between Mr. 2 Rai and his friend and Mr. Rai inform
Teach India that Mr. Sahai has agreed to transfer the land to them? Discuss and
decide with the help of relevant provisions of law and cases.
Ans. The enforceability of the agreement in the scenario described involves key
legal principles such as the doctrine of promissory estoppel and the requirement of
consideration. Let's analyze both situations:
Situation 1: Agreement involving Teach India, Mr. Rai, and Mr. Sahai:
 1. Doctrine of Promissory Estoppel:
 If Mr. Rai and Mr. Sahai enter into an agreement, and Mr. Sahai later changes
his mind, Teach India may have a claim based on the doctrine of promissory
estoppel.
 For promissory estoppel to apply:
 There must be a clear promise (Mr. Sahai's promise to transfer the
building).
 Teach India must have reasonably relied on the promise.
 Detrimental reliance by Teach India (such as making preparations to use
the building for educational purposes).
2. Consideration In traditional contract law, consideration is essential for the
formation of a contract. However, the doctrine of promissory estoppel relaxes
the requirement of consideration in certain circumstances.
3. Applicability of Promissory Estoppel If Teach India can establish that Mr.
Sahai made a clear promise, they reasonably relied on it to their detriment,
and enforcing the promise is necessary to prevent injustice, promissory
estoppel may be invoked.
Situation 2: Agreement between Mr. Rai and his friend:
1. Teach India as a Third Party If Mr. Rai enters into an agreement with his
friend, and Mr. Rai informs Teach India that Mr. Sahai has agreed to transfer
the land to them, the enforceability depends on whether Teach India is
considered a third-party beneficiary.
2. Doctrine of Privity of Contract In general contract law, the doctrine of privity
of contract holds that only parties to a contract can enforce its terms.
However, there are exceptions.
3. Third-Party Beneficiary If Teach India is intended to be a third-party
beneficiary, they may have the right to enforce the contract between Mr. Rai
and his friend.
4. Novation or Assignment If Mr. Rai intends to transfer his rights and
obligations under the contract to Teach India, this can be achieved through
novation or assignment.
Relevant Provisions of Law:
1. Promissory Estoppel The Indian Contract Act, 1872, does not explicitly
codify the doctrine of promissory estoppel. However, the principle has been
recognized and applied by courts in India based on equitable considerations.
2. Doctrine of Privity Section 2(d) of the Indian Contract Act defines
consideration. Section 2(h) defines a contract as an agreement enforceable
by law. However, the specific principles related to third-party beneficiaries are
not explicitly addressed in the Act.
Cases:
 1. Promissory Estoppel Central London Property Trust Ltd v. High Trees
House Ltd (1947): In this case, the court applied the doctrine of promissory
estoppel, holding that a promise to accept reduced rent, made during wartime,
was binding during the post-war period.
2. Doctrine of Privity bTweddle v Atkinson (1861): This case exemplifies the
traditional doctrine of privity, where a father-in-law could not sue to enforce a
promise made to his son.
Conclusion:
 In Situation 1, if Teach India can establish the elements of promissory
estoppel, they may have a claim against Mr. Sahai.
 In Situation 2, the enforceability of the agreement between Mr. Rai and his
friend, with Teach India as a third-party beneficiary, depends on the intent of
the parties and whether there is a valid novation or assignment.
Q12. What do you understand from a standard form contract? What are the
protective devices used by the courts to protect a weaker party in such contracts?
Ans. A standard form contract, also known as a contract of adhesion or boilerplate
contract, is a pre-drafted agreement prepared by one party and presented to the
other party on a take-it-or-leave-it basis. It is characterized by its standardized terms
and conditions that are typically not subject to negotiation or modification by the
weaker party. Examples of standard form contracts include terms and conditions for
online services, insurance policies, and consumer agreements.
A standard form contract, also known as a contract of adhesion or boilerplate
contract, is a pre-drafted contract with standardized terms and conditions that are not
typically subject to negotiation between the parties. One party, often a business or a
party with greater bargaining power, provides the contract to the other party on a
"take it or leave it" basis. The key features of a standard form contract include:
1. Pre-Printed Terms Standard form contracts come with pre-printed terms and
conditions, usually in a standardized format. These terms are drafted by one
party and presented to the other party without the opportunity for negotiation.
2. Unequal Bargaining Power These contracts often arise in situations where
there is a significant imbalance in bargaining power between the parties. The
party offering the standard form contract typically has more influence or
resources.
3. Limited or No Negotiation Unlike negotiated contracts where parties discuss
and modify terms to reach an agreement, standard form contracts offer limited
or no room for negotiation. The terms are presented on a take-it-or-leave-it
basis.
4. Mass Production Standard form contracts are frequently used in mass-
produced transactions, such as consumer contracts for goods, services, or
software licenses. Examples include contracts for mobile phones, software
applications, and insurance policies.
5. Incorporation by Reference Some standard form contracts may incorporate
terms and conditions by reference, referring to external documents or terms
 available elsewhere. This allows the party presenting the contract to include
extensive terms without cluttering the primary document.
6. Adherence to Legal Formalities Standard form contracts must adhere to
legal formalities to be enforceable. This includes meeting the requirements of
contract law, such as offer and acceptance, consideration, and the intention to
create legal relations.
7. Consumer Protection Concerns In consumer transactions, where the
consumer has limited bargaining power, there may be legal provisions or
regulations in place to protect consumers from unfair terms in standard form
contracts. Courts may scrutinize such contracts to ensure fairness.
8. Efficiency and Convenience Standard form contracts are often used for their
efficiency and convenience, especially in industries where frequent
transactions occur. They streamline the contracting process and reduce the
need for extensive negotiations.

Protective devices used by courts to safeguard weaker parties in standard form

contracts include:
1. Unconscionability doctrine Courts may scrutinize the terms of a standard
form contract to determine if they are unconscionable, meaning they are
extremely unfair or oppressive to the weaker party. If a court finds that a
contract is unconscionable, it may refuse to enforce the unfair terms or may
modify them to be fair and reasonable.
2. Implied terms Courts may imply terms into a standard form contract to
protect the weaker party's interests. These implied terms can be based on
statutes, common law principles, or the parties' presumed intentions. The
purpose is to fill gaps in the contract and provide a more balanced outcome.
3. Interpretation against the drafter. When interpreting ambiguous or unclear
terms in a standard form contract, courts may adopt an approach that favors
the weaker party. This means that any ambiguity or uncertainty in the contract
is resolved against the party who drafted it. The rationale behind this is that
the party who prepared the contract is in a better position to ensure clarity and
fairness.
4. Statutory protections. Many jurisdictions have consumer protection laws or
specific legislation that safeguards consumers or weaker parties in standard
form contracts. These laws may impose requirements on contract terms,
prohibit certain unfair practices, or provide avenues for legal recourse and
remedies.
5. Public policy considerations. Courts may consider public policy implications
when reviewing standard form contracts. If a term or provision is contrary to
public policy, it may be deemed unenforceable. This is particularly relevant in
contracts that involve essential services, such as healthcare or utilities, where
the public interest is at stake.
6. Mandatory disclosures and transparency requirements . Some
jurisdictions require the party presenting the standard form contract to provide
 clear and conspicuous disclosures about the terms, limitations, and rights
involved. This ensures that the weaker party is informed and can make an
informed decision before entering into the contract.
These protective devices aim to address the inherent power imbalance between the
parties in standard form contracts and ensure that the weaker party is not unfairly
disadvantaged. However, the specific protections available may vary depending on
the jurisdiction and the nature of the contract. It's advisable for the weaker party to
review the contract carefully, seek legal advice if necessary, and be aware of their
rights and options before entering into such agreements.
Q13. An irrevocable commitment either in the form of confirmed bank guarantee or
irrevocable letter of credit is the life blood of international commerce hence must
be honored. Explain their nature and the obligation of the bank to honor them.
When can a bank refuse payment of the above-mentioned guarantee or letter of
credit? Discuss the factors a court take into account (i.e. how it decides) before
granting an injunction restraining the enforcement of the above mentioned
irrevocable commitments.

Ans. An irrevocable commitment in the form of a confirmed bank guarantee or

irrevocable letter of credit is a contractual arrangement where a bank acts as a
guarantor for the payment of a specific amount of money. These instruments are
widely used in international commerce, as they provide a degree of security to both
the buyer and the seller.
The nature of a confirmed bank guarantee or irrevocable letter of credit is that they
are independent contracts and separate from the underlying commercial contract
between the buyer and the seller. The bank's obligation is to pay the amount
guaranteed upon presentation of the required documents, regardless of any dispute
between the parties to the underlying contract. The bank cannot refuse payment on
the basis of any dispute between the buyer and the seller.
However, there are certain situations where a bank may be justified in refusing
payment of a confirmed bank guarantee or irrevocable letter of credit. One such
situation is where fraud has been committed by the beneficiary of the guarantee or
letter of credit. For example, if the beneficiary provides false or forged documents to
the bank to obtain payment, the bank may refuse payment on the grounds of fraud.
Another situation is where there is a clear mistake in the underlying commercial
contract, which is apparent from the documents presented to the bank.
Before granting an injunction restraining the enforcement of an irrevocable
commitment, such as a confirmed bank guarantee or irrevocable letter of credit, a
court will take into account a number of factors. The court will consider whether there
is a serious question to be tried as to the validity of the underlying contract, or
whether there is a clear case of fraud. The court will also consider whether the
balance of convenience lies in granting or refusing the injunction. This involves
weighing the harm that would be caused to the party seeking the injunction if it is
refused against the harm that would be caused to the party seeking to enforce the
irrevocable commitment if it is granted.
In India, the relevant provisions of the Indian Contract Act, 1872 that apply to
confirmed bank guarantees and irrevocable letters of credit are Sections 126 to 147.
These provisions lay down the rules for the performance of contracts, including the
obligations of the parties and the consequences of breach of contract. Section 126
specifically provides that a "contract of guarantee" is a contract to perform the
promise or discharge the liability of a third person in case of his default, and that
such a contract may be either oral or written. Section 147 provides that a "letter of
credit" is a promise by a bank to pay a certain sum of money upon the fulfillment of
certain conditions.
Alt Answer
Nature of Irrevocable Commitments - Confirmed Bank Guarantee and
Irrevocable Letter of Credit:
1. Confirmed Bank Guarantee: A confirmed bank guarantee is a commitment
issued by a bank to honor a payment obligation on behalf of its customer (the
applicant) in favor of a beneficiary. The confirmation involves a second bank
(the confirming bank) providing additional assurance of payment.
2. Irrevocable Letter of Credit: An irrevocable letter of credit is a financial
instrument where a bank (the issuing bank) undertakes an irrevocable
obligation to pay a specified amount to the beneficiary upon presentation of
compliant documents. It is commonly used in international trade transactions
to provide assurance of payment.
Obligation of the Bank to Honor Irrevocable Commitments:
1. Independence Principle: Both confirmed bank guarantees and irrevocable
letters of credit operate on the principle of independence. The bank's
obligation to honor them is separate from the underlying transaction between
the applicant and the beneficiary.
2. Strict Compliance: Banks are obligated to honor the irrevocable
commitments strictly in accordance with the terms and conditions specified in
the instrument. If the beneficiary complies with the stated conditions, the bank
is obliged to make payment.
3. Autonomy of the Bank: The autonomy of the bank means that, absent fraud,
the bank cannot refuse payment based on disputes or issues arising between
the applicant and the beneficiary. The bank's role is to examine documents
and make payment if they are compliant.
When Can a Bank Refuse Payment:
While the general principle is that banks are obligated to honor irrevocable
commitments, there are limited circumstances under which a bank may refuse
payment:
1. Fraud: If there is evidence of fraud in the presentation of documents, the
bank may refuse payment. Fraudulent activities may include the submission
of forged documents or misrepresentation of facts.
2. Null and Void Documents: If the documents presented by the beneficiary
are null and void, the bank may refuse payment. For example, if a required
document is missing or is not genuine, the bank can reject the documents.
 3. Not in Conformity: If the documents presented do not conform to the terms
and conditions specified in the irrevocable commitment, the bank may refuse
payment.
Factors Courts Consider Before Granting an Injunction:
When a party seeks an injunction restraining the enforcement of an irrevocable
commitment, courts consider various factors:
1. Fraud or Forgery: Courts may grant an injunction if there is evidence of fraud
or forgery in the presentation of documents. This underscores the importance
of maintaining the integrity of the documentary credit system.
2. Irreparable Harm: The party seeking the injunction must demonstrate that it
would suffer irreparable harm if the enforcement of the irrevocable
commitment proceeds.
3. Balance of Convenience: Courts weigh the balance of convenience between
the parties. If the harm suffered by the party seeking the injunction outweighs
the harm to the party seeking enforcement, the court may grant the injunction.
4. Clear Fraud: Courts are more likely to grant an injunction if there is clear
evidence of fraud or impropriety in the underlying transaction.
In summary, the nature of confirmed bank guarantees and irrevocable letters of
credit involves a strict obligation on the part of the bank to honor them. However,
there are limited circumstances, such as fraud or non-compliance with document
requirements, where a bank may refuse payment. Courts, when considering
injunctions, focus on factors such as fraud, irreparable harm, and the balance of
convenience between the parties. The autonomy and independence of banks in
honoring these commitments contribute to the efficiency and reliability of
international trade finance.
Q14. What are the formal requirements of a government contract? What is the
effect of not following a formal requirement on the contract?
Ans. Under Indian law, there are certain formal requirements that must be fulfilled
for a government contract to be valid. These requirements may vary depending on
the nature of the contract and the laws applicable to the particular government entity
involved.
The most important formal requirement is that the contract must be in writing and
signed by the parties. The contract should also contain all essential terms, such as
the subject matter of the contract, the consideration, and the rights and obligations of
the parties. Additionally, the contract must comply with any applicable laws,
regulations, or policies governing the particular government entity involved.
Failure to comply with these formal requirements may result in the contract being
deemed invalid or unenforceable. For example, if a government contract is not in
writing and signed by the parties, it may not be considered a valid contract under
Indian law. Similarly, if a contract does not contain all essential terms, it may be
deemed too uncertain to be enforceable.
In some cases, non-compliance with formal requirements may result in the contract
being void ab initio, which means that it is considered void from the beginning. This
may occur when the non-compliance is so significant that it affects the very essence
of the contract, such as the failure to include an essential term. In other cases, the
contract may be considered voidable, which means that it is valid until one of the
parties decides to rescind it due to the non-compliance.
It is therefore important for parties to government contracts to ensure that they
comply with all formal requirements to avoid any disputes or challenges to the
validity of the contract.
Alt Answer
Formal Requirements of a Government Contract:
Government contracts often have specific formal requirements to ensure
transparency, legality, and accountability. The formal requirements may include:
1. Parties Clearly identifying the parties involved, including the government
entity and the contractor. The names and details of the contracting parties
must be accurately specified.
2. Writing Many government contracts must be in writing to be enforceable. This
requirement helps in documenting the terms and conditions of the agreement
and provides a clear reference for both parties.
3. Signatures The contract may require signatures from authorized
representatives of both the government entity and the contractor. Signatures
indicate the parties' intention to be bound by the terms of the contract.
4. Authority of Signature Ensuring that the individuals signing the contract
have the authority to do so on behalf of their respective organizations.
Authority may be granted through official delegation, statutes, or
organizational bylaws.
Effect on the Contract if Formalities Are Not Followed:
1. Enforceability Failure to follow formal requirements may impact the
enforceability of the contract. Some jurisdictions or government regulations
may require strict adherence to formalities for a contract to be legally binding.
2. Void or Voidable In some cases, a contract that does not meet formal
requirements may be deemed void or voidable. A void contract is considered
invalid from the outset, while a voidable contract may be set aside at the
option of one of the parties.
3. Lack of Legal Standing A contract not meeting formal requirements may lack
legal standing, making it difficult for a party to enforce its terms or seek
remedies for breaches.
4. Procurement Regulations Failure to comply with formalities may lead to
non-compliance with procurement regulations. This could result in the contract
being challenged or set aside, particularly in the context of government
contracts where strict adherence to procurement procedures is often required.
5. Risks of Litigation Contracts that do not meet formal requirements may be
more susceptible to legal challenges. The lack of proper documentation and
signatures may create uncertainties and increase the risk of litigation.
 6. Remedies and Damages The availability of remedies and damages for
breaches of the contract may be affected if formalities are not followed. A
party seeking damages or specific performance may encounter difficulties in
the absence of a properly executed contract.
7. Public Accountability In government contracts, failure to adhere to formal
requirements may raise concerns about transparency and accountability. Non-
compliance with established procedures may lead to scrutiny or legal
challenges.

It is crucial for parties entering into government contracts to carefully review and
comply with any formal requirements specified by applicable laws, regulations, and
procurement policies. Failure to do so may have serious legal and financial
implications. Legal advice should be sought to ensure compliance and to mitigate the
risks associated with non-compliance.
Q15. Mr. X stands as a surety for a loan of 50 lakh rupees taken by Mr. Y. Y fails to
pay the amount and because of interest it becomes 70 lakhs. The bank sues X the
surety for the recovery of the amount. X puts forward the following two defences:
(i) That first the bank should recover the amount from the Y and his liability would
arise only if the bank cannot recover the amount form him.
(ii) He is liable to pay 50 lakhs only and not 70 lakhs.
Give your opinion with respect to the above mentioned defences made by Mr. X with
the aid of relevant provisions of law and cases.
Ans. As per the Indian Contract Act, a surety's liability is co-extensive with that of
the principal debtor, unless otherwise provided by the contract. This means that if the
principal debtor fails to pay the amount due, the creditor can recover the entire
amount from the surety.
In the given case, Mr. X, as a surety, is liable to pay the entire amount of 70 lakhs to
the bank. Mr. X's first defence that the bank should recover the amount from Mr. Y
first is not tenable. The creditor has the right to proceed against the surety without
first proceeding against the principal debtor.
Regarding the second defence, as per Section 128 of the Indian Contract Act, the
surety's liability is not limited to the principal amount, but extends to all interests,
costs, and charges that have accrued. Hence, Mr. X is liable to pay the entire
amount of 70 lakhs along with the interest and other charges.
In the case of State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd, the
Supreme Court held that the surety is liable to pay the entire amount due, and his
liability is not limited to the amount specified in the contract. The Court also observed
that the creditor can proceed directly against the surety without first proceeding
against the principal debtor.
Therefore, in light of the above provisions of law and the relevant case law, Mr. X's
defences are not valid, and he is liable to pay the entire amount of 70 lakhs to the
bank.
Q16. Distinguish between a contract of indemnity and guarantee?
Ans. A contract of indemnity and a contract of guarantee are two distinct types of
contracts, each with its own characteristics and legal implications. Let's distinguish
between the two:
1. Contract of Indemnity: A contract of indemnity is a contract in which one
party (the indemnifier) promises to compensate the other party (the
indemnified) for any loss or damage they may suffer. The key features of a
contract of indemnity are:
a. Primary liability: In a contract of indemnity, the indemnifier's obligation is to
directly compensate the indemnified party for any loss or damage they incur.
b. Loss-based: The indemnity obligation arises when there is an actual loss or
damage suffered by the indemnified party. The indemnifier is responsible for making
the indemnified party whole again by providing monetary compensation or other
agreed-upon forms of restitution.
c. Right to indemnity after payment: The indemnified party is entitled to seek
indemnity from the indemnifier only after they have made the actual payment for the
loss or damage suffered.
d. Contractual relationship: A contract of indemnity typically arises from a specific
contractual agreement between the parties, where the indemnifier assumes the
responsibility for any losses or damages that may occur.
2. Contract of Guarantee: A contract of guarantee, on the other hand, is a
contract in which one party (the guarantor) agrees to be responsible for the
debts or obligations of another party (the principal debtor) if the principal
debtor fails to fulfill their obligations. The key features of a contract of
guarantee are:
a. Secondary liability: In a contract of guarantee, the guarantor's liability is
secondary to that of the principal debtor. The guarantor becomes liable to pay only if
the principal debtor fails to fulfill their obligations.
b. Debt-based: The guarantee obligation arises when there is a default by the
principal debtor in fulfilling their contractual obligations, such as non-payment of a
loan or failure to perform a contractual duty.
c. Right of recourse without payment: Unlike a contract of indemnity, the
guarantor can be held liable by the guaranteed party even without having to pay the
debt or fulfill the obligation. Once the principal debtor defaults, the guarantee is
triggered, and the guaranteed party can seek recourse against the guarantor.
d. Tripartite relationship: A contract of guarantee involves three parties—the
guarantor, the principal debtor, and the guaranteed party. The guarantor assures the
guaranteed party that they will fulfill the obligations of the principal debtor in case of
default.
In summary, a contract of indemnity focuses on compensating the indemnified party
for actual losses suffered, while a contract of guarantee involves assuming
secondary liability for the debts or obligations of another party. The key distinction
lies in the nature of liability, the trigger for obligations, and the parties involved in
each type of contract.
Q17. What are the differences between Void and Voidable contracts? Examine the
remedies available under each category
Ans. Void and voidable contracts are both categories of contracts that are
unenforceable under certain circumstances. However, there are differences between
the two categories, as well as differences in the remedies available for each.
Void contracts are those that are null and void from the very beginning, meaning that
they are not contracts at all. These contracts have no legal effect and cannot be
enforced by either party. Examples of void contracts include contracts that are
entered into under duress, contracts that are illegal, and contracts that are contrary
to public policy.
On the other hand, voidable contracts are contracts that are initially valid, but can be
voided by one or both parties under certain circumstances. Voidable contracts are
usually the result of one party being taken advantage of or being deceived by the
other party. For example, a contract entered into under fraudulent misrepresentation,
coercion or undue influence would be considered voidable.
The main remedy for a void contract is rescission, which involves the cancellation of
the contract and the return of any consideration or benefits received under the
contract. However, no damages can be claimed in such cases as the contract was
void ab initio.
In the case of voidable contracts, the party that was taken advantage of or deceived
has the option to either rescind the contract or affirm it. If the party chooses to
rescind the contract, the contract is treated as if it had never existed, and any
benefits or consideration received under the contract must be returned. The party
may also choose to affirm the contract, but can claim damages for any losses
suffered as a result of the other party’s misconduct.
In summary, the main difference between void and voidable contracts is that void
contracts are null and void from the beginning and cannot be enforced, while
voidable contracts are initially valid but can be voided by one or both parties under
certain circumstances. The main remedy for a void contract is rescission, while the
remedies for a voidable contract include rescission and damages.
Q18. Critically examine the role of liquidated damages in Commercial Contracts.
Ans. Liquidated damages play a significant role in commercial contracts by
providing parties with a predetermined remedy for a breach of contract. They are
pre-agreed damages that the parties stipulate in the contract as compensation for
specific types of breaches. While liquidated damages clauses offer certain
advantages, they also raise some concerns that require critical examination.
Advantages of Liquidated Damages:
1. Certainty. Liquidated damages provide certainty to the parties involved. By
agreeing on a specific amount of damages in advance, the parties can avoid
potential disputes and uncertainty regarding the extent of damages that may
arise from a breach. It provides a clear framework for assessing damages and
helps parties plan their financial commitments accordingly.
2. Efficiency and Convenience. Liquidated damages clauses can contribute to
the efficient resolution of disputes. Instead of engaging in lengthy and costly
 litigation or arbitration proceedings to determine the actual damages suffered,
parties can rely on the predetermined amount set forth in the contract. This
saves time, resources, and efforts that would otherwise be spent on proving
and quantifying actual damages.
3. Risk Allocation. Liquidated damages clauses allow parties to allocate the risk
of potential breaches. By stipulating a fixed amount of damages, parties can
protect their interests and incentivize the other party to perform their
contractual obligations diligently. It serves as a deterrent against non-
performance or inadequate performance, providing the injured party with
compensation in case of a breach.
Concerns and Limitations of Liquidated Damages:
1. Penalty Clause Risk. The primary concern with liquidated damages is the
potential for the clause to be deemed a penalty rather than a genuine pre-
estimate of damages. Courts are cautious in ensuring that the amount
stipulated is a reasonable estimate of the loss likely to be suffered, rather than
a punishment for breach. If a clause is found to be a penalty, it may be
unenforceable, and the injured party will be limited to claiming only the actual
damages suffered.
2. Overcompensation or Undercompensation. There is a risk that the
predetermined amount of liquidated damages may not accurately reflect the
actual loss suffered by the injured party. In some cases, the stipulated amount
may result in overcompensation, unjustly enriching the injured party. On the
other hand, it may also lead to undercompensation, leaving the injured party
with inadequate compensation for their losses.
3. Unforeseen Circumstances. Liquidated damages clauses may not
adequately address unforeseen circumstances or events that could impact the
actual damages suffered by the injured party. If the predetermined amount
does not account for such contingencies, it may not provide fair compensation
in situations where the actual loss exceeds the stipulated amount or where
the damages are minimal.
Difference between Liquidated Damages and Ordinary/Unliquidated Damages:
1. Liquidated Damages: These are pre-determined, fixed amounts agreed
upon by the parties and specified within the contract. They are intended to
compensate for specific losses that might result from a breach.
2. Ordinary/Unliquidated Damages: These damages are not pre-estimated or
predetermined within the contract. Instead, they are calculated based on the
actual losses suffered due to the breach. Determining unliquidated damages
typically involves a legal or judicial process to assess and quantify the specific
losses incurred.
The key distinction lies in the certainty and predetermined nature of liquidated
damages versus the need to assess and quantify actual losses for unliquidated
damages. Liquidated damages provide a clear, predefined compensation amount,
while ordinary or unliquidated damages are determined after the breach occurs,
based on the actual harm suffered as a result of the breach.
In conclusion, while liquidated damages clauses offer advantages such as certainty,
efficiency, and risk allocation, they also raise concerns regarding penalty clause risk,
overcompensation or under compensation, and unforeseen circumstances. Careful
drafting and consideration of the specific circumstances of the contract are
necessary to ensure that the liquidated damages clause is enforceable, reasonable,
and fair to both parties. It is advisable to seek legal advice when incorporating
liquidated damages clauses into commercial contracts to strike the right balance
between protecting the injured party and avoiding unfair penalties.
Q19. A, owes an amount 12 lakhs to B. The due date of repaying the amount is
30th December 2019. He fails to repay the amount on the said date. B threatens to
institute a suit against him. A, is unable to repay the amount because of he is duped
by C to the tunes of 10lakhs. He offers to repay the amount in 4 installments of 3
lakhs each after every 3 months. B accepts his proposal. Nevertheless after two
installments, B insists on getting the entire amount else he is free to institute a suit
against him in the court for the recovery of the remaining amount. A argues that B
cannot do that before the expiry of the one year period. What obligations are
generated by the new agreement between A and B, if any? Discuss and decide
referring to the relevant provisions of law and cases.
Ans. Under the Indian Contract Act, 1872, and relevant legal principles, here's an
analysis of the situation:
1. Initial Debt and Default: A owes 12 lakhs to B, and the due date for
repayment was 30th December 2019. A defaulted on this payment.
2. Negotiated Settlement: A proposes to repay the debt in 4 installments of 3
lakhs each after every 3 months, which B accepts. This forms a new
agreement modifying the terms of the original debt.
3. B's Change of Heart: B initially agrees to the installment plan but later insists
on immediate payment of the remaining amount after two installments.
4. Applicable Legal Provisions:
a. Indian Contract Act, 1872: This act governs contracts in India, defining
rights and obligations of parties entering into contracts.
b. Limitation Act, 1963: It prescribes the time limits for initiating legal actions,
including the recovery of debts.
The new agreement between A and B, where B accepted the proposal for installment
payments, creates legal obligations binding upon both parties. This agreement
constitutes a contract under the Indian Contract Act, where both parties are obligated
to fulfill the terms agreed upon.
However, if B unilaterally changes the terms of the agreement after two installments
and demands immediate payment of the remaining amount, it could be a breach of
contract unless there was a clause allowing B to demand full payment before the
completion of installments under specific conditions. This could potentially make B
liable for the breach of the modified agreement.
Regarding the limitation period, the Limitation Act provides a specific time frame
within which a person can file a suit to recover a debt. Normally, the limitation period
for recovery of money is three years from the due date.
A's argument that B cannot sue before the expiry of one year might refer to a
different aspect of the law. It's possible that A is referring to the limitation period
prescribed under the Act. If the limitation period for the debt was three years and the
default occurred in December 2019, B might have time within the limitation period to
initiate a lawsuit for recovery.
For a comprehensive understanding and specific legal advice tailored to this
situation, consulting a lawyer experienced in Indian contract law and the Limitation
Act would be prudent. They can analyze the nuances of the case, the terms of the
agreement, and the relevant legal provisions to determine the rights and obligations
of both parties accurately.
Alt Answer
In the scenario provided, the parties (A and B) entered into a new agreement for the
repayment of the outstanding amount after the due date. Let's analyze the
obligations generated by this new agreement and refer to relevant provisions of law:
1. New Agreement for Repayment A proposed to repay the outstanding
amount in four installments of 3 lakhs each after every three months, and B
accepted this proposal.
2. Change in Terms The new agreement modifies the terms of the original
agreement, particularly the manner and timeline for repayment.
3. Part Performance A makes two installments as per the new agreement.
4. B's Insistence on Full Payment After two installments, B insists on receiving
the entire remaining amount, threatening to institute a suit if A fails to comply.
5. A's Argument on the One-Year Period A argues that B cannot institute a suit
before the expiry of a one-year period.
Legal Analysis:
1. New Agreement The new agreement between A and B constitutes a valid
contract. A proposed a modification of the terms, and B, by accepting the
proposal and allowing A to make two installments, entered into a new
agreement.
2. Part Performance A's part performance of making two installments
strengthens the validity of the new agreement. Part performance indicates a
willingness to fulfill the obligations as per the modified terms.
3. B's Insistence on Full Payment B has the right to insist on receiving the
entire remaining amount if the terms of the new agreement allow for such a
demand. The effectiveness of this right depends on the specific terms agreed
upon.
4. One-Year Period Argument A's argument that B cannot institute a suit before
the expiry of a one-year period may be related to the limitation period for
enforcing a debt. However, the facts provided do not specify the nature of the
debt or the applicable limitation period. In general, limitation periods
(prescription periods) vary depending on the nature of the claim. If the debt
has a limitation period of one year, B may be entitled to institute a suit for the
recovery of the remaining amount after the expiration of that period.
Relevant Legal Provns – As mentioned above
Q20. What do you understand by discharge of a contract? Discuss the ways in
which a contract could be discharged.
Ans. The discharge of a contract refers to the termination or fulfillment of the
contractual obligations between the parties involved. Once a contract is discharged,
the parties are relieved of their respective duties and liabilities under that contract.
Here are several ways in which a contract can be discharged:
1. Performance: The most common way a contract is discharged is through
performance, where both parties fulfill their obligations as per the terms of the
contract. Once the parties have completed what was agreed upon, the
contract is considered discharged.
2. Agreement: Parties can mutually agree to discharge a contract. This might
involve a new agreement that voids or alters the terms of the original contract,
releasing both parties from their obligations.
3. Breach: If one party fails to perform its obligations as outlined in the contract,
the other party might choose to consider the contract discharged due to the
breach. This can lead to legal remedies for the aggrieved party, but it
effectively ends the contract.
4. Frustration of Contract: Sometimes, unforeseen events occur that make it
impossible to fulfill the contract. This is known as frustration of contract. If an
event occurs after the contract is formed, rendering it impossible to perform or
significantly changing the nature of the obligations, the contract might be
discharged.
5. Lapse of Time: Contracts might include a specific time frame within which the
obligations must be fulfilled. If this time frame expires without performance,
the contract is discharged.
6. Operation of Law: Certain situations prescribed by law can discharge a
contract. For example, a contract might become void due to illegality,
incapacity of a party, or a change in law that makes the contract illegal or
impossible to perform.
7. By Performance of Conditions: Contracts often include conditions that,
when fulfilled, discharge the contract. These conditions might be precedent
(must occur before the contract comes into effect) or subsequent (occur after
the contract is formed and can discharge it).
8. By Mutual Rescission: Both parties can agree to cancel or rescind the
contract. This agreement effectively discharges the obligations outlined in the
original contract.
9. Bankruptcy or Insolvency: If the part becomes bankrupt or insolvent, may
be discharged. Bankruptcy laws provide a framework for the distribution of
assets among creditors.
10. Release: A party may release another party from its obligations under the
contract, either through a specific release agreement or by conduct indicating
an intention to release.
Understanding the ways in which a contract can be discharged is crucial for parties
entering into agreements. It helps them anticipate the circumstances under which
their obligations might end and the legal consequences of such termination.
Q21. What do you understand from an invitation to make an offer? Explain with the
help of important case law. What is the criterion to distinguish it from an offer?
Ans. An invitation to make an offer, also known as an invitation to treat, refers to a
preliminary stage in the formation of a contract where one party invites others to
make an offer. It's not an offer itself but an invitation for others to initiate negotiations
or make an offer to enter into a contract.
The key distinction between an invitation to treat and an offer lies in the intention to
be legally bound. An invitation to treat is an invitation for others to make an offer and
does not signify a willingness to be immediately bound by a contract. On the other
hand, an offer is a clear expression of willingness to be bound by specific terms if the
other party accepts.
Case law, such as the case of Pharmaceutical Society of Great Britain v Boots
Cash Chemists (Southern) Ltd (1953), illustrates the concept of an invitation to
treat. In this case, Boots had goods displayed on shelves in their self-service store.
The Pharmaceutical Society contended that displaying the goods in the store
constituted an offer, and acceptance occurred at the point of picking up the goods.
The court, however, ruled that the display of goods was not an offer but an invitation
to treat. It was an invitation for customers to make offers by taking the goods to the
cash counter. The acceptance happened at the cash counter when the cashier
agreed to sell the goods at the indicated price. This case clarified that the display of
goods in a shop is generally an invitation to treat and not an offer.
Criteria to Distinguish an Invitation to Treat from an Offer:
1. Intention: An offer shows a clear intention to be legally bound upon
acceptance. An invitation to treat does not exhibit such intention; it's an
invitation for others to make an offer.
2. Specificity: An offer must be specific in terms of its terms and conditions,
while an invitation to treat is usually more general and invites others to start
negotiations.
3. Action Involved: An offer typically involves a clear action or promise made by
one party, while an invitation to treat invites the other party to make an offer.
4. Revocability: An offer, once made, can generally be accepted within a
specific timeframe. In contrast, an invitation to treat is revocable and does not
bind the party making the invitation until an offer is accepted.
Understanding the distinction between an invitation to treat and an offer is crucial in
contract law as it determines when the actual formation of a contract occurs, which
impacts legal obligations and rights.
Q22. Critically examine the law related to acceptance of an offer in India, including
the postal rule of communication.
Ans. The acceptance of an offer in India, as governed by the Indian Contract Act,
1872, is a crucial aspect of contract formation. Acceptance is the final and
unqualified expression of assent to the terms of an offer. It leads to the creation of a
legally binding contract between the parties.
Key Aspects of Acceptance of an Offer in India:
1. Mode of Acceptance: Acceptance can be communicated by words, conduct,
or any other mode specified or implied by the offeror. Silence generally does
not constitute acceptance unless circumstances indicate otherwise.
2. Communication of Acceptance: Acceptance must be communicated to the
offeror or their authorized agent for it to be valid. This principle is essential to
ensure that both parties are aware of their mutual agreement.
3. Postal Rule of Communication: The postal rule, as established in the Indian
Contract Act, is similar to that in common law systems. According to this rule,
acceptance is deemed to be communicated at the time it is posted, not when
it is received by the offeror. However, this rule applies only if postal
communication was expressly or impliedly authorized by the offeror.
Critique of the Law Related to Acceptance in India:
1. Communication Requirement: The requirement for communication of
acceptance sometimes leads to complexities, especially in cases where
acceptance is delayed, misunderstood, or lost in transmission. It may create
uncertainties regarding the formation of a contract.
2. Postal Rule Challenges: The postal rule can be problematic in today's digital
era where instant communication is prevalent. There might be delays or
uncertainties in postal delivery, leading to issues regarding the timing of
acceptance.
3. Electronic Communications: With the rise of electronic communications,
questions arise about the application of traditional acceptance rules to emails,
instant messages, or other electronic modes. Clarity in defining when
acceptance is deemed to occur in electronic communications remains a point
of discussion.
4. Revocation of Acceptance: Another challenge arises concerning the
revocation of acceptance. If an offeror attempts to revoke an offer after
acceptance but before communication, it might create legal disputes
regarding the validity of the contract.
In summary, while the principles related to acceptance of an offer in India are
generally aligned with contract law principles, challenges arise in the context of
modern communication methods and the potential for delays or uncertainties in
communication. The law may need adaptation or clarification to address these
challenges effectively in the contemporary business environment.
Q23. Mr Ajay Sharma is a well-known chef. He enters into an employment
agreement with Paradise Food Court Pvt. Ltd. (PFC), a well-known restaurant in
Hyderabad. He is employed by PFC for 5 years at a salary of 3 lakh rupees per
month with a yearly hike of 10%. According to clause no. 7 he cannot work for any
other company or firm or business enterprise in any capacity in any part of the
country during these 5 years. It is remarkable here that PFC’s business is confined
to Hyderabad only. According to clause no. 8 his contract can be renewed after 5
years. But if he chooses not to renew it, he cannot work with any restaurant or hotel
situated in Hyderabad for a period of 1 year. Ajay is told by one of his friends that
both these clauses are void as they are in restraint of trade. What is your opinion?
Discuss and decide with the aid of relevant provisions of law and cases.
Ans. The clauses mentioned in Ajay Sharma's employment agreement with
Paradise Food Court Pvt. Ltd. (PFC) impose certain restrictions on Ajay's future
employment opportunities. Clauses restricting an individual's freedom to work after
the termination of an employment contract are often scrutinized under the Indian
Contract Act, 1872, particularly concerning restraints of trade.
Analysis of Clauses in Question:
1. Clause No. 7 - Restriction on Working Elsewhere: This clause restricts
Ajay from working for any other company or business enterprise in any
capacity in any part of the country during the 5-year employment period with
PFC.
2. Clause No. 8 - Post-Termination Restriction: This clause imposes a
restraint on Ajay from working with any restaurant or hotel in Hyderabad for
one year if he chooses not to renew his contract after the initial 5-year period.
Legal Validity of the Clauses:
Restraint of Trade: Clauses that impose unreasonable restrictions on an
employee's future employment opportunities can be deemed void as they are
considered to be in restraint of trade. The Indian Contract Act, 1872, under Section
27, declares agreements that restrain individuals from exercising a lawful profession,
trade, or business as void.
Analysis of Specific Provisions:
 Clause No. 7: This clause restricts Ajay from working anywhere in the
country, even outside PFC's business area. Such a wide and unconditional
restraint is likely to be considered unreasonable and against the spirit of
Section 27, making it void.
 Clause No. 8: This clause imposes a restriction on Ajay's future employment
in Hyderabad in a similar line to Clause 7, but for a specific location. However,
courts often scrutinize such post-termination restraints. A one-year restriction
in a limited area might be more justifiable than a nationwide prohibition, but it
could still be challenged for reasonableness.
Case Law and Precedents:
Courts have often held that while reasonable restrictions are valid to protect an
employer's legitimate interests (such as trade secrets or confidential information),
excessively broad and unreasonable restraints are not enforceable.
Conclusion:
Given the broad nature of Clause 7 and the post-termination restriction in Clause 8
limiting Ajay's future employment opportunities in Hyderabad, both clauses may likely
be deemed void as they impose unreasonable restraints of trade. However, specific
judicial interpretations and precedents could affect the final decision. Consulting a
legal expert for a detailed assessment based on relevant case law and legal
precedents would provide a more definitive opinion.
Q24. What does amount to a breach of a contract? Explain the concept of
anticipatory breach?
Ans. A breach of contract occurs when one party fails, without lawful excuse, to
fulfill its obligations as outlined in the contract. It involves the failure to perform,
incomplete performance, or performance that doesn't meet the terms specified in the
agreement.
Types of Breach:
1. Material Breach: This is a substantial breach that goes to the root of the
contract, depriving the innocent party of the essential benefit they were to
receive from the contract.
2. Minor Breach: Also known as partial breach, this occurs when a party fails to
perform a minor aspect of the contract. While it's a breach, it doesn’t
undermine the main purpose of the contract.
Anticipatory Breach:
Anticipatory breach, also called anticipatory repudiation, occurs when one party
clearly communicates, through words or actions, its intention not to fulfill its
contractual obligations before the actual time of performance arrives. This
anticipatory breach is significant because it allows the innocent party to treat the
contract as breached immediately, without waiting for the actual performance date.
Elements of Anticipatory Breach:
1. Express Repudiation: A party explicitly communicates that they will not
perform their obligations as specified in the contract.
2. Impossibility: The party's actions or circumstances make it clear that they
won't be able to fulfill their obligations when the time for performance arrives.
Consequences of Anticipatory Breach:
1. Rights of the Innocent Party: The innocent party has the right to consider
the contract breached immediately and can pursue remedies for breach of
contract without waiting for the performance date.
2. Duty to Mitigate Losses: The innocent party also has a duty to mitigate their
losses. They should take reasonable steps to minimize the damages resulting
from the breach.
Example: If Party A contracts with Party B to deliver goods on a specific date but, a
month before the delivery date, Party A clearly communicates that they won't be able
to deliver the goods, it constitutes an anticipatory breach. Party B can immediately
treat the contract as breached and seek remedies for the breach.
Understanding breaches of contract, whether material, minor, or anticipatory, is
crucial for parties to protect their interests and seek appropriate remedies or
damages in case of non-performance or violation of contractual terms.
Q25. Explain the essential elements of a valid of a contract.
Ans. The Indian Contract Act, 1872, defines and regulates contracts in India.
According to Section 10 of the Act, a contract is an agreement enforceable by law,
and it must satisfy the essential elements outlined in the Act to be considered valid.
The essential elements of a valid contract, as per the Indian Contract Act, include:-
1. Offer and Acceptance (Section 2(a)): There must be a lawful offer by one
party and a lawful acceptance of that offer by the other party. The offer and
acceptance must be clear, definite, and lead to a meeting of minds.
2. Intention to Create Legal Relations (Section 10): Both parties must have a
genuine intention to create legal relations. Social agreements or agreements
without the intent to be legally bound are generally not considered contracts.
3. Lawful Consideration (Section 2(d)): The contract must involve a lawful
consideration, which can be a benefit or a detriment. It is something of value
exchanged between the parties.
4. Capacity of Parties (Section 11): The parties entering into the contract must
have the legal capacity to do so. They should be of sound mind and not
disqualified by law from entering into a contract.
5. Free Consent (Section 13): Consent is said to be free when it is not caused
by coercion, undue influence, fraud, misrepresentation, or mistake. The
parties must agree to the contract without any external pressure or unfair
tactics.
6. Lawful Object (Section 23): The object of the contract must be lawful. An
agreement with an unlawful object or consideration is void.
7. Certainty and Possibility of Performance (Section 29): The terms of the
contract must be clear and certain. The contract must also be capable of
being performed; if it is impossible or uncertain, it may be void.
8. Not Expressly Declared Void (Section 24-30): The contract must not fall
into any of the categories expressly declared void by the Act, such as
agreements without consideration, agreements in restraint of marriage, or
agreements restraining trade.
These elements work together to form the foundation of a valid contract under the
Indian Contract Act, 1872. It's important for parties entering into contracts to ensure
that these elements are present to avoid any legal issues and to have a legally
enforceable agreement.
Q26. Write a short note on Standing offer.
Ans. A standing offer, also known as an open offer or continuing offer, is a type of offer in
contract law that remains open for acceptance over a specified period or until it is revoked by
the offeror. It is a unique contractual arrangement that allows for repeated acceptance by the
offeree during the specified duration.
Key Characteristics of a Standing Offer:
1. Open Duration: Unlike a traditional offer that might have a specific deadline
for acceptance, a standing offer remains open for acceptance over a defined
period.
 2. Repetitive Acceptance: The offeree can accept the standing offer multiple
times during the open period, creating a series of separate contracts for each
acceptance.
3. Communication of Acceptance: To form a contract, the offeree typically
needs to communicate acceptance to the offeror. However, in the case of a
standing offer, acceptance often occurs through the offeree's performance of
the specified act or conduct outlined in the offer.
4. Revocability: The offeror retains the right to revoke or terminate the standing
offer before it is accepted. Once accepted, however, the offer becomes a
contract, and the terms are binding for the specified transaction.
Example of a Standing Offer:
Suppose a supplier offers to sell a certain quantity of goods at a fixed price to a
buyer on an ongoing basis for the next six months. The offer specifies that the buyer
can place orders for the goods at any time during this period, and each order will be
considered an acceptance of the standing offer. The supplier, in turn, commits to
delivering the goods at the agreed-upon price for each order placed during the open
period.
Legal Considerations:
1. Clear Terms: For a standing offer to be effective, the terms must be clearly
defined, including the duration of the offer and the specific actions that
constitute acceptance.
2. Communication: The method of acceptance must be specified in the
standing offer. If acceptance is through conduct, it is essential that the
offeree's actions align with the terms outlined in the offer.
3. Revocability: The offeror must have the right to revoke the standing offer at
any time before acceptance to maintain flexibility.
Standing offers can be beneficial in situations where parties anticipate a series of
transactions over time and want to establish a stable framework for repeated
agreements without the need for constant negotiation. It provides a convenient way
for parties to engage in transactions without the need to renegotiate terms for each
occurrence.
Q27. Write a short note on Contingent Contract.
Ans. A contingent contract is a type of contract in which the performance of
contractual obligations depends on the occurrence or non-occurrence of a specific
event, often uncertain or unpredictable. The enforceability of the contractual rights
and obligations is contingent upon the happening or non-happening of these events.
Key Characteristics of a Contingent Contract:
1. Contingency Clause: The contract must explicitly state the specific event or
conditions upon which the performance of the contract depends. This is
known as the contingency clause.
 2. Uncertainty of Event: The occurrence of the specified event must be
uncertain, and its outcome should not be predetermined or within the control
of the parties involved.
3. Future Event: The contingent event is usually a future event, meaning it has
not yet happened at the time of contract formation.
4. Enforceability: The rights and obligations under the contract become
enforceable or void based on the occurrence or non-occurrence of the
contingent event.
Examples of Contingent Contracts:
1. Insurance Contracts: Insurance contracts are classic examples of contingent
contracts. The insured pays premiums, and the insurer's obligation to provide
coverage is contingent on the occurrence of an insured event, such as an
accident or theft.
2. Sale of Goods Based on Inspection: A contract to sell goods subject to
inspection is contingent on the goods meeting certain standards during
inspection. If the goods pass the inspection, the contract becomes
enforceable.
3. Performance Dependent on External Factors: A construction contract might
be contingent on obtaining necessary permits or approvals. If these approvals
are not granted, the contract may become void.
Legal Aspects:
Contingent contracts are governed by the Indian Contract Act, 1872. Sections 31 to
36 of the Act specifically deal with contingent contracts, providing guidelines on their
enforceability and performance.
Enforceability of Contingent Contracts:
1. Fulfillment of Contingency: If the contingent event occurs, and the
conditions are met, the contract becomes enforceable, and the parties must
fulfill their respective obligations.
2. Non-Fulfillment of Contingency: If the contingent event does not occur or
the conditions are not met, the contract becomes void, and neither party has
any obligation to perform.
Contingent contracts are valuable in situations where parties want to create binding
agreements but wish to factor in uncertain future events. These contracts allow
flexibility and risk mitigation by linking enforceability to specific conditions.