CHAPTER-II CONCEPT OF CONTRACT IN INDIAN CONTRACT ACT, 1872

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CHATPTER-II CONCEPT OF CONTRACT IN INDIAN CONTRACT ACT, 1872 2.1

Historical Development of Contract Law in India The history of the act brings to light the very origin of the economic processes and in

this regard, contract is important in order to conduct one‘s business in everyday life 62. The prevalent system in the ancient times was barter, exchange and it was based on the mutual principle of give and take. This was confined to commodities as there was no medium of exchange as is seen in the form of money today and this system can be traced back in time to the Indus Valley Civilization (the earliest human civilization). The system still finds relevance in the contemporary world, where it can be found in commercially and economically underdeveloped areas. However, the relevancy of such a system in modern times is questioned as the complexity in the nature of the economic systems as well as the increasing demand and supply systems due to the change in the wants and needs of the human beings came to the fore. Also, money had evolved as the medium of exchange such that the value of every commodity could now be quantified. Thus, in such an era of greater economic transaction one finds the existence of Contract Laws and with it, their relevance. The Indian Contract Act codifies the way we enter into a contract, execute a contract and implement provisions of a contract and effects of breach of a contract 63. The contractual capacity is restricted in certain situations otherwise it is the prerogative of the individual to contract.64 There are specific areas which deal with property, movable goods and specific performance such as the Transfer of Property Act, the Sale of Goods Act and the Specific Relief Act. Some of these acts, were originally a part of the Indian Contract Act enacted in 1872 but were later codified as separate laws. Moreover the Act is not retrospective in nature. Hence a contract entered into prior to 1st September 1872, even though to be performed after passing of this Act is not hit by this Act.65 Hence, we arrive of the conclusion that the basic framework of contracting is covered in the Indian Contract Act and it is an important area of law, with roots deep in the history of civilization- and thus forms the subject matter of this project of this course of legal.

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www.slideshare.netassessed on 14.08.2014 www.sitenim on web.comassessed on 24.08.2014 64 Casheire and Fifoot and Furmston, Contract Law; (1986) Butterworth and Com. Id at p.19-26. 65 Id at p. 39. 63

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2.1.1 Vedic and Medieval Period During the entire ancient and medieval periods of human history in India, there was no general code covering contracts. Principles were thus derived from numerous referencesthe sources of Hindu law, namely the Vedas, the Dhramshatras, Smritis, and the Shrutis give a vivid description of the law similar to contracts in those times. The rules governing contracts form a part of the law called Vyavaharmayukha. Studies of the Smritis reveal that the concept of contract originated in the Vedic period itself66. The general rules of contract bear a striking resemblance to the modern law of contract. For e.g. as mentioned in the Manusmriti, the first and the foremost requirement for a contract process to start is the competence of the persons who are willing to enter into a contract. This norm laid down for competence corresponds with the provisions of the present law (Section 11, Indian Contract Act), namely, dependents, minors, sanyasis, persons devoid of limbs, those addicted to vices were incompetent to contract. The Naradsmriti categorizes competent persons into three, the king, the Vedic teacher and the head of the household. The concept of liability in contract law finds its birth in the Vedic period too. Spiritual debts were referred as ‗rina‘and it was constantly reinforced by the Smritis that failure to pay back the debts meant re-birth as a slave, servant, woman or beast in the house of creditor. So, the son was liable to pay of his father‘s debts even if he did not inherit any property from him. Towards the end of the medieval age, the law of contracts was pretty much being governed by two factors, the moral factor and the economic factor. Activities like transfer of property, performance of services etc. required rules for agreements and promises, which covered not just business and commercial transactions, but also personal relationships in all walks of life. This takes us to the next source, i.e. the Arthashastra by Kautilya, which is considered to be the only existing secular treatise on politics and governments. During Chandragupta‘s reign, contract existed in the form of ―bilateral transactions‖ between two individuals of group of individuals. The essential elements of these transactions were free consent and consensus on all the terms and conditions involved. It was an open contract openly arrived at. It was laid down that the following contracts were void contracts formed during the night67.Contracts entered into the interior compartment of the house. Contracts made in a forest contracts made in any other secret place .There were certain exceptions to clandestine contracts such as: Contracts made toward off violence, attack and Contracts made in celebration of marriage Contracts made under orders of government Contracts made by traders, hunters, spies and others who would 66 67

Id at p. 3, 4. Ibid.

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roam in the forest frequently. The contract would be rendered void if there was any undue influence or if the contract was entered into a fit of anger or under influence of intoxication etc. In general, women could not make contracts binding on their husbands or against family properties. It was possible for a competent person to authorize a dependent to enter into transactions. The dependents in such case included a son whose father was living, a father whose son managed the affairs, a woman whose husband was alive, a slave or hired servant. It has to be noted that money lending was seen as an occupation. Usury was a sin only when the usurer cheated the debtor, for e.g., when he lent goods of a lower quality, but received goods of a higher quality in return or if he extracted fourfold or eightfold return from a distressed debtor68. The interest would be fixed with reference to the article pledged or surety given. Although, all commentaries are not in agreement with the amount of interest to be charged, they all agree that it was sinful to take exorbitant interest and such interest would not be enforceable in court. The Yajnavalkyasmriti provided that in case of cattle being loaned; their progeny was to be taken as profit. , the rights and duties (of a bailee) in a bailment, as we know it today in the form of sections 151 and 152 of the Indian Contract Act, 1872, has its root to the Katyaynasmriti containing a special provision called the ‗silpinyasa‘ dealing with the deposit of raw materials with an artisan- talking about the degree of care attached. The text laid down that ―if an artisan does not return the things deposited with him during the stipulated time, he should be made to pay its price even in the cases, where the loss is due to acts of God or King. The artisan, however, is not responsible for the loss of an article which was defective at the very time of bailment, unless the loss is due to his own fault.‖ It is also interesting to note that there was no ‗limitation‘ for bringing a suit for money lent. This was because of the rule of ‗damdupat‘ which laid down that ‗the amount of principle and interest recoverable at one time in a lump sum cannot be more than double the money lent.‘ It took into consideration the fact that debts were not necessarily recoverable from a man himself, his descendents were also liable. Thus there was no concept of a ‗limitation period‘ for filing a suit. The rule of ‗damdupat‘ is still prevalent in Calcutta and Bombay as it has been upheld to be a valid custom and thus enjoys enforceability under the savings clause, section.69

68 69

Id at p.2. Ibid.

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2.1.2 Islamic Law During the Muslim rule in India, all matters relating to contract were governed under the Mohammedan Law of Contract. The word contract in Arabic is Aqd meaning a conjunction. It connotes conjunction of proposal (Ijab) and acceptance which is Qabul. A contract requires that there should be two parties to it one party should make a proposal and the other accept it, the minds of both must agree that is there declaration must relate to the same matter and the object of contract must be to produce a legal result. It also supplied rules to govern specific contracts to commercial, mercantile and proprietary nature like agency (vakalat), guarantee and indemnity (zamaanat and tamin), partnership (shirkat), one person‘s money and another‘s work (muzarabat), bailment (kafalat). All transactions were treated as secular contracts and rules were provided for settlement of all types of disputes even relating to property and succession. Another thing to be noted is that under Islamic Law even marriages (Nikah) were treated as contracts and till date the situation remains the same. Either of the parties to the marriage makes a proposal to the other party and if the other party accepts, it becomes a contract and the husband either at the time of marriage or after it has to pay an amount to the wife as a symbol of respect known as Mahr. Also the Mahommedans were the firsts to recognize the concept of divorce. This way, a party to marriage could absolve itself of the contractual obligations under marriage. Muslim marriages are thus considered contracts for these reasons70. 2.1.3 History in the Fifteen and Sixteenth Centuries The challenge faced by the common law Courts in the fifteenth and sixteenth centuries was to develop a general criterion for enforcing promises within the framework of the forms of action. And by the end of the 15th century, two forms of action for enforcing rights, which included some of those which we now call contractual, had taken a fairly definite shape. These were action on ‗debt‘ and the action on ‗convenant‘71.

70

Shivamlawworld.blogspot.com/.../history-of-indian-contract-act-1872.ht.assessed on 22.11.2014 8 Mulla, Law of Contract (2013 Lexis Nexis India; Fourteenth edition) id at p.272

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Covenant: - The word ‘convenant’ is the nearest medieval equivalent to current definition of ‘contract’. The action of convenant mainly concerned breaches of agreement for services like building or for sales or leases of land. The primary claim was for performance, and in royal courts the action was begun by the precise writ ordering the defendant to keep the agreement; but judgments ceased to order specific performance and damages were awarded instead. But the action of convenant soon fell out of use, not because it was ineffective but because the other action of ‘debt’ proved more effective72. Debt: - The action on debt covered the claims for the price of goods sold and delivered. The essential feature of it was that the claim was for money compensation for benefit received. The defendant‘s liability in debt was not based on a mere promise but on the debtor‘s receipt of what the debtor had asked for, called quid pro quo like the Romans in the form of loan. It was therefore thought to be unjust to allow the debtor to retain it without paying for it. The debtor‘s wrong was more in misfeasance than nonfeasance. Following this rationale the courts finally broadened the action of debt to allow recovery by anyone who had conferred a substantial benefit. However, the lacuna in this system was that the defendant might avoid liability by a procedure known as ―wager of law‖, in which the defendant denied the debt under oath accompanied by a number (usually 11) of oath-helpers, who swore that defendant was telling the truth.73 2.1.4 The Sixteenth Century: Development of ‘Assumpsit’s’ Now, at this point the main question that confronted the courts as that how the common law would break out of this mould of ―wager of law‖. The courts finally found answer to this question in the law of torts. They had already developed a liability in tort, where if a person undertook to perform a duty and while performing it he caused harm to the obligee; the obligee could sue on the common law action of ―trespass on the case‖ and this principle came to be known as ‗assumpsit‘.74 2.1.5 The Seventeenth and Eighteenth Centuries The seventeenth and eighteenth centuries saw the recognition of the transferability of contract rights as kind of property, the enactment of legislation requiring writing for some 72

Anson, Law of Contract (1975), Oxford University) id at p.11. Ibid. 11Ibid. 73

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kind of contracts, and the shaping of the concept of the dependency of promises. But the movement was slow during this period. Towards the end of the eighteenth century, things had dramatically changed. A modern legal historian wrote that in America years from 1800-1875 were, ―above all else, the years of contract.‖ Contract expressed, ―energetic self-interest,‖ and the law it governed it expressed the nature of contract by insisting that men assert their interests, push them, and fight for them, if they were to have the help of the state 75. It is also generally supposed that it was during this period that Adam Smith had proclaimed that freedom of contract, freedom to make enforceable bargains would encourage individual entrepreneurial activity. Also from the utilitarian point of view, freedom to contract maximizes the welfare of the parties and therefore works for the good76 of the society, which is still in force, provided that the law to be observed in the trial of suits be the Acts of Parliament and regulations of government applicable to the case, and in the absence of such acts and regulations; the usage of the country in which suit arose; and if none such appearedthe law of the defendant, and in the absence of specific law and usage, equity and good conscience77.The expression ‗justice, equity and good conscience‘ was interpreted to mean the rules of English law so far as applicable to the Indian society and circumstances 78. It has been observed that in practice, the application of English law did not raise difficulty because on many points there were no differences between the English and the personal law, and there was no rule of personal law in many cases, moreover because many Indian businessmen acquired experience from their relations with Britons79. The law of England, so far as consistent with the principles of equity and good conscience, generally prevailed in the country unless it came in conflict with Hindu or Mahommedans law.

2.2 Definition and Nature of Contract Law An Agreement enforceable by law is a contract. Therefore in a contract there must be (1) an agreement and (2) the agreement must be enforceable by law. An agreement comes into existence whenever one or more persons promise to one or others, to do or not to do something, ―Every promise and every set of promises, forming the consideration for each other, is an agreement. Some agreements cannot be enforced thought he courts of law, e.g.,

75

www.uakron.eduassessed on 14.08.2014 Ilr.hellco.orgassessed on 14.08.2014 77 Id at p.9,10 13 P...S. Atiyah, The Law of Contract (2010), Vikas Publishing House Pvt Ltd. Id at p. 56. 78 archive.org assessed on 14.08.2014 76

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an agreement to play cards or go to a cinema. An agreement, which can be enforced through the courts of law, is called contract. The law of contract deals with agreements which can be enforced through courts of law. The law of contract is the most important part of commercial law because every commercial transaction starts from an agreement between two or more persons.80 According to Salmond a contract is an ―agreement creating and defining obligations between the parties.‖ According to Sir William Anson, ―A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others. Sir William Anson observes as follows: ―As the law relating to property had its origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass; and that what has been promised to him shall be performed.‖ The Indian Contract Act of 1872 (Act IX of 1872) lays down certain general rules regarding contracts. The Act is not exhaustive. There are other Acts relating to particular types of contracts e.g. the Negotiable Instruments Act, Transfer of Property Act, etc.81The Contract Act does not affect nay usage or custom of trade, or any incident of any contract not inconsistent with the provisions of the Act.82 The law of contract has in recent time to face a problem, which is assuming new dimensions. The problem has arisen out of the modern large scale and widespread practice of concluding contracts in standardized form. People upon whom such exemption clauses or standard form contracts are imposed hardly have any choice or alternative but to adhere. This gives a unique opportunity to the giant company to exploit the weakness of the individual by imposing upon him terms, which may go to the extent of exempting the company from all liability under contract. It is necessary and proper that their interests should be protected. 83 The courts have therefore devised some rules to protect the interest of such persons. Indian courts have consistently refused to enforce post-termination non-compete clauses in employment contracts, viewing them as ―restraint of trade‖ impermissible under Section 27 of the Indian Contract Act, 1872 (the Act), and as void and against public policy because of their potential to deprive an individual of his or her fundamental right to earn a livelihood. The contract Act does not define a wagering agreement. Cotton, L.J. (Thacker v. Hardy) said: ―The essence of gaming and wagering is that one party is to win and other to lose upon a

80 81 82 83

G.H. Trietel, The law of contract (1983) London Stevens and Company id at p.1, 2. Y. S. Sharma, law of contract (2012), University Book House (P) Ltd. Id at p.3. Ibid. R.K.Bangia, Indian Contract Act (2011) Allahabad Law Agency Id at p.45.

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future event which at the time of contract is of an uncertain nature, i.e., that if the future event turns out one way a will lose, but if it turns out the other way, he will win‖. Hawkins, J. (Carlill v. Carbolic Smoke Ball Co.) said: ―It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event and therefore remaining uncertain until, that issue is known. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract‖. In this case the defendants promised to pay 100 pounds to anyone who caught influenza after using the smoke ball manufactured by them. It was held not to be a wager because the user could not lose anything if he failed to catch influenza. The important points to be noted here is that there should be equal chances of gain or loss to the parties and it should be regarding an uncertain event. The most striking feature of wager is that each party has the chance of winning or losing. The subject of government contracts has assumed great importance in the modern times. Today the state is a source of wealth. In the modern era of a welfare state, government's economic activities are expanding and the government is increasingly assuming the role of the dispenser of a large number of benefits. Today a large number of individuals and business organizations enjoy largess in the form of government contracts, licenses, quotas, mineral rights, jobs, etc. This raises the possibility of exercise of power by a government to dispense largess in an arbitrary manner. It is axiomatic that the government or any of its agencies ought not to be allowed to act arbitrarily and confer benefits on whomsoever they want. Therefore there is a necessity to develop some norms to regulate and protect individual interest in such wealth and thus structure and discipline the government discretion to confer such benefits. The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. There are two times where third party beneficiaries are allowed to fall under the contract. 84 The duty owed test looks to see if the third party was agreeing to pay a debt for the original party. The intent to benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract

84

Id at p.203.

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extends to third party beneficiaries. A recent case is in England, where the Contract (Rights of Third Parties) Act 1999 was introduced.85 There are certain situations wherein certain persons are required to perform an obligation despite the fact that he hasn‘t broken any contract nor committed any tort. For instance, a person is obligated to restore the goods left at his home, by mistake, and keep it in good condition. Such obligations are called quasi-contracts. In this era of globalization where a contract contains one or more foreign elements, the difficult and complicated question in proceeding that arises is that of ascertaining its applicable law. Such difficulty stems from the multiplicity and diversity of connecting factors and each of them may arise in a different jurisdiction for instance the place where the contract was made; the place of performance; the place of business of the parties; the place of payment; the of payment; domicile or nationality o the parties and so on. So to avoid this situation parties are granted with the freedom to select the law to govern their contract under the provisions of Rome convention. The inclusion of a choice of law clause is such an everyday matter in international contracts that its absence would be to ignore commercial realities86.

2.3 Types of Contracts Contracts may be classified in terms of their (1) validity or enforceability, (2) mode of formation, or (3) performance. 2.3.1 Classification According to Validity or Enforceability87 Contracts may be classified according to their validity as (i) voidable (ii) void (iii) valid, (iv) illegal, or (v) unenforceable:- A contract to constitute a valid contract must have all the essential elements discussed earlier. If one or more of these elements is/are missing, the contract is voidable, void, illegal or unenforceable. (1) Voidable Contract as per Section 2:a) A voidable contract is one which may be repudiated at the will of one of the parties, but until it is so repudiated it remains valid and binding. It is affected by a flaw (e.g., simple misrepresentation, fraud, coercion, undue influence), and the presence of anyone of these defects enables the party aggrieved to take steps to repudiate the contract. It shows that the consent of the party who has the discretion to repudiate it was not free. An agreement which is not enforceable by either of the parties to it is 85

Id at p.205. Available at http.//www.legalserviceindia.com/article/article assessed on 4.92013. 87 www.BMS.co.in. assessed on 4.92013. 86

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void88. Such an agreement is without any legal effect ab initio (from the very beginning). Under the law, an agreement with a minor is void89. b) Void Contract: - A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable90.In fact; in that case there is no contract at all. It may be called a void agreement. However, a contract originally valid may become void later. An illegal agreement is one the consideration or object of which (1) is forbidden by law; or (2) defeats the provisions of any law; or (3) is fraudulent; or (4) involves or implies injury to the person or property of another; or (5) the court regards it as immoral, or opposed to public policy. c) An Unenforceable Contract: - An unenforceable contract is neither void nor voidable, but it cannot be enforced in the court because it lacks some item of evidence such as writing, registration or stamping. An agreement which is required to be stamped will be unenforceable if the same is not stamped at all or is under-stamped. In such a case, if the stamp is required merely for revenue purposes, as in the case of a receipt for payment of cash, the required stamp may be affixed on payment of penalty and the defect is then cured and the contract becomes enforceable91. If, however, the technical defect cannot be cured the contract remains unenforceable, e.g., in the case of an unstamped bill of exchange or promissory note.92 Contracts which must be in writing the following must be in writing, a requirement laid down by statute in each case: a) A negotiable instrument, such as a bill of exchange, cheque, promissory note (The Negotiable Instruments Act, 1881). b) A Memorandum and Articles of Association of a company, an application for shares in a company; an application for transfer of shares in a company (The Companies Act, 1956). c) A promise to pay a time-barred debt (Section 25 of the Indian Contract Act, 1872). d) A lease, gift, sale or mortgage of immovable property (The Transfer of Property Act, 1882). Some of the contracts and documents evidencing contracts are, in addition to be in writing, required to be registered also. These are: 88

Section 2(i), Indian Contract Act, 1872. Section 11, Indian Contract Act, 1872. 90 Section 2(i), Indian Contract Act, 1872. 91 M.C.Kuchhal , Mercantile law; (2010) Vikas Publishing House Pvt Ltd. Id at p.16. 92 Id at p.17,19. 89

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1. Documents coming within the purview of Section 17 of the Registration Act, 1908. 2. Transfer of immovable property under the Transfer of Property Act, 1882. 3. Contracts without consideration but made on account of natural love and affection between parties standing in a near relation to each other (Section 25, The Indian Contract Act, 1872). 4. Memorandum of Association, and Articles of Association of a Company, Mortgages and Charges (The Companies Act, 1956).

2.3.2 Classification According to Mode of Formation There are different modes of formation of a contract. The terms of a contract may be stated in words (written or spoken). This is an express contract. Also the terms of a contract may be inferred from the conduct of the parties or from the circumstances of the case. This is an implied contract (Section 9)93. We have seen that the essence of a valid contract is that it is based on agreement of the parties. Sometimes, however, obligations are created by law (regardless of agreement) whereby an obligation is imposed on a party and an action is allowed to be brought by another party. These obligations are known as quasi-contracts. The Indian Contract Act, 1872 (Chapter V Sections 68–72) describes them as ―certain relations resembling those created by contract‖. 2.3.3 Classification According to Performance Another method of classifying contracts is in terms of the extent to which they have been performed. Accordingly, contracts are: (1) executed, and (2) executory or (3) unilateral, and (4) bilateral, (5) Contracts under Seal (6) Express Contracts (7) Implied Contracts.94 Executory Contract and Executed Contract-An executed contract is one wholly performed. Nothing remains to be done in terms of the contract. . Executed and Executory Contracts -An executed contract is one in which nothing remains to be done by either party. The phrase is, to a certain extent, a misnomer because the completion of performances by the parties signifies that a contract no longer exists. An executory contract is one in which some future act or obligation remains to be performed according to its terms95An executory contract is one which is wholly unperformed, or in which there remains something further to 93

www.newagepublication.comassessed on 14.08.2014 ibid 95 www.encyclopedia.comassessed on 24.08.2013 94

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be done96.An important corollary can be deduced from the distinction between Executed and Executory Contracts .97It is that a contract is a contract from the time it is made and not from the time its performance is due. The performance of the contract can be made at the time when the contract is made or it can be postponed also. See above cases under executory contract.98 Bilateral and Unilateral Contracts:- The exchange of mutual, reciprocal promises between entities that entails the performance of an act, or forbearance from the performance of an act, with respect to each party, is a Bilateral Contract. A bilateral contract is sometimes called a two-sided contract because of the two promises that constitute it. The promise that one party makes constitutes sufficient consideration (see discussion below) for the promise made by the other99. A unilateral contract involves a promise that is made by only one party. The offeror (i.e., a person who makes a proposal) promises to do a certain thing if the offeree performs a requested act that he or she knows is the basis of a legally enforceable contract. The performance constitutes an acceptance of the offer, and the contract then becomes executed. Acceptance of the offer may be revoked, however, until the performance has been completed. This is a one-sided type of contract because only the offeror, who makes the promise, will be legally bound. The offeree may act as requested, or may refrain from acting, but may not be sued for failing to perform, or even for abandoning performance once it has begun, because he or she did not make any promises100. Contracts under Seal: - Traditionally, a contract was an enforceable legal document only if it was stamped with a seal. The seal represented that the parties intended the agreement to entail legal consequences. No legal benefit or detriment to any party was required, as the seal was a symbol of the solemn acceptance of the legal effect and consequences of the agreement. In the past, all contracts were required to be under seal in order to be valid, but the seal has lost some or all of its effect by statute in many jurisdictions. Recognition by the courts of informal contracts, such as implied contracts, has also diminished the importance and employment of formal contracts under seal. Express Contracts: - In an express contract, the parties state the terms, either orally or in writing, at the time of its formation. There is a definite written or oral offer that is accepted

96

Supra note 27 id at p.16. www.newagepublication.comassessed on 14.08.2014 98 S.K. Maheshwari, S.N. and S.K. Maheshwari; A Manual of Business Laws; 2003, First edition Himalaya Publishing House, Bombay, India, id at p.1.11. 99 www.encyclopedia.comassessed on 14.08.2014 100 Lawjrank.orgassessed on 14.08.2014 97

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by the offeree (i.e., the person to whom the offer is made) in a manner that explicitly demonstrates consent to its terms.101 Implied Contracts: - Although contracts that are implied in fact and contracts implied in law are both called implied contracts, a true implied contract consists of obligations arising from a mutual agreement and intent to promise, which have not been expressed in words. It is misleading to label as an implied contract one that is implied in law because a contract implied in law lacks the requisites of a true contract. The term quasi-contract is a more accurate designation of contracts implied in law. Implied contracts are as binding as express contracts. An implied contract depends on substance for its existence; therefore, for an implied contract to arise there must be some act or conduct of a party, in order for them to be bound102. A contract implied in fact is not expressed by the parties but, rather, suggested from facts and circumstances that indicate a mutual intention to contract. Circumstances exist that, according to the ordinary course of dealing and common understanding, demonstrate such an intent that is sufficient to support a finding of an implied contract. Contracts implied in fact do not arise contrary to either the law or the express declaration of the parties. Contracts implied in law (quasi-contracts) are distinguishable in that they are not predicated on the assent of the parties, but, rather, exist regardless of assent. The implication of a mutual agreement must be a reasonable deduction from all of the circumstances and relations that contemplate parties when they enter into the contract or which are necessary to effectuate their intention. No implied promise will exist where the relations between the parties prevent the inference of a contract. A contract will not be implied where it would result in inequity or harm. Where doubt and divergence exist in the minds of the parties, the court may not infer a contractual relation-ship. If, after an agreement expires, the parties continue to perform according to its terms, an implication arises that they have mutually assented to a new contract that contains the same provisions as the old agreement. A contract implied in fact, which is inferred from the circumstances, is a true contract, whereas a contract implied in law is actually an obligation imposed by law and treated as a contract only for the purposes of a remedy. With respect to contracts implied in fact, the contract defines the duty; in the case of quasi-contracts, the duty defines and imposes the agreement upon the parties. Unconscionable Contracts: - An Unconscionable contract is one that is unjust or unduly one-sided in favor of the party who has the superior bargaining power. The adjective 101

S.N. Maheshwari, S.K. Maheshwari, A manual of Business laws (2010) Himalaya Publishing House, Bombay, India id at p.1.11. 102 Ibid.

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unconscionable implies an affront to fairness and decency. An unconscionable contract is one that no mentally competent person would accept and that no fair and honest person would enter into. Courts find that unconscionable contracts usually result from the exploitation of consumers who are poorly educated, impoverished, and unable to shop around for the best price available in the competitive marketplace103. The majority of unconscionable contracts occur in consumer transactions. Contractual provisions that indicate gross one-sidedness in favor of the seller include limiting damages or the rights of the purchaser to seek court relief against the seller, or disclaiming a Warranty i.e., a statement of fact concerning the nature or caliber of goods sold the seller, given in order to induce the sale, and relied upon by the purchaser. Unconscionability is ascertained by examining the circumstances of the parties when the contract was made. This doctrine is applied only where it would be an affront to the integrity of the judicial system to enforce such a contract. Adhesion Contracts :- Adhesion contracts are those that are drafted by the party who has the greater bargaining advantage, providing the weaker party with only the opportunity to adhere to (i.e., to accept) the contract or to reject it. These types of contract are often described by the saying "take it or leave it." They are frequently employed because most businesses could not transact business if it were necessary to negotiate all of the terms of every contract. Not all adhesion contracts are unconscionable, as the terms of such contracts do not necessarily exploit the party who assents to the contract. Courts, however, often refuse to enforce contracts of adhesion on the grounds that a true meeting of the minds never existed, or that there was no acceptance of the offer because the purchaser actually had no choice in the bargain. Aleatory Contracts: - An Aleatory contract is a mutual agreement the effects of which are triggered by the occurrence of an uncertain event. In this type of contract, one or both parties assume risk. A fire insurance policy is a form of aleatory contract, as an insured will not receive the proceeds of the policy unless a fire occurs, an event that is uncertain to occur. Void and Voidable Contracts104- Contracts can be either void or voidable. A void contract imposes no legal rights or obligations upon the parties and is not enforceable by a court. It is, in effect, no contract at all105. A voidable contract is a legally enforceable agreement, but it may be treated as never having been binding on a party who was suffering from some legal disability or who was a victim of fraud at the time of its execution. The contract is not void 103

Id at p.16. En.wikipedia.org/wiki/Indian Contract Act, 1872 assessed on11 August 2014. 105 www.encyclopedia.orgassessed on 14.08.2014 104

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unless or until the party chooses to treat it as such by opposing its enforcement. A voidable contract may be ratified either expressly or impliedly by the party who has the right to avoid it. An express ratification occurs when that party who has become legally competent to act declares that he or she accepts the terms and obligations of the contract. An implied ratification occurs when the party, by his or her conduct, manifests intent to ratify a contract, such as by performing according to its terms. Ratification of a contract entails the same elements as formation of a new contract. There must be intent and complete knowledge of all material facts and circumstances. Oral acknowledgement of a contract and a promise to perform constitute sufficient ratification. The party who was legally competent at the time that a voidable contract was signed may not, however, assert its voidable nature to escape the enforcement of its terms106. 2.4 Essential Elements of a Valid Contract "All agreements are contracts, if they are made by the free consent of the parties, capacity of parties to contract, for a lawful consideration with a lawful object, and not hereby expressly to be void."107 2.4.1 Offer: - It is an essential element for a valid contract; offer is called in India proposal. (i)

Definition: - A proposal is defined as ―when one person signifies to another his

willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal108. An offer is synonymous with proposal. The offeror or proposer expresses his willingness ―to do‖ or ―not to do‖ (i.e., abstain from doing) something with a view to obtain acceptance of the other party to such act or abstinence. Thus, there may be ―positive‖ or ―negative‖ acts which the proposer is willing to do. (ii) Ways of Offer: - An offer can be made by an act in the following ways: a) By words (whether written or oral). The written offer can be made by letters, telegrams, telex messages, advertisements, etc. The oral offer can be made either in person or over telephone.

106

Lawjraink.orgassessed on 14.08.2014 Section 10. 108 Section 2a of Indian Contract Act, 1872. 107

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b) By conduct. The offer may be made by positive acts or signs so that the person acting or making signs mean to say or convey. However silence of a party can in no case amount to offer by conduct. An offer can also be made by a party by omission (to do something). This includes such conduct or forbearance on one‘s part that the other person takes it as his willingness or assent. An offer implied from the conduct of the parties or from the circumstances of the case is known as implied offer.109 (iii) Kinds of Offer Specific and General Offer110: - An offer can be made either: 1. to a definite person or a group of persons, or 2. to the public at large. 1. The first mode of making offer is known as specific offer and the second is known as a general offer. In case of the specific offer, it may be accepted by that person or group of persons to whom the same has been made. The general offer may be accepted by any one by complying with the terms of the offer. 111 The celebrated case of Carlill v. Carbolic Smoke Ball Co112 is an excellent example of a general offer and is explained below. [Boulton v. Jones113]. 2. (2) In Carbolic Smoke Ball Co.‟s case (supra), the patent-medicine company advertised that it would give a reward of £100 to anyone who contracted influenza after using the smoke balls of the company for a certain period according to the printed directions. Mrs. Carlill purchased the advertised smoke ball and contracted influenza in spite of using the smoke ball according to the printed instructions. She claimed the reward of £100. The claim was resisted by the company on the ground that offer was not made to her and that in any case she had not communicated her acceptance of the offer. She filed a suit for the recovery of the reward. It was held that she could recover the reward as she had accepted the offer by complying with the terms of the offer. The general offer creates for the offeror liability in favour of any person who happens to fulfill the conditions of the offer. It is not at all necessary for the offeree to be known to the offeror at the time when the offer is made. He may be a

109

Chawla, R C Garg K C Chawala, Industrial and Commercial Law (1989) New Delhi: Kalyani Publishers, id at p.14,15. 110 Anson , Law of Contract (2010) Oxford Publishing House id at p. 35, 36 111 Supra note 33 id at p.1.11. 112 (1813) 1 Q.B. 256. 113 (1857) 2H. and N. 564.

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stranger, but by complying with the conditions of the offer, he is deemed to have accepted the offer. (iv) Essential Requirements of a Valid Offer: - An offer must have certain essentials in order to constitute it a valid offer. These are: 1. The offer must be made with a view to obtain acceptance114. 2. The offer must be made with the intention of creating legal relations. [Balfour v. Balfour115] 3. The terms of offer must be definite, unambiguous and certain or capable of being made certain116. The terms of the offer must not be loose, vague or ambiguous. Held: N was not liable [Harris v. Lickerson117]. (2) A father wrote to his would-be son-inlaw that his daughter would have a share of what he would leave at the time of his death. At the time of death, the son-in-law staked his claim in the property left by the deceased. Held: The son-in-law‘s claim must fail as there was no offer from his father-in-law creating a binding obligation. It was just a declaration of intention and nothing more.118 Offer vis-à-vis invitation to offer. An offer must be distinguished from invitation to offer. A prospectus issued by a college for admission to various courses is not an offer. It is only an invitation to offer. A prospective student by filling up an application form attached to the prospectus is making the offer. An auctioneer, at the time of auction, invites offers from the would-be-bidders. He is not making a proposal. A display of goods with a price on them in a shop window is construed an invitation to offer and not an offer to sell. In a departmental store, there is a self-service. The customers picking up articles and take them to the cashier‘s desk to pay. The customer‘s action in picking up particular goods is an offer to buy. As soon as the cashier accepts the payment a contract is entered into.119 Likewise, prospectus issued by a company for subscription of its shares by the members of the public, the price lists, catalogues and quotations are mere invitations to offer. On the basis of the above, we may say that an offer is the final expression of willingness by the offeror to be bound by his offer should the other party choose to accept it. Where a party, without expressing his final willingness, proposes certain terms on which he is

114

Section 2(a), Indian Contract Act, 1872. (1919) 2 K.B. 571. 116 Section 29, Indian Contract Act, 1872. 117 (1875) L.R.S. Q.B. 286. 118 Re Ficus (1900) 1. Ch. 331. 119 Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. (1953) 1 Q.B. 401 115

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willing to negotiate, he does not make an offer; he only invites the other party to make an offer on those terms. This is perhaps the basic distinction between an offer and an invitation to offer. In Harvey v. Facie, the plaintiffs (Harvey) telegraphed to the defendants (Facie), writing: ―Will you sell us Bumper Hall Pen? Telegraph lowest cash price.‖ The defendants replied also by a telegram, ―Lowest price for Bumper Hall Pen £900‖. The plaintiffs immediately sent their last telegram stating: ―We agree to buy Bumper Hall Pen for £900 asked by you‖. The defendants refused to sell the plot of land (Bumper Hall Pen) at that price. The plaintiff‘s contention that by quoting their minimum price in response to the inquiry, the defendants had made an offer to sell at that price was turned down by the Judicial Committee. Their Lordship pointed out that in their first telegram, the plaintiffs had asked two questions, first as to the willingness to sell and second, as to the lowest price. They reserved their answer as to the willingness to sell. Thus, they had made no offer. The last telegram of the plaintiffs was an offer to buy, but that was never accepted by the defendants. The offer must be communicated to the offeree. An offer must be communicated to the offeree before it can be accepted. This is true of specific as well as general offer. G sent S, his servant, to trace his missing nephew. Subsequently, G announced a reward for information relating to the boy. S traced the boy in ignorance of the announcement regarding reward and informed G. Later, when S came to know of the reward, he claimed it. Held, he was not entitled to the reward on the ground that he could not accept the offer unless he had knowledge of it.120 The offer must not contain a term the non-compliance of which may be assumed to amount to acceptance. Thus, the offeror cannot say that if the offeree does not accept the offer within two days, the offer would be deemed to have been accepted 121. Tenders commonly arise where; a hospital invites offers to supply eatables or medicines. The persons filling up the tenders are giving offers. However, a tender may be either: (a) Specific or definite; where the offer is to supply a definite quantity of goods, or (b) Standing; where the offer is to supply goods periodically or in accordance with the requirements of the offeree. In the case of a definite tender, the suppliers submit their offers for the supply of specified goods and services. The offeree may accept any tender (generally the lowest one). This will result in a contract. In the case of standing offers, the offeror gives an open offer whereby he offers to supply goods or services as required by the offeree. A separate 120 121

Lalman Shukla v. Gauri Dutt, II, A.L.J. 489. Supra note 42 id at p.1.17,1.18.

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acceptance is made each time an order is placed. Thus, there are as many contracts as are the acts of acceptance. The G.N. Railway Co. invited tenders for the supply of stores. W made a tender and the terms of the tender were as follows: ―To supply the company for 12 months with such quantities of specified articles as the company may order from time to time. The company accepted the tender and placed the orders. W executed the orders as placed from time to time but later refused to execute a particular order. In this case, it was held that W was bound to supply goods within the terms of the tender.122 The Supreme Court of India in this regard has observed: As soon as an order was placed a contract arose and until then there was no contract. Also each separate order and acceptance constituted a different and distinct contract.123 It is to be noted that if the offeree gives no order or fails to order the full quantity of goods set out in a tender there is no breach of contract. Revocation or Withdrawal of a tender: - A tenderer can withdraw his tender before its final acceptance by a work or supply order. This right of withdrawal shall not be affected even if there is a clause in the tender restricting his right to withdraw. A tender will, however, be irrevocable where the tenderer has, on some consideration, promised not to withdraw it or where there is a statutory prohibition against withdrawal.124 Special terms in a contract: - The special terms, forming part of the offer, must be duly brought to the notice of the offeree at the time the offer is made. If it is not done, then there is no valid offer and if offer is accepted, and the contract is formed, the offeree is not bound by the special terms which were not brought to his notice. The terms may be brought to his notice either:125 a. By drawing his attention to them specifically, or b. By inferring that a man of ordinary prudence could find them by exercising ordinary intelligence. a) First cases are where certain conditions are written on the back of a ticket for a journey or deposit of luggage in a cloak room and the words. ―For conditions see back‖ are printed on the face of it. In such a case, the person buying the ticket is bound by whatever conditions are written on the back of the ticket whether he has read them or not. 1) P, a passenger deposited a bag in the cloakroom at a Railway Station. The acknowledgement receipt given to him bore, on the face of it, the words ―See back‖ 122

Great Northern Railway v. Witham (1873) L.R. 9 C.P. 16. Chatturbhuj Vithaldas v. Moreshover Parashram AIR 1954 SC 326. 124 The Secretary of State for India v. Bhaskar Krishnaji Samani AIR 1925 Bom 485. 125 The Secretary of State for India v. Bhaskar Krishnaji Samani AIR 1925 Bom 485. 123

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One of the conditions printed on the back limited the liability of the Railways for any package to £10. The bag was lost, and P claimed £24. 10s, its value, pleading that he had not read the conditions on the back of the receipt. It was held that P was bound by the conditions printed on the back as the company gave reasonable notice on the face of the receipt as to the conditions at the back of the document.126 2) A lady, L, the owner of a cafe, agreed to purchase a machine and signed the agreement without reading its terms. There was an exemption clause excluding liability of the seller under certain circumstances. The machine proved faulty and she purported to terminate the contract. It was held that she could not do so, as the exemption clause protected the seller from the liability.127 3) T purchased a railway ticket, on the face of which the words: ―For conditions see back‖ were written. One of the conditions excluded liability for injury, however caused. T was illiterate and could not read. She was injured and sued for damages. It was held that the railway company had properly communicated the conditions to her who had constructive notice of the conditions whether she read them or not. The company was not bound to pay any damages.128 (a) The same rule holds good even where the conditions forming part of the offer are printed in a language not understood by the acceptor provided his attention has been drawn to them in a reasonable manner. In such a situation, it is his duty to ask for the translation, of the conditions and if he does not do so, he will be presumed to have a constructive notice of the terms of the conditions.129If conditions limiting or defining the rights of the acceptor are not brought to his notice, then they will not become part of the offer and he is not bound by them. A passenger was traveling with luggage from Dublin to Whitehaven on a ticket, on the back of which there was a term which exempted the shipping company from liability for the loss of luggage. He never looked at the back of the ticket and there was nothing on the face of it to draw his attention to the terms on its back. He lost his luggage and sued for damages. It was held that he was entitled to damages as he was not bound by something which was not communicated to him.130Also, if the conditions are contained in a document which is delivered after the contract is complete, then the offeree is not bound by them. Such a document is considered a noncontractual document as it is not supposed to contain the 126

Parker v. South Eastern Rly. Co. (1877) 2 C.P.D. 416. L‟Estrange v. Grancob Ltd. (1934) 2 R.B. 394. 128 Thompson v. LM. and L. Rly. (1930) 1 KB. 417]. 129 Mackillingan v. Campagine de Massangeres Maritimes (1897) 6 Cal. 227 J. 130 Henderson v. Stevenson (1875) 2 H.L.S.C. 470. 127

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conditions of the contract. For instance, if a tourist driving into Mussoorie, receives a ticket upon paying toll-tax, he might reasonably assume that the object of the ticket was that by producing it he might be free from paying toll at some other toll-tax barrier, and might put in his pocket without reading the same. The ticket is just a receipt or a voucher. C hired a chair from the Municipal Council in order to sit on the beach. He paid the rent and received a ticket from an attendant. On the back of the ticket, there was a clause exempting the Council ―for any accident or damage arising from hire of chairs.‖ C sustained personal injuries as the chair broke down while he was sitting therein. He sued for damages. It was held that the Council was liable.131From the illustrations given it may be concluded that whether the offeree will be bound by the special conditions or not will depend on whether or not he had or could have had notice by exercising ordinary diligence. Detailed observations with respect to printed conditions on a receipt were made by the Bombay High Court in R.S. Deboo v. M. V. Hindlekar132. These observations are: 1. Terms and conditions printed on the reverse of a receipt issued by the owner of the laundry or any other bailee do not necessarily form part of the contract of bailment in the absence of the signature of the bailor (customer) on the document relied upon. The onus is on the bailee to prove that the attention of the bailor was drawn to the special conditions before contract was concluded and the bailor had consented to them as contractual terms. 2. It cannot be just assumed that the printed conditions appearing on the reverse of the receipt automatically become contractual terms or part of the contract of bailment. 3. In certain situations, the receipt cannot be considered as a contractual document as such, it is a mere acknowledgement of entrustment of certain articles. (v) Cross Offers Where two parties make identical offers to each other, in ignorance of each other‘s offer, the offers are known as cross-offers and neither of the two can be called an acceptance of the other and, therefore, there is no contract. H wrote to T offering to sell him 800 tons of iron at 69s. per ton. On the same day T wrote to H offering to buy 800 tons at 69s. Their letters crossed in the post. T contended that there was a good contract. It was held that there was no contract133. Termination or Lapse of an Offer An offer is made with a view to obtain 131

Chapleton v. Barry U.D.C. (1940) 1 K.B. 532. AIR 1995 Bom. 68. 133 Tinn v. Hoffman & Co. (1873) 29 L.T. Exa. 271. 132

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assent thereto. As soon as the offer is accepted it becomes a contract. But before it is accepted, it may lapse, or may be revoked. Also, the offeree may reject the offer. In these cases, the offer will come to an end134. Essential Requirements of a Valid Offer135 1. Must be made with a view to obtain acceptance. 2. Must be made with the intention of creating legal relations. 3. Terms of offer must be definite, unambiguous and certain or capable of being made certain. 4. It must be distinguished from mere declaration of intention or an invitation to offer. 5. It must be communicated to the offeree. 6. The offer must not contain a term the non-compliance of which may be assumed to amount to acceptance. 7. A tender is an offer as it is in response to an invitation to offer. 8. The Special terms, forming part of the offer, must be duly brought to the notice of the offeree at the time the offer is made. 9. Two identical cross-offers do not make a contract. 10. The offer lapses after stipulated or reasonable time. [Section 6(2)] The offer must be accepted by the offeree within the time mentioned in the offer and if no time is mentioned, then within a reasonable time. The offer lapses after the time stipulated in the offer expires if by that time offer has not been accepted. If no time is specified, then the offer lapses within a reasonable time. What is a reasonable time is a question of fact and would depend upon the circumstances of each case136. 1) M offered to purchase shares in a company by writing a letter on June 8. The company allotted the shares on 23rd November. M refused the shares. It was held that the offer lapsed as it was not accepted within a reasonable time.137 2) An offer lapses by the death or insanity of the offerer or the offeree before acceptance. Section 6(4) provides that a proposal is revoked by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Therefore, if the acceptance is made in ignorance of the death, or insanity of offerer, there would be a valid contract. Similarly, in the case of the death of offeree before acceptance, the offer is terminated.

134

Supra note 47 id at p.1.19. S.K.Kapoor, Contract-1and Specific Relief Law (2010) Jain Book Agency id at p.19, 20. 136 Supra note 65 id at p.1.19. 137 Ramsgate Victoria Hotel Co. v. Montefiore (1860) L.R.I. Ex. 109. 135

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3) An offer terminates when rejected by the offeree. 4) An offer terminates when revoked by the offerer before acceptance. 5) An offer terminates by not being accepted in the mode prescribed, or if no mode is prescribed, in some usual and reasonable manner. 6) A conditional offer terminates when the condition is not accepted by the offeree. 7) A proposes to B ―I can sell my house to you for Rs.12, 000 provided you lease out your land to me.‖ If B refuses to lease out the land, the offer would be terminated. 8) Counter offer138. An offer terminates by counter-offer by the offeree. When in place of accepting the terms of an offer as they are, the offeree accepts the same subject to certain condition or qualification, he is said to make a counter-offer. The following have been held to be counter-offers: i. Where an offer to purchase a house with a condition that possession shall be given on a particular day was accepted varying the date for possession.139 ii. An offer to buy a property was accepted upon a condition that the buyer signed an agreement which contained special terms as to payment of deposit, making out title completion date, the agreement having been returned unsigned by the buyer.140 iii. An offer to sell rice was accepted with an endorsement on the sold and bought note that yellow and wet grain will not be accepted.141 iv. Where an acceptance of a proposal for insurance was accepted in all its terms subject to the condition that there shall be no assurance till the first premium was paid.142

138

A.N.Chaturvedi ,Indian Contract Act, (2013) id at p.23. Routledge v. Grant (1828) 130 E.R. 920. 140 Jones v. Daniel (1894) 2 Ch. 332. 141 All Shain v. Moothia Chetty, 2 BomL.R. 556. 142 Sir Mohamed Yusuf v. S. of S. for India 22 Bom. L.R. 872. 139

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2.4.2 Acceptance: - it is the second important essential elements for a valid contract. (i) Definition:Acceptance as follows: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. A offer to sell his house to B for Rs.500, 000. B accepts the offer to purchase the house for Rs. 500, 000. This is an acceptance.143 (ii) Essentials of a Valid Acceptance:It must be given by the Offeree- An offer can be accepted only by person to whom it is made. It cannot be accepted by another person with the consent of offeror. Similarly in case of offer to the particular class it can be accepted by any member of that class. A sold his business to B without disclosing the fact to his customers. J send is an order for the supply of good to A by name. B receives the order and executed the same. It was held that there was no contract between B and J because J never made any offer to B. It must be Absolute and Unconditional- In order to convert the offer into an agreement, the acceptance must be an absolute and unconditional. If the offeree imposes any condition in his acceptance, it is not a valid acceptance, but a counter offer. 1. A offer to sell his watch to B for Rs.200 and B replies that he can buy it only for Rs. 100, there is a material variation in the acceptance. Therefore, there is no agreement as the acceptance is not absolute and unconditional. 2. M offer to sell his piece of land to N for Rs. 12, 00, 000, N accepted and enclosed Rs. 800, 000 with the promise to pay the balance by the monthly installments. Held there was no contract between N & M, and the acceptance was unmodified.

143

Section 2(b).

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It must be in Prescribed Manner144- If the offeror in his offer has prescribed any particular manner of acceptance, it must be given according to that particular manner. It must be communicated to the Offeror. In order to form a contract the acceptance must be communicated to the offeror in a clear manner by the offeree or his authorize agent. Here expression of intension to accept an offer is not a valid acceptance. A proposes by letter to purchase B's house. B expresses his intension to sell it to A but does not send a reply to him. The house is sold to C, despite B's intension. He has no legal remedy to against Bit may Express or Implied- When an acceptance is given as words spoken or written, it is called express acceptance. When it is given by conduct, it is called implied acceptance. It must follow the Offer- Acceptance must be given after receiving the offer. It should not precede the offer. Acceptance always follows the offer. It must be given within Reasonable Time. In order to be valid acceptance, it must be given at specified time allowed by offeror. If no time is mentioned, then the acceptance must be given in a reasonable time. M implied for certain shares in a company in June but allotment was made in November. M refuse to accept the shares, it was held that M could refuse to take shares offer has lapsed after the expiry a reasonable time. An acceptance is a "final and unqualified expression of assent to the terms of an offer". The idea of finality and meeting of minds is important. However, there are many situations in which the meeting of minds will not be clear, e.g. what if: 

The terms of the acceptance are not identical to those of the offer, Acceptance hasn't been communicated,

144



There is a prescribed method of acceptance,



Silence is used to accept,



Can an offer be accepted if the offeree is unaware of it?

Ibid.

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The terms of an offer and acceptance. The general rule is that the acceptance is an unqualified expression of consent to the terms the offeror has offered. Thus an acceptance which tries to vary the terms of the offer is not an acceptance. In fact it will be a counter-offer, which implies a complete rejection of the terms in the original offer. With counter-offers, the offeree then becomes the offeror. Thus in Hyde v Wrench145, the D offered to sell his farm to C for 1000, C then offered? 950 but D refused. C then wrote back agreeing to pay 1000 but D never replied. The court held that no contract had been formed as the offer to pay 950 was a counter-offer which completely rejected the earlier offer and thus the C could not go back and later accept it. It is important to be careful, however, when construing statements as counter-offers as they may in fact be requests for information. Thus if Claimant had written back saying "are you willing to pay 950" rather than "I'll pay 950", this would have been a request for information and the original offer would have remained open for acceptance. In modern business, many industries will adopt their own standardised terms and modes of negotiating contracts. Thus it can be increasingly hard to tell whether there has been an acceptance. In Butler Machine Tool v Ex-Cell-O Corporation146, the C quoted D a price for some machinery and stated delivery would be within 10 months. On the back of the quotation was a set of terms, one of which provided for an increase in price if the cost of the machinery, delivery etc. increased. By the time the machinery was delivered there had been a massive increase in price and the D rejected the excess charge. They relied on a clause in their own terms and conditions on the back of their order (which they sent after the quotation) which did not contain any variation clause. The court held that the terms on the terms on the order had been different enough to constitute a counter-offer and the acknowledgment of order by C had been the acceptance. Thus the defendant's terms prevailed, notwithstanding that the claimant had made reference to their own terms after the acknowledgement. The court, however, has been criticised for adopting a strained view of the facts. The acknowledgment was simply a tear-off slip which C signed. If there had been no such slip what would the situation have been? The claimant proceeded to refer to their own terms during the contract and the goods were produced and delivered. Would it have made sense to say that there was no acceptance and thus no contract? It is clear though that the parties

145 146

[1840] 3 Beav. 334. [1979] WLR 401.

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thought there was a contract even though there was no meeting of minds as to the increased payment clause. The courts will, however, hold that no contract existed in the absence of proper acceptance, making and delivering the machinery is not sufficient: conduct alone does not constitute acceptance. The reason for this is that the basis of contract is the agreement of the parties and conduct by one party does not evidence that agreement. The court must determine whether the intention was to perform task A or B, the fact that one party performs A and not B does not prove that this was the agreement between the parties: he may simply be acting in breach of contract. (iii) Communication of an Acceptance The general rule is that in order to be valid, an acceptance must be communicated to the offeror. Otherwise, an offeree would be unaware that they were bound in a contract. There are, however, exceptions to this. It is possible for a person making the offer to waive the right to receiving an acceptance as in Carlill v Carbolic Smoke Ball. In cases of unilateral offers the acceptance is performing the action specified by the offer and this need not be communicated to the offeror147. The general rule doesn't apply when the reason for the lack of communication is the offeror's fault. Thus in Entores v Miles Far East Corporation148, the C in London made an offer by telex (which is like a fax) to the D (who were in Amsterdam), who were acting as agents for an American company. The D sent their acceptance by telex. The C later applied to the court to be allowed to serve a claim form on the American company (where a party wishes to serve a claim form against a non-English party they need the court's permission. One of the questions the court will ask is whether the contract was concluded in England). The court held that the contract had in fact been made in England when the acceptance was received by the Claimants in London. The court distinguished between cases involving instantaneous communication (like a fax or email) and communication by post. In cases involving post the rules are different, as is considered below. In cases involving instant communication, the contract will be concluded in whichever country the acceptance fax or email is sent to. As the acceptance was sent to London, the contract was concluded there. A more intricate question is whether acceptance is at the moment that the acceptance arrives or only when it is read. It is likely that a court would hold that the moment of acceptance is the moment the message arrives, as long as it is within office hours.

147 148

A.N.Chaturvedi , Indian Contract Act(2010), Allahabad Law Agency id at p.33, 34. [1955] 2 QB 327.

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(iv) Prescribed Method of Acceptance An offeror is permitted to state how the acceptance must be communicated. If the terms of the offer state that an acceptance must be in a certain format, then any deviation is likely to render the acceptance invalid. Whereas, it is possible that if the terms do not stipulate the mode of acceptance in a mandatory way, then any form of acceptance will be valid as long as it is not more disadvantageous to the offeror (e.g. if the offeror says acceptances by email or phone, but the offeree faxes and the offeror has no fax machine to receive the fax). The answer will depend on an interpretation of the term.149 (v) Can Silence be an Acceptance Generally, silence cannot be an acceptance as, obviously, there would be extreme uncertainty as to whether a contract has been concluded or not. The rule seems less obvious in a situation where an offeror makes and offer and says that they will consider it accepted within 7 days unless the offeree rejects it. The offeree wants to accept the contract and so says nothing, but the offeror later seeks to assert that there is no contract. Arguably it is unfair to the offeree150. In Felthouse v Bindley151, the C claimed he had bought a horse from his nephew. After negotiations C wrote to his nephew offering to buy the horse. He ended the letter saying "if I hear no more about him, I consider the horse mine at 30 15s". The nephew didn't reply. The horse was sold by accident by an auctioneer and the C brought an action for conversion (the tort of taking a possession for which one doesn't have ownership). The court held that there had been no valid contract. (vi) Postal Rule Acceptances mailed by post do not follow the general rule that an acceptance is only valid when it is communicated to the offeror. An acceptance is valid at the moment when it is put into the post box by the offeree in order to send it to the offeror: Adams v Lindsell.152 This validity upon posting is called the "postal rule". This rule is well settled but has been frequently criticised. Thus in Henthorn v Fraser153 the claimant was given a written offer in person. The next day, however, the defendant tried to revoke their offer and the letter of revocation reached the claimant's office at 5pm. However, earlier that day the claimant had mailed his acceptance of the offer and it reached the defendant at 8.30pm. The defendant refused to 149

Id at p.38. Supra note 47 id at p.1.21. 151 (1862) 11 CBNS 869. 152 [1818] 1 B&Ald 681. 153 [1974] 1 WLR 155. 150

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honour the contract and argued that because he had given the claimant the offer in person, he had indicated that the postal rule did not apply to this case. The court held against the defendant saying that the use of the post had been contemplated and thus the postal rule applied. The claimant's acceptance was valid when he posted it which was before the revocation. In Holwell Securities v Hughe154, the C tried to exercise an option to purchase some land by mailing a written declaration to that effect. The D never received the letter. C then sought the remedy of specific performance (where the court forces the party at fault to perform the action they contracted to do, in this case transfer land). The court rejected the claim on the grounds that the claimant had failed to give notice. The reasoning for this was that the postal rule did not apply. Had the postal rule applied then there would have been a valid contract even if the letter had been lost in the post. The rationale of the court was that the wording of the clause said that C must give "notice in writing to" the defendant which required communication to the defendant and not just posting. Leaving the particular fact that there was a clause in this case, the decision of the court is authority for the principle that whether or whether not the postal rule applies depends on what the parties contemplated. Thus if the parties contemplated that the acceptance might be by post, the postal rule applies. If, however, as in this case, the parties say that the written acceptance must be "to" the defendant, then the acceptance is only valid when it reaches him. It is still possible to send it by post but the postal rule doesn't apply. (vii) Acceptance in Unilateral Contracts155 As mentioned in the discussion of the Carlill case, above, the courts are prepared to accept that in cases of unilateral contracts the offeror has waived their right to have an acceptance communicated to them. Another general rule would be that the offeree must perform the entire act specified by the offer before there has been acceptance. Thus a person who finds a leaflet for a missing dog cannot spend 10 minutes looking for the dog and claim that they accepted the offer of a reward upon finding the pet. A different question is when a unilateral offer can be revoked. Arguably once someone has begun performance there should be an implied term preventing them from withdrawing the offer. Thus if the performance is long and arduous it would unfair for the offeror to withdraw it halfway through. In Errington v Errington156, the Court of Appeal considered the situation where a father bought a house 154

[1892] 2 Ch 27. Supra note 27 at p.24. 156 (1952) 1 KB 290. 155

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and was paying the mortgage on it. He allowed his son and daughter-in-law to live there if they paid the mortgage. The father died and left the house to his widow in his will, she wanted the house back. The court held that a unilateral contract had arisen between the father and the son and his wife and the payment of the mortgage was performance of the contract. It was not possible for the widow to claim the house anymore than it would have been for the father to withdraw his offer once they had started. As long as they were performing the obligation and did not stop until it was complete, it was not possible to revoke the offer. (viii) Acceptance of an Offer in Ignorance Is it possible to accept an offer you don't know exists? As a general rule, you must have knowledge otherwise you may find yourself subject to contracts you didn't know existed. But where the offeree performs the act in question unknowingly but then becomes aware of the offer right before speaking with the offeror, it is arguable that they should be allowed to assert a contract came into existence. A more likely situation is where a party performs an action which would constitute acceptance but they did so without any intention of accepting the offer. In an Australian case is where a man was arrested for murder, he was aware that there was a reward for information leading to the arrest of the murderers and he gave information to the police. The court did not allow him to recover the reward because they held that he had given information to the police "exclusively to clear himself" and not because he wanted the reward. It would seem, however, that as long as the offeree was aware of the offer then they will be allowed to assert there was valid acceptance, unless their motive was completely different. This would be hard for an offeror to prove. (ix) Withdrawal or Termination of an Offer When does an offer cease to be open for acceptance? As touched on above, the general rule is that an offer is capable of being revoked until it has been accepted. The revocation, however, must have been communicated to the offeree prior to their acceptance. Thus, in Byrne v Van Tienhoven157, the court held that an offer posted on 1 October was validly accepted by the Claimants in America. There had been a massive leap around 3 October in the price of tin and the offeror immediately sent a revocation of their offer of October 1 to sell tin at a low price. By the time the revocation reached America on 20 October the Claimants had already accepted. An offer will expire after a period of time stated

157

(1880) 5 CPD 344.

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in the offer. However, a promise to keep an offer open for a certain period can only be enforced by the offeree if consideration is provided for that promise: Dickinson v. Dodds.158 2.5 Consideration: it is the Essential Elements for a Valid Contract (i) Meaning Consideration is one of the essential requisites to support a contract. Subject to certain exceptions, an agreement made without consideration is void. Consideration is the necessary evidence required by law for a valid contract. Thus, all contracts require consideration to support them. Consideration means the valuable considerations, i.e. the price paid for the other party‘s promise. Contract result where one party promises to do in exchange for something in return. Consideration is (in other words); know as quid pro quo or ―something in return of something‖. Consideration, broadly speaking, is the price paid by the promise for the obligation of the promisor. (ii) Definitions:Consideration has been defined n various ways. According to Blackstone the simplest definition is, ―Consideration is the recompense given by the party contracting to the other‖. In the words of Pollock, ―Consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable‖. Consideration is the cause of all promises. Law supplies no means nor affords any remedy to compel the performance of an agreement made without consideration. An agreement without consideration is a bare or a naked promise and ex nudo pacto non oritio action i.e. cannot be held to be binding upon the parties. The best definition available so far is given in an English case of Currie v. Misa159 as under: Atiyah has suggested that consideration can simply be seen as ‗a reason for the enforcement of promises‘, with that reason being ‗the justice of the case‘. (iii) Promisor and Promisee In most contracts two promises will be exchanged, so each party is both a promisor and a promise. In a contract case, the claimant will often be arguing that the defendant has broken the promise made to the claimant, arguing that the defendant has broken the promise made to the claimant, and therefore the claimant will usually be the promise, and the defendant will be the promisor. So if A contracts to paint B‘s promise to pay A £ 200. If A fails to pant the bathroom, B can sue her, and if the issue of consideration arises, B will seek 158 159

(1876) 2 Ch D 473. (1875) L.R. 10 Ex. 153.

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to prove that her promise to pay £ 200 was consideration for A‘s promise to paint the bathroom. In that action, A will be the promisor, and B the promise. On the other hand, if a does the work but B does not pay the price, B can be sued by A, and if consideration is at issue, A will have to prove that her promise to paint the bathroom was consideration for B‘s promise to pay. In that action, A will be the prmosee and B the promisor. (iv) Kinds of Consideration ‗Executory‘ and ‗Executed‘ consideration Consideration is often divided into two categories: executory and executed. Executed consideration is the performance of an act in return for a promise – if I promise to give £ 20 to anyone who finds my lost handbag, returning the bag is both acceptance of my offer, and executed consideration of my promise. Executed consideration usually occurs in unilateral contracts160. Consideration is called executory when the defendant makes a promise, and the plaintiff offers a counter-promise – you promise to deliver some goods to me and I promise to pay for them when they arrive. The promise is executory because it is something to be done in the future. A bilateral contract usually involves executory rather than executed consideration161. Consideration must not be past consideration must be given in return for the promise or act of the other party; something done, given or promised beforehand will not count as consideration. So, if A looks after B‘s dog while b is on holiday, and when B returns she promises to give A some money, A cannot enforce that promise because she did not look after the dog in return for it – she had already looked after the dog.162 There are two exceptions to the rule that past consideration is no consideration. The first is where the past consideration was provided at the promisor‘s request, and it was understood that payment would be made. This exception can be traced back to the old case of Lamplight v Brathwait

163

Thomas Brathwait had been connected of killing a man, and he

asked Anthony Lampleigh to obtain a pardon for him from the king. After considerable trouble and expense, Lampleigh managed to do so. In the excitement of getting his pardon,

160

Cheshire Fifoot, Law of Contract (1986) and Furmston Butterworth and Com.Ltd.id at p. 97. Id at p. 99, 100. 162 (1915) A.C. 847. 163 (1942)1 All ER 220. 161

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Brathwait promised to pay Lampleigh £ 100, but later refused to hand over the money, so Lampleigh sued. It might appear that Lampleigh‘s consideration was past, since he had secured the pardon before the promise to pay was made. In fact, the court upheld Lampleigh‘s claim. It reasoned that Lampleigh had obtained the pardon at Brathwait‘s own request, and this request carried with it the unspoken understanding that the service would be paid for. Lampleigh obtained the pardon after, and in return for, this implied promise to pay, and so obtaining the pardon was good consideration of for the promise to pay. The later promise, specifying that £100 would be paid, was said to be merely confirmation of the original, unspoken one. This reasoning seems less odd when we consider that today there are many requests which carry with them unsaid promises to pay – when we ask a taxi driver to take us somewhere, or ask the milkman to leave an extra pint, we do not actually say that we will pay for those goods and services, but clearly it is understood by both parties that we will. It may well be that requests to secure royal pardons had the same well-understood effect in 1615. Consideration must be sufficient although consideration must provide some benefit to the promisor or determent to the promise; these do not have to amount to a great deal. This principle is usually described in the rather confusing phrase ‗consideration must be sufficient buy need not be adequate‘, which effectively means that the courts will not inquire into the adequacy of consideration, so long as there is some. Providing something is given in return for a promise, it does not matter that it is not much, or not what the promise would usually be considered to be worth. It is often said that just one peppercorn can be good consideration – even if the promise does not like pepper! The same principle was applied in Chappell & Co. Ltd v Nestle Co Ltd.164 Nestle ran a special offer involving a record of a song called ‗Rockin‘ Shoes‘ – customers could get a copy of the record by sending in 1s 6d (about seven and a half pence), and three wrappers from Nestle‘s bars of chocolate. The copyright holders for the record brought an action against Nestle, which among other things claimed that royalties should be paid on the price of the record. To calculate the royalties due, it was necessary to establish what price Nestle were charging for the record, and the copyright holder alleged that this price (which was the consideration for the promise to send the record) included the three wrappers. Nestle, on the other hand, contended that consideration was only the 18 6d, and that they threw away the 164

(1960) All ER 2232.

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wrappers they received. The House of Lords held that the wrappers did form part of the consideration – the fact that they were of no real worth no Nestle was irrelevant. The interesting implication of this case is that if the fact that the wrappers were useless to Nestle was irrelevant, presumably wrappers alone could have amounted to consideration – if, Nestle had just asked for three wrapper, and not requested money in addition. Consideration must be of economic value it is sometimes said that consideration must have some ‗economic‘ value, though as the Nestle case shows, this economic value may be negligible. What this principle basically seems to mean is that there must be some physical value, rather than just an emotional or sentimental one. In Thomas v Thomas (discussed above) the plaintiff suggested that following her husband‘s wishes was part of the consideration, but the court rejected this argument because they said the husband‘s wishes had no economic value though in the even this did not alter the outcome of the case, as the widow‘s own promise was consideration). Similarly, in White v Bluett165 (1853) a father promised not to make his son repay money he had borrowed, if the son promised was not sufficient consideration to make his father‘s promise binding, because it had no economic value. Consideration can be promise not to sue.166 If one party has a possible civil claim against the other, a promise not to enforce that claim is good consideration for a promise given in return. In Alliance Bank Ltd v Broom

167

Broom had an overdraft of £22,000 with the bank,

and they asked him to provide some security. Mr. Broom promised to do so, but never did, so the bank sued him. Mr. Broom argued that there was o consideration for his promise to provide security, but the court held that the consideration was provided by the bank‘s implied promise not to sue for a while, giving Mr. Broom time to provide security, even though they did sue fairly shortly afterwards. Where forbearing to enforce a legal claim is offered as consideration, there must have been some intention actually to bring proceedings. In Miles v New Zealand Alford Estate Co168 a company had bought some land which it was dissatisfied with. The seller later promised to make certain payments to the company, and the company alleged that it had provided consideration for this promise by not taking legal proceedings to rescind the

165

(1853) 23 LJ Ex.36. (1615) Hab 105: 15 MLC (13th Edn) 148:80 ER 255. 167 (1864) 2 Dr. and Sm. 289. 168 Catherine Elliott Stevens & Frances Quinn, Contract Law , (1986) publication Longman; 6 edition at p. 60. 166

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contract when they found the problems with the land. This argument was rejected by the court of Appeal which held that there was no consideration for the vendor‘s promise, because there was no evidence that the buyers ever usually intended to bring proceedings to rescind. In the same case, it was pointed out that if the party who has the claim believes it to be legally valid, but it turns our not to be, the promise will valid claim – so in the car accident case above, even if it subsequently transpires that for some reason B could not have successfully sued A anyway B‘s promise not to sue is still valid consideration, providing B honestly believes he has a claim against A. One party‘s promise not to enforce an existing claim can only provide consideration if the promise given in return was actually induced by the promise not to enforce the claim. In Combe v. Combe169 a husband and his wife were involved in divorce proceedings, during which he promised to pay her an annual allowance. She later brought an action to enforce this promise and argued, among other things, that she had given consideration for it by not exercising her right to apply to the court for a maintenance order. It was held that this could not be consideration because her husband had not asked her not to apply to the court, and therefore his promise had not been made in return for her promising not to do so. This principle can be a difficult one to apply. In Alliance Bank v. Broom13 the defendant did not ask the bank not to sue, yet the bank‘s forbearance to do so was held to constitute consideration. However, decision has been explained on the basis that by promising to supply security, the debtor was by implication asking the bank not to sue. Consideration must move from the promisee this means that the person who wants to enforce the promise must have given consideration for it. In Tweddle v Atkinson170 Guy and Tweddle agreed that they would each give a sum of money to Twaddle‘s son William, who was about to marry Guy‘s daughter. When Guy died without paying, William sued his executors for the money. His actions failed on the grounds that no consideration had moved form him – he himself had given nothing in return for Guy‘s promise. Consideration need not move to the promisor although consideration must move form the promise, it does not need to move to the promisor – so there can be consideration where the promise suffers some determined at the promisor‘s request, but this gives no particular benefit to the promisor‘s request, but this gives no particular benefit to the promisor to the promisor. In Jones v. padavatton171 the daughter‘s giving up her job would be consideration 169

(1842) 2 QB 851. Supra note 99. 171 (1969) All E.R.616. 170

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for the mother providing an allowance, even thought it did not directly benefit the mother (though as we have seen, the mother‘s promise was not binding because there was no intention to create legal relations). Another way in which consideration can move form the promisee but not to the promisor is where contracts are made for the benefit of a third party. (v) Lawful Consideration According to Section 2(d), Consideration is defined as: "When at the desire of the promisor, the promisee has done or abstained from doing, or does or abstains from doing, or promises to do or abstain something, such an act or abstinence or promise is called consideration for the promise.‖Consideration" means to do something in return. In short, Consideration means quid pro quo i.e. something in return. An agreement must be supported by a lawful consideration on both sides. It must move at the desire of the promisor. An act constituting consideration must have been done at the desire or request of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it will not be good consideration. Consideration may move from the promisee or any other person. Under Indian law, consideration may be from the promisee of any other person i.e., even a stranger. This means that as long as there is consideration for the promisee, it is immaterial, who has furnished it. Consideration must be an act, abstinence or forbearance or a returned promise. Consideration may be past, present or future. Past consideration is not consideration according to English law. However it is consideration as per Indian law. When consideration is given simultaneously with promise, it is said to be present consideration. When consideration to one party to other is to pass subsequently to the maker of the contract, is said to be future consideration. Consideration must be real. Consideration must be real, competent and having some value in the eyes of law. Consideration must be something which the promisor is not already bound to do. A promise to do something what one is already bound to do, either by law, is not a good consideration, since it adds nothing to the previous existing legal consideration. Consideration need not be adequate. Consideration need not be necessarily being equal to value to something given. So long as consideration exists, the courts are not concerned as to adequacy, provided it is for some value. The consideration or object of an agreement is lawful, unless and until it is: 73

1. Forbidden by law: If the object or the consideration of an agreement is for doing an act forbidden by law, such agreement are void. The agreement is void as the procuring government job through unlawful means is prohibited. 2. If it involves injury to a person or property of another. 3. If courts regards it as immoral- An agreement in which consideration is object of which is immoral is void. An agreement between husband and wife for future separation is void. 4. Is of such nature that, if permitted, it would defeat the provisions of any law: 5. Is fraudulent, or involves or implies injury to the person or property of another, or 6. Is opposed to public policy. An agreement which tends to be injurious to the public or against the public good is void. Agreements of trading with foreign enemy, agreement to commit crime, agreements which interfere with the administration of justice, agreements which interfere with the course of justice, stifling prosecution, maintenance and champerty. 7. Agreements in restrained of legal proceedings: This deals with two category. One is, agreements restraining enforcement of rights and the other deals with agreements curtailing period of limitation. 8. Trafficking in public offices and titles: agreements for sale or transfer of public offices and title or for procurement of a public recognition like padma vibhushanor padma sree etc. for monetary consideration is unlawful, being opposed to public policy. 9. Agreements restricting personal liberty: agreements which unduly restrict the personal liberty of parties to it are void as being opposed by public policy. 10. Marriage brokerage contact: Agreements to procure marriages for rewards are void under the ground that marriage ought to proceed with free and voluntary decisions of parties. 11. Agreements interfering marital duties: Any agreement which interfere with performance of marital duty is void being opposed to public policy. An agreement between husband and wife that the wife will never leave her parental house. 12. Consideration may take in any form-money, goods, services, a promise to marry, a promise to forbear etc.172

172

Ibid.

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Contract Opposed to Public Policy can be Repudiated by the Court of law even if that contract is beneficial for all of the parties to the contract- What considerations and objects are lawful and what not-Newar Marble Industries Pvt. Ltd. Vs. Rajasthan State Electricity Board, Jaipur173. Agreement of which object or consideration was opposed to public policy, unlawful and void- – What better and what more can be an admission of the fact that the consideration or object of the compounding agreement was abstention by the board from criminally prosecuting the petitioner-company from offence under Section 39 of the act and that the Board has converted the crime into a source of profit or benefit to itself. This consideration or object is clearly opposed to public policy and hence the compounding agreement is unlawful and void under Section 23 of the Act. It is unenforceable as against the Petitioner-Company. 2.5.1 Capacity to Contract (i) Definition:It is one of the important essential requirements for a valid contract. Capacity is defined as: According to section 10, an agreement becomes a contract if it is entered into between the parties who arc competent to contract. Every person is competent to contract who is or the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.174 It may be seen from this definition that any and every person is not capable of entering into a contract. It follows from the definition enunciated in Section 11, that a person is incapable of entering into a contract under the following circumstances: (i) Minor: Is a person who has not attained the age of majority according to the law to which he is subject; (ii) Insane: If he is of unsound mind, that is, if he is a lunatic or an idiot or suffering from a similar disability; and (iii) Disqualified: If he is disqualified from contracting by any law to which he is subject175. Let us consider all these ingredients in detail. 173

1993 Cr. L.J. 1191 at 1197, 1198 [Raj]. Supra note 52 at p.52, 53. 175 Section 11. 174

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Minor’s:- Who is a Minor: Every person domiciled in India (whatever his personal law may be) is deemed to have attained his majority when he has completed his age of 18 years and not before. To this rule there are two exceptions: i. When a guardian of the minor of whose person or property is appointed by a Court of Law and ii. when a minor's property is taken over by the Court of Wards for management. In either of these cases, minority continues upto the completion of 21st year. In England, it may be noted; minority continues upto the completion of 21st year in all cases.176 (ii) The Law Regarding Agreements The law regarding agreements made by minors under the Indian Law may be summarized as follows: 1. Minor's agreement is void ab initial: Today an agreement with or by a minor is void and inoperative ab initio. Formerly the position was not clear. The Indian Contract Act docs not expressly slate whether a contract made by a minor is void or voidable. S.11 of the Act simply states that a minor is not competent to contract. Following the English Law, it was held formerly that a minor's contract was voidable but not void. The issue again came up in the case of Mohori Bibi v. Dharmadas Ghose.177 2. A minor can be a promisee or beneficiary: Incapacity of a minor to enter into a contract means incapacity to bind himself by a contract. There is nothing which deprives a minor from becoming a beneficiary. Thus; an agreement under which a minor in whose favour a mortgage has been executed can get a decree for the enforcement of the agreement.178 So also a promissory note executed in favour of the minor can be enforced. He can draw, negotiate or endorse a negotiable instrument so as not to incur any liability upon him. M aged 17 years, agreed to purchase a second hand bicycle for Rs. 200 from B.M. paid Rs. 50 as advance and agreed to pay the balance the next day and collect the bicycle. When M returned with the balance next day, B refused to hand over the bicycle and tried to return the advance. B cannot avoid the contract. No ratification: A minor on attaining majority cannot ratify an agreement entered into while he was a minor. The reason is that ratification 'relates back' to the date of the making of the 176

Section 3 of the Indian Majority Act of 1875. (1903) 30 Cal. 539. 178 Raghavachariah v. Srinivas 40 Mad. 308. 177

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contract and, therefore, a contract which was void at the time when it was entered into cannot be made valid by subsequent ratification. Since minor's agreement is void ab initio, it cannot be validated by any subsequent action. A promissory note was given by a person on attaining majority as renewal of another promissory note given by him during his minority in consideration of money then borrowed. Held, as the consideration for the promissory note is only the note executed during minority, the fresh promissory note was unenforceable.179 Where, however, a minor on becoming a major receives fresh consideration and makes a promise in respect also of a debt contracted during infancy, it has been held that the promise could be enforced to the extant to which it is .supported by consideration given subsequent to his becoming a major.180 Claim for necessaries: If every contract of a minor is void, minor might find himself in difficulties, for no one might lend him money. So, the law has consistently held that contracts by minors are valid if for necessaries. The Privy Council pointed out in Mohori Bibi's case that under Section 68 any-person would be entitled to reimbursement out of the minor's estate for necessaries supplied to him or to his family. A minor is liable to pay out of his property for 'necessaries' supplied to him or to anyone whom the minor is bound to support. The relief contemplated under Section 68 is not dependent on any contract. Fletcher Moulton J. in Nash v. Inman observed as follows: "The basis of the action is hardly contract. Its real foundation' is an obligation which the law imposes on the infant to make a fair payment in respect of needs satisfied." The tern 'necessaries' is not confined to goods. It can include other things such as good teaching, medical and legal advice. An article, therefore, is a necessity depending upon the status and the social position of the minor. The price in such cases, which the trader will receive, is a reasonable price and not the agreed price. Only the property of a minor is liable. The minor is not personally responsible. No estoppel: the principle of estoppel: This rule is a rule of evidence. If a man has by words or conduct induced others to believe in the existence of a certain fact, knowing that they might act on this belief, then, by rule of estoppel he is prevented from denying the existence of such facts. "Estoppel arises when you are precluded from denying the truth of anything which you have represented as a fact, although it is not a fact (Lord Halsbury). This rule of 179 180

Arunugham v. Dara Singh (1914) 37. Narendera Lal v. Hrishi Kesh (1918) 46 I.C. 765.

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estoppel is based on sound principles of equity and good conscience. A minor who falsely representing himself of age has induced a person to enter into a contract with him, can nevertheless plead 'minority' as a defense in an action on the agreement. There can be no estoppel against a minor.181 Thus, a contract entered into by a minor is a complete nullity by the statutory provision contained in the Contract Act. There cannot be any estoppel against a statute. Under English Law, therefore, the loan obtained by a minor by falsely representing the age cannot be made to repay the amount of loan as damages for fraud, nor can be compelled inequity to repay. But in India, it has been held, that the Court can instruct minor to pay compensation to the other party in such cases.182 Whereas law gives protection to the minors, it docs not give them a liberty. "to cheat men." No doubt, the rule of estoppel cannot be applied against the minor but this does not mean that the minor shall be allowed to retain and enjoy the fruits of his own fraud. Court will order, on equitable considerations, restitution if the minor is still in possession of the money or the things purchased out of it. Law will not allow a person to enrich himself at the expanse of another. The minor shall have no liability, however, if the money or things cannot be traced out. (iii) Restitution or Compensation: A minor cannot, in a suit to avoid a contract which is void, be compelled to compensate for or refund any benefit which he has received under such contract. Sections 64 and 65 of this Act do not apply to such cases. But equity requires a minor who seeks to avoid a contract which he induces the opposite party to enter with him by fraudulent representation as to his age, to return the consideration which he received in it. This rule of equity has been embodied in Section 30 of the Specific Relief Act of 1963 which provides: "On adjudging the rescission of a contract, the Court may require the party to whom such relief is granted to restore, so far as may be, any benefit which he may have received from the other party and to make any compensation to him which justice may require." But under the guise of restitution the contract itself cannot be enforced. If a minor seeks relief on the ground that the contract is void, he must make restitution.183 Restitution stops where repayment begins.

181

Sadiq Ali Khan v. Jai Kishore AIR 1928 (P.C.) 152. Khan Gul v. Lakha Singh (1928) 9 Lah. 701. 183 Latcharao v. Bhimayya AIR 1956 AP 182. 182

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The Court observed in Gokela Latcharao v. Viswanadham Bhimayya184: "Where the properly is not traceable and the only way to grant compensation would be by granting a money decree against the minor, decreeing the claim would be almost tantamount to enforcing the minor's pecuniary liability under the contract which is void ... There is no rule of equity, equity and good conscience which entitles a court to enforce a void contract of a minor against him under the cloak of restitution." No specific performance: There can be no specific performance of the agreement entered into by a minor as they arc void ab initio. A contract entered into by a minor though void is not unlawful. If a person after attaining majority pays a debt incurred during his minority, he cannot subsequently bring a suit for the refund of this amount. No Insolvency: A minor cannot be adjudged insolvent. This is true even where there arc dues payable from the properties of the minor. This is because he is incapable of contracting debts. Minor as a Partner: A minor cannot become a partner in his own right since he is incapable of contracting under Section 11 of the Contract Act. A partnership pre-supposes a contract. Therefore, a minor admittedly cannot become a partner. But he can be admitted into the benefits of a partnership in an existing firm with the consent of all the existing partners (Section 30) of the Partnership Act). Minor as an Agent: An agent is simply a 'connecting link' between the principal and the third party. As soon as the Principal and the third party arc brought together the agent ceases to function. Since the parties lo a contract, in such cases arc the principal and the third party, they should be competent at law to contract. An agent, being not a party to such contract can either be a major or a minor. It mailers little a minor binds the principal by his acts without himself incurring any personal liability. Minor along with a major: Where a contract is entered into by a minor and a major jointly with another person, the minor is not liable under the contract. However, the contract can be enforced against the major if his liability can be separately ascertained. Similarly, if an adult stands surety for a minor, the adult is liable on the agreement although the minor is not. Position of minor's guardian: An agreement by a minor is void, but an agreement by his guardian on his behalf is valid provided the obligations undertaken are within the powers of the guardian. The guardian can function only within the doctrine of legal necessity or benefit. Where contracting party is a minor represented by a guardian and the contract is clearly for the benefit of minor and was made at the request of the guardian for the benefit of minor, it 184

A.I.R. (1956) A.P. 282.

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binds the minor. However, the minor personally incurs no contractual obligation in such cases. Moreover, a minor may not be answerable for the fraud of his guardian 185. However, note the following case: A film producer entered into an agreement with a minor girl to act in a film and tile same agreement was entered into by the father of the minor on her behalf with the producer. On a breach of the agreement the minor such film producer through her father as the next field. Held, the agreement with the father was equally void since the consideration moving from the father being the minor's promise to act and as the minor could not in law promise there was no consideration. However, if the consideration had moved from the father in the shape of an undertaking by him that his daughter should act, the father could have sued and recover only those damages which he had suffered.186 (iv) Persons of Unsound Mind Insane Persons Definition One of the essential requisites of competency of parties to a contract is that they should be of sound mind.) A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, is capable of understanding It and of forming a' rational judgment as to its effect upon his interests187. Unsoundness of mind may arise from (1) idiocy, (2) lunacy or insanity, (3) drunkenness and similar other factors. Let us Lake one by one. (1) Idiocy:Idiocy is an extreme form of mental unsoundness of mind. Idiocy is permanent and incurable. An idiot or a natural fool is a person that has had no understanding from his infancy. If he has any glimmering of reason so as to tell his age, his father's name or other common matters, he is not an idiot. Contracts entered into by an idiot other than those for necessaries arc void. (2) Lunatics:A lunatic is such a person who is mentally deranged due to some mental strain or other personal experience. A lunatic or non compos mentis is one who has had understanding but, by disease, grief or other causes has lost the use of his reason. Lunacy can sometimes be 185 186 187

Ibid. Raj Rani v. Prem Adib, AIR (1949) Bom. 215. Section 12 (part I).

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curable. (3) Drunkenness:Drunkenness results from intoxication. A drunken person suffers from temporary incapacity to contract i.e. at the time when he is so drunk that he is incapable of forming a rational judgment. It is not ordinary drunkenness that would be a sufficient ground for a person to avoid a contract. A person, who wants to avoid a contract on the ground of drunkenness must be (i) in a state of complete intoxication so that it can be said that he had not the reasoning mind about Him to give availed consent to the contract enters into; and (ii) the other party to the contract must have known of his mental condition188. Contract in Lucid Interval:The second paragraph of the section provides that a person, who is usually of unsound mind, but occasionally of sound mind-lucid interval, may make a contract when he is of sound mind. Thus, even a patient in a lunatic asylum may contract during lucid intervals. A person who is usually of unsound mind, but occasionally of sound mind may make a contract when he is of sound mind. A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind189. 2.5.2 Persons Disqualified by Law Disqualified Persons:The section mentions only two cases of incapacity, namely, minority and lunacy, but there are grounds as well.

Chart: 1. Political or Civic

(a) Status which may Incapacity be to contact.

1.

Foreign Sovereign

2. Professional

May arise out of

2.

Alien enemy

3.

Felons or

3. Artificial or Corporate

188

Supra note 33 id at p.1.32, 1.33. 189 Section 12 (paras 2 and 3).

4. Married

Convicts

(b) Mental deficiency

which may be due to

81

1. 2.

Infancy Idiocy

Section 11 of The Indian Contract Act specifies that every person is competent to contract pro 1. He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 years in normal case and 21 years if guardian is appointed by the Court. 2. He should be of sound mind while making a contract. A person, who is usually of unsound mind, but occasionally of sound mind, can make a contract when he is of sound mind. Similarly if a person is usually of sound mind, but occasionally of unsound mind, may not make a valid contract when he is of unsound mind190. 2.5.3 Free Consent Free consent is the fourth essential condition, described in Sec. 10 Indian Contract Act for a contract. Sec-I3 of the act defines consent and enact that, two or more persons are said to consent when they agree upon the some thing in some sense. Some times, it may happen, one party may have one thing in 'mind and other may, the other thing in his mind. In such cares, though it seems to be parties agreed but actually this is not consent in eyes of law. This flaw in consent may be the result of mistake in consenting mind called error in consensus or fundamental error in consent. Then the question arises what consent or a free consent is in the eyes of law. Definition Free consent, It says that, "Consent is said to be free when it is not caused by 191 (i) Coercion, as defined in Sec.15, or (ii) Undue Influence, as defined in Sec.16, or (iii)Fraud as defined in Sec.17, or (iv) Misrepresentation as defined in Sec.18, or (v) Mistake, subject to the provisions of Sec.20, 21 and 22. 190 191

Sec. 11of Indian Contract Act, 1872. Section 14.

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Consent is said to be caused when it would not have been given but for the existence of such coercion, under influence, fraud, misrepresentation or mistake. If the consent of one of the parties is not free consent, i.e. it has been caused by one or other of the five enumerated elements, the contract is not valid one. A flow in the consent which is a caused by anyone of the five elements shall vitiate the contract which shall be void or voidable at the option of the other party whose consent was so caused. Sec.15 of the Act says, "Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code CXL V of 1860 or the unlawful detaining or threatening to detain, any property to the prejudice of any person whatever with the intention of causing any person to enter into an agreement. It means coercion in a consent if the some conditions are to be fulfilled192. 1. It is committing of any act forbidden by the Indian Penal Act, or 2. The threading to commit any act forbidden by the Indian Penal code, or 3. It is unlawful detaining of any property to the prejudice of any person, or 4. Threatening to detain any property wrongfully to the prejudice of any person. The property may belong to the party of the contract or to any stranger. 5. With the intention of causing any person to enter into an agreement. 6. It is not necessary that the act of coercion must be committed at a place where the Indian penal code is in force.193 The scope of coercion under this section is wider than its synonyms 'duress or menace used under English Law. The act of coercion need not necessarily proceed from the party to contract. It may be directed against the party or to the third person. Coercion includes menace to the goods while menace is not duress. The consent on agreement caused by coercion renders the contract voidable to option of the party whose consent was caused.194 Act Forbidden by Indian Penal Code: - It has been described that person commits or threatens to com it an act forbidden by the Indian penal code with a view to obtaining the consent of other person, the consent in such a case is deemed to have been obtained by coercion. Sec19, Indian Contract Act, 1872. For coercion, it is not necessary that the Indian Penal "Code should be applicable at the place where the consent has been so caused. 195

192

Supra note 33 id at p.1.32,1.33. Id at p.1.41. 194 Sec. 19 Indian Contract Act. 1872. 195 Supra note 123. id at p.1-68. 193

83

In "Chikkan Amiraju v. Chikkam Seshama‖196 case A, a Hindu by a threat of suicide, induced is wife. And son to erasure a release deed in favour of his brother in respect of certain properties claimed their own by the wife and son. The question before the court was whether. It was an act of coercion of act. The majority said that the cut was forbidden by I.P.C. and also threat to kill oneself was out where a person acts to his own prejudice and also to the prejudice of his wife and son and thus requirement of sec. 15 were satisfied. Oldfield I dad different view from majority who said that suicide was not forbidden by I.P.C. ad a threat to do that could not be considered to be threat to do a forbidden act with in the meaning of Sec.15 of Indian contract act. The majority view in this case appears to be convincing. Committing suicide is a crime, which gives no chance to punish wrong doer so it is to be said that the thereafter to suicide should amount to be coercion. But it creates a need for amendment of Sec. 15. Sec. 15 does not include that acts, which are punishable by other penal law, though they create coercion. So the law commission of India in it report on the Indian contract act197 and inclusion in the definition other penal laws also, which says that the function of I.P.C. is to create offences and not merely to forbid. It forbids only what it declares punishable so the word any act forbidden by I.P.C.' should be dated a wider expression should be substituted so that the penal law other than the I.P.C. may be included. Parties The act of coercion may be committed by one party against other party or by a stranger against the party or by the party against stranger or between strangers who may not be the parties to the contract at all. The word ―cause‖ occurring Sec.15 or 16 is not a word of art but is of science. Nothing can be said to be cause of a particular effect is the direct out come of that particular cause. If the alleged cause is remote and not proximate, is distant, not, immediate, such a cause can not be said to be the cause in legal pertinence.198 In case of ―Mathiah Chetiyan v. Karuppan Chetti"199 the plaintiff appointment agent for a fixed term and at the end of term he appointed another person as his place. The defendant refused to hand over account books bonds papers etc, of agency unless the principle gave him release bond from all the liabilities in respect of his agency. Consequently, the release was given and the new given agent got the account book and bonds etc. from the

196

ILR 191841 Mad. 33. 13th Report 1954 p. 21. 198 Vijay Singh Mohan Singh v. Transport Manager ATM Service, A.T.C. 1982 Guj. 307. 199 ILR (1927) Mad. 786, AIR 1927 Mad. 852 ; 501 IC 5. 197

84

defendant. It was held at the plaintiff s consent was induced by coercion and so the contract was voidable to his option. Unlawful Detaining of Property: - Coercion could also be caused by the unlawful detaining or threatening to detain, any property to the prejudice, to the prejudice of any person whatever, the intention of causing any person to enter in an agreement. If an outgoing agent refuses to land over the accounts to the new agent until the principal release executes release in is favors, it is coercion. If the detention of property is not unlawful, there is no coercion. In a case "Bengal stone co. Ltd. v. Joseph Hyam200 if a mortgage refuses to course the equity of redemption except on the term dictated by him, there is nothing unlawful in it and, therefore so coercion is caused in this case (a) Forcible dispossession of property under threat is Coercion: If a person is dispossessed of his property under illegal threat unless he parts with the possession he would be detained under MISA (Maintenance of Internal security), parting with the property under such threat amounts to coercion under Sec.15. There are cases of persons affected by excesses of emergency period proclaimed in 1975. In this case it was held that a person is not bound by an act done under duress or coercion. To the prejudice of a person. Sec. 15 requires that there should be omitting or threatening to commit any act forbidden by I.P.C. or the unlawful detaining or threatening to detain any property to the rejoice of any person whatever, with the intention of causing any person to enter into agreement. It means that the act causing coercion should be necessarily be directed against the contracting party, it is enough that the act to the prejudice of any person whatever, with the intention of causing any person enter into an agreement in the case of ―Ranganayapamma v. Alwar Setti”201, it was that to course a widow to adopt a child, the relatives of the adopted boy do not allow he dead body the Widow's husband to be taken out of the home until the adoption is made, this is coercion. Undue influence as: A contract is said to be induced by undue influence where the relation subsisting between the parties are such that one of the party is in position to dominate the will the other and uses that position to obtain an unfair advantage of over the other202. A person is deemed to be in position to dominate the will of another. 200

(1918) Col. 78. LLR (1889) 13 Mod 214. 202 Section 16. 201

85

a) Where he holds a real or apparent authority over the other. The relationship between master and servant, doctor and patient. b) Where he stands in the fiduciary relation (that is relation of mutual fair and trust) to the other. Relationship between rather and son, solicitor and client, trustee and beneficiary promoter and company etc. c) where he maps a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or bodily distress. Relationship between a medical attendant and his patient. In case of ―Ranee Annapurni v. Swaminath‖203, a poor Hindu widow persuaded by a money lender to agree pay 100 percent rate of interest on money lent by him to her she needed the money to establish her right to maintenance. It was held this was a case of undue influence and court reduced the rate of interest to 24 percent. In case ―Mannu Singh v. Umadat Pandey‖,204 a spiritual guru induced his devotee to give him gifts of whole his property in return of a promise of salvation of the devotee. It was held that the consent of the devotee was under undue influence. In case of ―Sher Singh v. Pirthi Singh‖,205 an literate villager aged about 90 yrs. Physically infant and mentally in distress, executed a deed of gift under the influence of his nearest relative (who at the time formed a joint family) who looked after his daily dominate his well. Similarly in case of ―Inche Nariah v. Sheich Ali Bin Omar‖206, an illiterate old woman made a gift of deed of practically the whole of her property to her nephew who managed her affair, it was hold the gift should be set aside in the grand of undue influence. Where there is no domination of will. If the contract gives advantages to one of the parties but the same has been made in ordinary course of business, the presumption would not be raised. When the person taking the advantage in a transaction was not in a dominant position over the other the presumption of undue influence will not be erased transaction appears uncontainable. In case of ―Shrimati v. Sudhakar R. Bhatkar‖,207 the plaintiff was an illiterate lady managing her properties. The defendant was thing in a part of the house owned by the plaintiffs as a tenant. He treated the plaintiff as his mother. He persuaded her to gift him her property, which she did. The gift deed was registered in his favors. It was held mere 203

(1910) 34 Mad. 7. (1890) 12 All 523. 205 AIR (1975) All 259. 206 (1929) AC 127. 207 AIR (1198) Bom. 122. 204

86

persuasion by the plaintiff to the defendant to gift her property did not mean the undue influence. There was nothing to show that he was able to dominate her will. The transaction was held to be valid as there was no undue influence in this case. Contracts with Pardanashin Lady A contract with Pardanashin is presumed to have seen undue influence. A pardanashin woman is one who observes complete reclusion because of the custom of the particular community to which she belongs she can avoid a contract unless the other party shows it was her intelligent and voluntary Act.208 "Ismaile Mussajee v. Hajiz Boo‖209, it was held that a woman who goes to the court and gives evidence, settles rents with her tenants and collects rents and communicates in matter of business with men other than the member of the family is not a pardanashin woman. ―Kalibaksh Singh v. Ram Gopal Singh‖210, it was held by Privy Council that the prove must go so far as to allow show affirmatively and conclusively that the deed was not only executed by, but also explained to, and was really understood by grantor. In such cases, it must also be established that the deed was not signed under duress and also arose from the free and independent will of the grantor. "Wazid Khan v. Raja Ewaz Ali Khan‖211 an old illiterate pardanashin lady, who was herself incapable of transacting any business, conferred a grant of her substantial property without any valuable consideration in favors of her confidential managing agent. The Privy Council held that it was incumbent in the grantee to show that he had made proper use of confidence reposed by the lady in him and there was no undue influence. "Chidambaram Pillas v. Muthammas,‖212 it was held that a pardanashin lady may not be illiterate. If she is fractionally, excluded from social inter course and communication outside void, she will fall in this category. Relation which Raise Presumption of Undue Influence The following relationship usually raises the presumption of undue influence: 1) Parent and child 2) Guardian and ward 3) Trustee and beneficiary 208

A.N.Chaturvedi ,Indian Contractact, (1984) Allahabad Law Agency id at p.114. (1906) 33 Cal. 773. 210 (1913) 41 IA 223. 211 ILR (1891) IA 144. 212 (1993) ILW 466. 209

87

4) Religious advisor and disciple 5) Doctor and Patient 6) Solicitor and client 7) Financer and finance The presumption of undue influence usually applies whether the relationship between the parties is such one of them is by reason of confidence reposed in him by the other, able to lake unfair advantage on other. However, no presumption of undue influence is made in relationship of: 1. Land Lord and Tenant 2. Creditor and Debtor 3. Husband and wife provided wife should not be pardanashin woman otherwise the presumption will rise. Effects of Undue Influence An agreement is caused by undue influence, the agreement is a contract avoidable at the option if the party whose consent was so causes. The second Para to Sec.19 (a) incorporates the following provision as: "any such contract may be set aside absolutely, or the party, who was entitled to avoid it, has received any benefit thereafter, upon such terms and condition as the court seems just213." Thus because of the undue influence one party to contract may have taken an un due advantage under the contract or the party entitled to avoid the contract may have already received some benefit under the contract, the contract in such cases has been empowered to set aside the contract either or upon such terms and conditions as the court may deem just. This is so because if a party who seeks rescission of the contract must also do equity and if we have received any benefit under the contract, he should compensate the other party. In such a case, it is for dominant party to rebut the presumption of undue influence. If the party has got exorbitant gain at the cost of the other party, it is for him to prove that this advantage had not been gained by undue influence. In case of ―Sethani v. Bhanna‖214, a sale deed of her property was executed by an old, blind, illiterate and a blind woman in favours of respondent, on whom she was totally dependant. There was not evidence of consideration having passed at the time of sale, or the respondent having proved absence of undue influence. The respondent was held to be bound 213 214

Sec.19(a) a of Contract Act, 1872. AIR (1993) SC 956.

88

to return the obtained advantages by him in this case. In case of ―Kirpa Ram v. Sami-id-Din Ahmad Khan‖215, respondent borrowed from the appellants a sum of Rs. 900 executing a fond to pay compound interest at 2% menace, with monthly rent. At the time of execution of bond, the respondent was 18 yrs. Old and was a known thrift and drunkard. It was held to be unconscionable bargain and a court allowed only simple interest on the set amount instead of compound interest. In ―Vinayakappa v. Dulli Chand‖216, case, there was a sale deed of a multithread building situated on the main road wishing the municipal area. Looking to the commercial property of the area, the consideration was extremely inadequate. Moreover, seller's brother continued to occupy a portion of the property without paying any rent. The buyer of the property did not pay any taxes on the same for a number of years. It was also found that the seller and the buyer were having the relationship of borrower and money lender and thus had influence there, and the transaction was a loan transaction rather than the sale. No title therefore passed to the buyer of the property. ―Rukmani v. C.B. Krishan Nair‖217, an old lady seventy who had a paralytic attack was made to execute a gift deed without the contents of the deed, being made known to her. It was held that the burden of proof was on the donee to show there was no undue influence. Fraud and Misrepresentation When a false statement is made with knowledge that it is false and also with the intention to deceive the other party and make him enter into contract on the-basis is known as fraud. When the person making false statement believe the statement to be true and does not interest to mislead the other party to the contract, is known as misrepresentation. Fraud (Sec.17) Fraud exits when it is shown that: 1) A false representation has been made: (a) Knowingly, or (b) Without believe in its truth, or (c) Recklessly, not caring whether it is true or false and the maker intended to out upon it. or 2) There is a concealment of a material fact or that there is a partial statement of fact in such a manner that the withholding of what is not stated makes that which stated false. 215

ILR (1903) 25 All 284. AIR (1986) Bom. 193. 217 AIR (1985) noc 101 Ker. 216

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The intention of party making fraudulent misrepresentation must be to deceive the other party to contract or induce him to enter in a contract. 'Fraud' means and includes any of the following acts omitted by a party to contract or with his connivance C intention active or passive acquiesce, or by his agent with intent to deceive or induce a present enter into contract. 1. The suggestion, a fact is true when it is not true and the person making suggestion does not believe it to be true. 2. Active concealment of a fact by a person leaving knowledge or belief if the fact. 3. A promise made without intention of performing it. 4. Any act fitted to deceive. 5. Any such act or omission as the law specially declares to be fraudulent.218 A. Essential Elements of Fraud 1) To be a representation or ascertain which is false (suggestion false) Without the representation or ascertain, there can be no fraud except in those cases where silence may itself amount to fraud or where there is an effective concealment of facts. If a representation is true when it is made, but to the knowledge of party making it, but becomes the untrue before entering into contract, it must be corrected. If it is not correct, the other party may rescind the contract. In ―Peek v. Gurney‖219, case, the prospectus of a company did not refer to the document existing there which discloses liability. This gave impression that the company was prosperous. If the existence of document had been disclosed, the impression would have been Quito different. It was held that non-disclosure amount to fraud and anyone who purchased shares on the faith of this prosperous could avoid contract. In ―With v. O'Flangan‖220 case, the negotiation for the sole of a medical practice started in January taking receipts fine of 2000. In May, when the contract was concluded the taking had dwindled to of 5 a week. It was held that the contract would be rescinded as there was failure to disclose the fall in takings. The representation must rebate to material fact which exists now or existed in past. A mere opinion, commendatory or puffing expression or hearsay or flourishing description is not regarded as representation of fact.

218

Sec.17 of Indian Contract Act, 1872. (1873) LR 6 GHL 377: (1874) 43 LJ Ch. 19. 220 (1936) All ER 727 : 1936 Ch. 525. 219

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In case of ―Bisset v. Wilkinson‖221, the vender of a price of a land told a prospective purchaser then, in his opinion, the land would carry 2000 sheep. In fact the land could carry a number less then this. It was held it was no misrepresentation us the statement was one of opinion which was honestly held. The representation must have been made before the conclusion of the contract with the intention of inducing the other party to act open it. Not only must the representation to be false and made with the knowledge of its falsity, but it also be made with an intent to deceive the other party. The representation or must have been made with a knowledge of its falsity or without belief in its truth or recklessly, not carrying whether it is true or false. Further the representation amounting to fraud must have been made either by a party to contract or with his agent or connivance. In case of ―Resse River Silver Mining Co. v. Smith‖222, a company issued a prospectus giving false information about the unfound worth of Neveda. A share holder, who had taken shares on the faith of the prospectus wanted to avoid the contract. It was held that he could not do so as the false representation in the prospectus amounted to the fraud. The other party must have been induced to act upon representation or ascertain. A mere false hood is not enough to give a right of action. It must have induced the other party to act upon it. The other party cannot sheet his eyes to the obvious dejects or flows which he could have easily an ascertained by reasonable investigation or inspection. In case of ―Smith v. Chad Wick‖223, 'A' bought shares of company on the faith of a prospectus which contained an untrue statement that one '8' was a director of the company. A had never beart of be and. Therefore, the statement was immaterial from his point of view. 'A' is claim for damages in this case was dismissed because the untrue statement had not induced 'A' to buy shares. The other party must have relied upon the representation and must have been deceived. A mere attempt at deceit by one party is not fraud unless the other party is actually deceived. If a representation does not come to the notice of a party, it cannot say to have misted that party because it does not lead the party at all.

221

(1927) AC 177: (1926) All ER Rep. 343. (1896) LR 4 HL 64. 223 (1884) 9 AP B. as 187. 222

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In ―Horsefull v. Thomas‖224, case, I bought canon from it. The canon was defective. But it had plugged it. T did not examine the canon, but when he used it, it burst. It was held that as the play had not deceived T, he was liable to pay. The other party, acting on representation or ascertain must have subsequently suffered some loss. It is a common role of law that there is no fraud without damage. As such fraud without damage or damaged without fraud does not give right to an action of deceit. Mere silence is no fraud Active concealment has also been considered to be equivalent to a statement because in that case, there is a positive effort to conceal the truth and create untrue impression on the Mindy other. Mere silence, however as to fact is no fraud. Explanation to Sec.17, in this connection incorporates the following provision: ―Mere silence as to fact likely to affect the willingness of a person to enter into a contract is us fraud, unless the circumstances of the case are such that, regard being had to them it is the duty of the person keeping silence to speak or his silence is, in itself is equivalent to speech.‖ In a case before Supreme Court, a candidate, who had full knowledge of the fact that he was short of attendance, did not mention this fact in his examination form. This was held to be no fraud, it being the duty of University to scrutinize the forms and to call for verification or information in case of doubts. The university having failed to do so, it was stopped from canceling the examination of candidate. In case of ―Keates v. Lord Cadogan‖225 a let his house to B which he knows was in ruinous condition. He also knows that the house was to be occupied by ‗B‘ immediately. A did not disclose the condition of the house to B. it was held that being the duty of 'B' to check and inspect the house, a had not committed any fraud. A contracting party is not obliged to disclose each and everything to the other party. If a person is selling his goods, he is under no duty to disclose the defect in his goods. If he makes false statement as to the quality of the goods, it would be fraud, but if he merely keeps silence as regard the defects in them, there is no fraud. In case of sole of goods the rule is ‗Caveat Emptor‘ i.e. buyer beware, which means that it is a duty of buyer to be careful white purchasing the goods and there is no implied condition or warrants by the seller as to the

224 225

(1862) IHL 90. (1851) 10 CB 591.

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quality or fitness of goods for any particular purpose.226 Exceptions Where silence is fraud General rule is that mere silence is no fraud. But there are come cases which are exception to it when keeping silence may be deemed taken act of deception. Explanation to Sec. 17 mentions the two following exception. 1. Where there is duty to speak, keeping silence is fraud. 2. When silence, is in itself, equivalent to speech, such silence is a fraud. Misrepresentation (Sec.18) A contract the consent to which is induced by misrepresentation is the contract in which false statement is made with the knowledge that it is true and also without the intention to deceive the other party and make him enter into a contract that basis, it is known as misrepresentation. Misrepresentation is defined in Sec.18, which says misrepresentation means and includes: 1. The positive ascertain, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true. 2. Any breach of duty, without an intent to deceive again, an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him. 3. Causing, however, innocently a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. 4. Unwarranted Statements: When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be true, this to misrepresentation. The Calcutta High Court has held that a statement cannot be said to be warranted for the purpose of Sub Sec(l) of Sec.18 of the Act where it is based upon mere hear say held in ―Mohan Lal v. Sri Gangaji Cotton Mills Co.‖227 In a case of ―Bombay Oceanic Steam Navigation Co. v. Soonderdas Dharmsay”.228 The defendant chartered a ship from plaintiff, who stated the ship was certain not more than 2800 tonnage register. As a matter of fact the ship had never been in Bombay and was wholly known to plaintiff. She turned out to be of the registered tonnage of more than 3000 tones. It was held that the defendants were entitled to avoid the charter party. 226

Sec. 16 of Indian Sales of Goods Act. 1930. (1899) 4 C.W.N. 369. 228 (1980) 14 ILR Bom. 241. 227

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Where a representation acquires the status of being a term of contract and it turn out to be untrue, the due advantaged party may not only avoid the contract but also sees for damages for breach. Where in the course of negotiable for the sale of lamb, the seller stated the whole of the lot was fully serviced, whereas this was not so, the buyer was allowed damages for the breach of warranty.229 Breach of Duty:Any breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice is a misrepresentation. This clause is probably intended to all those cases who are called in the court of equity cases of 'constructive fraud' in which there is no intention to deceive, but where the circumstances an such as to make the party who derives a benefit from the transaction equally answerable in effect as if he had been activated by motives of fraud or deceit.

230

In case ―Oriental Banking Corporation v. John

Flemings.‖231 The plaintiff having no time to read the contents of a deed signed it as he was given the impression by the defendant that it contained nothing but formal matter already settled between them. The deed, however, contained a release in favour of the defendants. Accordingly, the plaintiff was allowed to set aside the deed. Inducing Mistake about subject matter:Causing, however innocently, a parts to an agreement to make a mistake as to the substances of the thing which is subject of the agreement is also misrepresentation. The subject matter of every agreement is supposed by the parties to possess certain value or quality. If one of the parties leads the other, however innocently, to make a mistake as to the nature or quality of the subject matte, there is misrepresentation. Suppression of vital facts Cases of concealment or suppression will fall either under Sub Section (2) when amounts to breach a duty or under Sub Section (3) when it leads the other party to make a mistake about subject matter of the agreement. It is misrepresentation. Misrepresentation should be of facts 'Commendatory Expressions' such as men of business will habitually make about their goods and not sufficient to avoid the contract. Change of Circumstances There is often a gap of time between the representation and the ultimate conclusion of 229 230 231

(1975) 19 377. Kiran Gupta S.P. Babuta Mercantile Law,1st Edition , Kalyani p.72,73 (1879) 3 Bom. 242.

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the contract. Any change of circumstances in the mean time affecting the fact represented must be bought to the knowledge of the other party232. Which was held by court of appeal in 'With V. O. Flangan' Inducement It is further necessary that misrepresentation must be cause of the consent, in the sense, that but for the misrepresentation the consent would not have been given. Sec.19 explains this clearly. Sec.19 says about the visibility of agreement without free consent. When consent to an agreement is caused by coercion, fraud or misrepresentation the agreement is a contract voidable at the option of the party whose consent was so caused. A party to contracts whose consent was so caused, may fit insist that he shall perform the contract, or rescind at and refused to be bound by it. The expression is justified by him. They would be in position where they were before entering into contract. Limits to the right of rescission 1. If the party whose consent is caused by misrepresentation affirms the contract besides the rescind it. It will be valid and a binding contract on them. 2. A person having right to avoid the contract must do so in reasonable time. If he does not do so it will amount to affirmation of the contract. 3. If the contract creates an interest of in favour of third time after some time, it would be amount to affirmation not avoidance. 4. If a contract has been made in such way, to and some steps has been taken like exchange of goods and the party is unable to restore goods then it amounts to affirmation because the goods cannot be kept in its former position. 5. If the contract has been done and some steps has been taken, and this can't be taken into former position. And the other party gives damages in lieu of rescission of contract. The contract would amount affirmation. Mistake When the consent of the parties to the contract is caused mistake, it is not free consent which is needed for validity of a contract. One or both of the parties may be working under some misunderstanding or misapprehension of some fact relating to the agreement. If such a misunderstanding had not been there, probably they would have not been caused by mistake233. 232

S.N. Maheshwari, S.K. Maheshwari; Amanual of Business laws; (2010) Himalaya Publishing House, Bombay, India id at p.1.51 233 Chawala and Garg, Industrial and Commercial law ) New Delhi Kalyani Publication id at p. 68, 69, 70.

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"An agreement is void where both the parties are under mistake of fact, where both the parties to an agreement are under a mistake of fact essential to an agreement, the agreement is void.234" Explanation: An erroneous opinion as to value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as a matter of fact. Agrees to by from B a certain horse. It turns out that the horse was dead at the time of Bargain; though neither the party was aware of the fact the agreement is void. When the type of mistake contemplated in Sec.20 is present in an agreement, the agreement is void. Sec.20 requires that: 1. Both the parties to the contract should be under a mistake, and 2. Mistake should be regards a matter of fact. 3. The fact regarding which the mistake is made should be essential to the agreement. 1. Mistake of both the Parties:Sec.20 makes the agreement void if there is mistake on the part of both the parties. But it requires that the mistake should be bilateral. If the mistake is unilateral and having some misimpression, the validity of the agreement is not affected thereby. Sec.22 of the Act clears it which says, "Contract caused by mistake of one party as to matter of fact." A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as the mistake of fact. In ―Ayekam Angahal Singh v. Union of India‖235, there was an auction for sales of fisheries rights which was for highest bidding of some amount per year for 3 years. But the plaintiff by mistake understood, the amount for all three years. But it was unilateral mistake and was not avoided by court. 3.Mistake of fact:There should be mistake of fact and not to law. The validity of the contract is not affected by mistake of law. Regarding mistake of law the provision contained in Sec.21 is as follows: Effect of mistake as to law - 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 law in force in India has the some effect as a mistake of fact. For instance a owe 'B' Rs. 1000/- Both A and B mistakenly think that the debt is time barred and agreed that a may pay only Rs. 500/. to clear the debt. It is a mistake of law and 234 235

Sec. 20 of Indian Contract Act, 1872. AIR (1970) Manipur 16.

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the contract to pay Rs. 500/. is valid236. 3. Mistake essential to the contract: - It is also necessary that the fact regarding which the mistake is made should be essential to the agreement. Whether the mistake is regarding a fact essential to the agreement or not depends on a particular contract. In this view, a question arises that what constitutes essential facts. Speaking broadly, certain facts are essential to every agreement. They are: i) Mistake as to existence of the subject matter If both the parties to contract believe in the existence of any subject matter, which in fact does not exist, the agreement would be void. The reason is that if the subject matter of the contract has already perished, there is nothing regarding which the contract is being made. Such agreement is void for reason that the performance of the agreement is impossible. Sec.56 declares that an agreement to do an act impossible in itself is void. Sec.7 of Indian Sales of Goods Act, 1930 also declares that if there is a contract of sale of specific goods but they are non-existent at the time of contract, the contract is void. When there is a contract for sale of specific goods i.e. the goods identified and agreed upon at the time of making of the goods are in existence. If in fact is not so the agreement is void. ―Courturier v. Hastle”237 a man and a woman executed a separation deed, both of them working under a common mistaken impression that they are married to each other. Since fact of marriage was no existent, the deed was held void. If the parties to the contract are not mistaken as to the subject matter, but not only regarding its quality i.e. when the subject matter has been clearly identified although its quality has not been, the arrangement would be valid. In case of ―Smith v. Hughis”238 , a delivered some oats. B, who returned it to A on thinking that they were old which were in fact new. This was held the mistake was of age not the subject matter. So it was held to be a valid contract. Mistake as to possibility of performance of the contract If the performance of any contract is not legally possible, then the contract would be void. For instance, a agrees to take a lease of a Jishari from B. If it turns out that himself already the tenant for life and B has not interest which could be transferred A. It is not legally possible for B to perform the contract. The agreement having been entered into 'under

236

Section 21 of Indian Contract Act, 1872. (1856) HLC 673 appeal from (1858) 9 Ex 102. 238 (1871) LR 6 Q.B. 597. 237

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mistake, to void.239 In ―Sheikh Brothers Ltd. v. Ochsner”240 case, a contracted with B to grant him to license to cut, process and manufacture sisal growing on A's land. 'B' agreed that he would process sisal and deliver to 'A' minimum 50 tons of sisal fiber. But the leaf potential of the land was insufficient for fulfilling the contractual requirement. The contract could not be fulfilled due to Physical Impossibilities. So the contract was void because of mutual mistake. i) Mistake as to Title Sometimes the parties may be labouring under a mutual mistake as to the title to the goods sold. The buyer may already be the owner of what the seller purports to sell. In fact there is nothing which the seller has to transfer. The transfer of ownership is intended but the same is impossible as the buyer is already the owner. Such an agreement is void due to mutual mistake. The case of ―Cooper v. Phibbs”241 a good example of this rule.

Mistake as to Promise If there is a mistake because of which the promise does not reflect the real initiation which was there in proposed agreement, such contract would be void. In case of ―Hartog v. Collins & Shieds‖242, it was held that there had arisen no contract in this case, because there could be have noticed the mistake by the seller contained in their offer and because of their mistake the seller's intention was not property reflected in the offer. Mistake as to Identity of the parties If I intend to enter into contract with A for the purchase of goods for him and I place the order accordingly, 'B' cannot accept this offer and if 'B' supplies me the goods. I have no obligation to pay to him because I never wanted to make any contract with him. ―Boulton v. Jones”243, it was observed by C.B. that it was rule of law that a person had intended to contract with A, B cannot give himself was given to Broclehurst. Possibility Broclehurst might have adopted the act of plaintiff in supplying goods and maintained an action for their price. But since the plaintiff has chosen to see, the only course the defendant could take was to plead that there was no contract with him. In ―Said v. Butt‖244, the plaintiff wanted the first night performance of a certain play

239

Cooper v. Phibbs (1867) 2 HL 149. (1957) AC 136. 241 (1867) LR 2 HL 141. 242 (1939) 3 All Ex. 566. 243 (1857) 2 H & N 564 , 115 R.R. 595. 244 (1920) 3 KB 497. 240

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in defendant theatre. But he knew respondent would refuse him as he has done it before so he contracted with him through his friend. Which was refused by respondent again. It was held no liability arises of respondent. Mistake as to existence of a material fact If the mistake is regarding a fact essential to the agreement, the agreement is void. But if the mistake does not relax to the existence of a material fact concerning the subject matter of the contract, the validity of the contract may not be affected thereby. An another question also arises that what will be the position if contract by parties are inter presents. The answer is quite difficult as it is different in different cases. ―Philips v. Brook Ltd.‖245, the respondent by mistake purchased a goods by a person who himself as a known person of that city. Who was infact a cheater. The real owner filed a suit. It was held that the defendant had acquired the good titles in this case. It appears that the decision is correctly taken. When the parties are face to face, there is no mistake as to the identity. The contract in such cases is voidable on the ground of fact which was in respect of payment only. The situation in case of ―Lewis v. Averay”246 was like the above case and decision was also some. A distinction may so drawn between the identity of a person and his attribute. If a lady enters in a contract saying that she is Mrs. A, if she in fact is not A's wife, through whom the seller wanted to deliver the goods on A's, credit, the agreement would be a mere nullity. Limitations Mistake operates to avoid agreement subject to following limitation: Mistake of Both Parties:Under Sec.20 an agreement is void by reason of mistake, when both the parties are mistaken as to a matter of fact essential to the agreement. This is further supplemented by Sec.22 that a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact. There is no real consent where mistake prevents the parties from coming to an agreement upon the same thing in the same sense. The mistake of both the parties of which Sec.20 speaks may be either common or mutual. Common mistake will definitely render. The agreement void if the parties are mistaken about the existence of the subject matter.

245 246

(1919) 2 KB 243. (1972) Q.B : 1971 3 All ER, 907.

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In ―Leaf v. International Gallaries‖247, a picture was sold, the seller representing that it was by John Constable, when it turned out to be different. The picture was the essentially different from what it was supposed to be, yet the contract was to be only voidable. Erroneous Opinion:The explanation of Sec.20 provides that, "an erroneous opinion as to the value, which forms the subject matter of the agreement is not to be deemed a mistake as to a matter of fact. In a case before the Travancore Cochin High Court named ―Kochuvareed V. Mariappa‖248, a property which was subject to a subsisting lease was sold. The lesser had the right to receive value of improvements. But the arrangement of sale was silent about this. The court held that there was no mistake. It could only be an erroneous opinion which the parties had formed as to the real value of subject matter." Mistake of fact not of law:Mistake should be of fact and not of law, for, Sec. 21 declares that 'a contract is not voidable because it is caused by a mistake as to any law in force in India. This section carries an illustration. Other legal Formalities Part II of section 10 provides: Nothing herein contained shall affect nay law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. As seen earlier, a contract may be in writing, or made orally. Both carry the same legal effect. But in some specified cases, the particular law may require a contract to be writing. While in still other cases, the document may further be required to be stamped and registered. The effect of such provisions in those laws is an agreement which is otherwise enforceable as contract as per Section 10 will create rights and liabilities only when they fulfill the additional requirements stipulated therein, viz., stamp, registration, etc. A and B make a contract grounded on erroneous belief that a particular to debt is barred by the Indian law of Limitation, the contract is not voidable. A mistake as to the effect of registration upon the validity of a document has been regarded by the Supreme Court as a mistake of Law.249 2.5.4 Contracts Required to be Writing Some of the contracts which have to be registered are as follows:

247

(1950) 2 KB 86: (1950) All ER 693. (1950) Tra-Co. 10. 249 Kalyanpur Line Works v. State of Bihar AIR (1954) SC 165. 248

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(1) Document of which registration is compulsory under Sec. 17 of the Registration Act of 1908. (2) Contracts made out of natural love and affection between the parties standing in near relation to each other, and made without any consideration. [SC {25 (1)] (3) Transfer of any immovable property viz. Land, House, etc. (Transfer of Property Act). (4) Memo and Articles of a Company (Sections 15 and 30 of the Companies Act 2.6 Conclusion Law of contract is a peculiar branch of substantive law. It does not enumerate the rights and duties of the parties. It provides only the circumstances in which promise made by a person is legally binding on him. Anson on English law says contract cannot be defined exclusively on the basis of objectivity or subjectivity rather it is a mixture of both. In India, under Section 10 of Indian Contract Act, 1872, only consent is a subjective concept otherwise whole is objective. Hence contract is an objective concept. According to Section 2(h) of Indian Contract Act, 1872, “An agreement enforceable by law is a contract.” It means there are two things needed for a contract viz. 1. There should be an agreement. 2. Agreement should be enforceable by law. Section 2(e) of Indian Contract Act, 1872, defines agreement. It says, “Every promise and every set of promises, forming the consideration for each other, is an agreement.” Hence it means that, even a single promise can be an agreement and a set of promises, forming consideration for each other can also be an agreement. Promise. It says, hence, proposal and acceptance are necessary for making a promise250. And since promise is an agreement, we can conclude that proposal and acceptance are also necessary for making an agreement. In Section 2(a) words ‗signifies to another‘ and in Section 2(b) words ‗signifies there to‘ clearly declares that two parties are necessary for acceptance and consequently for agreement. Assent of both i.e. consent is also necessary for acceptance. It is clear from the mere plain reading for the Section 2(a), (b). Hence there should be consensus ad idem i.e., meeting of minds. There is a universal rule that as everything has a price similarly promise should also has a price. Section 25 of Indian Contract act, 1872 says, agreement without consideration is void. It means it will not be a contract hence consideration is necessary for a 250

Section 2(b) of Indian Contract Act, 1872,

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contract. Since proposer has given consideration to promisee by way of a promise he should also get a consideration in back. If promisee also delivers a promise in lieu of consideration, these two promises will form a set of promises which will form consideration for each other. Hence an agreement will be formed. So consideration in this way is also necessary for formation of an agreement. Section 10 of Indian Contract Act, 1872 lays down what agreements are contracts. It says, “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in [India], and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.” There should be two parties. Parties have no role in making contract, they have role in making agreement. Contract is made between them if parties are competent. Hence it is law which makes the contract not the parties. Competency is necessary. If they are not competent to contract than agreement will not be contract u/S-10. Further in case of Mohri Bibi v. Dharmodash Ghosh, it was held that, if parties are not competent to contract then it will be void. Consent of both the parties should be free. There should be free consent. If the consent is not free or is caused by coercion, fraud, undue influence or misrepresentation then according to section 19 read with section 19A the contract will be voidable. But if consent is caused by mistake then it will be void under section 20-22. Agreement should have a lawful consideration and it should be for a lawful object. If agreement is supported with unlawful consideration or unlawful object then the agreement will not be a contract. According to Section 23 of Indian Contract Ac, 1872 it will be void. Agreement should not be expressly declared to be void. If the agreement is expressly declared to be void means that if it is falling under Section 25-30 or s/56 or s/20 then also agreement will not be a contract. On appraisal of English law we can state one more essential of contract i.e. Intention to create legal relationship. Famous English Jurist Anson had said that Law of contract is a child of commerce. Commerce is the reason for origin of Law of Contract. Social engagements, domestic agreements are not contract. Although inconvenience, hardship, liability suffered is also a consideration, these agreements are not a contract. It means no intention to create legal relationship. It is for a friendly relationship or social engagements. In Balfour v. Balfour, Lord Atkin said, ―There must be an intention to be attended legal consequences i.e. party have in mind at the time of making agreement that they will follow legal consequences.‖ 102

further in Darlymple v. Darly mple, Lord Stowell held that Contract is not a sport of idle time. It is not every loose conversation that is to turn into contract although parties may seem to agree. In India point of authority on intention to contract is Commissioner Wealth Tax v. Abdul Hussain which cited Carlill v. Carbolic Smoke Ball Company case. The law of contract is nothing but the law relating to promises-their formation, performance and enforceability. The law relating to contract is scattered over many statutory enactments and judicial decisions. Law of contract is concerned with promises created by the free mutual consent of the parties this is called agreement. Offer + Acceptance is an Agreement, Agreemrnt+section10 is a contract. All agreements are not contract only those agreements are contract which fulfills the conditions of section10. This chapter of this study discusses the essential elements of a valid contract and kinds of contract. This means: the law can neither can make a contract for the parties nor unmake one which the parties have made. A contract of relationship is entered into by mutual consent and the law recognizes the freedom of parties to enter into contracts and thereby regulate their mutual rights and obligations.

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