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INTRODUCTION The law relating to contract is contained in the Indian Contract Act,1872. The first six chapters of the Indian Contract Act contain the general principles of the law of contract. The remaining chapters refer to particular contracts like Agency, Bailment etc. The preliminary section defines various terms relating to contract. Then it classifies agreements as (1) void or not enforceable by law, (2) voidable contracts enforceable by one party only, and (3) contracts enforceable by both parties. The act has following chapters and topics which are given below. Formation of Contract Chapter I refers to the formation of contracts. It sets out the rules for the offer and acceptance and revocation of proposals. Voidable and Void Agreement Chapter II sets out the essentials of a legally enforceable agreement or contract. It states the circumstances when it is voidable or enforceable by one party only, and when the agreement is void, i.e. not legally enforceable and not a contract. Contingent Contract Chapter III refers to contingent contracts, i.e. contracts which are conditional on some future event happening or not happening. Contracts of insurance or of indemnity are contracts of this class. Performance of Contract Chapter IV deals with the performance of contracts. A contract has for its subject the creation of an obligation between the parties. This chapter explains (1) who must perform his obligation, (2) the mode of performance, and (3) the consequences of non-performance. Quasi Contracts or Implied Contract Chapter V refers to cases in which an obligation is created without a contract. Such obligations are treated in English Law as arising out of the fiction of a contract implied by law. In this chapter, however, the legal relations are defined and the obligations they give rise to are expressly enacted. Breach of Contract and Remedies Chapter VI refers to breach of contract. In case of non-performance by one party, the other party need not perform his part of the contract and is entitled to compensation for the loss occasioned to him. This chapter explains the mode in which compensation for breach of contract is estimated.

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Sale of Goods Chapter VII is repealed and re-enacted in the Indian Sale of Goods Act, 1930 (Sec. 3 of 1930). Indemnity and Guarantee Chapter VIII refers to contract of Indemnity and Guarantee. Bailment and Pledge Chapter IX refers to Bailment and Pledge. Agency Chapter X refers to Agency. Partnership Chapter XI which deals with partnership is repealed and re-enacted in the Indian Partnership Act, 1932 (IX of 1932)

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PRELIMINARY The law of contracts which constitutes the most important branch of commercial law is governed by the Indian Contract Act, 1872. 

Law of contract creates jus in personam(right against individual) and not jus in rem(right against whole world).

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The Indian Contract Act consists of the following two parts: (a) General principles of the Law of Contract. (b) Special kinds of contracts.

 The general principles of the Law of Contract apply to all kinds of contracts irrespective of their

nature.  Special contracts are Indemnity, Guarantee, Bailment, Pledge and Agency.

I. DEFINITION OF CONTRACT We all enter into and will continue to enter into agreements with each other. The nature of these agreements could vary from a simple borrowing of class notes for an exam to the sale of a property. Law does not recognise all possible agreements between parties. Only an agreement between persons that can be enforced by law is a contract. This means that for an agreement to become a contract that is recognised and enforceable by law, it has to fulfil certain conditions laid down in the Indian Contract Act, 1872. But there are certain agreement which do not create contractual obligations, e.g. (i) Agreement of domestic nature between husband and wife. (ii) Agreement relating to social matters.

II. FORMATION OF CONTRACT In formation of a contract, an offer is accepted, wheby it becomes a promise which takes shape of agreement, and finally it becomes a contract. In this context, it is important to understand the meaning of these terms. 1. Offer (i.e. Proposal) 2(a) : When one person communicates to another his desire to do or not to do with a view to obtain the assent of the other person he is said to make a proposal. or offer. 2. Acceptance : When the person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. 3. Promise 2(b) : A Proposal when accepted becomes a promise. In simple words, when an offer is accepted it becomes promise. A promise is an accepted proposal.

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4. Promisor and Promisee 2(c) : When the proposal is accepted, the person making the proposal is called as promisor and the person accepting the proposal is called as promisee. 5. Consideration 2(d) : When at the desire of the promisor, the promisee or any other person has done or abstained from doing something or does or abstains from doing something or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise. In other words, Consideration is the price paid by the one party for the promise of the other. It is based on the phrase, QUID-PRO-QUO i.e. something in return for something 6. Agreement 2(e) : Every promise and set of promises forming the consideration for each other is called an agreement. Agreement = offer + acceptance.

A. AN AGREEMENT ENFORCEABLE BY LAW IS A CONTRACT Enforceability means the right of one party to a contract to approach a court of law in cases when the other party does not fulfil its promise given under the contract. Thus, a contract is a combination of two things: (i) Agreement, and (ii) Obligation enforcing it (Offer + acceptance = Promise) + Consideration = Agreement + Enforceability by Law = Contract That is why it is said that “all contracts are agreements but all agreements are not contracts” “All agreements are contracts, if they are made – 

by free consent of the parties,

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competent to contract,

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for a lawful consideration,

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with a lawful object, and

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not hereby expressly declared to be void.”

B. ESSENTIALS OF CONTRACT Following are essential elements of a valid contract (i) Agreement : It means that two or more parties agree on certain terms and conditions. In other words there must be an offer and acceptance. But it is not necessary that proposal should be made to specific persons. It can be made to public at large also i.e. general offer. (ii) Capacity of the Parties : The parties must be competent to contract. The Indian Contract Act specifies that every person is competent to contract provided  the parties should be of the age of majority and age of majority should be 18 years so as to be able

to contract.

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 the parties should be of sound mind and person of unsound mind can enter into a contract during

those intervals when he is sound i.e. lucid intervals.  the parties should not be disqualified from contracting by any law to which they are subject. An

alien enemy, foreign sovereigns, accredited representative of a foreign state, insolvents and convicts are not competent to contract. (iii) Free consent(Sec. 14) : Two or more persons are said to consent when they agree upon the same thing in the same sense. This is called Consensus ad idem which means agreeing on the same thing in the same sense. Consent obtained by (1) coercion(Sec. 15),

(2) undue influence(Sec. 16),

(4) misrepresentation(Sec. 18), or

(3) fraud(Sec. 17),

(5) mistake is not free consent(subject to provisions of Sec. 20,21,22)

(iv) Consideration(2d) : Consideration is the recompense given by the party contracting to the other. In other words, it is a price of the promise. However, the agreement must be for a lawful consideration and with a lawful object in order to constitute a valid contract. (v) It should not be void : The agreements should not be expressly declared to be void. The following agreements are declared void under the Act (a) Where both the parties to an agreement are under a mistake of fact essential to the agreement; or (b) Agreement in restraint of the marriage of any person other than minor; or (c) Agreement in restraint to trade; or (d) Agreement in absolute restraint of judicial proceedings; or (e) An agreement the meaning of which is uncertain and not capable of being made certain; or (f) Agreement by way of wager; or (g) Agreement to do an act which is impossible in itself or which subsequently becomes impossible without any default of a party. (vi) Intention to create legal relationship : In order that offer and acceptance can result in valid contract, it is necessary that they should be made with an intention to create legal relationship. Promise in the case of social engagements is generally without an intention to create legal relationship. Such an agreement, therefore, cannot be considered to be a contract. Thus, an agreement to go for a walk, to go to a movie, to play some game, or entertain another person with a dinner, cannot be enforced in a court of law. (vii) Necessary Legal Formalities : 

Under law, it is not necessary that every contract must be in writing.

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Where a particular type of contract is required by law to be in writing and registered, it must comply with necessary formalities as to writing, registration and attestation.

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If legal formalities are not carried out then the contract is not enforceable by law and it is called unenforceable agreement.

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(viii) Possibility of Performance : In order to constitute a valid contract: 

The terms of the agreement should be capable of performance.

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An agreement to do an act, impossible in itself cannot be enforced.

(ix) The Terms of the Agreements are Certain or are Capable of Being Made Certain.

C. DISTINCTION BETWEEN AN AGREEMENT & A CONTRACT Basis 1. Section

Contract

Agreement

2. Definition

Sec. 2 (e) A contract is an agreement Every promise or every set of promises forming consideration for each other is an enforceable by law. agreement.

3. Enforceability

Every contract is enforceable.

Every promise is not enforceable.

4. Interrelationship

A contract includes an agreement.

An agreement does not include a contract.

5. Scope

The scope of a contract is limited, as it includes only commer cial agreements.

Sec. 2(h)

Its scope is relatively wider, as it includes both social agreement and commercial agreements. Only legal agreements are called An agreement may be both legal and illegal. contracts.

6. Validity 7. Legal Obligation

Ever y contr act creates a legal It is not necessary for every agreement to have legal obligation. obligation.

D. CLASSIFICATION ON THE BASIS OF VALIDITY (a) Valid contract:- An agreement which satisfies all the requirements prescribed by law is a valid contract. (b) Void contract 2(j) - A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. When both parties to an agreement are:Under a mistake of facts 

Consideration or object of an agreement is unlawful

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Agreement made without consideration

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Agreement in restraint of marriage

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Agreement in restraint of trade

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Agreement in restraint of legal proceeding.

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Agreement by wage of wager

(c) Voidable contract 2(i) - An agreement which is enforceable by law at the option of one or more parties but not at the option of the other or others, is a voidable contract. The contract is voidable as a result of coercion, undue influence, fraud and misrepresentation. For example - A, intending to deceive B, falsely represents that five hundred maunds of indigo are made annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the option of B.

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(d) Unenforceable contract - Where a contract is good in substance but because of some technical defect i.e. absence of writing, barred by imitation etc. Here, one or both the parties cannot sue upon it and it is described as unenforceable contract. For example - An agreement which is required to be stamped will be unenforceable if the same is not stamped at all or is under stamped. (e) Illegal agreement- It is a contract which the law forbids to make. All illegal agreements are void but all void agreements or contracts are not necessary illegal. 

Contract that is immoral or opposed to public policy are illegal in nature.

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Unlike illegal agreements there is no punishment to the parties to a void agreement.

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Illegal agreements are void from the very beginning. Agreements are void from the very beginning but sometimes valid contracts may subsequently become void.

E. DIFFERENCE BETWEEN VOID AND VOIDABLE CONTRACT Basis

Void contract

Voidable contract

Definition

It means contract which ceases to be enforceable.

It means an agreement enforceable by law by one or more parties.

Nature

Valid when made subsequently becomes It remains voidable until cancelled unenforceable. by party.

Rights or remedy

No legal remedy.

Aggrieved party has remedy to cancel the contract.

Performance of contract Party can't demand performance of If aggrieved party does not cancel contract. it within reasonable time, then contract cant be avoided and it has to be performed.

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OFFER AND ACCEPTANCE

I. OFFER In order to form an agreement, there must be at least two elements – (1) offer and (2) acceptance. Thus, offer is the foundation of any agreement. An offer is a proposal, whereby a person expresses his willingness to enter into a contract in return for a promise or set of promises. The person who makes an offer is called “Offeror” or “Promisor” and the person to whom the offer is made is called the “Offeree” or “Promisee”. For example - Mr. A says to Mr. B, “Will you purchase my car for Rs.1,00,000?”. In this case, Mr. A is making an offer to Mr. B. Here A is the offeror and B is the offeree.

A. ESSENTIAL ELEMENTS OF AN OFFER (1) There must be two parties. (2) The offer must be communicated to the offeree. (3) The offer must show the willingness of offeror. Mere telling the plan is not offer. (4) The offer must be made with a view to obtaining the assent of the offeree. (5) A statement made jokingly does not amount to an offer. (6) An offer may involve a positive act or abstinence by the offeree. (7) Mere expression of willingness does not constitute an offer – For example- A tells B that he desires to marry by the end of 2008, it does not constitute an offer of marriage by A to B. A further adds "will you marry me". Then it becomes an offer.

B. KINDS OF OFFER TYPES OF OFFER

Express offer

Implied offer

Specific offer

General offer Cross offer Counter offer

Standing/Continuous Offer

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There may be different kinds of offers, viz. (i) Express Offer : When the offeror expressly communicates the offer, the offer is said to be an express offer. The express communication of the offer may be made by: 

Spoken word or

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Written word

(ii) Implied Offer : When the offer has not been communicated expressly then an offer may be implied from:

The conduct of the parties or

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The circumstances of the case

(iii) Particular Offer : It is made to a particular person and it can be accepted only by that person to whom the offer is made. For example - If A offers to marry B then C can’t accept offer of A. If C accepts offer of A, then A is not bound. (iv) General Offer : It is made to the public at large and it may be accepted by anyone who fulfils the conditions or performs the conditions of the offer. 

If offeree fulfills the terms and conditions which is given in offer then offer is accepted.

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Communication of acceptance is not necessary in case of general offer. For example - X offered by advertisement to pay Rs.100 to anyone who contracts influenza or any disease caused by cold after having used the prescribed medicine as per printed directions. Y used the medicine according to the directions but subsequently suffered from influenza. X is entitled to recover the promised reward because it was an offer made to public at large which was accepted by B who performed the conditions of the offer.

(v) Cross Offer : When the offer made by two persons to each other containing similar terms of bargain cross each other in post they are known as cross offers. In cross offers, both the parties intend the same bargain, even then there arises no contract because there is no meeting of minds. For example X wrote to Y offering him to sell certain quantity of goods at certain place. On the same day, Y wrote to X to buy identical quality of goods at the same price. The letters crossed in Post. There was no concluded contract. It was only cross offer because a contract could arise only if X or Y, after having the knowledge of offer had accepted the same. (vi) Counter Offer : When the offeree gives qualified acceptance of the offer subject to modifications and variations in the terms of original offer, then it is known as counter offer. Counter offer amounts to rejection of the original offer. Legal effect of counter offer:(1) Rejection of original offer (2) The original offer is lapsed (3) A counter offer results in a new offer.

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In other words, an offer made by the offeree in return of the original offer is called as a counter offer. For example- A offered to sell his pen to B for Rs.1,000. B replied, “I am ready to pay Rs.950.” On A’s refusal to sell at this price, B agreed to pay Rs.1,000. Held, there was no contract as the acceptance to buy it for Rs.950 was a counter offer, i.e. rejection of the offer of A. Subsequent acceptance to pay Rs.1,000 is a fresh offer from B to which A was not bound to give his acceptance. (vii)Standing, Open and Continuous Offer : An offer is allowed to remain open for acceptance over a period of time and is known as standing, open or continuous offer. Tender for supply of goods is a kind of standing offer. For example - When we ask the newspaper vendor to supply the newspaper daily, in such case, we do not repeat our offer daily and the newspaper vendor supplies the newspaper to us daily. The offers of such types are called Standing Offer.

C. LEGAL RULES AS TO VALID OFFER 1. Offer must be communicated to the offeree: The offer is complete only when it has been communicated to the offeree. Until the offer is communicated, it cannot be accepted. When a person does an act without knowing that an offer exists under which persons doing that act will be rewarded, it is not possible for that person to claim later that a valid contract existed. Thus, an offer accepted without its knowledge, does not confer any legal rights on the acceptor. For example - A’s nephew has absconded from his home. He sent his servant to trace his missing nephew. When the servant had left, A then announced that anybody who discovered the missing boy, would be given the reward of Rs.500. The servant discovered the missing boy without knowing of the reward. But when afterwards the servant came to know about the reward, he brought an action against A to recover the same. But his action failed. It was held that the servant was not entitled to the reward because he did not know about the offer when he discovered the missing boy. 2. The offer must be certain, definite and unambiguous: For example - A offered to sell to B ‘a hundred tons of oil’. The offer is uncertain as there is nothing to show what kind of oil is intended to be sold. 3. The offer must be capable of creating legal relation. A social invitation does not create legal relationship: For example - A invited B for dinner and B accepted the invitation. It is a mere social invitation and A will not be liable if he fails to provide dinner to B. 4. Offer may be express and implied: The offer may be express or implied. An offer may be express as well as implied. An offer which is expressed by words, written or spoken, is called an express offer. The offer which is expressed by conduct, is called an implied offer. 5. Communication of complete offer: For example - A offered to sell his pen to B for Rs.1,000. B replied, “I am ready to pay Rs.950”. On A’s refusal to sell at this price, B agreed to pay Rs.1,000. It was held there was no contract at the acceptance to buy the pen for Rs. 950 as there was a counter offer, i.e. rejection of the offer of A. Subsequent acceptance to pay Rs.1,000 is a fresh offer from B to which A was not bound to give his acceptance. 6. Counter offer: A counter offer amounts to rejection of the original offer. 7. Cross offer do not conclude a contract.

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8. An offer must not thrust the burden of acceptance on the offeree: For example - A made a contract with B and promised that if he was satisfied as a customer he would favorably consider his case for the renewal of the contract. The promise is too vague to create a legal relationship. The acceptance cannot be presumed from silence. Acceptance is valid only if it is communicated to the offeror. 9. Offer must be distinguished from invitation to offer: Sometimes a person may not offer to sell his goods, but make some statement or give some information with a view to invite others to make offers on that basis. For example - Menu card of restaurant is an invitation to put an offer, Price – tags attached with the goods displayed in any showroom or supermarket is also an invitation to proposal. If the salesman or the cashier does not accept the price, or the cashier does not accept the price, the interested buyer cannot compel him to sell. If he wants to buy it, he must make a proposal. Job or tender advertisement inviting applications for a job or inviting tenders is an invitation to an offer. An advertisement for auction sale is merely an invitation to make an offer and not an offer for sale. Therefore, an advertisement of an auction can be withdrawn without any notice. The persons going to the auction cannot claim for loss of time and expenses if the advertisement for auction is withdrawn. Offer

Invitation to offer

When the person shows his readiness to enter into a contract, it is called an offer.

Person invites offerer to make an offer to him.

The Purpose is to enter into a contract.

The Purpose is to enter into an offer.

Results in contract.

Results in contract.

For example- application filled in by a prospective applicable to the Institution, a student seeking admission in educational Institution.

For example- issue of prospectus by a Company, an education Institution.

10. Offeror should have an intention to obtain the consent of the offeree. 11. An answer to a question is not an offer.

D. COMMUNICATION OF OFFER The proposal should be communicated to the other party. The process of making a proposal is completed by the act of communicating it. It may be made by word of mouth, or by writing, or it may even be made by conduct. Examples (1) Suppose a child is lost in the bus on the way from Delhi to Lucknow. A tries in vain to find her, but does not succeed. He gives an advertisement in the newspaper announcing a reward for the person who finds her, Y, an illiterate woman, on finding the lost girl, takes her to a police station, where she meets A, the girl’s father. The woman has found the girl, i.e. performed the act for which a reward was promised, without knowing that the offer/promise existed, i.e. without knowing that A had made an offer to reward the person who found his daughter. Thus, since she has no knowledge of the offer made by A, she will not be able to take legal action against A if he refuses to give her the reward, since no valid contract has come into

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existence between them. This is because there has neither been an agreement of term or meeting of minds between them nor has the act been done in return for the offer/promise. (2) Now consider another situation where Y knew of the reward, and found the girl, not because she could claim the reward, but because she was worried about her safety. In such a case, despite her motive in doing the act being different, she is nevertheless entitled to the reward if she chooses to accept it, because by her action, she has accepted the offer of reward. In first case, she had no knowledge of the offer, so, she can not ask for reward but in second case, as she had knowledge, so she can claim the reward.

E. COMMUNICATION OF OFFER WHEN COMPLETE The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. “An offer cannot be accepted until and unless it has been brought to the knowledge of the person to whom it is made”. For example - A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter.

F. LAPSE OF AN OFFER An offer should be accepted before it lapses (i.e. comes to an end). An offer may come to an end in any of the following ways stated in the Indian Contract Act. 1. By communication of notice of revocation: An offer may come to an end by communication of notice of revocation by the offeror. It may be noted that an offer can be revoked only before its acceptance is complete for the offeror. In other words, an offeror can revoke his offer at any time before he becomes bound by it. Thus, the communication of revocation of offer should reach the offeree before the acceptance is communicated. 2. By lapse of time: When time is fixed for the acceptance of the offer, and it is not accepted within the fixed time, the offer comes to an end automatically on the expiry of fixed time. Where no time for acceptance is prescribed, the offer has to be accepted within reasonable time. The offer lapses if it is not accepted within that time. 3. By failure to accept condition precedent: When the offer requires that some condition must be fulfilled before the acceptance of the offer, the offer lapses, if it is accepted without fulfilling the condition. 4. By the death or insanity of the offeror: When the offeror dies or becomes insane, the offer comes to an end if the fact of his death or insanity comes to the knowledge of the acceptor before he makes his acceptance. But if the offer is accepted in ignorance of the fact of death or insanity of the offeror, the acceptance is valid. This will result in a valid contract, and legal representatives of the deceased offeror shall be bound by the contract. On the death of offeree before acceptance, the offer also comes to an end by operation of law. 5. By counter offer by the offeree: When a counter offer is made by the offeree, the original offer automatically comes to an end, as the counter offer amounts to rejections of the original offer. 6. By not accepting the offer, according to the prescribed or usual mode: When some manner of acceptance is prescribed in the offer, the offeror can revoke the offer if it is not accepted according to the prescribed manner.

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7. By rejection of offer by the offeree: When the offeree rejects the offer, the offer comes to an end. Once the offeree rejects the offer, he cannot revive the offer by subsequently attempting to accept it. The rejection of offer may be express or implied. 8. By change in law: Sometimes there is a change in law which makes the offer illegal or incapable of performance. In such cases also, the offer comes to an end.

II. ACCEPTANCE ‘Acceptance’ is giving consent to a proposal and it has the effect of converting the proposal into promise. An acceptance is a final and unqualified expression of assent to the terms of an offer.

A. ESSENTIALS OF A VALID ACCEPTANCE In order that acceptance of an offer can result in a contract, the acceptance must satisfy the following requirements: (i) It should be communicated by the offeree to the offeror: Mere mental acceptance is no acceptance, but there is no requirement of communication of acceptance of general offer. For example - The manager of Railway Company received a draft agreement relating to the supply of coal. The manager marked the draft with the words “Approved” and put the same in the drawer of his table and forgot all about it. Held, there was no contract between the parties as the acceptance was not communicated. It may however, be pointed out that the Court construed a contract because conduct to parties like railway company accepting the supplies of coal from time to time indicate contract. (ii) It should be absolute and unqualified: For example - A offers to sell his house to B for Rs. two lakhs. B accepts the offer and promises to pay the price in four installments. This is not a valid acceptance as the acceptance is with variation in the terms of the offer. (iii) It should be made in some usual and reasonable manner, unless the proposal prescribes the manner of acceptance. General rule says that it must be as per the manner prescribed by offeror. (iv) It should be made when the offer is still subsisting. (v ) If there is deviation in communication of the acceptance of offer, offeror may reject such acceptance by sending notice within reasonable time. If the offeror doesn’t send notice of rejection, he is considered to have accepted the offer. For example - A offers B and indicates that the acceptance be given by telegram. B sends his acceptance by ordinary post. It is a valid acceptance unless A insists for acceptance in the prescribed manner. (vi) Acceptance of offer must be signified by offeror: For example - A applied for the headmastership of a school. He was selected by the appointing authority but the decision was not communicated to him. However, one of members in his individual capacity informed him about the selection. Subsequently, the appointing authority cancelled its decision. A sued the school for breach of contract. The Court rejected A’s action and held that there was no notice of acceptance. “Information by unauthorized person is as insufficient as overhearing from behind the door”. (vii) Acceptance must be communicated to offeror.

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(viii)Time limit for acceptance: If the offer prescribes the time limit, it must be accepted within specified time. If the offer does not prescribe the time limit, it must be accepted within reasonable time. For example - A applied (offered) for shares in a company in early June. The allotment (Acceptance) was made in late November. A refused to take the shares. (ix) Acceptance of offer may be made expressly (by words spoken or written); or impliedly (by acceptance of consideration); or by performance of conditions (e.g.in case of a general offer) (x) Mere silence is not acceptance of the offer: For example - A offers to B to buy his house for Rs.5 lakhs and writes “If I hear no more about it within a week, I shall presume the house is mine for Rs.5 lakhs". B does not respond. Here, no contract is concluded between A and B. However, following are the two exceptions to the above rule. It means silence amounts to acceptance of offer. (a) Where offeree agrees that non – refusal by him within specified time shall amount to acceptance of offer. (b) When there is custom or usage of trade which specified that silence shall amount to acceptance. (xi) Acceptance subject to the contract is no acceptance: If the acceptance has been given "subject to the contract” or "subject to approval" by certain persons, it has no effect at all. Such an acceptance will not create binding contract until a formal contract is prepared and signed by all the parties.

B. COMMUNICATION OF ACCEPTANCE I. Overt Act or External Manifestation: The assent should be signified (communicated). It may be signified or expressed by any act or omission by which the accepting party intends to communicate his assent or which has the effect of communication. There should be some external manifestation (overt act) of acceptance. A mere mental determination to accept un-accompanied by any external indication will not be sufficient. For example - F offered to buy his nephew’s house for Rs. 30.15 lakhs adding “If I hear no more about horse I shall consider the horse mine at Rs. 30.15 lakhs”. The nephew did not communicate his acceptance to F but told B, an auctioneer to remove the horse out of the auction sale as he intended to reserve it for his uncle. B sold the horse by mistake. It was held that the Nephew’s acceptance was not communicated to F, the nephew had no obligation to reply and his silence did not constitute acceptance. F’s action for conversion failed. II. Acceptance by Conduct: “Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal”. Such proposals demand acceptance by performance. For example - A says, whoever finds my lost dog, will be given Rs. 500 as award. B finds the dog and this is performance/acceptance by conduct. Contract comes in existence and B is entitled to demand Rs. 500 from A. III. Acceptance to be signified to Offeror : Acceptance must be communicated to the offeror himself. A communication to any other person is as ineffectual as if no communication has been made. IV. Acceptance to be signified by acceptor: The communication of acceptance should be from a person who has the authority to accept. Information received from an unauthorized person is ineffective. V. Acceptance by Post : The communication of acceptance is complete as against the proposer, when it is put in the course of transmission to him so as to be out of the power of the acceptor and the

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communication of acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer. For example - B accepts A’s proposal by a letter sent by post. The communication of the acceptance is complete:-As against A, when the letter is posted; As against B, when the letter is received by A. VI. Acceptance by telephone or Telex: In the case of contract by telephone, the position is the same as in the case where the parties are in the presence of each other, and the rule of a contract through post does not apply to such contracts. In case of acceptance sent by post, the contract is concluded when the letter of acceptance is posted, whereas in the case of acceptance by phone, the contract is deemed to be complete when the offeror hears the acceptance at his end rather than when the acceptor speaks the words of acceptance. For example - Where A made an offer on phone from Chennai for the purchase of a machine from B and B accepted this offer on phone in Delhi. The contract was made at Chennai where the acceptance was communicated and the part of cause of action for the breach of contract had arisen within the jurisdiction of Chennai Court. VII.Communication of acceptance in case of an Agent : Where the offer has been made through an agent, the communication of acceptance is completed when the acceptance is given either to the agent or to the principal. In such a case, if the agent fails to convey the acceptance received from offeree, still the principal is bound by the acceptance.

C. REVOCATION Communication of Revocation Communication of revocation is complete – 

As against the peron who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;



As against the person to whom it is made, when it comes to his knowledge

Examples– (a) A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B when B receives it. (b) B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is dispatched, and as against A when it reaches him. Revocation of Proposal (Offer) A proposal can be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards. For example - A proposes, by a letter sent by post, to sell his houss to B. B accepts the proposals by letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter but not afterwards. Revocation of Acceptance An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. For Example - In the above example, B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

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Particulars When Communication of Proposal is complete

Offer

Acceptance

Communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. For example - A proposes by letter, to sell his Tonga to B at Rs. 10,000. Communication of the proposal is complete when B receives the letter.

As against the offerer/ Proposer: When it is put in a course of transmission to him so as to be out of the power of the Acceptor.

Offer/proposal may be revoked at any When Revocation can be time before the communication of its acceptance is complete, as against the made proposer, but not afterwards. For example - A sends a letter to B proposing to sell his land. B sends his acceptance by post. A can revoke the offer at any time before or at the moment when B posts his letter of acceptance, but not afterwards.

When communication of revocation is complete

As against the offeror: When it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it. For example - S proposes to H by letter. H sends his acceptance by letter. Suddenly, S sends a telegram revoking his offer, the communication of revocation is complete against S when it is dispatched and against H, when it is received by him.



As against the Offeree/Acceptor: When it comes to the knowledge of the Proposer. Acceptance may be revoked at any time befo re t he communication of acceptor, but not afterwards. For example - A sends to B by post, an offer to sell his cycle. B sends his acceptance via post. B could revoke his acceptance, upto any time before or at the moment when he posts his letter of acceptance, but not afterwards.

As against the Offeree: When it comes to his knowledge. Communication of revocation is complete against H only when H receives the telegram. When H revokes his acceptance, it is complete when he dispatches the telegram.

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CAPACITY TO CONTRACT

I. INTRODUCTION “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject” It means that the following three categories of persons are not competent to contract:1. A person who has not attained the age of majority, i.e. one who is a minor. 2. A person who is of unsound mind. 3. A person who has been disqualified from contracting by some law. Parties unable to enter into a contract

Minor

A person of unsound mind

Lunatic

Alien enemy

Foreign Sovereign

Idiot

Person disqualified by law

Drunken and Intoxicated

Convict Corporation and Company

Insolvent

II. MINOR A person who has not attained the age of majority is a minor. A person is deemed to have attained the age of majority when he completes the age of 18 years. According to Indian Majority Act, 1875 as amended by 1997Aamendment, age of majority is 18 years in all cases. POSITION OF AGREEMENTS BY MINOR 1. Validity: - An agreement with a minor is void-ab-initio

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For example– Mr. D, a minor, mortgaged his house for Rs. 20000 to a money – lender, but the mortgagee, i.e. the money lender, paid him a sum of Rs.8000. Subsequently, the minor sued for setting aside the mortgage. Held that the contract was void, as Mr. D was minor and therefore he is not liable to pay anything to the lender. 2. If a minor has received any benefit under a void contract, he cannot be asked to return the same. 3. Fraudulent representation by a minor - no difference in the status of agreement. The contract remains void. 4. A minor with the consent of all the partners can be admitted to the benefits of an existing partnership. 5. Contracts entered into by minors are void-ab-initio. Hence no specific performance can be enforced for such contracts. 6. Minor’s parent/guardians are not liable to a minor’s creditor for the breach of contract by the minor. 7. A minor can act as an agent but cannot be held personally liable. He cannot be the principal. 8. A minor cannot become shareholder of a company except when the shares are fully paid up and transfer by share. 9. A minor cannot be adjudicated an insolvent 10. A minor can enter into contracts of Apprenticeship, Services, Education etc. - These are allowed because it generates benefits to the minor. 12. Guarantee for and by minor A contract of guarantee in favour of a minor is valid. However, a minor cannot be a surety in a contract of guarantee. This is because, the surety is ultimately liable under a contract of guarantee whereas a minor can never be held personally liable. EXCEPTIONS i.

Contract for supply of Necessaries

Food, clothes, bed, shelter, shoes, medicines and similar other things required for the maintenance of his life or for the life of his dependents, expenses for instruction in grade or arts; expenses for moral, religious or intellectual education, funeral expenses of his deceased family members, marriage expenses of a dependent female member in the family; expenses incurred in the protection of his property or personal liberty, diwali puja expenses, etc. have been held by courts to be necessaries of life. However, the things like earrings for a male, spectacles for a blind person or a wild animal cannot be considered as necessaries. ii. Liability for tort: A minor is liable for a tort, i.e., civil wrong committed by him. For example– A, a 14 year old boy drives a car carelessly and injures B. He is liable for the accident i.e. driving car negligently. iii. A minor cannot ratify the agreement made during minority after becoming major, but there are exceptions to this rule. In case of an agreement for minor’s benefit like marriage, contract is valid or in case of a contract for purchase of property but this is not so in case of contract of service.

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Examples– (1) A Contract of marriage, entered into by a guardian for the benefit of his minor child is not void for want of consideration, unlike a contract of service by a minor which is a contract of service entered into by a father on behalf of the minor which is not enforceable as it is void for want of consideration. (2) Where a mortgage was made by a minor and the money lender who had advanced money to the minor on the security of the mortgage sued the minor on the strength of the contract. It is held, having regard to sections 2, 10 and 11 of the Contract Act, that the Act makes it essential that the contracting parties should be competent to contract and that a minor’s contract is void.

III. UNSOUND MIND A Person of Unsound Mind

Lunatic and Intoxicated

Idiot

Drunken



A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.



At time of entering into a contract, a person must be of sound mind. Law presumes that every person is of sound mind unless otherwise it is proved before court. An agreement by a person of unsound mind is void.



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



The following are categories of a person considered as person of unsound mind:

An idiot An idiot is a person who is congenital (by birth) unsound mind. His incapacity is permanent and therefore he can never understand contract and make a rational judgment as to its effects upon his interest. Consequently, the agreement of an idiot is absolutely void ab initio. He is not personally liable even for the payment of necessaries of life supplied to him. Delirious person A person delirious from fever is also not capable of understanding the nature and implications of an agreement. Therefore, he cannot enter into a contract so long as delirium lasts. Drunken person An agreement made by intoxicated person is void.

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Generally of

Occasionally of

Capacity to Contract

Example

Unsound Mind

Sound Mind

Can enter into a contract when he is of sound mind.

A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.

Sound Mind

Unsound Mind

Cannot make a contract when he is of unsound mind.

A sane man, who is delirious from fever or who is so drunk that he cannot understand terms of a contract or form a judgment, cannot contract while such delirium or drunken ness lasts

IV. PERSONS DISQUALIFIED BY LAW Persons Disqualified by law

Alien enemy

i.

Foreign Sovereign

Convict

Corporation and Company Insolvent

Body corporate or Company or Corporation : Contractual capacity of company is determined by object clause of its Memorandum of Association. Any act done in excess of power given is ultra – vires and hence void.

ii. Alien enemy : An ‘alien’ is a person who is a foreigner to the land. He may be either an ‘alien friend’ or an ‘alien enemy’. If the sovereign or State of the alien is at peace with the country of his stay, he is an alien friend. On the other hand, if a war is declared between the two countries he is termed as an alien enemy. During the war, contract can be entered into with alien enemy with the permission of Central Government. iii. Convict : A convict can’t enter into a contract while he is undergoing imprisonment. But he can enter into a contract with permission of Central Government while undergoing imprisonment. After the imprisonment is over, he becomes capable of entering into contract. Thus, the incapacity is only during the period of sentence. iv. Insolvent : When any person is declared as an insolvent, his property vests in receiver and therefore, he can’t enter into contract relating to his property. Again he becomes capable to enter into contract when he is discharged by court.

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v. Third party or a stranger to a contract cannot sue : Only those persons, who are parties to a contract, can sue and be sued upon the contract. This Rule is called “Doctrine of privity of contract” Exceptions to the doctrine (i) Trust:- In case of trust, a beneficiary can sue upon the contract. A transferred certain properties to B to be held by him in trust for the benefit of C. In this case, C although not a party to the trust, can sue for the benefits available to him under the trust. (ii) Family settlement / Marriage contract:- In case of family settlement, members who were not originally party to the contract can also sue upon it. Female members can sue for provision for marriage expenses made on partition of HUF. H sued her father – in – law K to recover Rs.15,000 being arrears of allowance called Pin money payable to her by K under an agreement between K and H’s father, consideration being H’s marriage to K’s son D. Both H and D were minors at the time of marriage. It was held that the promise can be made enforceable by H. Provision of marriage expenses of female members of a Joint Hindu Family, entitles the female member to sue for such expenses on a partition between male members. (b) Two brothers, on partition of family joint properties, agreed to invest in equal shares for their mother’s maintenance. It was held that the mother was entitled to require her sons to make the investment. (iii) Acknowledgement of liability - Where a person admits his Liability thereafter if he refuses, he will be stopped from denying his liability. X receives money from Y for paying it to Z. X admits the receipt of that amount to Z. Z can recover the amount from X, even though the money is due from Y. (iv) Assignment of contract - Assignee (the person to whom benefits of contract are assigned) can enforce upon the contract. (v) Contract entered into through an agent.

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CONSIDERATION According to Sir Frederick 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 what one pays for the promise of other. It may be – (i) Some benefit, right, interest, loss or profit that may accrue to one party or, (ii) Some forbearance, detriment, loss or responsibility suffered or undertaken by the other party 1. If A promises to sell his house to B for Rs.10, 00,000, the amount is consideration. 2. ‘P’ aggress to sell his car to ‘Q’ for Rs. 50,000 Here, ‘Q’s Promise to pay Rs. 50,000 is the consideration for P’s promise and ‘P’s promise to sell the car is the consideration for ‘Q’s promise to pay Rs.50,000. 3. ‘A’ promises his debtor ‘B’ not to file a suit against him for one year on ‘A’s agreeing to pay him Rs.10,000 more. Here the abstinence of ‘A’ is the consideration for ‘B’s Promise to pay.

I. GENERAL RULE: AN AGREEMENT WITHOUT CONSIDERATION IS VOID There can be no valid contract without any consideration. It means something, which is of some value in the eye of law. It may be some benefit to the plaintiff or some detriment to the defendant.

II. FOR THE PURPOSE OF VALID CONSIDERATION, THE FOLLOWING THINGS ARE IMPORTANT 1. It is essential that the consideration must have been given at the desire of the promisor, rather than merely voluntarily or at the instance of third party – D constructed a market at the instance of District collector. Occupants of shops promised to pay D a commission on articles sold through their shops. Held, there was no consideration because money was not spent by Plaintiff at the request of the Defendants, but at instance of a third person viz. the Collector and, thus the contract was void. 2. Consideration may move from the promisee or any other person who is not a party to the contract. A owed Rs.20,000 to B. A persuaded C to sign a Pro Note in favour of B. C promised B that he would pay the amount. On faith of promise by C, B credited the amount to A’s account. Held, the discharge of A’s account was a valid consideration for C’s promise. A, an old lady, granted an estate to her daughter (the defendant) with a direction that the daughter should pay an annuity of Rs. 653 to A’s brothers (plaintiffs). On the same day, the defendants made a promise with the plaintiffs that she would pay the annuity as directed by A. The defendant failed to pay the

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stipulated sum. In an action against her by the plaintiffs she contended that since the plaintiffs themselves had furnished no consideration, they had no right of action. The Court held that in this agreement the consideration has been furnished by the defendant’s mother and that is enough consideration to enforce the promise between the plaintiffs and the defendants. 3. Consideration may be past, present, Future – 

Under English law, past consideration is no consideration. Under Indian Contact Act, past consideration is a valid consideration.



Present consideration:For Example- Cash sale



Future or executory consideration:-

A Promises to B to deliver him 100 bags of sugar at a future date. B promise to pay first on delivery 4. Consideration should be real and not illusory. Illusory consideration renders the transaction void. Consideration is not valid if it is (i) Physically impossible (ii) Legally not permissible (iii) Uncertain (iv) Illusory (fulfillment of a pre existing obligation) A son used to complain to his father that his brother had been given more property than him. The father promised that he would release the son from a debt if the latter stopped complaining. It was held that the promise by the son not to bore his father with complaints in future did not constitute good consideration for the father’s promise to release him and the son continued to be liable for his debt. 5. Must be legal:- Consideration must not be unlawful. The consideration is lawful, unless – 

it is forbidden by law; or



is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or



involves or implies, injury to the person or property of another; or



the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration of an agreement is said to be unlawful. Such agreements are void. A promises to obtain for B an employment in the public service and B promises to pay Rs. 1,000 to A. The agreement is void, as it’s consideration is unlawful. 6. Consideration need not be adequate. A contract is not void merely because of the fact that the consideration is inadequate. The law simply requires that contract should be supported by consideration. So long as consideration exists and it is of some value, courts are not required to consider its adequacy. A agreed to sell a watch worth Rs.500 for Rs. 20, A’s consent to the agreement was freely given. The consideration, though inadequate will not affect the validity of the contract. However, the inadequacy of the consideration can be considered in order to know whether the consent of the promisor was free or not.

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7. The consideration for the performance of an act what one is legally bound to perform is not valid consideration. A police officer who is legally bound to protect the citizens cannot charge extra money for giving protection. Such a consideration is not valid consideration. 8. A contract not supported by consideration is void.

III. EXCEPTIONS TO THE RULE “NO CONSIDERATION, NO CONTRACT” 1. A written and registered agreement on account of natural love and affection between near relatives is enforceable without consideration. (a) Raman, for natural love and affection promises to his son Ravi a BMW CAR. Raman puts his promise in writing and get’s it registered. This is a contract without consideration. (b) An elder brother, on account of natural love and affection, promised to pay the debts of his younger brother. Agreement was put to writing and registered. Held, agreement was valid. (c) A Hindu husband by a registered document, after referring to quarrels and disagreements between himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence. Held that the promise was unenforceable since natural love and affection was missing. 2. A Promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor is enforceable. A finds B’s ATM card and gives a whole amount of A/C. This is a contract without consideration. A finds B’s purse and give to him. B Promises to give A Rs.500. This is a valid contract. 3. A promise to pay time barred debt is enforceable. The promise should be in writing. It should be signed by the promisor or by his agent generally or specially authorised in that behalf. Anjani owes Raghav Rs. 85,000, but the debt is barred by the limitation Act. Anjani signs a written promise to pay B Rs. 500 on account of the debt. This is a contract. 4. It is not necessary that consideration should be adequate at the promise. Alok agrees to sell his p4 computer worth Rs. 10,000 for Rs. 2000. Alok’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely given. The inadequacy of the consideration is a fact which the Court should take into account in considering whether or not A’s consent was freely given. 5. Completed Gift- A Gift does not require any consideration. 6. Agency – According to the Indian contract Act, no consideration is necessary to create an agency. 7. Bailment - Consideration is not necessary to effect a valid bailment of goods. It is called Gratuitous Bailment. 8. Charity- If a person promises to contribute to charity and on this faith, the promisee undertakes a liability to the extent not exceeding the promised subscription, the contract shall be valid.

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FREE CONSENT

Two persons are said to consent when they agree upon same thing in the same sense. It is also called ‘consensus – ad – idem’ Examples– (1) Suppose, A has two cars black and white and he always uses black car which has been seen by B but not white one which is not used by A. Now A offers to sell his car and B agrees to buy it but there is no mention of colour of car. B has in mind black car, whereas A has intended to sell white car. In this situation, there is no consensus ad idem i.e. agreement on same thing in same sense. (2) If two persons enter into an apparent contract concerning a particular person or ship, and it turns out that each of them, misled by a similarity of name, had a different person or ship in mind, no contract would exist between them as the is no consent.

EFFECT OF ABSENCE OF CONSENT When there is no consent at all, the agreement is ‘void' It is not enforceable at the option of either party Examples– (1) X have two cars one Maruti car and one Honda city car. Y does not know that X has two cars Y offers to buy car at Rs.50,000. Here, there is no consensus in respect of the subject matter. Hence there is no consent at all and the agreement is void – ab – inito. (2) An Illiterate woman signed a gift deed thinking that it was a power of attorney – no consent at all and the agreement was void – ab – initio.

FREE CONSENT As per the Indian Contract Act, Consent is said to be free when it is not caused by (a) Coercion (b) Undue influence (c) Fraud (d) Misrepresentation (e) Mistake

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EFFECT OF ABSENCE OF FREE CONSENT Where consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. It is a contract which is enforceable at the option of only one of the parties, namely, the party whose consent was not free.

I. COERCION Consent is said to be caused by coercion when it is obtained by pressure exerted by either of the following techniques(1) committing or threatening to commit any act forbidden by the Indian Penal Code; or (2) threatening to commit any act which is forbidden by the Indian Penal Code; or (3) unlawfully detaining or threatening to detain any property. Other features (1) Coercion need not necessarily proceed from party to contract. (2) Coercion need not necessarily be directed against the other contracting party. Examples– (1) By threat of suicide, A induced his wife and son to execute a release deed in favour of his brother in respect of certain properties which they claimed as their own. “The threat of suicide amounted to coercion and the release deed was, therefore, voidable”. (2) A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code (45 of 1860). A afterwards sues B for breach of contract at Calcutta. A has employed coercion, although his act is not an offence by the law of England, and although section 506 of the Indian Penal Code (45 of 1860) was not in force at the time when or at the place where the act was done.

II. UNDUE INFLUENCE A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. A person is deemed to be in a position to dominate the will of another(a) Where he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other; or (b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. Examples– (1) A, having advanced money to his son, upon, B during his minority, upon B’s coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence because he obtained bond from his son misusing parental influence the bond is therefore voidable.

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(2) A Poor Hindu widow agreed to pay interest at 100% to P, a lender because she needs the money to file a suit for her right of maintenance. It was held that the lender was in position to dominate the will of widow. (3) A, a man enfeebled by disease of age, is induced by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services, B employs undue influence. Circumstances

Examples

Where he holds a real or apparent authority over the other

Master and servant, parent and child, Income Tax officer and assesses, Principal and a Temporary Teacher.

Where he stands in trust-confidence relation to the other

Trustee and beneficiary, Spiritual Guru and his disciples, solicitors and clients, Guardian and wards.

Mental Capacity of a person is temporarily or permanently Relationship between medical attendant and effected by reason of age, illness or mental or bodily ward. distress However, there is no presumption of domination of will in the following cases: (1) Landlord and Tenant (2) Creditor and Debtor (3) Husband and wife (other than Pardanashin) (4) Principal and Agent Essentials In order to constitute undue influence, it is necessary to prove that: (1) The relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and (2) Such a person uses his dominant position to obtain an unfair advantage over the other. (3) Where some transaction is entered into in the ordinary course of business, but due to certain contingencies, one party is able to make the other party agree to certain terms and conditions, then it is not undue influence. Effect of undue Influence (A) When consent to an agreement is caused by undue influence, the contract is voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just. (B) It is upon the person who uses his dominant position to cause undue influence to show that undue influence was not employed Examples– (1) A’s son has forged B’s name to a promissory note. B under threat of persecuting A’s son, obtains a bond from A for the amount of the forged note. If B sues on this bond, the Court may set the bond aside.

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(2) A, a money lender, advances Rs. 100 to B, an agriculturist, and, by undue influence induces B to execute a bond for Rs. 200 with interest at 6 per cent per month. The court may set the bond aside, ordering B to repay the Rs. 100 with such interest as may seem just. Example– (1) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence. (2) However, when a spiritual guru induced his chela to donate all his property to the ashram and said that in return of it, he will certainly get salvation. The chela did the same. Held, that this is a case, of undue influence so it becomes voidable of the other party whose consent was obtained by under influence.

III. FRAUD Intentional misrepresentation of facts, speaking, broadly, is called “fraud”. It means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; (Suggestio falsia) 2. The active concealment of a fact by one having knowledge or belief of the fact; (Suppresio veri) 3. A promise made without any intention of performing it; 4. Any other act fitted to deceive; 5. Any such act or omission as the law specially declares to be fraudulent. For example– A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud in A. But where B is A’s daughter and has just come of age. Here if A says nothing to B about the horse’s unsoundness then it will amount to fraud because the relation between the parties would make it A’s duty to tell B if the horse is unsound. Mere silence at to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them (1) it is the duty of the person keeping silence to speak, (For example, in case of contract uberrima fide) (2) unless his silence is, in itself, equivalent to speech. Examples – (1) B says to A- “If you do not deny it, I shall assume that the horse is sound”. A says nothing. Here, A’s silence is equivalent to speech. (2) A and B, being traders, enter upon a contract, A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B

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IV. MISREPRESENTATION A contract, the consent to which is induced by misrepresentation is voidable at the option of the deceived party. Misrepresentation means mis statement of a fact material to the contract. For example– A sells a horse to B which is unsound but A himself does not know about this fact. He tells B that the horse is sound. There is misrepresentation. Effect of Flaw in FREE Consent 1. When the consent of a party to the contract has been caused by coercion, misrepresentation or fraud the contract is voidable at the option of such party. 2. In case of fraud, apart from avoiding the contract, the person whose consent has been so caused may also bring an action for damages because fraud is also a tort. 3. When a person at whose option the contract is voidable rescinds it, he is bound to restore the benefit, if any, received by him under such a contract. Examples– (1) A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of indigo are made annually at A’s factory. B examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation. (2) A fraudulently informs B that A’s estate is free from encumbrance. B thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out and the mortgage-debt redeemed. (3) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal the existence of the ore fromA. Though A’s ignorance B is enabled to buy the estate at an undervalue. The contract is voidable at the option of A. (4) A is entitled to succeed to an estate at the death of B, B dies; C having received intelligence of B’s death, prevents the intelligence reaching A, and thus induces A to sell him his interest in the estate. The sale is voidable at the option of A

V. MISTAKE Mistake is that mental supposition that does not correspond with reality. Essentials Following are the essential ingredients of mistake:(1) When both the parties to an agreement are mistaken, (2) Their mistake is as to a matter of fact, and (3) The fact about which they are mistaken is essential to the agreement. However, an erroneous opinion as to the value of the things which forms the subject-matter of the agreement, is not to be deemed a mistake as to a matter of fact

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Examples– (1) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void because of mistake as to a matter of fact. Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. (2) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain in the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void. (3) A, being entitled to an estate of the life of B, agrees to sell it to C, B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void. 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 a law not in force in India has the same effect as a mistake of fact. For example– A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation; the contract is not voidable.

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