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Study Material

LAW OF CONTRACTS

Brief Introduction

Contract is an agreement enforceable in law. Any agreement if broken (breached) can be made executable in a court of law. If A breaches an agreement between him and Z. Z can sue A in a court of law for damages or compel him to perform the agreement.

A contract can be oral or written i.e. mutual agreement over discussion or documented.

Contract   =   Agreement   +   Legally Enforceable

An agreement is document or decided guidelines that decides and fixed rights and duties of parties, in relation to performance of an act (act included abstinence), having its terms and conditions of performance.

Agreement is:

a)    a document or decided guidelines

b)    that decides and fixed rights and duties of parties,

c)     in relation to performance of an act (act included abstinence),

d)    having its terms and conditions of performance,

which when becomes lawfully enforceable in court of law is called a Contract. In India contract law is governed by the Indian Contract Act, 1872.

Essential elements of a valid contract

We have seen above that the two elements of a contract are:

(1) An agreement; and

(2) Legal obligation.

Section 10 of the Indian Contract Act provides for some more elements which are essential in order to constitute a valid contract. All agreements are contracts if they are made by 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. Thus, the essential elements of a valid contract can be summed up as follows;

1. Agreement.

2. Intention to create legal relationship.

3. Free and genuine consent.

4. Parties competent to contract.

5. Lawful consideration.

6. Lawful object.

7. Agreements not declared void or illegal.

8. Certainty of meaning.

9. Possibility of performance.

10. Necessary Legal Formalities.

A brief outlook is presented below, for detailed understanding the topics are covered in detail in further course of the chapter.

1. Agreement

To constitute a contract there must be an agreement. An agreement is composed of two elements—offer and acceptance. The party making the offer is known as the offeror, the party to whom the offer is made is known as the offeree. Thus, there are essentially to be two parties to an agreement. They both must be thinking of the same thing in the same sense. In other words, there must be ‘consensus-ad-idem’.

Thus, where ‘A’ who owns 2 cars x and y wishes to sell car ‘x’ for Rs. 30,000. ‘B’, an acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also. He thinks that ‘A’ owns only car ‘y’ and is offering to sell the same for the stated price. He gives his acceptance to buy the same.

There is no contract because the contracting parties have not agreed on the same thing at the same time, ‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no consensus-ad-idem.

2. Intention to create legal relationship

There should be an intention on the part of the parties to the agreement to create a legal relationship. An agreement of a purely social or domestic nature is not a contract.

Example, a husband agreed to pay £30 to his wife every month while he was abroad. As he failed to pay the promised amount, his wife sued him for the recovery of the amount. Held: She could not recover as it was a social agreement and the parties did not intend to create any legal relations [Case of Balfour v. Balfour (1919)2 K.B.571].

However, even in the case of agreements of purely social or domestic nature, there may be intention of the parties to create legal obligations. In that case, the social agreement is intended to have legal consequences and, therefore, becomes a contract. Whether or not such an agreement is intended to have legal consequences will be determined with reference to the facts of the case. In commercial and business agreements the law will presume that the parties entering into agreement intend those agreements to have legal consequences. However, this presumption may be negatived by express terms to the contrary.

Similarly, in the case of agreements of purely domestic and social nature, the presumption is that they do not give rise to legal consequences. However, this presumption is rebuttable by giving evidence to the contrary, i.e., by showing that the intention of the parties was to create legal obligations.

Examples;

(1) There was an agreement between Rose Company and Crompton Company, where of the former were appointed selling agents in North America for the latter. One of the clauses included in the agreement was: “This arrangement is not a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts”. Held that: This agreement was not a legally binding contract as the parties intended not to have legal consequences [Case of Rose and Frank Co. v. J.R. Crompton and Bros. Ltd. (1925) A.C. 445].

(2) An agreement contained a clause that it “shall not give rise to any legal relationships, or be legally enforceable, but binding in honour only”. Held: The agreement did not give rise to legal relations and, therefore, was not a contract. [Case of Jones v. Vernon’s Pools Ltd. (1938) 2 All E.R. 626].

(3) An aged couple (C and his wife) held out a promise by correspondence to their niece and her husband (Mrs. and Mr. P.) that C would leave them a portion of his estate in his will, if Mrs. and Mr. P would sell their cottage and come to live with the aged couple and to share the household and other expenses. The young couple sold their cottage and started living with the aged couple. But the two couples subsequently quarreled and the aged couple repudiated the agreement by requiring the young couple to stay somewhere else. The young couple filed a suit against the aged couple for the breach of promise. Held: That there was intention to create legal relations and the young couple could recover damages [Case of Parker v. Clark (1960) 1 W.L.R. 286].

3. Free and genuine consent

The consent of the parties to the agreement must be free and genuine. The consent of the parties should not be obtained by misrepresentation, fraud, undue influence, coercion or mistake. If the consent is obtained by any of these flaws, then the contract is not valid.

4. Parties competent to contract

The parties to a contract should be competent to enter into a contract. According to Section 11, every person is competent to contract if he (i) is of the age of majority, (ii) is of sound mind, and (iii) is not disqualified from contracting by any law to which he is subject. Thus, there may be a flaw in capacity of parties to the contract. The flaw in capacity may be due to minority, lunacy, idiocy, drunkenness or status. If a party to a contract suffers from any of these flaws, the contract is unenforceable except in certain exceptional circumstances.

5. Lawful consideration

The agreement must be supported by consideration on both sides. Each party to the agreement must give or promise something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. However, this price need not be in terms of money. In case the promise is not supported by consideration, the promise will be ‘nudum pactum’ (a bare promise) and is not enforceable at law.

Moreover, the consideration must be real and lawful.

6. Lawful object

The object of the agreement must be lawful and not one which the law disapproves. Meaning the contract cannot go against any provision of law in India or international law which India abides by.

7. Agreements not declared illegal or void

There are certain agreements which have been expressly declared illegal or void by the law. In such cases, even if the agreement possesses all the elements of a valid agreement, the agreement will not be enforceable at law.

8. Certainty of meaning

The meaning of the agreement must be certain or capable of being made certain otherwise the agreement will not be enforceable at law. For instance, A agrees to sell 10 metres of cloth. There is nothing whatever to show what type of cloth was intended. The agreement is not enforceable for want of certainty of meaning. If, on the other hand, the special description of the cloth is expressly stated, say Terrycot (Quality measure of 80:20), the agreement would be enforceable as there is no uncertainly as to its meaning.

However, an agreement to agree is not a concluded contract.

9. Possibility of performance

The terms of the agreement should be capable of performance. An agreement to do an act impossible in itself cannot be enforced. For instance, A agrees with B to discover treasure by magic. The agreement cannot be enforced.

10. Necessary legal formalities

A contract may be oral or in writing. If, however, a particular type of contract is required by law to be in writing, it must comply with the necessary formalities as to writing, registration and attestation, if necessary. If these legal formalities are not carried out, then the contract is not enforceable at law

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PROCESS OF CONTRACT FORMATION

A contract is formed when the following three elements as process are fulfilled;

[1] Offer

[2] Acceptance

[3] Valid Consideration

When an acceptance is given over an offer for a valid consideration, a contract is said to be complete. Meaning, the parties are now bound to perform their promises made out under the contract. Once a contract is complete, it has to be executed and the parties are bound by the contract, with no option of backing out. If a party breaches a contract, he can be prosecuted in court of law.

Offer (Proposal)

Offer is an expression of willingness to contract with a person. A person making an offer is ready to follow certain terms and conditions and expects compliance from the one accepting it.

Section 2(a) of the Indian Contract Act, 1872

Section 2(a) 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 either to such act or abstinence, he is said to make a proposal;

A makes an offer, “I want to sell my car for Rs. 4,00,000/-.” Hence, if someone pays him the amount, A will hand over the car to him. (if someone agrees A is ready to perform an act)

Acceptance

Acceptance is when a person agrees to the offer and its conditions thereto. Once it is accepted, it becomes a promise making it compulsory for the contracting parties to perform their part of the promise. 

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

Section 2(b) 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 makes an offer, “I want to sell my car for Rs. 4,00,000/-.” B replies, “I am ready to buy the car for Rs. 4,00,000/-.” Hence, B agrees to the offer. On payment of the amount A has to transfer the car to B.

Parties to Contract:-

Section 2(c) of the Indian Contract Act, 1872

Section 2(c) The person making the proposal is called the "promisor", and the person accepting the proposal is called "promisee",

Promisor: person making the proposal (offer).

Promisee: person accepting the proposal so made.

Consideration

Consideration is simple words is ‘value for exchange’ or price of exchange of a particular commodity or service. For example, a packet of chips costs Rs. 10/- is general parlance. Legally, the value of the commodity is exchanged for a consideration of Rs. 10/-; meaning Rs. 10/- is consideration for a packet of chips, vice versa, a packet of chips is good consideration for Rs. 10/-.

Examples of Valid Consideration

A Nehru jacket costs approximately Rs. 5000/-. Selling the jacket for Rs. 21,00,000/- is not deemed to be a valid consideration. But if that jacket was worn by Prime Minister Modi, then is the consideration of 21,00,000/- justified. Yes! It can become a valid consideration now. In short, a contract cannot go out of proportion causing someone wrongful gain or wrongful loss. Exceptions of artifacts, monuments and priced possessions can have abnormal consideration, like in auctions and exhibitions.

Examples of Invalid Considerations

A contract killing is the most basic example of invalid consideration. Payment for taking a life of a person is an invalid as it is illegal under Indian criminal law.

Similarly, bribing an authority for issuing a fake driving license is again illegal consideration. On same grounds, exchange of drugs for a motorbike is invalid consideration. 

Section 2(d) of the Indian Contract Act, 1872

Section 2(d): When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;

The above section 2(d) is famous for its quotation in CLAT’s principle based contract questions, understanding it thoroughly is very essential; 

1.    When, at the desire of the promisor,- when a person expresses his intention, which is directed towards 

2.    the promisee or any other person;- a specific person or any other person who is aware about the intention so expressed

3.    has done or abstained from doing, or-has already done something in the past

4.    does or abstains from doing, or- or is continuing to do something till date

5.    promises to do or- or agrees to do something in the future

6.    to abstain from doing,- or agrees to not do something in future

7.    something,-an act/activity/behavior/conduct/omit (to execute a contract)

8.    such act or abstinence or promise is called a consideration for the promise;- it will be deemed to be called consideration towards the intention so expressed.

Example:- Consideration

Has done

Does or abstains

Promises to

The promisee has performed his promise in the past

The promisee is continuing to fulfill the promise

The promise will perform the promise in future

A person finds a missing child, who had a reward on him of Rs. 10,000/-. He will be paid Rs. 10,000/- as he has already performed the promise of reward on finding the child.

P buys a phone on installments of 1 year. Installment is like a continuing contract. P has to continue to pay till 12 months.

X receives an advance of Rs. 6,00,000/- for delivery of a Italian show piece one month later.

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CONDUCT OF CONTRACT FORMATION

There are few concepts that govern the formation of contract, that are listed as following;

[1] Invitation to Offer

[2] Communication of Offer and Acceptance

[3] Counter and Cross Offer

[4] Rescind and Termination of Offer

[5] Impossible Contracts

Invitation to offer

Invitation to offer is mere expression of willingness to negotiate a deal (contract). It is an offer that cannot be accepted (or deemed to be accepted on expression of acceptance). An offer that will not constitute a promise or be executable in a court of law.

For examples;

[1] An advertisement of a LCD television showing 40% discount on every deal till stocks last. Invitation to offer, inviting customers to make a contract (buying a television), depending on stock reserved for such deals, if available.

[2] A opens, “I wish to sell my car.” The offer is still open for negotiation on its price, other details of the car, mode of payment etc.

[3] Price tags on articles in a shopping mall. Mere invitation to a contract.

[4] Booking of Flight tickets. The websites which provide for flight fares are again mere invitation to offer. The prices may fluctuate when you make the actual booking.

Communication

The basic concept of communication in contract law is when the ‘offer’ is communicated (comes into knowledge of the acceptor [promisee]), the offer is complete. Once the offer is ‘accepted’ the contract becomes complete (having valid consideration). But there are times when the communication is not so simple and is governed by other factors like;

[1] Mode of Communication: when there is specified mode of communication fixed with a contract, unless and until the offer or acceptance is made in that mode, the contract cannot be said to be executed. If ‘A’ expresses his will to sell a laptop to ‘B’ for Rs. 40,000/-. B demands the offer to be written and signed by ‘A’, unless the offer is not so written and signed by ‘A’, the offer cannot be made otherwise. Likewise, if ‘A’ demands Rs. 20,000/- in cash and Rs. 20,000/- in cheque, and ‘B’ sends a cheque of Rs. 40,000/-, the acceptance is not complete because it is not in the prescribed manner and form. 

[2] Communication Of Offer: once the promisor makes an offer and the promise becomes aware or has knowledge of the said offer, the communication of offer is complete.

Q e-mails P, “I will be selling my BMW car for Rs. 30,00,000/-. Are you interested.” Once the email is send on the e-mail id of P the communication of offer is complete. When P reads his e-mail he can choose to make a contract or not. But mere delivery completes the communication process as the offer is now in possession of P.

[3] Communication Of Acceptance: on receipt of the offer the promise sends his acceptance and the same is delivered to the promisor or the promisor becomes aware of the acceptance the contract is deemed to be complete under the principle of ‘communication of acceptance’. The contract can only become valid if the acceptance is communicated to the promisor. This is a deviation from the basic rule.

In continuing example, Q e-mails P, “I will be selling my BMW car for Rs. 30,00,000/-. Are you interested.” P reads his e-mail and chooses to buy the car. Under the basic principle the contract is not complete. But under the principle of ‘communication of acceptance’, P has to reply back to Q and only when Q is made aware of his acceptance the contract can be said to have formed and then be executed and enforced.

Additionally, if P e-mail back Q showing his expression of willingness to buy the car; the communication of acceptance is complete. If Q’s laptop crashes before he could read the e-mail from P and he later sells the car to R. P can sue Q for breach of contract, as it was the duty of Q to check P’s reply and Q was negligent to fulfill his part of the duty. This is similar to sending the acceptance by a registered letter. Once the letter is delivered the acceptance is complete, even if the promisor fails to read the letter the contract is valid and executable. It is in-fact the negligence of the promisor, as he was supposed to read the letter addressed to him.  

Counter & Cross Offer

a.    Counter Offer: an offer made over an offer is a counter offer. There could be many counter offers as is in normal procedure of negotiations. Any counter offer that receives acceptance, becomes the final offer which regulates the contract. It can be best understood via the following illustration;

A-    I want to sell my i-phone 5s for Rs. 7000/-                       (original offer)

B-    I am interested, but I shall pay Rs. 6000/-                  (counter offer)            

A-    I shall not price below Rs. 6,500/-                         (2nd counter offer)

B-    I will buy your phone for Rs. 6,500/- but I also want the original charger and original headphones.                          (3rd counter offer)

A-    Ok!                                                                                  (acceptance)

For purpose of a valid contract, as per the above example:

3rd counter offer – actual Offer

Acceptance – actual Acceptance

Consideration – Rs. 6,500/- (against/for i-phone, charger and headphones)

b.    Cross Offer: Cross-offer is a contract law term that refers to an offer made to another in ignorance that the offeree has made the same offer to the offeror. In a cross offer both parties state to each other the same proposal.

An offer by A to sell to B on certain terms and an offer by B to buy from A on the same terms unaware of the A's proposition at that time, is an example of a cross-offer.

For example, A writes a letter to B offering him his bike for Rs 100. At the same time B writes a letter to making a similar offer to buy his bike for Rs 100. Offers of both A and B cross each other. Such offers do not constitute to acceptance of one's offer by the other.

Comparative Study Chart

Counter Offer

Cross Offer

Offer over an offer

Constitutes two simultaneous offers

(simultaneous offers)

Can lead to acceptance

Acceptance cannot be made 

A to B:

Motorbike for 80,000/-

B to A:

Price is high. 65,000/-

A accepts

A to B:

Television for 40,000/- (offer)

B to A:

Television for 42,000/- (offer)

Acceptance cannot be derived from either A or B.

 

Rescind of an Offer

An offer once accepted, cannot be revoked because it forms a contract; and a contract once formed cannot be revoked. An offer can be revoked before acceptance is made.

For example; A writes to B expressing his willingness to sell his property for a price of Rs. 40,00,000/-. A subsequently decides to revoke his offer and sends a telegram revoking his offer, which reaches before the letter. The offer is said to be revoked. In the same set of facts if the letter reached B before the telegram the offer then cannot be revoked if B has accepted it.

Hence, to rescind a offer or a contract, it has to be so done before the offer is accepted, as once the offer is accepted it forms a contract and cannot be revoked.

If the contract is not performed it is termed as breach of a contract.

Breach of a Contract

Once an offer is accepted, it forms a contract and the offer cannot be now set aside. In such a case if the proposer fails to perform his part of the contract, or the promisee after accepting the offer fails to perform his part of the contract, the contract is said to have been breached.

Once a valid contract is breached, the affected party can approach the court of law to, either;

[1] compel the other party to perform the contract, or

[2] claim for compensation as damages under contract law. 

Impossibility of a Contract

Impossibility of a contract is not equivalent to breach of contract. In such a situation where the contract becomes impossible to execute due to external forces/issues the contract is said to have never happened and no damages can be claimed thereof.

For example, if A has an agreement with B to provide for shipping import-services from Canada. On the way to India, the ship drowns due to stormy weather. The contract becomes impossible to perform as the ship has sunk and B’s container has drowned. The only claim that B can make is insurance claim to recover for the loss, if he had gotten his goods insured.

Similarly, if P agrees to sell to Q five tickets to an India-Pakistan cricket match which is to be delivered on the day of the match. Unfortunately, the match is called off one day before due to security reasons. The contract between P and Q has become an impossible and the contract cannot be executed or be prosecuted in any court of law.

Legal Knowledge: Standard form of contract.

A standard form of contract is a contract which cannot have a counter offer. Meaning that the promisor sets his terms and conditions to a contract, and the promisee can choose to either accept the contract or leave it. There can be no alterations to the terms and conditions as provided by the promisor.

For example, while opening of a savings bank account, the bank provides for a saving account’s form, which you have to sign accepting all the terms and conditions in it. You cannot alter the contract between you and the bank, but choose to go to a different bank. Wherever you approach you will have to accept the terms as laid down by the bank, as it is. Such contracts are known as standard form of contract.  

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LEGAL ENFORCEMENT OF A CONTRACT

Under Section 10 of the Indian Contract Act, 1872 essential conditions are laid down to be essentially complied with, for a contract to be valid and executable;

Section 10 of the Indian Contract Act, 1872

Section 10. What agreements are contracts- 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.

The following statutory requirements are explained as follows;

[1] Agreement to be under ‘FREE CONSENT’

[2] Parties are ‘COMPETENT’ to contract

[3] For a ‘LAWFUL CONSIDERATION’

[4] With ‘LAWFUL OBJECT’

[5] Not void under any ‘LAW / ACT’ enforced in India

All the five conditions are discussed in detail below.

[A] FREE CONSENT

The word consent means when the parties to a contract are agreeing on the same thing in the same sense and meaning. If there lies difference of understanding the consent is missing.

A has two cars of the same model, one is red and the other being black. B agrees to buy A’s car. If A believes he is selling the red car and B is under the impression that he is buying the black car. The contract has no valid consent.

Consensus ad idem is the Latin maxim meaning the consent has to be on the same thing in the same sense.

Section 13 of the Indian Contract Act, 1872

Section 13. "Consent" defined- Two or more persons are said to consent when they agree upon the same thing in the same sense.

In addition, the consent has to be free to form a valid contract. The consent is said to be free when it is free from the following;

(1) Coercion

(2) Undue Influence

(3) Fraud

(4) Misrepresentation

(5) Mistake

Hence if there is no coercion, undue influence, fraud, misrepresentation and mistake, then the contract is said to be have made under free consent and once a free consent is given the contract cannot be revoked. Alternatively, to declare a contract void if any of the following is proved then the contract is not under free consent and is liable to be set aside.

Section 14 of the Indian Contract Act, 1872

Section 14. "Free consent" defined-

Consent is said to be free when it is not caused by-

(1) coercion, as defined in section 15, or

(2) undue influence, as defined in section 16, or

(3) fraud, as defined in section 17, or

(4) misrepresentation, as defined in section 18, or

(5) mistake, subject to the provisions of sections 20, 21, and 22.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake.

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[1] COERCION

When any person uses criminal force or inflicts injury causing physical harm or mental agony is said to be using unlawful force against a person. In such a condition if one forces the other to sign a contract, the contract is said to be have made under coercion. A contract made under coercion is a void contract.

Example; A points a gun at B and compels him to sign property papers in the name of A. The said contract is void.

X kidnaps Y’s son and forces him to sell his house to Z. The contract of sale between Y and Z is a void agreement to sale. 

Coercion as defined under Section 15 of the Indian Contract Act, 1872 is the most relevant and self explanatory definition, which states;

Section 15 of the Indian Contract Act, 1872

Section 15. "Coercion" defined- Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal Code 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.

Explanation: It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed.

Illustration

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.

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 was not in force at the time when or at the place where the act was done.

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[2] UNDUE INFLUENCE

Undue Influence is defined as an unfair advantage that a party to a contract uses to intimidate the other party to form a contract with him (usually a contract of loss). In such a contract a party uses his relationship with the other party to make him sign a contract which he may or may not so desire, hence, such contracts lack free consent and are void contracts. In short, it is the domination of one party over the other to influence him to sign a contract. 

There are three categories of relationship which exercise undue influence.

[1] Real and Apparent Authority: When the relationship between the parties is in itself evidence of the fact that undue influence could have easily been exercised. In simple terms, it is apparent from the relationship that undue influence could have been exercised. In example, a relationship between a boss and his employee is a real and apparent authority relationship, i.e. it is clear that a boss could apply undue pressure on the employee to make him act in a manner which he otherwise may not have wanted to. The boss is in a position to dominate the will of his employee.

Suppose, a firm’s CEO tells all his employees to open a bank account with ACBC Bank for which the CEO is getting a cut on each new customer to the bank. Those not opting to open a bank account are not being granted yearly bonuses. Hari, being one of the employees open a savings bank account with ACBC Bank. Later Hari finds huge bank charges being cut from his account and demands for refund and closure of his account. The contract between Hari and the bank is an outcome of undue influence which in this case is done by the CEO for his personal benefit. The CEO being in capacity to dominate Hari is said to have exercised undue influence and the contract is void.

Another example, where a teacher demands from all his students to join his coaching class otherwise each student shall fail. On the threat everyone joins his class for a fee of Rs, 10,000/-. Later, one student takes a transfer to another school and demands for refund of fees paid. The fees will have to be refunded as the contract was made under undue influence and the nature of undue influence was of real and apparent authority as the teacher student relationship is such where one can easily exercise influence on the other. It is real use of domination (misuse of power/authority) and apparent that the teacher has misused his authority.     

[2] Fiduciary Relationship: Fiduciary means trust. Any contract which is made by a person while trusting another person or under the influence of the other person whom he trusts is a contract under fiduciary relationship. When a person misuses his position of trust and makes the other person sign a contract which he otherwise would not have committed to is a void contact under undue influence where the nature of parties was that of fiduciary relationship.

For example, if Chandan is in blind faith of a Sadhu (priest) and only on the request of Sadhu, Chandan enters into a contract with Nandan, thinking whatever the Sadhu says is beneficial for him. Chandan is unaware that Sadhu is a beneficiary to the contract. Chandan can refuse to perform the contract as his consent is taken under undue influence where that nature of undue influence was of fiduciary relationship.

In many cases a relationship of father and son is also deemed to be of a fiduciary relationship. For example, if the father promises to his son (major) to buy him a motorcycle if he scores 90% + in his final graduation examination; on securing 90% + marks in his final examination the father refuses to buy him a bike. The son cannot sue the father as the contract was obtained under undue influence by the underperforming son and the father never had given free consent and it was merely for the betterment of his son’s performance. 

[3] Under Intoxication/Loss of capacity: If any person is not in the mental capacity to understand the terms and conditions of the contract and does not have the capacity to understand what rights and duties he is signing, contracts as a result of which are void.

Any person who is involuntarily intoxicated and is under the influence of alcohol/toxicants is not said to have freely consented to a contract as he did not have the mental capacity to understand what he is signing. Any person voluntarily intoxicated can be held liable for his contractual obligation and be held liable for breach of contract.       

Similarly, any person who signs a contract under fits, unsoundness of mind and like is not liable to perform his part of the contract as the contract lacks free consent as undue influence was exercised where the undue influence was due to lack of mental capacity. A person knowing that the other person is mentally unsound and takes advantage of the same cannot sue the other person for contract performance or for compensation as damages.  

Section 16 of the Indian Contract Act, 1872

Section 16."Undue influence" defined-                                 

(1) 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.

(2) In particular and without prejudice to the generality of the foregoing principle, 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.

(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.

Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872).

Illustrations

(a) A having advanced money to his son, B, during his minority, upon B's coming of age obtains, by misuse of parental influence a bond from B for a greater amount then the sum due in respect of the advance. A employs undue influence.

(b) 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.

(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable, It lies on B to prove that the contract was not induced by undue influence.

(d) 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.

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[3] FRAUD

Any person who is subject to fraud to obtain his assent to a contract is not liable to perform the contract and the contract is said to be void. Fraud is said to be exercised when by;

[1] concealment of facts,

[2] modification of truth, and

[3] delivery of untrue facts

any person obtains consent of a person to contract. Such contracts are void as they are obtained by fraud. Another test of fraud is when the promisee would have refused to accept the contract if the said fraud was not so done.

Simply, A agrees to sell a plot of land to B for Rs. 50,00,000/-. A demonstrated fake papers and makes B believe that the property is owned by A. B makes a token payment of Rs. 10,00,000/-. Later, B refuses to make the payment and demands for refund. A has no claim to the contract as it was obtained by fraud. The contract is a void contact.     

When silence amounts to fraud

Silence on material facts to a contract would amount to fraud. If any person is silent about a fact which could determine the outcome of the contract, the contract is said to be made by fraud and is a void contract. Fraud in most cases is an outcome of intentional act to cheat another. There could be the following two cases;

 [1] When the promisee demands for a specific information and the promisor gives false information or hides the true information to the contract. The promisor is said to have committed fraud to obtain the consent of the promisee.

For example, A proposes to sell a flat to B. B demands to know the electricity condition in the area of the flat. A lies and assures 24 hours of electricity. Later B faces 4hrs of power cut every day. B can refuse to oblige the contract as it was obtained by fraud.

[2] When the promisor hides vital information to contract. In a case, where A who is selling a flat to B hides the information on the condition of water supply to the flat. The flat only receives water for 2 hours a day in the afternoon. Later B can refuse to accept the flat as he had not consented to such a condition. Hence, silence could be termed as fraud only when the silence is over an essential requirement to the contract. 

When silence does not amount to fraud is when the information hidden is not essential to contract. For example, A wished to sell a flat to B. A knows that the flat is haunted and the person living in the flat starts to experience paranormal events. A hides this information. Later, B refuses to accept the contract. A can successfully sue B to make the complete payment for the flat as such a information is not an essential information in the eyes of law. Silence on the quality of paint and furniture used to decorate the flat is again not essential information and can be silenced upon unless and until the promisee demands to have knowledge of the same.

For example, A tells B that he will buy B’s car only and only if the car has a Bose sound system. If B remains silent on the same and later A comes to know that the car has a Sony sound system, the contract becomes void as silence amounted to fraud. If A would have not raised any such demand then the information of the sound system used in the car would have become irrelevant and even if B would have remained silent on the same; it would have had no effect on the contract to sell a car between B and A.    

Section 17 of the Indian Contract Act, 1872

Section 17. "Fraud defined-

"Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents , with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(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.

Explanation: Mere silence as 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, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

Illustrations-

(a) 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.

(b) B is A’s daughter and has just come of age. Here the relation between the parties would make it A's duty to tell B if the horse is unsound.

(c) 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.

(d) 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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[4] MISREPRESENTATION

Misrepresentation is an unintentional act which can be explained as a negligent statement made by the promisor to the promisee on basis of which the consent to the contract is given. Another way to explain misrepresentation is that when the promisor fails in his duty to check and confirm the essential information to a contract and makes a frivolous dialog with the promisee, based on which the promisee accepts his offer; the contract so formed is a void contract as the contract is made by misrepresentation and lacks free consent.  

For example, a property is jointly owned by B and C. Both B and C have the power of attorney to sell the property. B agrees to sell the property to Z and takes a token amount from Z. Later B finds out that the property has already been sold by C to Y. Z claims the property from B. Such a contract is an outcome of misrepresentation, where B failed to check the real status of the ownership of the property before putting it up for sale to Z.

Misrepresentation is an honest mistake where the promisor innocently believes over a certain set of fact which in realty is not true.

For example, A contracts with B to sell him a cell phone which has a 2 GB RAM processor. A genuinely believes that the cell phone has a 2 GB RAM processor. Later, after the sale is made to B, it is found that the cell phone has a 1 GB RAM processor. The contract is void and A will have to refund the amount of sale to B. The contract suffers from misrepresentation as A made an inadvertent mistake.  

Section 18 of the Indian Contract Act, 1872

Section 18. "Misrepresentation" defined-

"Misrepresentation" means and includes-

(1) the positive assertion, 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 which, without an intent to deceive, gains and advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice, or to the prejudice of any one 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.

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[5] MISTAKE

Under the concept of mistake both the parties are unaware of facts that are essential for contract formation. Ignoring the real facts and circumstances the parties contract and such a contract is void and cannot be enforced.

For example, A quotes a price of a property admeasuring 40ft x 60ft at 7,80,000/-. B gives his consent to buy the property. B discovers that the land in actuality physically measures to be 45ft x 50ft. The contract is hit by a mistake of fact and the contract is void contract. 

Mistake is an honest and accidental belief over a set of facts where both parties are in ignorance, based on which consent to a contract is given. A contract made under mistake is void as the consent given was not free consent and based upon a fact which is incorrect. Mistake under contract law is of two kinds;

[1] Mistake of Fact:

A contract made under mistake of fact is void, simply because the parties are consenting to a set of facts that are not true and any consent given on a certain set of facts not being true is invalid consent. Hence, mistake of fact renders a contract void or invalid.

Section 20 of the Indian Contract Act, 1872

Section 20. Agreement void where both parties are under mistake as to 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, the agreement is void.

Explanation: An erroneous opinion as to the value of the things which forms the subject-matter of the agreement, is not be deemed a mistake as to a matter of fact.

Illustrations-

(a) 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.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. The agreement is void.

(c) 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.

[2] Mistake of Law:

A contract made in ignorance of law enforced in India, will hold the contract valid, unless it is against the law itself. Meaning mistake of law will not affect the validity of a contract. If the contract is violating any law, then the contract will be deemed to be invalid.

For example, S wants to gift a new car to her son, R. S buys a car from a showroom (Texa Automobiles) for a price of Rs. 5,00,000/-, telling the salesman that she wants to gift it to her son. Later, S is informed by her lawyer that an additional tax @ 12% will be levied on the price of the car as wealth tax. S refuses to pay extra 12% tax on the car and wants to return the car to Texa Automobiles. The contract of sale of car cannot be held void and the contract is still valid, even if there was mistake of law. Texa Automobiles is under no liability to take back the car.    

Alternatively, A and B decide to contract over a building project and the land on which they wish to construct is reserved by the government as an agricultural land over which no construction can be done. The contract stands void and cannot be executed as it is not permitted under law of the state. 

Section 21 of the Indian Contract Act, 1872

Section 21. Effect of mistakes 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.

Illustration-

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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[B] COMPETENCE OF PARTIES

Competence of parties means the qualification or thereby meaning an eligibility requirement that any person willing to contact must have to form a valid and a legally enforceable contract. Any person who is;

[1] a minor (below 18 years of age),

[2] is intoxicated (involuntarily),

[3] is disqualified under law,

[4] is of unsound mind, or

for any reason whatsoever lack the capacity of decision making and is unable to understand the outcome of his accent to a contract, is said to be incompetent to contract. An incompetent person cannot contract.

 [1] A minor cannot contract because legally a person has to be a minimum of 18 years of age to be eligible to contract. The bar is so set as it is reasonably believed that an individual once attains an age of 18, he turns mature enough to understand and contemplate the consequences of his commitment to a contract. He can well understand the rights he obtains and the duties that he has to follow under a contract when he attains the age of majority/maturity.

For example, a 17 year old boy who has his birthday on 8th August 2017, enters into a contract on 7th August 2017 with Mr. Suresh, a bike showroom owner. Mr. Suresh lets the minor take the bike for a spin. On 8th August 2017 when the boy turns major Mr. Suresh demands payment for the bike sold the day before. The boy refuses to make the payment. Mr. Suresh cannot sue the boy as when the contract was made, the boy was a minor and a contract with a minor cannot be enforced.

Note: a contract with a minor is a void-ab-initio contract, but the person contracting with a minor has the right to recover the good that were sold or delivered to the minor as of right. Any modification, damage, loss caused to the good so sold or delivered to the minor cannot be compensated for. For example, A, a minor take a loan of 20,000/- from B. When B tries to recover the amount form A, A refuses to pay. B cannot sue A for compensation as A was a minor as on the date of the contact. Consequently, if A has an unspent amount of Rs. 7,000/-, B is entitled to recover the remaining amount of Rs. 7,000/-.

Also, in the above example where Mr. Suresh lets the minor take the bike for a spin and on 8th August 2017 when the boy turns major Mr. Suresh demands the payment for the bike sold the day before; Mr. Suresh cannot claim the payment but he is entitled to recover the bike from the boy. Even if the bike is damages Mr. Suresh can only recover the bike in the condition it is in and cannot claim compensation for the damage caused.

A contract with a minor does not affect the right of an individual to sue the minor separately under Law of Torts or Criminal Law.

Contract of Necessity

Generally, every single contract with a minor is void-ab-initio meaning void from the beginning, but valid only under exception of necessity. The law provides that contracts for certain goods and services are not voidable. Necessaries include items and services that are necessary to the minor’s health and safety, such as food, lodging, shelter and clothing. In some instances, education and books are considered necessaries (but in India, because primary education is free, it might not be necessary to contract for funding school education). The minor’s and his or her parent’s economic status can be considered in determining whether an item is considered a necessary.

For example, opening of a Bank Account of a minor (co-joint with a legal guardian) for the purpose of transferring inherited wealth. Other luxuries like taking a loan to buy a bike, car or mobile phones do not count as a contract made for necessity.

Another example would be where a minor takes a loan of 10,000/- to afford his school expenses. With time the minor boy starts to earn very well for himself. The boy is under a legal obligation (liable) to return the loan taken to support his schooling expenses as it could be treated as a contract of necessity. A contract of necessity is a valid contract and can be legally enforced.

[2] Any person who is intoxicated (involuntarily) without his consent cannot make a valid contract as he is deemed to be not in the mental capacity to understand the consequences of his actions and the rights and liabilities he is entering via a contract. When deciding intoxication the amount of alcohol or toxicant consumed is not to be disputed. Mere consumption in whatever quantity will deem to be treated as intoxication to the person so contracting. Voluntary intoxication does not affect the outcome of a contract as the person was aware that he would be contracting after consumption of alcohol.

For example, A, B and C are cracking a business deal. B playing cheeky mixes B’s drink and gets B to sign a contract. The contract is a void contract.

The outcome a contract would be the same in case of usage or drugs or other psychotropic substances as is in the case of intoxication. 

[3] Any person disqualified under law is not competent to contract. Where a law specifically provides that an individual cannot contract, the contract if so made is a void contract.

For example, Members of Parliament are not allowed to own houses of profit. They cannot run separate businesses of their own. If a Member of Parliament contracts with two other persons and opens a partnership firm, the contract is an illegal contract, as it is breaching a law. It is a illegal contract because it is violating/against a legal provision.

Likewise, a person who is serving a prison sentence cannot enter into a contract.Convicts or prisoners, so long as they are in the prison, they have no capacity to enter into a contracts. After completion of Period of imprisonment, they can enter into Contracts. Contract made by them attain Validity when they are made at the time ticket of leave.

[4] Any person who is of unsound or lacks the capacity to make decisions at the time of making a contract cannot enter into a contract. A lunatic who is partially unsound and partially of sound mind can enter into a contract when he is of sound mind. To render a contract void the parties will have to be proved in court of law that the person was of unsound mind at the time of making of the contract.

For example, A occasionally faces the problem of epilepsy. A contracts with B when he is of sound mind. The contract is a valid contract.  

Section 11 of the Indian Contract Act, 1872

Section 11. Who are competent to contract-

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.

Section 12 of the Indian Contract Act, 1872

Section 12. What is a sound mind for the purposes of contracting-

A person is said to be of sound mind for the purposes 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.

A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.

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

Illustrations

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

(b) A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium of drunkenness lasts.

Legal position in India-

Case Law: Srikakulam Subramaniam v. SubbaRao, 1948

To pay off, the promissory note and mortgage debt of his father, minor and his mother, the minor sold a piece of land to the holders of the promissory note in satisfaction of the debt. He paid off the mortgage and got possession of the land. But later the minor claimed that because of his minority the contract was void, and he demanded the possession of land. But the court held that this contract was for the benefit of the minor and was entered into by his guardian; his mother and thus was a valid one.

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[C] LAWFUL CONSIDERATION

The agreement must be supported by consideration on both sides i.e. Rs. 2000/- for a dress and a dress for Rs. 2000/- is consideration for each other. Consideration may not always be for money. A barter transaction is also a valid contract i.e.

The consideration has to be lawful.

Consideration is the price for which the promise of the other is sought. However, this price need not be in terms of money. In case the promise is not supported by consideration, the promise will be nudum pactum (a bare promise) and is not enforceable at law.

Moreover, the consideration must be real and lawful.

[For detailed understanding of ‘Consideration’, it has been dealt in the chapter: Process of Contract Formation]

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[D] LAWFUL OBJECT

A contract should possess a lawful object.The object of a contract is the thing which it is agreed, on the part of the party receiving the consideration, to do or not to do. The object of a contract must be lawful when the contract is made, and possible and ascertainable by the time the contract is to be performed.

For example, the thing that is agreed upon should be lawful. A contract with B for providing his car insurance upon payment of a certain premium for 5 years. In the said contract the object of the contract is insurance of the car, where the consideration is the premium being paid for the insurance. Hence, if the car meets with an unintentional accident B shall compensate A for the loss caused to him. The said object is lawful.

Alternatively, if A contracts with a broker who pledges to get a law suit decided in favour of A, upon bribing the judge. A pays Rs. 10,00,000 to the broker. In the said case, the object is to decide the case and the consideration is the bribe paid. The object is per se not unlawful, as the case may or may not be decided in favour of A, but making a payment to get a case decided in favour is illegal. Hence, in this case the consideration is said to be illegal.

In furtherance to the above example. A contracts with B to kill C upon a payment of Rs. 2,00,000. The said contract has an illegal object, as the deciding outcome of the contract is to take a life of a person, which is a criminal offence. Hence, such a contract has an illegal objective.      

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[E] NOT VOID UNDER ANY ACT OR LAW

Any contract will be said to be an invalid or void or illegal contract if;

[1] It violates any provision laid down in the Indian Contract Act, 1872,

[2] It violates any provision or expression as laid down in the Constitution of India, and/or

[3] It is contrary or non-compliant of any provision of any Act/Statute as legislated by the Parliament or the State legislative. 

Hence, in summary if any contract is violating any existing law in India that contract cannot be a valid contract and is deemed to be a void contract.

For example, Ajit knows that Sujit has successfully completed his course of ethical hacking. Ajit agrees to pay Sujit a sum of Rs. 500/- if he hacks the facebook account of Kavita for him. Sujit accepts the money and hacks into the account of Kavita for Ajit. The said contract is an illegal contract as it violates the provisions of the Information Technology Act, 2000, as hacking is a criminal offence under the act. Hence, the contract should not only be valid under the contract act/law but should also not violate other existing laws in India.

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AGREEMENTS OF RESTRAINT

[A] Agreement in restraint of Marriage:

An agreement in restraint of marriage is a void agreement. The agreement should not restrain a person from marrying someone but could add perks or advantages of marrying a particular individual.

Like, A tells B that if you marry C then I shall gift you may Bandra flat. Such an agreement is valid as it is not restraining B to marry any other person or forcing B to marry C only. It is a mere addition of advantage to marry C.

Alternatively, if A agrees to pay to B a sum of Rs. 1,00,000/- for not marrying C. Such a contract is an illegal contract as it is in violation of law in India. The law which restricts such practice is produced below.

Section 26 of the Indian Contract Act, 1872

Section 26. Agreement in restraint of marriage, void-

Every agreement in restraint of the marriage of any person, other than a minor, is void.

[B] Agreement in restraint of Trade:

An agreement which is restraining a person from exercising a lawful profession, trade or business of any kind, is void. The void is to the extent of the restraint clause in the agreement. Apart from the restraining clause the remainder of the contract is valid and can be enforced.

For example; A owns a partnership firm with B and C. They sign a common agreement which states that no partner can break out of the partnership firm and start his own firm. C and A develop animosity with the advent of time. C breaks off from the firm and opens his own firm. A cannot stop C from doing so as the contract is restraining C’s right to profession and trade.

Void to the extent of restraining clause: In the above example A cannot stop C from practicing trade but that does not make C discharged from all liabilities that he incurred while working in the previous firm; meaning the whole of the partnership contract is not invalid. Let us say, that the pervious partnership contract has a clause that any person exiting the partnership firm will have to pay a compensation of Rs. 4,00,000/- in the name of the firm. Consequently, C can be held liable for non-payment of the sum of Rs. 4,00,000/-. Hence, the remainder of the contract will still stand effective and valid and only the restraining clause in the contract will be declared as void.  

Exceptions-

[1] Trade Secrets: Contracts to preserve trade secrets not void. An employee who has access to a trade secret can be restrained to not work in rival firms. For example, an employee of KFC who has access to information of the ingredients used in their products can be compelled to sign a restraint agreement, where he can be restrained to not join a rival food chain, as he can disclose trade secrets.  

[2] Contract of Goodwill (conflict of interests): Any individual who imparts essential or technical knowledge to another person, who on a later date can use it for personal gain/profit; such an individual can be restrained to the extent it is reasonably justified.

For example, Arun is a known physician and has invented a home-made medicinal solution which cures diarrhea instantly. Arun sells it for Rs. 200/- per patient. Arun’s medicine turns so successful that he wishes to hire more people to help him manufacture more of the medicine. Anita joins Arun as a help and Arun makes her sign a contract of restraint that Anita can never commercially sell the same medicine. Later, Anita opens her own practice. Arun can legally stop Anita and restrain her form practice as Anita is now making profits out of Arun’s research, as patients buy the same medicine from her for Rs. 50/-. If Arun would have been aware of Anita’s behavior he would have never imparted the knowledge of the medicine to her.

Contrary example, if P joins a renowned doctor Q as an apprentice and Q makes P sign a contract of restraint that P after working with Q cannot open a clinic in the same city. Later, P opens a clinic in the same city. Q cannot legally enforce the contract and restrain P from practicing in the same city as Q is not losing out on patients because of P. Patients visit Q because of his own reputation, even if P has learnt from Q that does not build P a name equivalent to Q. Q’s patients will still continue to visit Q only. Would you show to a doctor and trust his advice just because he has worked with a renowned doctor? Hence, in such cases a contract of restraint cannot be legally enforced.   

Section 27 of the Indian Contract Act, 1872

Section 27. Agreement in restraint of trade, void-

Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception 1: Saving of agreement not to carry on business of which goodwill is sold-One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.

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CLASSIFICATION OF CONTRACTS

1. FROM THE POINT OF VIEW OF ENFORCEABILITY

(a) Valid contracts:A valid contract is a written or expressed agreement between two parties to provide a product or service. There are essentially six elements of a contract that make it a legal and binding document. In order for a contract to be enforceable, it must contain:

·         An offer that specifically details the intention of the promisor

·         Acceptance, or the agreement by the other party to the offer presented by the promisor

·         Consideration, or the money or something of interest being exchanged between the parties

·         Capacity of the parties in terms of age and mental ability

·         Intent of both parties to carry out their promise

·         Object of a contract is legal and not against public policy or in violation of law

In other words, a contract is enforceable when both parties agree to something, back the promise up with money or something of value, both are in sound mind and intend to carry out their promise and what they promise to do is within the law applicable in India.

(b) Voidable contracts:A voidable contract is a formal agreement between two parties that may be rendered unenforceable for a number of legal reasons. Reasons that can make a contract voidable include failure by one or both parties to disclose a material fact; a mistake, misrepresentation or fraud; undue influence or duress; one party's legal incapacity to enter a contract; one or more terms that are unconscionable; or a breach of contract.

If a contract is breached by one party, the other party can choose to declare the contract as breached or amend the contract and still accept the contract after the breach.

For example, A promised B to deliver 400 shirts before 02nd January, 2018. A fails to deliver on or before the said date and delivers later on 12th February, 2018. B can choose to declare the contract null and void or may choose to accept the shirts and consider the contract date amended to 12th February, 2018. Hence, the contract is voidable at the option of B, he can choose to consider the contract breached or valid. Also, one B accepts the shirts on a later date the contract is said to be valid and enforceable.

(c) Void contracts or agreements:A void contract is a formal agreement that is illegitimate and unenforceable from the moment it is created. There is some overlap in the causes that can make a contract void and the causes that can make it voidable. The fundamental difference between these two types of contracts is a void contract is not legally valid or enforceable at any point in its existence.

(d) Illegal agreements:An illegal agreement, under the common law of contract, is one that the courts will not enforce because the purpose of the agreement is to achieve an illegal end. The illegal end must result from performance of the contract itself. The classic example of such an agreement is a contract for murder.

(e) Unenforceable Agreements (Certain contracts must be in writing):An unenforceable contract or transaction is one that is valid but one the court will not enforce. Unenforceable is usually used in contradistinction to void (or void ab initio) and voidable. If the parties perform the agreement, it will be valid, but the court will not compel them if they do not.

2. ACCORDING TO MODE OF FORMATION

(a) Express contract:Express Contract is an exchange of promises in which the terms by which the parties agree to be bound are declared either orally or in writing, or a combination of both, at the time it is made. The terms and conditions with respect to the rights and duties to be performed/observed in the contract is specifically stated and expressly emphasized on.

(b) Implied contract:An implied contract is an agreement created by actions of the parties involved, but it is not written or spoken. This is a contract assumed to have been drawn. In this case, there is no written record nor any actual verbal agreement. A form of an implied contract is an implied warranty provided automatically by law.

For example, A agrees to lend his laptop to B for a payment of Rs. 100/- a day. It is implied that he laptop will come along the charger and no explicit understanding the same is not required. Hence, an understood expression where the laptop will be lent along with its charger.

(c) Quasi-contracts:A quasi contract is an agreement between two parties without previous obligations to one another that has been created and legally recognized by the court system. Under a quasi-contract, neither involved party is expected to create such an agreement; this contract is arranged and imposed by a judge to correct a circumstance in which one party acquires something at the expense of the other party.

3. ACCORDING TO PERFORMANCE

(a) Executed Contract:An executed contract is a legal document that has been signed off by the people necessary for it to become effective. The contract is often made between two or more people, but it can also be between a person and an entity, or two or more entities.

(b) Executory Contract:An executory contract is a contract made by two parties in which the terms are set to be fulfilled at a later date. The contract stipulates that both sides still have duties to perform before it becomes fully executed. The contract is often in place between a debtor or borrower and another party.

(c) Uni-lateral Contract:A unilateral contract is a legally enforceable promise - between legally competent parties - to do or refrain from doing a specified, legal act or acts. In a unilateral contract, one party pays the other party to perform a certain duty. If the duty is fulfilled, the party on the other side of the contract is obligated to transfer the specified funds. Only this party is under obligation of the contract, whereas the acting party is not legally obliged to perform the duty.

For example, if an individual places an advertisement in the local newspaper to provide an award in the event a missing item is returned, that individual is obligated to pay the award if the item is indeed returned.

(d) Bi-lateral Contract:A bilateral contract is a is a reciprocal arrangement between two parties where each promises to perform an act in exchange for the other party's act. Each party to a bilateral contract is an obligor (a person who is bound to another) to its own promise, and an obligee (a person to whom another is obligated or bound) on the other party's promise. A bilateral contract specifies a duty to act in exchange for another party's duty to act.

A bilateral contract, as opposed to a unilateral contract, is the type of contract that frequently comes to mind when contemplating contracts. It is a contract between two people or parties.

An example of a bilateral contract would be the contract for the sale of a home. A home buyer agrees to pay the seller a certain amount of money in exchange for the title to the home; the home seller agrees to deliver the title in exchange for the specified sale price. When the contract is not fulfilled there is a breach in contract.

 

Comparative Study Chart

Valid

Voidable

Void

An agreement enforceable by law is a contract;

An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract;

An agreement not enforceable by law is said to be void

A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

Void ab initio

Contract for sale of car.

Contract for delivery of goods which is accepted after passing of the date which was decided in the contract.

A contract with a minor.

 

Comparative Study Chart

Explicit Contract

Implied Contract

A contract where each term and condition is expressed and decided upon. The rights and duties under a contract are thoroughly discussed.

An un-negotiated / understood part of the contract which is bound to be performed even if not expressly decided upon.

Contract for sale of house.

Sale of a cellphone, where the battery for the phone requires no separate contract.

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DAMAGES UNDER CONTRACT LAW

When parties fail to perform their part of the contract, it results into breach of contract. Upon breach of a contract, the party who suffers a loss can bring about a suit/case against the person who breached the contract. The following actions can be sought:-

[1] Claim of damages (total monetary loss faced by the plaintiff).

[2] Demand of performance of obligations by breaching party, as promised under the contract (after breach has already been done).

[3] Demand to restrain the other party from breaching his part of the contract (in contemplation to breach in future).

Damage as explained in civil law have to be concrete and quantifiable; meaning which can be calculated in terms of money. The damage caused to the plaintiff should be the direct result of the breach of contract. No damage is payable if the damage so caused to the plaintiff is too remote to be contemplated as an outcome of breach of contract. Simply, damage should be a consequence of the breach of contract; if it is not a direct consequence and also cannot be substantiated indirectly, no claim of damage is maintainable.  

Privity of Contract

It means the relation between the parties in a contract which entitles them to sue each other but prevents a third party from doing so. For example; A and B enter into a contract for delivery of medical equipment; where B defaults in his contract by delivering sub-standard machines. In this breach of contract only A has the right to proceed against B. A’s friend C, A’s family members or no other person has no right against B. As A solely had entered into the contract, this is called privity of contract, where only contracting parties have rights against themselves.

[Legal Knowledge: Suits for specific performance of contracts are brought under the Specific Relief Act, 1963]

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LAW OF INTERNATIONAL CONTACTS

International business transactions are described in the form of an international contract, containing the objective(s) and commitments of each of the parties involved and the terms which govern the transaction.

When parties from different countries enter into a contract, they are governed by international contract law unless they agree to abide by the laws of one of the countries.

International contract law is a branch of private international law. This type of law is frequently applied to as international sales law. International sales contracts are governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG) and is effective since the year 1980 as established by UNCITRAL.

The purpose of the CISG is to provide a regime for contracts for the international sale of goods. The Convention is developed to promote commercial exchanges between private parties.

In history, merchants developed their own sort of international contract law. Traders wanted to deal despite differences in languages, culture and laws developed their own code for international transactions. These rules have evolved into the contract laws of today.

Most disputes that are under international contact are referred to and are settled under alternative dispute resolutions like arbitration, mediation, conciliation and other similar accepted practices abroad.

However, the view of the Supreme Court in taking cognizance of contractual disputes with regard to international contract is concrete. It was held in the case of Bhamboo v. Ram Narain, 1928 that an Indian court does not have jurisdiction to try a suit on a cause of action (place of dispute), which arose wholly outside the Indian territory; whereas if the cause of action if so lies inside the territory of India, the Indian Courts can try and settle the dispute between parties. Further, it was held by the apex court in Hakam Singh v. M/s Gammon (India) Ltd., 1971 where two or more courts, India or abroad, have jurisdiction to try a suit or proceeding, an agreement between the parties that the dispute between them shall be tried in one of such courts is valid and not contrary to the public policy as laid under the Constitution of India.

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SPECIAL CONTRACTS

Special contract are contracts where the nature of the relationship between the parties lead to formation of special rights between them. Hence, contracts forming out of the mere relationship between parties are called special contracts. Apart from the general application of contract law there are added special rules and regulations that apply to such contracts.

 [1] Contract of Bailment

A bailment is the delivery of goods by one person to another for some specific purpose upon a contract that they shall, when the purpose is accomplished, be returned or disposed of according to the directions of the person delivering them.

The person delivering the goods is called the 'bailor' and the person to whom the goods are delivered is called the 'bailee'.

The examples of a contract of bailment are; delivering a watch or radio for repair; leaving a car or scooter at a parking stand; leaving luggage in a cloak room; delivering gold to a goldsmith for making ornaments; leaving garments with a dry cleaner, etc.

The essence of bailment is the transfer of possession. The ownership remains with the owner. There cannot be a bailment of immovable property.

Under Chapter IX, Section 148 to 171 of the Indian Contract Act, 1872 deals with the legal aspects of Bailment.

Relevant Sections under Chapter IX of the Indian Contract Act, 1872

Section 148. "Bailment", "bailor" and "bailee" defined-

A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.

The person delivering the goods is called the "bailor". The person to whom they are delivered is called the "bailee".

Explanation: If a person already in possession of the goods of another contract to hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods, although they may not have been delivered by way of bailment.

Section 151. Care to be taken by bailee-

In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quantity and value as the goods bailed.

Section 158. Repayment, by bailor, of necessary expenses-

Where, by the conditions of the bailment, the goods are to be kept or to be carried, or to have work done upon them by the bailee for the bailor, and the bailee is to receive no remuneration, the bailors shall repay to the bailee the necessary expenses incurred by him for the purpose of the bailment.

Section 160. Return of goods bailed, on expiration of time or accomplishment of purpose-

It is the duty of the bailee to return, or deliver according to the bailor's directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished.

Section 161. Bailee's responsibility when goods are not duly returned-

If by the fault of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time.

Section 164. Bailor's responsibility to bailee-

The bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods, or to give directions, respecting them.

Section 170. Bailee's particular lien-

Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labor or skill in respect of the goods bailed he has in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.

Illustrations-

(a) A delivers a rough diamond to B, a jeweler, to be cut and polished, which is accordingly done. B is entitled to retain the stone till he is paid for the service he has rendered.

(b) A gives cloth to B, a tailor, to make into a coat, B promises A to deliver the coat as soon as it is finished, and to give a three months' credit for the price, B is not entitled to retain the coat until he is paid.

[2] Contract of Pledge

Pledge is a type of a contract of bailment. A pledge is a bailment of goods wherein the goods are delivered as a security for payment of a debt or performance of a promise.

The bailor is called the 'pledgor' or 'pawnor' and the bailee is called the 'pledgee' or 'pawnee'. Thus, pledge is a special kind of bailment. Pledge can be made only of movable properties. In order to make the pledge legally valid it is essential that the pledgor has the legal right or title to retain the goods, meaning thereby that not only the possession of goods is delivered but the title (ownership) of the goods is also transferred.

For example, taking a loan from a bank to facilitate a business, where you pledge your immovable property (house or godown). In such a case on repayment of the loan amount the property shall be released otherwise on default the bank will sell off the immovable property and recover the due loan amount. 

Under Chapter IX, Section 172 to 181 of the Indian Contract Act, 1872 deals with the legal aspects of Pledge under Bailment.

Relevant Sections under Chapter IX of the Indian Contract Act, 1872

Section 172. "Pledge", "pawnor", and "pawnee" defined-

The bailment of goods as security for payment of a debt or performance of a promise is called "pledge". The bailor is in this case called the "pawnor". The bailee is called "pawnee".

Section173. Pawnee's right of retainer-

The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interests of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

Section176. Pawnee's right where pawnor makes default-

If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.

Section177. Defaulting pawnor's right to redeem-

If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, on that case, pay, in addition, any expenses which have arisen from his default.

Bailment vs. Pledge

Difference between Bailment and Pledge:-

a.    Purpose:- A pledge is made for a specific purpose, while bailment can be made for any purpose.

b.    Property:- In bailment, the bailee gets only the possession of goods bailed. The ownership remains with the bailor. In the case of pledge, the pledgee acquires a special property in the goods pledged whereby he gets possession coupled with the power of sale, on default.

c.     Right of sale:- Bailee can exercise a lien on the goods bailed. He has no right of sale. But in case of a pledge, the pledge can sell the goods after due notice to the pawner.

[3] Contract of Guarantee

A contract of 'guarantee' is a contract, whether oral or written, to perform the promise, or discharge the liability, of a third person in case of his default. A contract of guarantee involves three persons, viz. a person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given called the 'principal debtor'; and the person to whom the guarantee is given is called the 'creditor'.

A contract of guarantee is a conditional promise by the surety that if the principal debtor defaults he shall be liable to the creditor.

For example, A buys a bike from B over installments, where C takes the guarantee to make the payment if A defaults. A is unable to pay the installments, hence under the contract of guarantee C will have to pay B the sum as guaranteed to him.

Relevant Sections under Chapter VIII of the Indian Contract Act, 1872

Section 126. "Contract of guarantee", "surety", "principal debtor" and "creditor"-

A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written.

 

Consideration for guarantee

The consideration under contract of guarantee is dealt in Section 127, Indian Contract Act, 1872).

It states that anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. Hence, meaning thereby that anything done for or in benefit of the ‘principal debtor’ by the ‘surety’, wherein the ‘surety’ clears the debt of the (taken from) ‘creditor’ on behalf of the ‘principal debtor’ is deemed to be consideration under contract of guarantee.

Illustrations:

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A's promise to deliver the goods. This is a sufficient consideration for C's promise.

(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C's promise.

(c) A sells and delivers goods to B.A afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.

Surety's liability

The liability of the surety as under Section 128 of the Indian Contract Act, 1872 is a liability that is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

Illustration

A guarantees to B the payment of a bill of exchange (eg. cheque) by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bills but also for any interest and charges which may have become due on it.

Rights of Surety

If on default by the principal debtor, being unable to pay back to the creditor the sum/amount so taken on loan; the surety makes the payment to the creditor on behalf of the principal debtor; then the surety steps into the shoes of the creditor. Meaning that now the principal debtor is liable to repay the amount to the surety, as the surety has subsequently become the creditor and has the right to legally sue the principal debtor to recover the amount he has paid to the original creditor.

Relevant Sections under Chapter VIII of the Indian Contract Act, 1872

Section 140. Rights of surety on payment or performance

Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

Multiple sureties

When there is more than one surety, then all of them are equally liable to repay the loan/sum/amount of default of the principal debtor, unless and until so decided where the liability of such sureties are limited in nature.

Relevant Sections under Chapter VIII of the Indian Contract Act, 1872

Section 146. Co-sureties liable to contribute equally

Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.

Illustrations

(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each.

(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the extent of one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees and C 500 rupees.

Continuing Guarantee

When a guarantee extends to multiple (more than one) transactions, then such guarantee is called a continuing guarantee. For example, B is a cloth merchant and regularly supplies to C. A contracts with B that on default by C, A will make such payment to B. B sells stock of Rs. 50,000/- to C. C makes payment for it. B again sells stock of Rs. 70,000/- to C. C fails to make payment. A shall be liable to the tune of Rs. 70,000/- as the contract of continuing guarantee applies to every transaction between B and C. 

Relevant Sections under Chapter VIII of the Indian Contract Act, 1872

Section 129. Continuing guarantee

A guarantee which extends to a series of transaction, is called, a "continuing guarantee".

Illustrations

(a) A, in consideration that B will employ C in collecting the rents of B's zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rent. This is a continuing guarantee.

(b) A guarantees payment to B, a tea-dealer, to the amount of £ 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of £ 100, and C pays B for it. Afterwards, B supplies C with tea to the value of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of £ 100.

(c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.

[4] Contingent Contracts

A contingent contract is a contract whose execution is based on an ‘uncertain event’, which and when the event becomes certain the contract can be put to force, or said to be executable.

The ‘event’ becomes certain when;

[1] the event has happened (making it certain that the event cannot now be undone), or

[2] when happening of the event becomes impossible; which now indirectly makes the event certain that the event will never happen.  

For example, A takes a loan of Rs. 5,00,000/- from a bank to buy a land. The said land is disputed before court of law. The bank sanctions the loan and puts a condition that the loan amount will be disbursed in the account on A, only when the land’s title becomes clear (after termination of dispute). On finality of the land dispute the bank will have to issue the loan to A.

In the above example, the land which is in dispute is an ‘uncertain event’. The land dispute could have ended shortly or litigation could have remained pending. Once if the dispute is over, the event becomes certain (it is certain that the land dispute is over and the title of the land is clear), the contingent contract comes in to force and A becomes entitled to receive the said loan amount.

Alternatively, A insures goods of B to tune of Rs. 10,000/- if his goods are destroyed, which are coming from Russian via a plane. The plane disappears. The contingent contract cannot be enforced. If the plane is found to be crashed only then the contract will become executable.   

Relevant Sections under Chapter III of the Indian Contract Act, 1872

Section 31. "Contingent contract" defined

A "contingent contract" is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

Illustration

A contracts to pay to B Rs. 10,000 if B's house is burnt. This is a contingent contract.

Section 32. Enforcement of contracts contingent on an event happening

Contingent contracts to do or nor to do anything in an uncertain future event happens, cannot be enforced by law unless and until that event has happened.

If the event becomes impossible, such contracts become void.

Illustrations

(a) A makes a contract with B to buy B's horse if A survives C. This contract cannot be enforced by the law unless and until B dies in A's lifetime.

(b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been offered, refuse to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse.

(c) A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.

Section 33. Enforcement of contract contingent on an event not happening

Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before.

Illustration

A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.

Impossibility and Fixed Time Contingent Contracts

Impossibility:-

If any contingent contract is entered into by parties which is impossible to perform, the contract becomes void. Simply, if A promises to pay to B a sum of Rs. 5,000/- if he marries C. C is dead at the time of such contract. The contract becomes void. If in the same example if C is married, then the contract is not void, as there is a chance that C divorces her husband and then subsequently marries B. 

Fixed Time Contracts:-

Such contingent contracts which are time bound, and that uncertain event does not happen within that time period the contract expires, hence becomes void. For example, if A decides to pay to B, a detective, a sum of Rs. 20,000/- if he fines a missing person M, within 5 months. B is unable to find M within 5 months; the contract expires.

Relevant Sections under Chapter III of the Indian Contract Act, 1872

Section 35. When contracts become void, which are contingent on happening of specified event within fixed time

Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void, if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.

When contracts may be enforced, which are contingent on specified event not happening within fixed time : Contingent contract to do or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or before the time fixed has expired, if it become certain that such event will not happen.

Illustrations

(a) A promises to pay B a sum of money if a certain ship returns within the year. The contract may be enforced if the ship returns within the year; and becomes void if the ship is burnt within the year.

(b) A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within a year, or is burnt within the year.

Section 36. Agreements contingent on impossible events, void

Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.

Illustrations

(a) A agrees to pay B 1,000 rupees if two straight lines should enclose a space. The agreement is void.

(b) A agrees to pay B 1,000 rupees if B will marry A's daughter C. C was dead at the time of the agreement. The agreement is void.

Contract of Indemnity

A contract of indemnity is one whereby a person promises to save the other from loss caused to him by the conduct of the promisor himself or of any third person. Such a contract is a subset of contingent contact. All contracts of indemnity are contingent contracts; but all contingent contract are not contracts of indemnity.

Simply, Insurance contracts are contracts of indemnity, fire-insurance, life-insurance, vehicle-insurance etc.

The person who gives the indemnity is called the 'indemnifier' and the person for whose protection it is given is called the 'indemnity-holder' or 'indemnified'.

A contract of indemnity is restricted to cover the loss caused by the promisor himself or by a third person. The loss must be caused by some human agency. Loss arising from accidents like fire or perils of the sea are not covered by a contract of indemnity, unless and until the contract so made specifically says so.

For example, a shareholder executes an indemnity bond favouring the company thereby agreeing to indemnify the company for any loss caused as a consequence of his own act.

Relevant Sections under Chapter VIII of the Indian Contract Act, 1872

Section 124. "Contract of indemnity" defined

A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity".

Illustration

A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Section 125. Right of indemnity-holder when sued

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit, if in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

[5] Contract of Wager

Wager simply is ‘betting’ and betting is illegal in India. Wager means staking something which is of value. Such a contract is a subset of contingent contact. All wagering contracts are contingent contracts; but all contingent contract are not wagering contracts. For example, betting in IPL (Indian Premiere League) is wager and hence illegal. In some jurisdictions like the UK wagering contracts are recognized and betting is legal.

Essentials of wagering agreement-

[1] Uncertain event. Uncertainty in the minds of the parties about the determination of the event in one way or other is necessary. A wager generally contemplates a future event; but it may even relate to an event which has already happened in the past, but the parties are not aware of its result or the time of its happening.

 

[2] Equal chances of gain or loss to the parties. There is no wager if there are no mutual chances of gain or loss, each party should stand to win or lose. If one party wins and there weren’t any chances of them losing, then in that case there is no wager. If winning or losing is completely based on skill there will be no wager (Case Law: Cole v. Odhams press) it should be dependent on chance.

Contingent Contract

Wager

Legal

Illegal

Super-set of wager

Wager is a sub-set of contingent contracts

No equal chance of winning:

From example under Contingent Contract of Loan agreement, it says that

1.      if the event becomes certain the contract will be executed

2.      if the event remains uncertain the contract will not be executed

Equal chance of winning:

Like in Betting, if it rains A pays B Rs. 100/-, if it does not B pays A Rs. 100/-

In both cases the contract becomes executable i.e. either A will have to pay or B will have to pay. The contract never remains non-executable.

 

[3] Neither party to have control over the event. Neither party should have control over the happening of the event one way or the other.

Case Law: Birdwood J in Dayabhai Tribhovandas v. Lakshmichand “If one of the parties has the event in his own hands, the transaction lacks the essential ingredient of wager”.

[4] No other interest in the event. Neither party should have any interest in the happening of the event other than the sum or stake he will win or lose.

Exceptions:

[1] Horse Racing

[2]Crossword competitions and lottery

The Supreme Court of India in B.R Enterprises V. State of U.P. held that even the state sponsored lotteries have the same element of chance with no skill involved in it and it comes under wagering contracts as the very nature of agreement has not changed and thus are void. If chance does not play a role and victory is completely dependent on skill, the competition is not a lottery, otherwise it is.

The Madhya Pradesh High Court in Subhash Kumar Manwani v. State of M.P. has characterized lotteries as wager and the court held that agreement for payment of prize money on a lottery ticket was held to be coming within the category of wagering agreement as contemplated by Section 30 of Contract Act, 1872.

Section 30. Agreements by way of wager, void

Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to a person to abide the result of any game or other uncertain event on which any wager is made.

Exception in favor of certain prizes for horse-racing: This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be rewarded to the winner or winners of any horse-race.

Section 294A of the Indian Penal Code not affected: Nothing in this section shall be deemed to legalize any transaction connected with horse-racing, to which the provisions of section 294A of the Indian Penal Code apply.

[6] Promissory Estoppel

Law of Promissory Estoppel states that if a person promises to do something and on basis of such promise the other person acts on it, the person who made the promise is liable to complete his promise.

Promissory means a promise made and Estoppel means to stop the person from not performing his promise.

For example, Father of Monu visits his school on Founder’s Day and promises to the Principal that if she makes a new library then he will donate 5000 books to the school. The Principal based on the father’s promise makes a new library in the school. Now Monu’s father is liable under principle of Promissory Estoppel to complete his promise and donate 5000 books.   

Contract law generally requires that a person receive consideration for making a promise or agreement. Legal consideration is a valuable asset that is exchanged between two parties to a contract at the time of a promise or agreement. Ordinarily, some form of consideration, either an exchange of money or a promise to refrain from some action, is required in order for a contract to be legally enforceable. However, in attempting to ensure justice or fairness, a court may enforce a promise even in the absence of any consideration, provided that the promise was reasonably relied on and that reliance on the promise resulted in a detriment to the promise.

[7] Agency Contracts / Partnership Contracts

An agent is a person employed to do any act or to represent another in dealings with third persons. The person who employs the agent and for whom such act is done, or who is so represented is called the principal. The relation between the agent and the principal is called Agency. It is only when a person acts as a representative of the other in the creation, modification or termination of contractual obligations, between that order and third persons, that he is an agent. The essence of a contract of agency is the agent's representative capacity coupled with a power to affect the legal relations of the principal with third persons.

Contracts of agency are based on two important principles:

a.    Whatever a person can do personally shall also be allowed to be done through an agent except in case of contracts involving personal services such as painting, marriage, singing, etc.

b.    He who does an act through a duly authorised agent does it by himself i.e. the acts of the agent are considered the acts of the principal.

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