Consideration in Contract Law

Definition:
 Consideration is defined as the something of value which is exchanged between the
parties to a contract. It is an essential element for the formation of a contract and
can be in the form of money, goods, services, or an act of forbearance (refraining
from doing something).
 Section 2(d) of the Indian Contract Act, 1872 defines consideration as:
"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."

Essentials of Consideration
According to R.K. Bangia, the following are the essential elements for consideration to be
valid:
1. It must move at the desire of the promisor:
o The act, forbearance, or promise must be done at the request of the
promisor. If it is done voluntarily or without any request, it does not qualify as
consideration.
o Example: If a person offers to pay for the repairs of a vehicle and the other
party does the repair work at their own discretion, it would not constitute
valid consideration.
2. It must be lawful:
o Consideration must be lawful; it cannot be something that is illegal, immoral,
or against public policy.
o Example: A promise to pay someone to commit a crime (like a bribe) would
not constitute lawful consideration.
3. It must be real and not illusory:
o The consideration must be real, tangible, and have a value that can be
enforced by the law. An illusory promise or an empty promise will not be
considered valid consideration.
o Example: A promise to "give someone a gift" without any specific details or
value is illusory and not enforceable.
4. It must be something of value:
 o Consideration must be something of value in the eyes of the law. It can be
money, goods, services, or a promise not to do something.
o Example: If person A promises to sell goods worth Rs. 5,000 to person B in
exchange for Rs. 5,000, then the money is the consideration for the sale.
5. It must not be past:
o The consideration must be given in exchange for the promise made in the
present or future. Past consideration (something done before the contract is
made) cannot form valid consideration.
o Example: If A helps B repair his car and later B promises to pay for the repair,
the payment is not valid consideration because it is a past consideration (the
work was done before the promise).

Types of Consideration
1. Executed Consideration:
o This refers to when the consideration has already been provided at the time
of making the promise.
o Example: A sells his bicycle to B for Rs. 2,000. The delivery of the bicycle to B
is the executed consideration for the sale.
2. Executory Consideration:
o This refers to a promise made for a promise or act that will be performed in
the future.
o Example: A promises to deliver goods to B on a future date and B promises to
pay Rs. 5,000 for those goods. The promises of delivery and payment are
executory consideration.
3. Past Consideration:
o Consideration that was provided before the promise was made. It is generally
not valid because there was no mutual exchange at the time the promise was
made.
o Example: A promises to pay B Rs. 1,000 for helping him move furniture last
week. Since the assistance was given in the past, the promise is based on past
consideration and is unenforceable.

Rules Regarding Consideration

1. Consideration Need Not Be Adequate but Must Be Sufficient:
 o The law does not require that the consideration should be equal in value or
equivalent to what is being promised. What matters is that it is sufficient,
meaning that it must have some value in the eyes of the law.
o Example: A contract for the sale of a diamond ring for Rs. 100 (which might
be considered grossly inadequate in value) would still be valid, as long as the
consideration is sufficient and not illusory.
2. Must Be Real and Not Illusory:
o The consideration must be real and not illusory (i.e., not vague or
impossible). A promise to do something that is impossible or is not serious
does not constitute valid consideration.
o Example: A promise to sell someone "a bucket of air" would not constitute
real consideration because it lacks substance.
3. Consideration Must Be Given by the Promisee:
o The person to whom the promise is made (the promisee) must provide the
consideration. It can be given either by the promisee or by someone on their
behalf, but it cannot be a gift.
o Example: If A promises to pay B for a certain task, B must be the one
providing the consideration, either by performing the task themselves or
through another person.

Privity of Contract and Consideration

 In a contract, the doctrine of privity means that only those who are parties to the
contract can enforce its terms.
 However, the person providing consideration must be the person who is in a
contractual relationship with the party offering the promise.
Example: If A promises to give B money in return for B helping C, C does not have the right
to sue A for performance, even though C might have benefited from the arrangement.

Exceptions to the Rule of Consideration

1. Natural Love and Affection (Section 25, Indian Contract Act):
o Under certain circumstances, a promise made out of natural love and
affection (e.g., family members) can be valid even if there is no consideration.
o Example: A father promises to give a property to his son, and the promise is
written down. The promise is valid, even without consideration.
2. Promise Made to Charity:
 o A promise to donate money to charity is binding in some jurisdictions, even if
it is made without consideration. However, the enforceability of such
promises depends on specific legal provisions.
3. Past Consideration (Exception for Implied Promise):
o In some cases, a past act can be recognized as consideration if it was done at
the request of the promisor, and both parties understood that a promise
would be made in return.
o Example: A promise to pay for a service that was rendered before a formal
contract was made may still be enforceable if it is deemed to be a reasonable
and implied understanding.
4. Contracts in Writing:
o Some jurisdictions, under particular conditions (such as a contract being
made in writing or executed as a deed), may allow a promise to be
enforceable even without consideration.

Illustrative Case Laws

1. Currie v. Misa (1875):
o In this case, the court explained that consideration must be something of
value in the eyes of the law, and it cannot be a mere moral obligation or past
consideration.
o Rule: Consideration must consist of a benefit to the promisor or a detriment
to the promisee.
2. Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. (1915):
o This case reinforced the rule that consideration must move from the
promisee. Even if a third party benefits from the contract, it does not give
them the right to sue for breach unless they provided consideration.
3. Chappell & Co. Ltd. v. Nestle Co. Ltd. (1960):
o The case clarified that the adequacy of consideration is not for the courts to
judge. What matters is that there is sufficient consideration, regardless of
whether it is fair or equal in value to the promise made.

Conclusion
Consideration is a foundational principle in contract law that serves as the exchange or
bargain for the promises made by parties. It ensures that there is a mutual exchange of
something of value, thereby giving the contract its legal enforceability. Consideration must
be lawful, real, and sufficient, though it need not be adequate. The rules surrounding
consideration help in distinguishing valid contracts from mere agreements or gifts.

Privity of Contract – According to R.K. Bangia

Privity of Contract is a fundamental principle in contract law which asserts that only the
parties to a contract have the rights and obligations under it. In simpler terms, a third party
who is not part of the contract cannot sue or be sued based on the contract, even if they
benefit from it.
According to R.K. Bangia in his book on Law of Contract - 1, the doctrine of privity of
contract is discussed as follows:

Definition of Privity of Contract

 Privity of Contract refers to the relationship that exists between the parties to a
contract. Only those who are parties to the contract (i.e., the offeror and the offeree)
have the right to enforce the contract and are bound by its terms.
 A third party who is not a party to the contract cannot sue or be sued under the
contract, even if they stand to benefit from it or if the contract affects them.
Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement that is
enforceable by law. This definition implicitly suggests that only those who are parties to the
contract can enforce the agreement or be held accountable for its terms.

Essentials of the Doctrine of Privity of Contract

1. Only the Parties to the Contract Have Rights and Obligations:
o The central rule of privity is that only those who have entered into the
contract have the rights and obligations under it.
o Third parties who are not involved in the agreement cannot claim benefits
from it, nor can they be held liable under the contract’s terms.
Example: If A sells a car to B, C (a third party) has no right to enforce the terms of the
contract between A and B, even if C benefits from the car being sold to B.
2. No Third Party Enforcement:
o A third party cannot enforce the contract, regardless of whether they are a
beneficiary or have been harmed by the contract.
o For example, if a contract involves the payment of money to a third party,
that third party cannot directly enforce the contract to claim the money.
Example: A contract between two people, A and B, wherein A promises to pay a certain sum
to C, does not give C the right to sue A if A defaults.
3. No Liability for Third Parties:
o Similarly, third parties have no liability for the performance of a contract.
o In the same example, if A defaults on paying the sum to C, C cannot hold B
responsible for A’s failure to perform, as B is not a party to that specific
promise.

Exceptions to the Doctrine of Privity

Though the rule of privity restricts third parties from enforcing contracts or having rights
under them, there are several exceptions where third parties can be involved or have rights:
1. Contracts for the Benefit of Third Parties (Third-Party Beneficiary Rule)
 R.K. Bangia notes that a third party may be able to claim benefits from a contract if
the contract was made for their benefit.
 A contract made for the benefit of a third party can give the third party the right to
enforce the terms, even though they are not a signatory to the contract.
 Example: If A and B contract to pay C a sum of money, C (the third party) can enforce
the contract and claim the money, even though C is not a party to the contract.
Case Law Example: Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915) - In this
case, the court held that only the parties to the contract can sue to enforce it, thus
confirming the privity rule. However, it also acknowledged that a third-party beneficiary
could enforce the contract if intended by the parties.
2. Agency Relationships:
 If one person acts as an agent for another, the principal is a party to the contract,
and the agent is simply acting on behalf of the principal.
 In this case, third parties can enforce the contract against the principal, even if the
principal is not directly involved in the contract.
Example: A person (agent) signs a contract with a third party on behalf of a company
(principal). The third party can enforce the contract directly against the principal.
3. Transfer of Rights and Benefits:
 The assignment or transfer of rights in a contract can enable a third party to step
into the shoes of one of the original contracting parties.
 R.K. Bangia mentions that in cases of assignment of rights, a third party who is a
beneficiary of that assignment can enforce the contract.
Example: If A agrees to sell a piece of land to B, and B assigns the rights to C, C can sue A for
breach of contract, as they now have the right to enforce the terms of the contract.
Case Law: Khadim's Shoes Ltd. v. S.K. Sinha – The court held that a third party who is
assigned rights under a contract may also enforce the contract, even though they were not a
party to the original agreement.
4. Contracts Created by Statutes (Statutory Rights):
 Sometimes, statutory provisions grant third parties the right to enforce a contract.
 Certain contracts, like those involving consumer protection, may give third parties
the right to claim benefits, even if they are not signatories to the contract.
Example: Under the Consumer Protection Act, a consumer can enforce the terms of a
contract against a supplier or manufacturer, even if they did not sign the original contract.

Exceptions Based on Judicial Interpretation

1. Doctrine of Constructive Trust:
o If a third party receives a benefit from a contract intended for their benefit,
the courts may impose a constructive trust and allow the third party to claim
the benefit.
o This exception applies where there has been an unjust enrichment of a third
party, who is benefiting from the contract despite not being a party to it.
2. Collateral Contracts:
o Sometimes, a third party may be involved indirectly through a collateral
contract related to the main contract. In such cases, the third party may have
rights and obligations as per the collateral contract, even though they are not
a direct party to the main contract.

Case Law Illustration

1. Tweddle v. Atkinson (1861):

o This case confirmed the privity of contract rule by stating that only the parties to the
contract can sue on it, and a third party who is not a party to the contract cannot
enforce its terms.

o Fact: In this case, the father of the bride and the father of the groom had entered
into an agreement, promising to pay money to the groom. However, since the groom
was not a party to the contract, he had no right to enforce it.

2. Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915):
 o This case reaffirmed the privity doctrine by establishing that a third party cannot
enforce the contract unless explicitly provided for in the contract itself. The case also
clarified that a promisee's right to enforce a contract is limited to the parties directly
involved in it.

Capacity to Contract – According to R.K. Bangia (Law of Contract 1)

In contract law, the capacity to contract refers to the ability of a person to enter into a
legally binding agreement. Under Indian Contract Act, 1872, only those who possess legal
capacity can enter into a contract. The general rule is that a person must be of sound mind
and of the age of majority to have the capacity to contract.
A minor (a person under the age of 18 years) is one such class of people who are generally
not competent to enter into contracts, with certain exceptions, as detailed below in R.K.
Bangia's book.

Who is a Minor?
 A minor is a person who is below the age of majority, i.e., below 18 years old in
India (under Section 3 of the Indian Majority Act, 1875).
 A minor lacks legal capacity to enter into a contract. Contracts entered into by
minors are typically voidable at their discretion.
 The age of majority can be extended to 21 years if the minor is under the
guardianship of a court or if a guardian has been appointed by the court.
Example: A person aged 17 years is considered a minor and cannot enter into a binding
contract on their own behalf.

Nature and Effect of a Contract by a Minor

1. General Rule:
o Contracts entered into by minors are void ab initio (void from the beginning).
This means that such contracts have no legal effect, and the minor cannot be
bound by them.
o Section 11 of the Indian Contract Act provides that a person who is a minor or
of unsound mind cannot contract, and their contracts are void.
2. Exceptions:
o Contract for Necessaries: A minor may be held liable for contracts for
necessaries (such as food, clothing, shelter, etc.), which are goods or services
essential for the minor's well-being.
o Beneficial Contracts: A contract that benefits a minor (e.g., a gift or a contract
to receive something for the minor’s benefit) may be valid.
 o Representation of Minor’s Age: If a minor misrepresents their age and enters
into a contract, they still cannot be held liable, though in some cases, the
minor might be required to return the benefit.

Remedy – Doctrine of Restitution and Restoration

 The Doctrine of Restitution and Restoration refers to the principle where a minor
who has received goods or money under a void contract may be required to restore
the goods or pay the money back.
 The minor cannot be compelled to perform the contract but may be ordered to
return the goods or money received.
Example: If a minor enters into a contract and receives goods, and then decides to repudiate
the contract, they may be required to return the goods or, if the goods cannot be returned,
to pay for them.

Necessaries (Section 68 of the Indian Contract Act)

 A minor is liable for contracts concerning necessaries that are essential for his or her
life. Necessaries include items such as food, shelter, education, and clothing.
 Section 68 allows the minor to be held liable to pay for necessaries supplied to them.
However, this does not extend to other non-essential items.
Example: A minor who enters into a contract for the supply of food or medicine can be held
liable for the payment, but a contract for a luxury item like jewelry would not be
enforceable.

Benefit of the Minor is Valid

 Contracts benefiting a minor are valid. If a contract is entered into for the minor's
benefit, the minor will not be bound by it, but the minor can still accept the benefit
of the contract.
 Example: A gift or a contract where a minor receives money or property from
another person can be considered valid, even if the minor is not legally bound to
fulfill any promises made under the contract.

Contract Done by a Parent/Guardian is Valid

 A parent or guardian may enter into a contract on behalf of a minor, but only in
limited circumstances, such as when the contract is for the benefit of the minor.
  A parent or guardian cannot bind the minor to contracts that impose liabilities or
obligations unless it is for necessaries or other essential purposes.
Example: A guardian may sign a contract for a minor to purchase necessities, but they
cannot enter into a contract that would financially burden the minor beyond their
necessities.

Ratification is Not Valid

 Ratification of a contract by a minor once they attain the age of majority is not valid.
A minor cannot ratify a contract made during their minority because they did not
have the capacity to contract in the first place.
Example: If a minor enters into a contract for the sale of a car and, upon turning 18, tries to
ratify it, the contract is still void.

No Restitution or Refund
 When a contract entered into by a minor is void, no restitution or refund is required
unless the minor has misrepresented their age or if the minor has made a fraudulent
misrepresentation.
 If a minor receives an advantage or benefit under a contract and the contract is
repudiated, they may still have to restore the benefit to the other party.
Example: If a minor receives a loan and repudiates the contract, the lender cannot force the
minor to pay back the money unless the loan was for necessaries or the minor was guilty of
misrepresentation.

Agency and Minor

 A minor cannot be an agent because an agent needs to have the legal capacity to
contract. Since a minor lacks capacity to enter into a binding contract, they cannot
act as an agent.
Example: A minor cannot represent another person (e.g., act as an agent for buying or
selling goods) because the contracts they enter into would not be enforceable.

Partnership and Minor

 A minor cannot be a partner in a partnership firm. According to the Indian
Partnership Act, 1932, a minor can only be admitted to the benefits of a partnership
but cannot be held personally liable for the debts of the firm.
Example: A minor may be allowed to share in the profits of a partnership, but they cannot
be made liable for any debts or obligations of the partnership.

Shareholder and Minor

 A minor can hold shares in a company but cannot enter into a contract related to the
shares until they reach the age of majority.
 Contracts made by a minor in this context are void, and the minor cannot be bound
by them, although they can enjoy the benefits derived from the shares, such as
dividends.

Surety and Minor

 A minor cannot be a surety because a surety must have the legal capacity to enter
into a contract. A contract where a minor acts as a surety is void.
Example: A minor cannot stand as a guarantor for someone’s loan because the contract they
enter into will not be enforceable.

Negotiable Instruments and Minor

 A minor can hold negotiable instruments (such as promissory notes, bills of
exchange, or cheques) and may receive them in good faith. However, a contract
involving a minor's signature on a negotiable instrument may not bind them unless it
is a transaction involving necessaries.
Example: A minor may receive a cheque from a friend as a gift, and while they can cash it,
they cannot be legally compelled to pay it back if the cheque was given for something other
than necessaries.

Torts and Minor’s Liability

 A minor can be held liable for torts (civil wrongs). Even though they cannot be held
liable for breach of contract, they can be held responsible for committing torts, such
as negligence or fraud, as they are not protected by the rules of privity or contract
law.
Example: If a minor damages someone’s property or injures another person in an accident,
they may be liable in tort for the injury or damage caused.

Insolvency – Minor Cannot Be Held Liable

  A minor cannot be held liable for insolvency. Since a minor cannot enter into
binding contracts, they cannot be subjected to the liabilities associated with
insolvency or bankruptcy.
Example: If a minor accumulates debts during their minority, they cannot be declared
bankrupt or held liable for the debts once they attain majority.

Estoppel Does Not Apply to Minors

 Estoppel is a legal principle that prevents a party from denying certain facts or
representations. However, estoppel does not apply to minors. A minor can assert
their minority as a defense in any legal proceeding, and the doctrine of estoppel will
not prevent them from doing so.
Example: If a minor misrepresents their age and enters into a contract, they can still claim
they were a minor and void the contract, even if the other party relied on the
misrepresentation.

Conclusion
The capacity to contract is a fundamental concept in contract law, and minors are generally
incapable of entering into binding contracts. However, there are several exceptions where
minors may be held liable or can enter into enforceable contracts, such as contracts for
necessaries.
Free Consent in Contract Law – According to R.K. Bangia
Free consent is one of the essential elements for the formation of a valid contract under
Section 10 of the Indian Contract Act, 1872. According to R.K. Bangia, consent is said to be
free when it is given voluntarily, without any form of coercion, undue influence, fraud,
misrepresentation, or mistake.
If consent is not free, the contract becomes voidable at the option of the party whose
consent was not freely given. Below, R.K. Bangia elaborates on various factors that affect the
freedom of consent.

Coercion (Section 15 of the Indian Contract Act)

Definition:
 Coercion refers to the act of forcing someone to enter into a contract against their
will using threats or force.
 It includes threats of physical harm, damage to property, or criminal intimidation.
Elements of Coercion:
1. Threat or Force: The coercive act must involve a threat to a person or their property.
2. Unlawful Act: The threat or force must be unlawful.
3. Effect on Consent: Coercion leads to the loss of free consent, as the coerced party is
compelled to agree due to the threat.
Example: If A threatens to kill B unless B signs a contract, the consent is obtained under
coercion, making the contract voidable at B's option.
Legal Consequence: A contract made under coercion is voidable at the option of the party
whose consent was coerced.

Undue Influence (Section 16 of the Indian Contract Act)

Definition:
 Undue influence occurs when one party to the contract has dominance over the
other party and uses that power to obtain an unfair advantage.
Characteristics of Undue Influence:
1. Dominance of Will: One party has the ability to influence the will of the other party
due to a relationship of trust or authority.
2. Exploitation: The dominant party exploits the weaker party’s dependence or trust.
3. Unfair Advantage: The contract is made under conditions that result in an unfair
advantage to one party at the expense of the other.
Examples of Relationships Leading to Undue Influence:
 Parent and Child
 Teacher and Pupil
 Doctor and Patient
 Guardian and Minor
Legal Consequence: A contract made under undue influence is voidable by the party whose
consent was influenced. However, the contract is not voidable if the influenced party cannot
prove the undue influence.
Example: A child signing a contract under the influence of an overbearing parent would be
considered to have consent that was not free.

Fraud (Section 17 of the Indian Contract Act)

Definition:
 Fraud refers to intentionally deceiving another party to make them enter into a
contract, resulting in the other party suffering a loss.
 It includes any act of misrepresentation, concealment, or false statements with the
intent to deceive.
Types of Fraud:
1. False Representation: Making a false statement with the intent to deceive.
2. Concealment of Facts: Withholding material facts that might affect the decision of
the other party.
3. Misinformation: Providing misleading or false information with the intention of
deceiving.
Examples of Fraud:
 Falsely Representing the Value: A seller misrepresenting the quality or value of
goods.
 Concealing Material Facts: A buyer failing to disclose defects in a property.
Legal Consequence: A contract induced by fraud is voidable at the option of the defrauded
party, who may also claim damages.
Example: If A sells a painting to B, claiming it is an original work of art when it is a fake, B can
rescind the contract due to fraud.

Misrepresentation (Section 18 of the Indian Contract Act)

Definition:
 Misrepresentation is an incorrect statement made innocently, without the intent to
deceive, that leads the other party to enter into a contract.
 Unlike fraud, misrepresentation is not intentional but still affects the validity of
consent.
Elements of Misrepresentation:
1. False Statement: A statement made that is false.
2. Innocent Intent: The false statement is made without any intent to deceive.
3. Impact on Consent: The other party is misled into entering the contract due to the
false statement.
Example: If A sells a car to B, stating that the car is a 2019 model when it is actually a 2017
model, this would be considered misrepresentation.
Legal Consequence: A contract induced by misrepresentation is voidable at the option of
the party misrepresented, and they may be entitled to damages.
Example: B can rescind the contract and demand the return of the purchase price if they
were misled about the model of the car.

Mistake (Section 20, 21, and 22 of the Indian Contract Act)

Definition:
 A mistake refers to an incorrect belief about something at the time the contract is
made. The Indian Contract Act recognizes two types of mistakes:
1. Mistake of Law (Section 21)
2. Mistake of Fact (Section 20)
Types of Mistakes:
1. Mistake of Fact (Section 20):
o Mistake of fact occurs when both parties have a false belief about a fact that
is material to the contract.
 o If both parties are mistaken about the existence or identity of a subject
matter, the contract is void.
Example: A contracts to sell a specific horse, but it turns out that the horse has already died
before the contract was made. Both parties were mistaken about the fact of the horse’s
existence.
2. Mistake of Law (Section 21):
o Mistake of law refers to an incorrect belief about the law. Under the Indian
Contract Act, ignorance of law is no excuse, and a contract made under a
mistake of law is still valid.
Example: A person paying a tax which they were not required to pay due to a
misunderstanding of the law. This is a mistake of law, and the payment cannot be
recovered.
3. Mistake of Judgment (Section 22):
o A mistake of judgment occurs when a party misjudges the value or quality of
something.
o In cases of mistake of judgment, the contract is not voidable, as the law does
not treat errors in judgment as a valid ground for avoiding a contract.
Example: A seller misjudges the market price of a piece of land and agrees to sell it for less
than its value. This is a mistake of judgment, not a mistake of fact.
Legal Consequence:
 Mistake of Fact: Contracts are voidable if both parties are under a mistake about a
fact.
 Mistake of Law: Ignorance of law is no excuse, and the contract remains valid.
 Mistake of Judgment: No remedy, as mistakes of judgment do not invalidate a
contract.

Summary of Free Consent

In summary, for a contract to be valid, consent must be free. The following factors
undermine the freedom of consent:
1. Coercion: Consent obtained by threatening to harm the other party or their property.
2. Undue Influence: Consent obtained through the exploitation of the dominant
position of one party over another.
3. Fraud: Consent obtained through deliberate deception or false representation.
 4. Misrepresentation: Consent obtained through innocent misstatements of fact that
influence the other party’s decision.
5. Mistake: Consent obtained where there is an error of fact or law.
If any of these factors affect the consent, the contract becomes voidable at the option of the
party whose consent was impaired.

Unlawful Consideration in Contract Law – According to R.K. Bangia

In contract law, a consideration is something of value exchanged between parties to form a
contract. However, not all forms of consideration are lawful. Unlawful consideration refers
to a situation where the consideration involved in a contract is against the law or public
policy, which renders the contract void and unenforceable. The Indian Contract Act, 1872,
prescribes that a contract is valid only if both the object and the consideration are lawful
(Section 23).
According to R.K. Bangia in his book "Law of Contract - 1", unlawful consideration can fall
under several categories, including being forbidden by law, defeated by law, or involving
actions that are against public policy, such as injury to persons or property or immoral acts.
Below are the various types of unlawful considerations as discussed by Bangia.

1. Forbidden by Law (Section 23)

Definition:
 Consideration is considered forbidden by law if it is prohibited by any statute or
regulation.
 Forbidden by law refers to acts that are explicitly made illegal by legislation. For
example, a contract where the consideration is for something that is illegal or against
the law, such as selling stolen goods or engaging in illegal activities.
Examples:
 A contract to sell drugs or contraband goods is a contract where the consideration is
forbidden by law.
 Loans for illegal purposes, such as money for a gambling venture or to commit a
crime, would have unlawful consideration.
Legal Consequence:
 Contracts with considerations forbidden by law are void. This means the contract
cannot be enforced, and the courts will not uphold such agreements.
Example: A contract for the sale of illegally obtained property is void, as the consideration is
for something that is forbidden by law.
2. Defeated by Law
Definition:
 Consideration is considered defeated by law when the object or purpose of the
contract is to defeat or circumvent the law.
 This type of consideration involves contracts made with the intention of evading
legal obligations or bypassing legal restrictions.
Examples:
 A contract designed to evade tax obligations, such as underreporting income or
providing false statements to the authorities, would fall under this category.
 Agreements intended to defeat the law by facilitating actions that are indirectly
illegal (like structuring illegal transactions to appear legitimate).
Legal Consequence:
 A contract with consideration that is defeated by law is also void and unenforceable,
as the law does not allow individuals to enter into agreements that undermine its
purpose or enforcement.
Example: A sham sale agreement intended to defraud creditors or avoid paying debts is
void, as it is made with the intention of defeating the law.

3. Innocent Collusion
Definition:
 Innocent collusion refers to situations where two or more parties collude to enter
into an agreement, but the purpose of the agreement is to carry out an unlawful act,
even if they are unaware of the unlawfulness.
 Here, the consideration is unlawful because it supports an act that is illegal, even if
the parties did not intend to break the law or did not know the full implications of
their actions.
Examples:
 Two parties agree to sell a property with the intention of evading inheritance tax.
They may not realize that such evasion is illegal, but the contract is still
unenforceable.
Legal Consequence:
  The contract is voidable as the consideration is unlawful. Even if the parties did not
have bad intentions, the law will not allow contracts that involve unlawful
considerations.
Example: A buyer and a seller agree to transact a car but collude innocently to hide the car's
true value for tax purposes. Although neither party intended to commit fraud, the contract
is still void due to unlawful consideration.

4. Agreement to Avoid Taxes

Definition:
 A contract made with the primary intention of avoiding tax obligations or evading
tax payment is considered to have unlawful consideration.
 Such contracts typically involve sham transactions, where the agreement appears
legitimate but is designed to reduce or evade tax payments by misrepresenting facts
or undervaluing the transaction.
Examples:
 A contract where an individual sells their property below market value to avoid
paying capital gains tax is an agreement to avoid taxes.
 Underreporting income to reduce tax liability in contracts related to business
transactions.
Legal Consequence:
 Any contract made for the purpose of tax evasion or avoiding taxes is void as it
involves unlawful consideration. The law does not permit individuals to circumvent
legal obligations like taxes.
Example: A company selling its goods at artificially low prices to avoid the GST or sales tax is
engaging in an unlawful agreement, and such a contract would be void.

5. Injury to a Person or Property

Definition:
 A contract with consideration that involves the injury to a person or property is
unlawful.
 This includes any contract where one of the parties is induced to engage in harmful
actions against another person or their property, such as violence or property
damage.
Examples:
  A contract to damage someone's property or to cause harm to another person.
 Hiring a person to commit assault or vandalism in exchange for monetary
consideration.
Legal Consequence:
 Contracts involving injury to a person or property are void because the consideration
is against public policy and involves illegal acts.
 Such contracts cannot be enforced by the courts.
Example: A contract to destroy someone’s business or to commit a violent act in exchange
for money is void, as the consideration involves injury to another person or their property.

6. Immorality with Marital Relations

Definition:
 A contract that involves consideration related to immoral acts within marital
relations is also considered unlawful.
 This typically involves agreements where one spouse is induced to break marital
vows or engage in illicit relationships for financial compensation.
Examples:
 A contract where one spouse agrees to give money to the other in exchange for
separation or divorce.
 Agreements that involve payment for infidelity or encouraging immoral acts
between married individuals.
Legal Consequence:
 Such contracts are void because they contravene the moral standards of society and
involve considerations that are immoral and detrimental to public policy.
Example: A contract between a husband and wife where one party agrees to a divorce
settlement on the condition of infidelity is void and unenforceable because it involves
immoral consideration.

7. Contract for Prostitution

Definition:
 A contract made with the consideration of prostitution is unlawful. This includes
contracts where one party is paid to engage in sexual services or to facilitate
prostitution.
Examples:
 A contract where one person is paid to provide sexual services in exchange for
money.
 Arrangements that involve trafficking or exploitation for prostitution.
Legal Consequence:
 Such contracts are void, as they promote illegal activity and immoral behavior. The
courts will not enforce contracts related to prostitution or any similar activities.
Example: A contract for engaging in prostitution is unlawful, and such an agreement will not
be enforced by the courts, as it involves an illegal consideration.

8. Illegal Cohabitation
Definition:
 Illegal cohabitation refers to agreements where two parties engage in an intimate or
sexual relationship without being married, often in circumstances that are against
public morality or illegal in certain jurisdictions.
Examples:
 A contract between two individuals that encourages cohabitation outside of
marriage when such relationships are deemed illegal or immoral in the relevant
jurisdiction.
 Contracts that facilitate cohabitation for financial gain or sexual favors.
Legal Consequence:
 Such contracts are considered void because they promote an immoral act and are
contrary to public policy. Contracts that encourage illegal cohabitation or illicit sexual
relationships cannot be enforced.
Example: A contract where one party agrees to provide financial support in exchange for
illicit sexual relations is void and unenforceable due to the unlawful consideration.

Conclusion
Unlawful consideration renders a contract void and unenforceable. The Indian Contract Act
specifically prohibits contracts that involve considerations that are forbidden by law,
defeated by law, or involve immoral, illegal, or harmful activities, such as injury to persons,
tax evasion, prostitution, and immoral acts in marital relations. R.K. Bangia’s analysis
emphasizes that public policy plays a crucial role in determining the lawfulness of
consideration, and any contract that promotes illegal or immoral actions will not be enforced
by the courts.
Mistake in Contract Law – According to R.K. Bangia
In contract law, a mistake refers to a misunderstanding or incorrect belief about a material
fact at the time of making a contract. The Indian Contract Act, 1872, addresses two types of
mistakes: mistake of fact and mistake of law. A contract made under a mistake is generally
voidable, depending on whether the mistake is a mistake of fact or a mistake of law.
R.K. Bangia, in his book "Law of Contract 1", discusses the concept of mistake in detail,
highlighting its essentials, including those that pertain to the identity of parties, the identity
of the subject matter, and the nature and content of promises.

1. Mistake of Fact (Section 20 of the Indian Contract Act)

A mistake of fact occurs when one or both parties to a contract have a false belief about a
fact that is material to the agreement. Under Section 20, if both parties are mistaken about
a fact that forms the foundation of the contract, the contract is void.
Essentials of Mistake of Fact:
 Incorrect Belief: The parties must hold an incorrect belief about a fact, which affects
the nature or existence of the contract.
 Material Fact: The mistake must relate to a material fact—i.e., a fact that is central
to the agreement and affects the substance or value of the contract.
Example: A contract to sell a specific car, but it is later discovered that the car no longer
exists or was destroyed before the agreement was made. Both parties were mistaken about
the fact of the car’s existence, and the contract would be void.
2. Mistake of Law (Section 21 of the Indian Contract Act)
A mistake of law refers to a misunderstanding or ignorance about the law itself. Unlike a
mistake of fact, a mistake of law does not affect the validity of a contract in India. Section 21
of the Indian Contract Act explicitly states that ignorance of the law is no excuse.
Essentials of Mistake of Law:
 Ignorance or Misunderstanding of the Law: A party's misunderstanding about the
legal rules or statutory provisions involved in the contract.
 No Effect on Contract Validity: Contracts made under a mistake of law are still valid,
and the parties cannot claim relief on the ground of ignorance of the law.
Example: If a person unknowingly violates a law while entering into a contract, such as
violating zoning laws during a real estate transaction, the contract is still valid.

3. Identity of Parties
Mistake regarding the identity of parties occurs when the parties to the contract are
mistaken about the identity of the other party. This type of mistake typically happens in
cases of fraud or when one party is misled about who they are entering into the agreement
with.
Essentials of Mistake in Identity of Parties:
 Misunderstanding of Identity: A party may enter into a contract under the mistaken
belief that they are dealing with a specific person, but the other party is actually
someone else.
 Material to the Contract: The identity of the parties is material to the contract. If the
identity of a party is mistaken, and it is essential to the contract, the contract can be
voided.
Example: If A contracts with B believing B is a well-known company, but it turns out B is a
different, unknown entity, A can claim that the contract is void due to a mistake of identity.

4. Identity of the Subject Matter

Mistake regarding the identity or existence of the subject matter refers to a situation where
both parties are mistaken about the subject of the contract. This could involve a mistake
about the nature, existence, or quality of the goods, property, or service being contracted
for.
Essentials of Mistake in Identity of Subject Matter:
 Misunderstanding of the Subject Matter: Both parties are mistaken about the
nature or identity of the object that forms the subject of the contract.
  Material to the Contract: The subject matter must be essential to the contract, and
the mistake must be material to the execution of the agreement.
Example: If A and B contract for the sale of a specific horse, but it turns out that the horse
they are referring to is different (e.g., one is dead or lost), the contract is void due to a
mistake regarding the identity of the subject matter.

5. Nature and Content of Promise

A mistake about the nature and content of a promise involves a misunderstanding by the
parties about the terms, conditions, or effect of their promises within the contract. The
parties may misunderstand what exactly they are agreeing to, and this mistake can lead to a
voidable contract.
Essentials of Mistake in Nature and Content of Promise:
 Misunderstanding of Terms: The mistake may concern the terms or conditions
under which the contract is made. The parties may have different views about what
is being promised, leading to confusion.
 Material to the Contract: The mistake about the promise must be essential, and it
must affect the performance or execution of the agreement.
Example: A contract to deliver 100 units of a product, but one party mistakenly thinks they
are agreeing to deliver 10 units, would be a case of a mistake about the nature of the
promise.

Types of Mistake According to Bangia

R.K. Bangia elaborates on two main types of mistakes that affect the validity of contracts:
1. Unilateral Mistake: When one party is mistaken about a fact, and the other party is
not aware of it. A unilateral mistake does not usually render a contract void, unless it
involves a material mistake regarding the nature or terms of the contract.
2. Bilateral Mistake: When both parties are mistaken about a material fact or the
identity of the subject matter of the contract. A bilateral mistake typically renders the
contract void because the mutual consent is vitiated.
Example:
 Unilateral Mistake: A person agrees to buy a painting believing it to be an original,
but the seller knows it is a copy. This is a unilateral mistake; the buyer can claim the
contract is void.
 Bilateral Mistake: Both parties agree to buy a specific horse, but both are unaware
that the horse has died before the agreement. This is a bilateral mistake, and the
contract is void.
Legal Consequences of Mistake
 Mistake of Fact: If both parties are mistaken about a material fact, the contract is
void under Section 20 of the Indian Contract Act.
 Mistake of Law: Ignorance of the law is no excuse, and contracts made under a
mistake of law are still valid under Section 21 of the Indian Contract Act.
 Unilateral Mistake: Typically, the contract remains valid unless the mistake is about
something fundamental to the agreement (such as the subject matter being
destroyed or non-existent).
 Bilateral Mistake: A bilateral mistake renders the contract void if the mistake relates
to a material fact or the identity of the subject matter.

Conclusion
In summary, mistake is an important concept in contract law that can affect the validity of a
contract. According to R.K. Bangia, the essentials of mistake are primarily concerned with
misunderstandings related to the identity of the parties, the subject matter of the contract,
and the nature and content of promises. If the mistake is material and affects the core of
the contract, it may render the contract void. However, a mistake of law does not affect the
validity of a contract, as ignorance of law is no excuse. The law requires that both parties
must have genuine consent for a contract to be enforceable.