MODULE II: GENERAL PRINCIPLES OF CONTRACT UNDER INDIAN CONTRACT ACT,

1872

SEC. 1 TO 75 OF INDIAN CONTRACT ACT, 1872

“Every contract is an agreement but every agreement is not a contract.”

Only the agreements enforceable by law are contracts. Any agreement which cannot be
enforced in a court of law, cannot be said to be a contract.

For eg: ‘A’ agrees to pay ‘B’ a sum of Rs. 5,00,000 for killing ‘C’. Since the object is unlawful,
the same cannot be enforced in the court, hence, not a contract.

Formation of a contract

1. Proposal + Acceptance = Promise

2. Promise + Consideration = Agreement
3. Agreement + Section 10, ICA (ingredients) = Contract

Promisor and Promisee:

As per Section 2(c), the person making the proposal is called the “promisor” and the
person accepting the proposal is called the “promisee”

Proposal and Acceptance

Proposal or Offer: Section 2(a) defines ‘Proposal’ as “When one person signifies to
another his willingness to do or to abstain from doing anything, with a view of obtaining
the assent of that other to such act or abstinence, he is said to make a proposal.”

Essentials of an Offer:

1. When one person signifies to another: There must be two persons for a valid
proposal, it includes both – natural and artificial person. ‘Signifies’ here stands to
mean that the proposal/offer must be communicated to the offeree clearly.
2. His willingness to do or abstain from doing anything: According to Section 4,
communication of a proposal is considered complete only when it comes to the
knowledge of the person to whom it is made.
3. With a view of obtaining the assent to such act or abstinence: The object of making
the offer must be to obtain the assent. The intention must be to create a legal
relationship. Offer will be valid only if it made with the intention to create a legal
relationship. The test of person’s intention in making a proposal is an Objective
Test, i.e., as it would be construed by a person in the position of the offeree – how
a reasonable man would view the particular situation.

Proposal can be accepted only by the person to whom it is made. It must be within the
knowledge of such other person.
In the case of Lalman Shukla v. Gauri Dutt (1913), the case established an important
principle in contract law, i.e., for a unilateral contract (such as a reward offer) to be
enforceable, the person performing the act must be aware of the offer and act upon it
with the intention of accepting the offer. The ruling clarified that mere performance of the
act without knowledge of the offer does not constitute acceptance, and hence no binding
contract is formed.

As per Section 9, the promise can be either Express or Implied, i.e., it can be either in
words (oral or written) or through gestures, respectively.

Types of Proposal:

1. General Proposal

A general proposal is an offer made to the public at large or to an undefined group of

people. It can be accepted by anyone who fulfils the conditions specified in the proposal.
The Key Characteristics are:

• It is open to anyone who meets the conditions.

• It is often accepted through the performance of an act rather than a promise.

In Carlill v. Carbolic Smoke Ball Co. (1893), the Carbolic Smoke Ball Company advertised
that they would pay £100 to anyone who used their product as prescribed and still would
contract influenza. The company also announced that they have deposited an amount of
£1000 with the bank to show their sincerity. This advertisement was a general proposal.
Mrs. Carlill used the smoke ball as directed and still got influenza. By following the
advertisement’s conditions, she accepted the offer and was entitled to the reward.

2. Specific Proposal

A specific proposal, also known as a specific offer, is made to a particular person or a

defined group of people. It can only be accepted by the person or group to whom it is
addressed. It is made to identifiable individuals or entities, and only the parties to whom
the offer is made can accept it.

For Eg.: A company sends a job offer to a specific candidate, offering a position with
specified terms and conditions. The job offer is addressed to that particular candidate.
Only the candidate to whom the offer is made can accept it by agreeing to the terms and
conditions.

3. Counter Proposal:

A counter proposal (or counter offer) occurs when someone responds to an initial offer
by making a different offer instead of accepting the original one. This effectively rejects
the original offer and puts a new offer on the table for consideration.
For eg.:

1. ‘A’ makes an offer to ‘B’ to sell his watch for Rs. 5,000/-
2. ‘B’ makes an offer as against his previous offer of buying it for Rs. 4,000/-
3. ‘A’ as against the said order, makes another offer of Rs. 4,500/-

2nd and 3rd points are counter proposals as against the previous offer.

In the case of Hyde v. Wrench, a landmark decision, the court established the principle
that a counter-offer constitutes a rejection of the original offer. This means that once a
counter-offer is made, the original offer is nullified and cannot be accepted at a later
stage. The ruling emphasizes the importance of clear and unequivocal acceptance in the
formation of contracts.

The facts and the ratio of the above case are that on June 6, 1840, Mr. Wrench offered to
sell his farm to Mr. Hyde for £1,000. Mr. Hyde responded on June 8, 1840, with a counter-
offer of £950, which Mr. Wrench rejected. On June 27, 1840, Mr. Hyde then agreed to pay
the original amount of £1,000 as initially offered by Mr. Wrench. Mr. Wrench refused to
complete the sale to Mr. Hyde, prompting Mr. Hyde to sue for specific performance,
seeking to compel Mr. Wrench to sell the farm at the originally stated price. The central
legal issue was whether Mr. Hyde's counter-offer of £950 constituted a rejection of the
original offer of £1,000, thereby nullifying it and preventing Mr. Hyde from later accepting
the original offer. The Court of Chancery ruled in favour of Mr. Wrench, dismissing Mr.
Hyde’s claim for specific performance. The reason given by the court was that that Mr.
Hyde’s counter-offer of £950 amounted to a rejection of the original offer of £1,000.
According to contract law principles, a counter-offer operates as a rejection of the initial
offer. Once Mr. Hyde made the counter-offer, the original offer was extinguished and
could not be accepted later. Therefore, Mr. Hyde’s subsequent attempt to accept the
£1,000 offer was invalid. As there was no valid acceptance of the original offer, there was
no binding contract between Mr. Hyde and Mr. Wrench. Thus, Mr. Hyde was not entitled
to enforce the sale.

Therefore, the offer and acceptance must correspond to each other in order to form a
promise (Mirror Rule). If there is any modification as to the acceptance of the offer, the
said modification would become a counter proposal. In easy terms A counter proposal
is:

• A rejection of the original offer.

• A new offer made in response.
• A step in the negotiation process, aiming to reach a mutually acceptable
agreement.
 4. Cross Proposal:

A cross proposal occurs when two parties make identical or similar offers to each other
without knowing that the other party has made an offer. Since neither party is aware of
the other's offer, there is no acceptance of either proposal, and thus no contract is
formed. The essential conditions are that the parties must be same, the subject matter
of the offer must be same and the terms must also be the same.

For eg.: Imagine two friends, Party A and Party B, who both want to buy each other's
bicycles.

• Party A's Offer: On Monday, Party A sends a letter to Party B offering to buy Party
B's bicycle for Rs. 1,000.
• Party B's Offer: Coincidentally, on the same day, Party B sends a letter to Party A
offering to buy Party A's bicycle for Rs. 1,000.
• Crossing in the Mail: Both letters cross in the mail, meaning that Party A’s offer and
Party B’s offer are made independently and without knowledge of each other.

Because both offers were made independently and without either party knowing about
the other's offer, neither offer has been accepted. Acceptance is a crucial element in
forming a binding contract. Therefore, such proposal do not form a contract. For a
contract to be formed, an offer must be accepted. In the case of cross proposals, neither
party accepts the offer made by the other because they are unaware of it.

A fundamental principle of contract law is the "meeting of minds" (mutual agreement)

between the parties. In cross proposals, there is no mutual agreement, as both parties
are acting independently.

Invitation to Offer:

An invitation to proposal (or invitation to treat) is an invitation for others to make an offer.
It is not an offer itself but an indication that someone is open to receiving offers. Before
parties enter into a contract, usually preliminary negotiations take place, e.g., a person
may ask for some information or supply some information and invite the other to make
an offer or make a definite offer.

The purpose behind invitation to proposal is business convenience. Sometimes one

signifies to another not his willingness but simply and information with a view to obtain a
proposal. This is called an invitation to proposal. Few relevant examples of the same are:

• Advertisement in newspaper
• Catalogue / Price list
• Display of goods in a shop window
• Invitation to Tender
Difference between Invitation to Offer and Offer:

Invitation to Offer Offer

In invitation to proposal, no willingness is Section 2(a) defines proposal as
signified, it is merely a supply of something where willingness is signified
information to do or not to do something
Object of invitation is to obtain a proposal Object of proposal is to obtain an assent
from another from the other person
When accepted, the invited person would When accepted, it creates a legally
be making the offer binding contract
Example: XYZ company applies for a Example: Self Serving vending machine
tender advertised by the Government for
drone making project

Acceptance:

Section 2(b) of Indian Contract Act defines ‘acceptance’ as:

“When the person to whom the proposal is made signifies his assent thereto; the
proposal is said to be accepted.”

Acceptance must be communicated to the offeror, mere mental decision is not

acceptance.

In the case of Powell v. Lee (1908), one Mr. Powell applied for the position of headmaster
at a school. The Board of Managers decided to appoint Mr. Powell to the position. One
member of the Board, acting in an unofficial capacity, informed Mr. Powell that he had
been selected for the job. Later, the Board decided to appoint a different candidate. Mr.
Powell sued for breach of contract, asserting that he had been appointed to the position,
based on the communication from the Board member. The legal issue was whether there
was a binding contract of employment between Mr. Powell and the board, given that the
appointment was communicated by an unofficial source.

The court ruled in favour of the Board of Managers, dismissing Mr. Powell’s claim for
breach of contract. The court held that the communication of the job offer must come
from an authorized person or through proper channels. The member of the Board who
informed Mr. Powell of his selection did not have the authority to make a binding job offer.
A valid contract requires an offer and acceptance. Since the offer was not communicated
through proper and official means, there was no valid acceptance. For a contract to be
formed, the decision of the Board must be communicated officially and properly. The
unofficial communication by an individual member did not constitute an official offer.
Therefore, no contract was formed because the offer was not communicated through
official and authorized channels.

Section 7 of the Contract Act provides that- “In order to convert a proposal into a
promise, the acceptance must:

• be absolute and unqualified;

Acceptance must be made only by the person to whom the offer is made and if someone
else tries to accept the offer there is no contract with such person. An acceptance should
be absolute and unqualified and correspond to the term of the offer and must be
expressed by means of an external act indicating the mental assent. While
communication of acceptance need not conform to any particular term or type (unless
prescribed for in the offer), silence can never be construed as acceptance. An
acceptance with a variation is no acceptance; it is simply counter-proposal which must
be accepted by the original promise before, a contract is made.

In simple terms, Absolute means that the proposal and acceptance must correspond to
each other. This is also called the ‘Mirror Rule’. Unqualified on the other hand stands for
unconditional. It means that the acceptance must be unconditional.

• be expressed in some usual and reasonable manner, unless the proposal

prescribes the manner in which it is to be accepted.

If the proposal prescribes the manner in which it is to be accepted, and the acceptance
is not made in such manner, the proposer may within a reasonable time after the
acceptance is communicated to him, insist that his proposal shall be accepted in the
prescribed manner and not otherwise, but if the fails to do so, he accepts the
acceptance.”

It is further essential that there must be an intention to create a legal relation. An

agreement may not be a contract even though it is supported by consideration, if there is
no intention to create a legal relation. The test to be applied in order to ascertain the
intention is the Objective Test.

Brief facts of Balfour v. Balfour are that there was one Mr. Balfour who was a civil engineer,
and worked for the Government as the Director of Irrigation in Ceylon (now Sri Lanka). Mrs
Balfour was living with him. In 1915, they both came back to England during Mr Balfour's
leave. But Mrs Balfour had developed rheumatoid arthritis. Her doctor advised her to stay
in England, because the climate in Ceylon would be detrimental to her health. Mr
Balfour's boat was about to set sail, and he orally promised her £30 a month until she
came back to Ceylon. Mr. Balfour continued to send the monthly payments initially, but
eventually stopped. The relationship between Mr. and Mrs. Balfour deteriorated, and Mrs.
Balfour sued her husband for the unpaid maintenance. The central legal issue was
whether Mr. Balfour's promise to pay his wife £30 per month constituted a binding
contract enforceable by law. Mrs. Balfour's contended that there was an agreement
between them, and Mr. Balfour's failure to provide the agreed maintenance was a breach
of contract. Mr. Balfour's argued that the agreement was a domestic arrangement without
any intention to create legal relations and thus was not enforceable as a contract. The
Court dismissed Mrs. Balfour’s claim, ruling in favour of Mr. Balfour. The court concluded
that agreements between spouses are typically domestic arrangements, and there is a
presumption that such arrangements are not intended to create legally binding contracts.
In domestic contexts, such as the relationship between Mr. and Mrs. Balfour, it is
presumed that the parties do not intend to create legal relations unless there is clear
evidence to the contrary. Additionally, the court noted that there was a lack of
consideration for Mr. Balfour's promise, as the promise was made during the ongoing
marital relationship and did not involve a reciprocal obligation. The case established the
principle that domestic agreements between spouses, made in the course of their
relationship, are typically not legally enforceable due to the lack of intention to create
legal relations. Therefore, the court held that the contract must capable of creating a legal
relationship between the parties.

Section 8 further provides that “performance of the conditions of a proposal or the

acceptance of any considerations for a reciprocal promise, which may be offered with a
proposal, is an acceptance of the proposal.” Thus, an offer once accepted explodes into
a contract. The offeree when he signifies acceptance is called the ‘Acceptor’.

A valid acceptance comprises the following essential features:-

1.Acceptance must be communicated in some usual or reasonable manner.

2.Acceptance should be made before the offer is revoked or rejected.

3.Acceptance should be absolute and unqualified and correspond with the terms of
the offer.

Communication

Section 3 states “The communication of proposals, the acceptance of proposals, and

the revocation of proposals and acceptances, respectively, are deemed to be made by
any act or omission of the party proposing, accepting, or revoking, by which he intends
to communicate such proposal, acceptance, or revocation, or which has the effect of
communicating it.”

This section says that proposals, acceptances, and revocations (taking back offers or
acceptances) can be communicated by any action or even inaction (omission such as
silence) that shows the intention to communicate and has an effect of communicating.

Silence as Communication

Silence generally does not constitute acceptance. For a contract to be valid, there must
be a clear and unequivocal acceptance communicated to the offeror.
If someone receives an offer and does not respond, this silence cannot be taken as
acceptance. However, there can be exceptions where prior dealings or explicit terms
between the parties indicate that silence can be taken as acceptance. For instance, if
the parties have agreed that non-response within a specific period would amount to
acceptance.

In the case of Felthouse v. Bindley (1862), Mr. Felthouse had been negotiating with his
nephew John Felthouse to buy a horse. He wrote a letter to his nephew stating that if he
did not hear back, he would consider the horse to be his at a specified price. The nephew
did not respond to this letter. However, The nephew arranged to sell some farm stock in
auction but instructed Mr. Bindley, the auctioneer, to not sell the horse. Mr. Bindley
accidentally sold the horse to a third party. Mr. Felthouse sued Mr. Bindley for conversion
(wrongful sale of property). The issue was whether there was a valid contract for the sale
of the horse between Mr. Felthouse and his nephew, based on silence as acceptance.
The court ruled in favor of Mr. Bindley, the defendant.

The court held that silence does not constitute acceptance. An offeror cannot impose a
contract on the offeree by stating that silence will be considered acceptance. The
nephew's silence in response to Mr. Felthouse's letter did not amount to acceptance of
the offer. Since there was no communication from the nephew indicating acceptance of
Mr. Felthouse's offer, no binding contract was formed. The case established the principle
that silence cannot be taken as acceptance in contract law. For an acceptance to be
valid, it needs to be communicated clearly to the offeror. However, the said case is
criticised on the ground that in the specified facts, the intention of the nephew could be
easily manifested through his conduct of instructing the auctioneer. But the case still
holds good for the general rule that it has laid down.

Section 4: “The communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made.

The communication of an acceptance is complete,

- as against the proposer, when it is put in a course of transmission to him

so as to be out of the power of the acceptor;
- as against the acceptor, when it comes to the knowledge of the proposer.

The communication of a revocation is complete,

- as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the power
of the person who makes it;
- as against the person to whom it is made, when it comes to his
knowledge.”

In simple terms, communication of proposal is complete when the person you're offering
to knows about it.

Communication of acceptance is complete,

• For the person making the offer (offeror), acceptance is complete when it's
sent out (like putting a letter in the mail).

• For the person accepting (acceptor), it's complete when the offeror knows
about it.

Communication of revocation is complete

• For the person revoking (taking back) the offer or acceptance, it's complete
when they send it out.

• For the other party, it's complete when they know about it.
Instantaneous Communication

Instantaneous communication refers to methods of communication where the message

transmission is virtually immediate. Examples include telephone calls, emails, and
online chats. The contract is formed when and where the acceptance is received by the
offeror. Jurisdiction can depend on where the acceptance is received.

For eg.: If ‘A’ in India offers to sell a car to ‘B’ in the USA over the phone, and ‘B’ accepts
on the call, the contract is formed instantly, and the acceptance is considered
communicated when ‘A’ hears ‘B’'s acceptance. It will be made in India.

Postal Rule

The postal rule is an exception to the general rule of communication of acceptance. It

applies to non-instantaneous methods of communication like postal letters.
Acceptance is considered complete as soon as the letter of acceptance is posted, not
when it is received by the offeror. The offeror cannot revoke the offer once the acceptor
has posted the acceptance.

For eg.: If ‘A’ in Delhi writes to ‘B’ in Mumbai offering to sell a bike and ‘B’ posts a letter of
acceptance, the contract is formed as soon as ‘B’ posts the letter, even if A has not yet
received it.

In the case of Household Fire Insurance Co. v. Grant (1879), Mr. Grant applied for shares
but never received the acceptance letter because it got lost in the mail. However,
Household Fire Insurance Co. had accepted Mr. Grant's application and posted a letter
of acceptance. The court held that Mr. Grant was bound by the contract once the
acceptance letter was posted, even though he never received it.

In contract law, an acceptance sent by mail is effective as soon as it is posted, not when
it is received. This rule is designed to provide certainty in contractual dealings made by
post.

Revocation

Section 5: “A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not afterward. An acceptance may
be revoked at any time before the communication of the acceptance is complete as
against the acceptor, but not afterward.”

A person can take back an offer any time before the acceptance is communicated to the
other party, and can take back an acceptance any time before the acceptance is
communicated to the offeror.

Section 6: “A proposal is revoked by the communication of notice of revocation by the

proposer to the other party, by the lapse of the time prescribed in such proposal for its
acceptance, or if no time is so prescribed, by the lapse of a reasonable time without
communication of the acceptance, or by the failure of the acceptor to fulfill a condition
precedent to acceptance, or by the death or insanity of the proposer, if the fact of his
death or insanity comes to the knowledge of the acceptor before acceptance.”
Offers can be revoked by:

1. Communicating the revocation to the other party.

2. Letting the time lapse (if a time limit was set).

3. If no time limit, after a reasonable period.

4. If the acceptor fails to fulfil conditions before accepting.

5. By the death or insanity of the proposer, provided the acceptor knows

about it before accepting.

Consideration:

Section 2(d) of Indian Contract Act 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, something, such act or abstinence or promise is called
consideration for the promise.”

Section 2(f) defines Reciprocal Promise, it states “promises which form the
consideration or part of consideration for each other are called Reciprocal Promise.”

Consideration is always for the Promise, i.e., there is a proposal and acceptance in
existence. It is something of value that is exchanged between the parties in a contract. It
can be money, goods, services, or a promise to do or not do something. It can be
something positive or negative. The essential part is that it must hold some value in the
eyes of law. For eg.: If you sell your bike to someone for ₹10,000, the bike is the
consideration from your side, and ₹10,000 is the consideration from the buyer's side.

Essential Elements

1.At the desire of the promisor:

For consideration to be valid, it must be provided at the promisor's desire. This means
that the promisor must have requested or agreed to the consideration. For eg.: If you
promise to pay someone ₹500 for cleaning your garden, the cleaning is done at your
desire.
Any act that is done at the desire of a third party is not consideration. In the case of Durga
Prasad v. Baldeo (1881), Durga Prasad built some shops in a marketplace at the request
of the local district collector. Baldeo, along with other shopkeepers who started using
the newly built shops, promised to pay a commission to Durga Prasad for the business
they would do in those shops. However, Baldeo did not pay the commission as promised.
Durga Prasad sued Baldeo to recover the promised commission. The question that arose
was whether there was valid consideration for Baldeo's promise to pay the commission
to Durga Prasad. The court ruled against Durga Prasad, stating that there was no valid
consideration for Baldeo's promise.

The court stated that the promise to pay the commission was not supported by valid
consideration. The shops were built at the request of the district collector and not at the
request of the shopkeepers. For consideration to be valid, it must be at the desire of the
promisor. In this case, the construction of the shops was not done at Baldeo's desire, so
there was no consideration from Baldeo for his promise to pay the commission. For a
promise to be enforceable, the act or forbearance that constitutes consideration must
be done at the request or desire of the person making the promise.

2.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.

Promissory Estoppel prevents a person from going back on a promise, even if the
promise was made without consideration, as long as the other party relied on that
promise to their detriment. For eg., BuildCo offers Mr. Sharma, a civil engineer, a job to
work on a major construction project, promising him a lucrative salary and benefits
package. Based on this promise, Mr. Sharma resigns from his current job, sells his house,
and relocates to another city where the project is located. Just before Mr. Sharma is
supposed to start his new job, BuildCo informs him that the job offer has been withdrawn
because the project funding fell through.Mr. Sharma is now jobless, has incurred
expenses for relocating, and has lost his previous job. If Mr. Sharma takes BuildCo to
court, he could argue that BuildCo should be estopped (prevented) from withdrawing the
job offer because he relied on their promise to his detriment. The court may order
BuildCo to compensate Mr. Sharma for his losses, such as relocation expenses and lost
wages, because it would be unjust to allow BuildCo to go back on its promise.

In the case of Kedarnath v. Gorie Mohd. (1886), The municipality (Kedarnath) decided to
build a town hall and needed funds for the construction. Citizens including Gorie
Mohammad agreed to contribute money towards the construction. Gorie Mohammad
promised to donate a certain amount. Based on these promises, the municipality
entered into contracts and began construction work. Gorie Mohammad did not pay the
promised amount. Kedarnath sued Gorie Mohammad to recover the promised amount.
The issue that arose was whether Gorie Mohammad's promise to pay the subscription
amount was enforceable, considering there was no direct benefit to him and seemingly
no consideration. The court held that the consideration for Gorie Mohammad’s promise
was the municipality’s action of entering into obligations and beginning the construction
work based on that promise. Even though Gorie Mohammad did not receive a direct
benefit, his promise induced the municipality to act, which was sufficient consideration.
The municipality relied on the promise and incurred expenses and obligations based on
it. This reliance created a binding obligation on Gorie Mohammad to fulfill his promise.

Privity of Consideration and Contract

Privity of Consideration means that consideration must move from the promisee but can
move to someone else. According to this,

In the case of Dutton v. Poole (1678), a father did not sell property based on his son's
promise to pay the father’s daughter (the son’s sister) a sum of money. The daughter then
sued to enforce this promise. The daughter did not provide consideration directly to the
son (the promisor). Instead, the father, by not selling the property, provided the
consideration. The court allowed the daughter to enforce the promise, making an
exception to the privity of consideration rule. The court recognized that the daughter was
a direct beneficiary of the promise, and fairness required enforcing the promise even
though she did not provide the consideration.

The case was overruled by Tweedle v. Atkinson (1861). In this case, the fathers of a bride
and groom agreed to each pay a sum of money to the groom upon marriage. The bride's
father died, and his executor did not pay the agreed amount. The groom sued the
executor. The groom (plaintiff) did not provide any consideration for the promises made
by the fathers; the consideration moved between the fathers. The court ruled against the
groom, emphasizing that he could not enforce the contract because he was not a party
to it and had not provided any consideration. Strict adherence to the privity of contract
and privity of consideration principles, meaning only those who are parties to the
contract and have provided consideration can enforce it.

However, the principle laid down in Tweedle is not followed in India. In the case of
Chinnaya v. Ramayya (1882), the plaintiff’s mother gifted land to Rammaya with the
condition that Rammaya would pay an annuity to Chinnaya (the plaintiff). After receiving
the land, Rammaya refused to pay the annuity, and Chinnaya sued to enforce the
payment. Chinnaya did not provide any direct consideration to Rammaya for the promise
to pay the annuity; the consideration was the land given by the plaintiff's mother. The
court ruled in favor of Chinnaya, allowing her to enforce the promise despite not
providing the consideration herself. The court recognized that the consideration moved
from the donor (plaintiff’s mother) to the donee (Rammaya), and Chinnaya, although not
providing consideration directly, was intended to benefit from the agreement.

Privity of Contract means only the parties involved in the contract have rights and
obligations under it. Therefore, only the parties to the contract can sue each other,
however, there are exceptions to this rule. A stranger to contract cannot sue.

In the case of Dunlop Pneumatic Tyre Co. v. Selfridge & Co. (1915), Dunlop sold tyres to
Dew & Co. with an agreement that Dew & Co. would not sell the tyres below a specified
minimum price. Dew & Co. sold the tyres to Selfridge & Co., including a stipulation that
Selfridge & Co. must adhere to the pricing agreement and not sell the tyres below the
specified minimum price. Selfridge & Co. sold the tyres below the minimum price,
violating the agreement. Dunlop sued Selfridge & Co. for breach of the price maintenance
agreement.

The issue that arose was whether Dunlop could enforce the price maintenance
agreement against Selfridge, considering that Selfridge was not a direct party to the
contract between Dunlop and Dew & Co. The House of Lords ruled in favor of Selfridge &
Co., stating that Dunlop could not enforce the agreement against Selfridge.

The court emphasized the principle of privity of contract, which states that only parties
to a contract can sue or be sued on it. Since Selfridge & Co. was not a party to the contract
between Dunlop and Dew & Co., Dunlop could not sue Selfridge for breach of that
contract. For a contract to be enforceable, there must be consideration moving from the
promisee (the party seeking to enforce the contract). Dunlop had not provided any
consideration to Selfridge; the consideration moved only between Dew & Co. and
Selfridge.
Only parties involved in a contract (those who have provided consideration) have the
right to enforce its terms. Third parties, who did not directly participate in the contract,
cannot enforce it.

Executory and Executed Consideration

Executory Consideration: A promise to do something in the future. For instance, you

promise to deliver goods to someone next month. Whereas an Executed Consideration
is an act has already been performed. For example, if you have already delivered the
goods, and now you are waiting for the payment. They are co-related.

Past, Present (Executed), and Future (Executory) Consideration

Past Consideration is an act done before a promise is made. Both the transactions are
independent of each other. The promise is subsequent to the act and independent of it.
It is merely an act of forbearance given in the past by which a person has benefitted
without incurring any legal liability.

Section 25 states that an agreement without consideration is void, except in certain

cases.

Exceptions under Section 25:

1.Natural Love and Affection: If made out of love and affection, in writing, and
registered.

All the elements are necessary to be fulfilled, i.e., first, the agreement must be based on
natural love and affection. This typically applies to close relationships such as those
between family members. Second, the agreement must be in writing and third, It must
be registered under the relevant laws (e.g., the Registration Act, 1908).

It is essential that the parties to the agreement must stand in a near relationship to each
other. Near relationships often include familial ties such as those between spouses,
parents and children, or siblings. In the case of Rajlukhy Dabee v. Bhootnath Mookerjee
(1900), a husband executed a registered document in favour of his wife due to disputes
between them. The husband through the agreement agreed to pay her for a separate
residency and maintenance. There was no consideration moving from the wife’s end. The
said agreement was declared to be void as the same was not made out of love and
affection.

2.Compensation for Past Voluntary Services: If someone has voluntarily done

something for the promisor in the past.

It is necessary that the service must have been provided voluntarily without any prior
promise of payment. Example: If A voluntarily saves B's property from a fire, and B later
promises to pay A for his efforts, this promise is valid.

The service provided must be in the past, meaning that the service was rendered before
the promise of compensation was made. For example: If A repairs B's house without
expecting payment, and B later promises to pay for the repairs, this promise is valid.
Alternatively, the service could involve something the promisor was legally bound to do.
For instance, If A pays taxes on behalf of B, which B was legally obligated to pay, and B
later promises to repay A, this promise is enforceable.

It covers those cases where a person without the knowledge or desire or request of the
promisor does something for the promisor, and later the promisor undertakes to
compensate him for such act. Such a promise doesn’t require consideration to support
it.

3.Promise to Pay a Time-Barred Debt: A written and signed promise to pay a debt
that's no longer legally enforceable due to the lapse of time.

Consideration may take the form of delivery of anything which has a money value, or
payment of money itself or rendering some service, or doing something which under law
a person is not bound to do (e.g., forbearance to sue) or a promise to do any or all of those
things.

Rule governing consideration

1. Consideration is essential to every contract, a contract not supported by

consideration is void and can only be called a gratuitous promise. In the words of
Salmond “a promise without consideration is a gift; one made for consideration is
a bargain.”
2. Under Section 2(d) there must be a link between the desire of the promisor and the
act or forbearance on the part of the promisee. In other words, that act or
forbearance on the part of the promisee should not be at the instance of a third
party.
3. Further, consideration must proceed from the promisee or any other party, unlike
in English Law, where consideration must flow from the promisee only.
4. Consideration need not be adequate. Adequacy of consideration is the look-out of
the promisor and it is not the business of Courts to adjudicate on the sufficiency or
insufficiency of consideration. However, in case the plea of coercion, fraud or
undue influences is raised by a party to a contract, the adequacy of consideration
will also form the part for the evidence to be considered in deciding the case.
5. Consideration must not be illusory but real and competent. – If a man promises to
convert an ordinary paper into currency notes or to make parallel lines meet, it is
illusory consideration. Consideration should also not be vague.
6. Pre-existing legal obligation.- If a person is already bound by statutory or official
duty to do a particular act, the performance of the act cannot be the consideration
for a promise. Similarly, an agreement to perform a contractual duty with a person
to whom it is already owed is not made for consideration.
7. It may be past, present or future (Executed, Executory and Past consideration).–
Executed consideration or present consideration refers to consideration which
takes place simultaneously with the promise.
Essentials of a valid contract

As per Section 10 of the Indian Contract Act, 1872, “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 declared to be void.”

Therefore, the requirement for a valid contract can be said to be:

1. Competent Parties
2. Free Consent
3. Lawful Object
4. Lawful Consideration
5. Not expressly declared to be void

It is not necessary for the contracts to be in writing unless expressly required by any other
law in force. In Tarsem Sigh v. Sukhminder Sigh, A.I.R. 1998 S.C. 1400, the Supreme Court
has made it clear that every contract is not required to be in writing. There can be an
equally binding contract between the parties on the basis of the oral agreement unless
there is a law which requires the agreement to be in writing.

AGREEMENTS REQUIRED TO BE IN WRITING

Section 25(1) and 25 (3), Indian Contract Agreement without consideration

Act, 1872

Section 54, 59, 107 and 123, Transfer of Agreement of sale, mortgage, lease and
Property Act gift have to be in writing

Section 5, Copyright Act Requires the agreement to be in writing

Section 7, Arbitration & Conciliation Act, Requires the agreement to be in writing

1940

Section 11 states all those persons who are competent to contract. As per the section,
every person is competent to contract who is:

1.of age of majority according to the law to which he is subject;

According to Section 11, minors (persons under the age of 18) are not competent to enter
into contracts. Any contract entered into by a minor is void ab initio (from the beginning).
However, the consequence of such act is not given under the Act. Prior to 1903, such
agreements by the minors were voidable, but after the case of Mohoiri Bibee v.
Dharmodas Ghose (1903), the privy council declared such agreements to be void (not
enforceable by law). In the said case, Dharmodas Ghose, a minor, executed a mortgage
of his property in favor of Brahmo Dutt to secure a loan of Rs. 20,000. At the time of the
mortgage, Dharmodas Ghose was a minor. This fact was known to Kedar Nath, Brahmo
Dutt's attorney. Out of the total agreed amount, only Rs. 8,000 was advanced to
Dharmodas. Dharmodas Ghose, through his mother and natural guardian, sued to have
the mortgage deed set aside on the grounds that he was a minor when the deed was
executed and that it was therefore void.

Two questions were raised, first, whether a contract entered into by a minor is void or
voidable. Second, whether the minor, having received benefits from the contract, must
return them as a condition for the contract being declared void. The Privy Council ruled
in favor of Dharmodas Ghose, declaring the contract void ab initio (from the beginning).

The court held that Section 11 of the Act specifies that a person who is not of the age of
majority is not competent to contract. Dharmodas Ghose, being a minor, was not
competent to enter into the mortgage agreement. The contract, therefore, lacked a
competent party and was void ab initio. The fact that Dharmodas Ghose misrepresented
his age did not create an estoppel against him from claiming minority. The minor's
misrepresentation did not change the legality of the matter that the contract was void
from the start. The concept of restitution (returning the benefits received) did not apply
in this case because the contract was void from the very beginning. Section 65 of the Act
pertains to agreements discovered to be void and is applicable only to voidable
contracts, not contracts that are void ab initio.
The purpose behind Section 11 is to protect those whose mental powers are under-
developed or undeveloped by preventing them from doing themselves an injury by their
legal declaration. Since contracts with minors are void, the primary remedy is to declare
the contract null and void.

Restitution:

Under the English Law, a property maybe restored from the minor if it is traceable and in
his possession. However, money cannot be recovered from an infant in the English Law.
In the case of Leslie v, Sheill (1914), it was held that “Restitution stops where repayment
begins.” It meant that if an infant repays the debt / loan he has taken, it is not restitution
but enforcement of contract itself.

Under the Indian law, Mohori Bibee judgment declared that Section 64 and 65 didn’t
apply to the minors. It led to unjust enrichment. In 1928, through the Khan Gul v. Lakha
Singh’s judgment, the Lahore Court laid down a new principle, stating that if minor
represents his age then on equitable grounds he can be compelled to restore the
benefits. However, in the year 1937, there was yet another conflicting judgment by the
Allahabad High Court in the case of Ajudhia Prasad v. Chandan Lal, in which the English
Law was followed and it was held that a minor cannot be held liable upon a contract to
restore.

The law commission accepted the view given in the Khan Gul’s judgment and suggested
that minor should be made to restore to prevent unjust enrichment. On the basis of this,
Section 33(2)(b) was added in the Specific Relief Act, 1963, which provides remedy
against the minor whereby he can be compelled to restore the benefit.
Estoppel Against Minors

A minor cannot be estopped from pleading minority. This means that even if a minor has
misrepresented their age and entered into a contract, they can still claim the defence of
minority. The same was held in the case of Nawab Sadiq Ali Khan v. Jai Kishori (1928).

Ratification

A minor cannot ratify a contract entered into during minority upon reaching the age of
majority. The contract remains void. In the case of Suraj Narain v. Sukhu Aheer (1928), a
minor executed a promissory note. After attaining majority, he endorsed the note. The
court held that since the original contract was void, it could not be ratified after attaining
majority.

2.of sound mind; and

As per Section 12 of the Act, a person is said to be of sound mind for the purpose of
making a contract if, at the time when he makes it, he is capable of understanding it and
of forming a rational judgment as to its effect upon his interests. 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.

Unsound Mind

A person of unsound mind is not competent to contract during periods of unsoundness.

Contracts made by persons of unsound mind are void.

Inder Singh v. Parmeshwardhari Singh (1957), a person with a history of mental illness
executed a contract during a period of sound mind. The contract was held valid as the
person was of sound mind at the time of entering into the contract. The competency to
contract depends on the mental state at the time of the agreement.

3.is not disqualified from contracting by any law to which he is subject

Few examples of people who are disqualified by law to enter into specific contracts are:

• Patent officers cannot take patent in his own name

• Forest officer is disqualified from buying forest production
• Property Act bars judges and legal professionals having interest in
actionable claims

Section 23 deal with what considerations and objects are lawful, and what not. The
consideration or object of an agreement is lawful, unless:

1. It is forbidden by law; or

Any agreement with consideration or an object that is expressly prohibited by statutory

law is deemed unlawful. Example: A contract for the sale of narcotics is void because the
sale of narcotics is forbidden by law.
 2. Is of such a nature that, if permitted, it would defeat the provisions of any
law; or

If the terms of an agreement are such that they would nullify the purpose of any law, the
agreement is unlawful. Example: A contract to evade taxes would be void as it defeats
the purpose of tax laws.

3. Is fraudulent; or

Agreements entered into with an intention to deceive or commit fraud are void. Example:
A contract based on falsified documents is fraudulent and void.

4. Involves or implies injury to the person or property of another; or

Agreements that involve causing harm or damage to individuals or their property are void.
Example: A contract to commit assault or vandalize property is void.

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

Contracts that involve actions that are considered morally wrong or that go against the
established norms of society and public welfare are deemed void. Example: Contracts
for prostitution or bribery are considered immoral and against public policy.

The case of Gherulal Parakh v. Mahadeodas Maiya & Ors. (1959) involved an agreement
to share profits from gambling. The Supreme Court held that the agreement was void as
it was opposed to public policy. Gambling was considered immoral and against public
policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful.

Every agreement of which the object or consideration is unlawful is void.

Section 24 states that Agreements are void, if considerations and objects unlawful in
part: If any part of a single consideration for one or more objects, or any one or any part
of any one of several considerations for a single object, is unlawful, the agreement is
void.

It addresses the scenario where an agreement includes multiple considerations or

objects, and one or more of these considerations or objects are unlawful. The section
makes it clear that if any part of the consideration or object is unlawful, the whole
agreement becomes void.

If there is one consideration supporting several objects, and any one of the objects is
unlawful, the entire agreement is void. Example: A agrees to pay B Rs. 10,000 for a legal
business transaction and for committing a crime. Since the object of committing a crime
is unlawful, the entire agreement is void.

If there are several considerations for a single object, and any one of the considerations
is unlawful, the entire agreement is void. Example: A agrees to sell his car to B for Rs.
5,000 and a promise to supply illegal drugs. Because one of the considerations
(supplying illegal drugs) is unlawful, the whole agreement is void.
However, on equitable grounds, the courts can enforce the lawful portion if the unlawful
portion is severable. This is called the Blue Pencil Rule. The case of Attwood v.
Lamont (1920) illustrates the limitations of the Blue Pencil Rule. It underscores that while
courts may attempt to sever unenforceable parts of a contract to save the rest, this is
only possible if the remaining terms are reasonable and can stand independently.
Section 57 of the Act also deals with the said rule indirectly. It states that when there is
a reciprocal promise to do things that are legal as well as the ones that are illegal, then
the agreement would be void to the extent of such illegal promise.

Void Agreements

A void agreement is one that is not enforceable by law. Such agreements may be void
from the very beginning (void ab initio) or become void due to certain circumstances. The
Indian Contract Act, 1872, lays down various provisions concerning void agreements.

Section 2(g) of the Indian Contract Act, 1872 defines void agreements as "An
agreement not enforceable by law is said to be void." This means that a void agreement
has no legal effect and cannot be enforced in a court of law.
Section 26 states that every agreement in restraint of the marriage of any person, other
than a minor, is void. For example, if A agrees to pay B a sum of money if B does not marry
anyone, this agreement is void as it restrains B from marrying. Such restraint can be
partial or absolute.

In the case of UGA Zan v. Hari Pru (1914), the plaintiff had spent money on the education
of his son-in-law in consideration of his agreeing not to marry a second wife in the lifetime
of his first wife. This agreement was held to be void.

Section 27 deals with agreement in Restraint of Trade. Every agreement by which anyone
is restrained from exercising a lawful profession, trade, or business of any kind is void to
that extent. Certain legal exceptions include non-compete clauses in partnership
agreements, sale of goodwill, and trade combinations that do not amount to
monopolies.

In the case of Madhub Chander v. Raj Coomar (1874), one shopkeeper asked another to
shut his shop in consideration of a sum of money. However, he later refused to pay
money. The agreement was declared void as it was in restraint of trade under Section 27
of the Indian Contract Act, 1872 and therefore could not be enforced in the court of law.

However, there are specific statutory and judicial exceptions to this rule, recognizing
circumstances where restraints on trade can be deemed reasonable and enforceable.

Statutory Exceptions:

1.Sale of Goodwill: Exception 1 to Section 27 of the Indian Contract Act, 1872, allows
for reasonable restrictions on trade or business when a person sells the goodwill
of a business to another. The restriction must be reasonable in terms of time
period and geographical area. For example: If A sells the goodwill of his bakery
business to B and agrees not to open a new bakery in the same city for the next
three years, this agreement can be enforceable as it is a reasonable restriction
tied to the sale of goodwill.
Judicial Exceptions:

1.Partnership Agreements: In certain partnership agreements, partners may agree

not to carry on competing businesses during the partnership and even after
dissolution.

2.Trade Combinations: Some collaborations or trade combinations may involve

restrictive agreements that are essential for the purpose of the combination and
do not amount to monopolistic practices.

3.Service Contracts: Agreements restricting an employee from working with

competitors or starting a competing business for a limited period post-
employment can be enforceable. In Superintendence Company of India (P) Ltd. v.
Krishan Murgai [1981], the Supreme Court held that post-employment restraints
are generally void unless they protect the employer’s proprietary interests. In
Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. Ltd. [1967], the Supreme
Court held that reasonable restrictions on an employee's trade or profession
during the term of employment are permissible. Negative covenants in
employment contracts that operate during the period of employment are
generally upheld if they protect the legitimate interests of the employer and are
not overly broad.

4.Franchise Agreements: Franchise agreements often contain clauses restricting

franchisees from setting up competing businesses during and after the
franchising relationship.

Section 28 is about Agreements in Restraint of Legal Proceedings. Any agreements that

restrict parties from enforcing their rights through legal proceedings or limit the time
within which they can do so are void.

Exceptions:

• Contracts with arbitration clauses are not considered void.

• Clauses that restrict legal proceedings to a specific jurisdiction are

permissible.

The Supreme Court in the case ABC Laminart Pvt. Ltd. v. A.P. Agencies, Salem [1989]
held that such jurisdiction clauses are valid and do not fall under the provision of
agreements in restraint of legal proceedings.

Section 29 states that the agreements, the meaning of which is not certain, or capable
of being made certain, are void. For example, If A agrees to sell B "a hundred tons of oil,"
the agreement is void unless it is clarified what type of oil is meant.

If something is capable of being made certain, it should be treated as certain. However,

the courts are under no obligation to remove the ambiguities. In the case of Damodar
Tukaram v. State of Bombay (1959), the Hon’ble Supreme Court held that a contract
would not be vague if it provides for a machinery for ascertaining the term.
Section 30 deals with wagering agreements. Agreements by way of wager (bet) are void.
Even though wagering agreements are void, they are not illegal. Certain transactions like
horse race betting, regulated by specific laws, are exceptions.

Features of a Wagering Contract:

1.Mutual Chance: Each party stands to win or lose depending on the outcome of an
uncertain event.

2.No Control: Neither party has control over the event.

3.No Other Interest: Neither party has any interest in the event apart from the bet.

4.Money or Money's Worth: Consideration is typically in the form of money.

Contingent Contract under the Indian Contract Act, 1872

A contingent contract is one where the performance of the contract depends on the
happening or non-happening of a future uncertain event.

Section 31 defines contingent contracts as "a contract to do or not to do something if

some event, collateral to such contract, does or does not happen." The performance of
the contract is dependent on the occurrence or non-occurrence of a future event. The
event must be collateral (incidental) to the contract, not the consideration or the main
subject matter itself. And the future event must be uncertain. If it is certain or bound to
happen, the contract is not contingent.

As per Section 32, Contingent contracts to do or not to do anything if an uncertain future

event happens, cannot be enforced by law unless and until that event has happened.

Section 33 states that 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.

Difference between Contingent Contract and Wagering Agreement

Contingent Contract Wagering Agreement

It is a valid contract It is void

The parties have a real interest in The parties are not interested in
occurrence or non-occurrence of the occurrence of the event except for
event. winning or losing.

The event may be within the power of one The uncertain event is beyond the power
party. of both the parties.

It is not a game of chance. It is a game of chance.

Free Consent

Free consent is a crucial element in the formation of a valid contract under the Indian
Contract Act, 1872. It ensures that all parties willingly agree to the contract's terms
without coercion, undue influence, fraud, misrepresentation, or mistake. The Indian
Contract Act, 1872, was influenced by various legal systems, including the New York
Draft Code, which emphasized mutual agreement and understanding in contracts. This
laid the foundation for the doctrine of free consent in Indian contract law.

Free consent is necessary for essential for a contract to be considered legally binding
and enforceable. It protects parties from being forced or misled into agreements. Only
contracts with free consent are enforceable in a court of law. Contracts lacking free
consent may be voidable.

Section 13 of the Act states that "Two or more persons are said to consent when they
agree upon the same thing in the same sense."

This concept is known as "consensus ad idem" or meeting of the minds. It implies mutual
understanding and agreement on the contract's terms. Consensus ad idem ensures that
all parties have a mutual understanding and agreement on the terms and subject matter
of the contract. It is also called ‘meeting of minds’, meaning thereby that both the parties
understand the same thing in the same way.

For example:

• A and B agree on the sale of a specific car for Rs. 1,00,000. Both understand and
agree on the car being sold and the price.
• A agrees to sell B his "red car." Both A and B understand and agree that it is the
specific red car owned by A, and not any other red car.

Section 14 defines Free Consent. It states that "Consent is said to be free when it is not
caused by:

• Coercion, as defined in Section 15, or

• Undue influence, as defined in Section 16, or

• Fraud, as defined in Section 17, or

• Misrepresentation, as defined in Section 18, or

• Mistake, subject to the provisions of Sections 20, 21, and 22."

Free Consent ensures that no party is forced or misled into a contract. It provides a clear
basis for determining the validity of contracts and prevents exploitation by ensuring
voluntary and informed agreement. Free consent is indispensable for a valid contract,
ensuring that parties agree willingly and with a clear understanding of the terms. Sections
13 and 14 of the Indian Contract Act, 1872, provide the legal framework, emphasizing
mutual consent and protecting against coercion, undue influence, fraud,
misrepresentation, and mistake. Case laws further illustrate these principles, ensuring
fairness and justice in contractual relationships.
Section 15 of the Indian Contract Act, 1872 provides for Coercion. It defines it as
"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."

Elements of Coercion:

Act Forbidden by Law: Includes acts or threats that are criminalized under the Indian
Penal Code, 1860 (now Bhartiya Nyay Sahita, 2023). For instance, if a person gets the
agreement signed by the other party on a gun point, threatening to kill the person, then it
would be said to be under coercion. Such contract is voidable at the option of the party
who was coerced. However, threatening to go on a strike or imposing commercial
pressure do not amount to coercion as the same are not forbidden by the law.

Unlawful Detention: Detaining or threatening to detain property unlawfully. For example

if a mortgagee refuses to return the property of the mortgager at the rate settled
beforehand, such act would signify detention of the property unlawfully.

Intention: The intention must be to cause someone to enter into an agreement.

Duress in English Law: Duress in English law refers to threats of harm or actual harm used
to compel someone to enter into a contract. Unlike coercion under Indian law, duress
primarily focuses on the threat of physical harm. Its scope is limited to physical harm to
a human being and doesn’t include unlawful detention of the property.

Under the Indian Law, Coercion includes threats related to acts forbidden by the Indian
Penal Code and unlawful detention of property. However, in English Law, Duress
primarily focuses on threats to the person, goods, or economic pressure.

Section 15 of the Indian Contract Act, 1872, defines coercion broadly, encompassing
acts forbidden by law and unlawful detention of property intended to compel someone
into a contract. Duress in English law, on the other hand, focuses on threats to personal
safety, goods, or economic interests to compel agreement. Both principles ensure that
contracts are entered into voluntarily and protect parties from illegitimate pressure, but
they differ in scope and application.

Section 16 talks about Undue Influence. According to it:

(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.

A contract is considered to be influenced by undue influence when one party, due to their
position or relationship, can dominate the will of the other party and uses this dominance
to gain an unfair advantage. Thus, when a person is in a position where they can dominate
the will of the person and by exercising such position, they influence the will of such other
person. Both the requirements need to be fulfilled, i.e.,

• Person has to be a in a superior position / position where the will of the other
person could be dominated
 • Such person uses their position to influence the will of the other person
• And due to such influence, they obtain an unfair advantage

A party to such a transaction, even though consenting to an act, cannot be said to have
given free consent as he is exposed to such influence from the other party which deprives
him of the free use of his judgment. In such a case, the contract will be voidable and can
be set aside. When a party is in a dominant position, the burden of proof shifts to them
to demonstrate that the contract was free from undue influence and was fair.

The expression ‘undue advantage’ means an advantage obtained by unrighteous means.

It would exist where the bargain is in favour of the influencer and unfair to 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.

This provision lays down a special presumption as to the relations which would be
considered as a position to dominate the will:

• Real Authority: Real authority refers to a situation where a person has actual,
legitimate power or control over another person. This authority can come from
a formal position, designation, or the nature of their relationship. Examples:
o Police officer
o Employer-Employee: An employer can have real authority over an
employee.
o Tutor-Student: A tutor may have real authority over a student due to their
educational relationship.
• Apparent Authority: Apparent authority refers to a situation where a person
appears to have authority over another based on circumstances or conduct,
even if they do not have actual authority. This perception can lead the
influenced party to believe that the dominant party has power over them.
Examples:
o Family Relationships: An older family member might have apparent
authority over a younger member due to family dynamics and
expectations.
o Professional Relationships: A person might appear to have authority in a
professional setting due to their experience or the way they present
themselves, even if they lack formal designation.
• Fiduciary Relationship: A fiduciary relationship under Section 16 of the Indian
Contract Act, 1872, is one where one party places substantial trust and
confidence in another, creating a significant level of influence. In such a
relationship the other person naturally reposes confidence in him, a confidence
such that an influence grows out of that relationship. This relationship often
leads to a presumption of undue influence if the dominant party gains an unfair
advantage. The burden of proof lies on the dominant party to show that the
contract was entered into voluntarily and fairly.
In the case of Philip Lukka v. Fransiscan Association Vashapalli (1985), one
Philip Lukka entered into a contractual agreement with the Fransiscan
Association Vashapalli. At the time of entering into the contract, Philip Lukka
was in a significantly disadvantaged mental and physical state. The plaintiff's
mental and bodily distress were such that his capacity to make informed
decisions was compromised. The Fransiscan Association Vashapalli was aware
of Philip Lukka's vulnerable condition. The question that arose was that whether
the contract between Philip Lukka and the Fransiscan Association Vashapalli
was influenced by undue influence due to the plaintiff’s compromised mental
and physical capacity. The High Court of Madhya Pradesh held that undue
influence was indeed exerted by the Fransiscan Association Vashapalli. The
contract was set aside because it was entered into under conditions where
Philip Lukka’s mental and physical capacities were significantly compromised.
Fransiscan Association Vashapalli was in a position to dominate the will of
Philip Lukka due to his mental and physical condition. The court found that the
defendant exploited the plaintiff’s disadvantaged state to obtain an unfair
advantage through the contractual agreement. Given the circumstances, the
court presumed that undue influence was exerted. The Fransiscan Association
Vashapalli failed to rebut this presumption by proving that the contract was
entered into freely and fairly.
A fiduciary relationship involves:
o Trust and Confidence: One party places trust and reliance on the other.
o Dominance: The fiduciary is in a position to dominate the will of the other
party due to the trust and confidence placed in them.
o Good Faith: The fiduciary is expected to act in good faith and with loyalty
toward the other party.
Examples or Types of Fiduciary Relationships can be:
• Trustee and Beneficiary: the trustee manages the trust property for the
benefit of the beneficiary.
• Guardian and Ward: The guardian is responsible for the ward's well-
being and property.
• Lawyer and Client: The lawyer provides legal advice and representation,
and the client places trust in their expertise.
• Doctor and Patient: The doctor provides medical care, and the patient
relies on their professional judgment.
 • Principal and Agent: The agent acts on behalf of the principal, who
places trust in the agent's actions.
• Director and Company: Directors are in a fiduciary relationship with the
company they serve, acting in the best interest of the company.
• Mental capacity: Mental capacity refers to an individual's ability to understand
the nature and consequences of their actions when entering into a contract. It
involves the cognitive ability to comprehend the terms, obligations, and
implications of the agreement. Specific factor that could affect the capacity are:
o Age – Someone who is below 18 years (minor)
o Illness – a person is undergoing any mental or physical illness
o Bodily distress – it could be either due to temporary or permanent
conditions.
In the case of Raja Ram v. Jai Prakash Singh & Ors. [1937], the court held that
merely because a person was old doesn’t mean that undue influence was
exercised over him. It is necessary to prove that the other person used their
position to influence his will.

(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.

It is presumed that when one the parties of a contract is in a dominating position, and
transaction that has taken place is on the face of it unconscionable, i.e., something by
which the conscience can be shaken or is very hard to believe, then it would be presumed
that in such a situation, such dominating position was used to dominate the will of the
other person.

Section 17 states the definition of Fraud. It defines fraud as an act committed by a party
to a contract or with their connivance, or by their agent, with the intent to deceive another
party or to induce them to enter into the contract.

The essential ingredients of Fraud are:

1. False Suggestion: A representation, as a fact, of something that is not true, made by

a person who does not believe it to be true. For example, a seller states that a car has
never been in an accident, knowing it has been.

2. Active Concealment: The deliberate hiding of a fact by a person who has knowledge
or belief of that fact. For example, a seller hides defects in a house during a sale.

3. Promise Without Intention to Perform: A promise made without any intention of

carrying it out. For example, a contractor promises to complete a building project
within a year but has no intention or capacity to do so.
4. Act or Omission Declared Fraudulent by Law: Any act or omission which the law
specifically declares to be fraudulent. Specific statutes or legal precedents that
define certain omissions as fraudulent.

5. Deceptive Act: Any act or omission intended to deceive or commit fraud, like, using
forged documents to obtain a loan.

Silence as Fraud: Under Section 17, mere silence regarding facts likely to affect the
willingness of a person to enter into a contract is not considered fraud unless:

1. Duty to Speak: One party is under a duty to communicate certain facts. For
instance, in a fiduciary relationship such as between a guardian and a
ward.

2. Silence Equivalent to Speech: When silence is tantamount to making a

representation. However, if the party had the means of discovering the
truth by ordinary diligence, the contract despite being based on fraudulent
silent, is not voidable. For instance, if a seller remains silent about a fact
and it is considered equivalent to affirmatively stating the opposite.

Section 18 defines Misrepresentation. It states that Misrepresentation includes:

1. Positive Assertion: A statement that asserts something as true which is not

true, made by someone who believes it to be true. For example: A person
selling a car believes it to have never been in an accident and tells the
buyer so, but the car had indeed been in an accident previously. The seller
is unaware of this fact but asserts it positively.

2. Breach of Duty: A breach of duty which, without the intent to deceive,

confers an advantage to the person committing it by misleading another
party. This typically involves situations where one party has a duty to
inform the other party of certain facts but fails to do so, leading to a
misunderstanding. For example: An insurance agent fails to inform a
policyholder of an important exclusion in the policy due to oversight,
leading the policyholder to believe they have more coverage than they
actually do.

3. Inducing Mistake: Causes, however innocently, a party to make a mistake

about the substance of the thing which is the subject of the agreement. For
example, a seller of a painting genuinely believes it is a work of a famous
artist and informs the buyer of the same. Later, it turns out the painting is
a forgery. The seller's statement, though made without fraudulent intent,
induced the buyer to enter into the contract under a mistaken belief about
the painting's authenticity.

Therefore, to conclude it can be said that the statement must be of fact (not opinion),
and it must be false. The person making the statement believes it to be true but it is, in
fact, false. Unlike fraud, misrepresentation does not involve an intent to deceive. And the
false statement must induce the other party to enter into the contract.
Differences Between Section 17 and Section 18

• Intent:

• Section 17: Involves intentional deception.

• Section 18: Does not require intent to deceive.

• Nature:

• Section 17: Fraudulent acts are done with the purpose of causing another
party to enter into a contract.

• Section 18: Misrepresentation involves false statements made innocently

or without knowledge of their falsehood.

• Discovery of Truth with due diligence:

• Section 17: In case of fraud, the aggrieved party can avoid the contract
even if the means to discover the truth were available (except when silence
amounts to fraud.)

• Section 18: If the aggrieved party had the means to discover the truth, it
cannot avoid the contract.

Section 19 deals with the Voidability of Agreements without Free Consent. When
consent to an agreement is obtained by coercion, fraud, or misrepresentation, the
agreement is voidable at the option of the party whose consent was so caused. It is
essential that:

1. The affected party may insist on the contract being performed as if the
representations were true.

2. If the party had the means of discovering the truth with ordinary diligence,
the contract is not voidable.

3. If misrepresentation or fraud did not cause the consent on whom the fraud
was practiced, the contract is not voidable.

Section 19A talks about power to set aside contract induced by Undue Influence. It
states that when consent to an agreement is obtained through undue influence, the
agreement is voidable at the option of the party whose consent was so caused.

The court may set aside the contract either absolutely or conditionally. Court may
change the terms to make them reasonable, if the transaction was unconscionable.

Voidable Contracts

A voidable contract is defined under Section 2(i) of the Indian Contract Act, 1872 as: "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."
This means that a voidable contract is valid and enforceable unless one of the parties
chooses to void it. Voidable contracts often arise from issues like misrepresentation,
undue influence, coercion, or a party's incapacity to consent.

It can be further divided into two types – Initially voidable and subsequently voidable.

Initially voidable contracts are such contracts that are voidable from the moment they
are formed due to factors that vitiate free consent, such as:

• Coercion

• Fraud

• Misrepresentation

• Undue influence

Whereas subsequently voidable contracts are contracts that become voidable after they
are formed due to certain events or conditions, such as:

• Failure to perform contractual duties (anticipatory breach).

Section 39 deals with effect of refusal of party to perform promise. When a party to a
contract refuses to perform, or disables themselves from performing their promise in its
entirety, the promise may put an end to the contract, unless they signify, by words or
conduct, their acquiescence in its continuance (allows later to continue after the wilful
absence). That is to say, if the party actually and directly refuses or through their conduct
it can be anticipated that they will not perform the contract by disabling himself.

In the case of Hochster v. De La Tour (1853), Mr. Hochster was hired by De La Tour as a
courier for a trip starting on June 1. De La Tour cancelled the contract in May. Hochster
sued for breach of contract before the start date. The court held that Hochster was
entitled to sue immediately after the contract was repudiated and he need not wait till
the actual date of performance. This established the principle of anticipatory breach,
making such contracts voidable at the option of the aggrieved party.

• Other conditions specified in the contract itself or by law. – Section 53 and 55

Under Section 53, there is a liability of party preventing event on which the contract is to
take effect. When a contract contains reciprocal promises, and one party prevents the
other from performing their promise, the contract becomes voidable at the option of the
party so prevented and such party will also be entitled for compensation. For example if
a buyer refuses to allow the seller to deliver goods as per the contract, the seller can void
the contract.

Section 55 states the effect of failure to perform at fixed time, i.e., time is the essence of
the contract. When a party to a contract promises to perform a task at or before a
specified time, and fails to do so, the contract becomes voidable at the option of the
promisee if time is of the essence. Otherwise, the promisee can claim compensation for
any loss caused by the delay.
Key points of the said section are:

• if time is the essence and the contract was not performed then the aggrieved
party can either refuse to accept the performance or accept it. If it refuses, then
it is entitled to get the contract to be declared void, as well as compensation. If
it accepts the performance then the option of voidability is not available and he
cannot even claim compensation until he proves that he had given a notice to
the promisor.
• If the time is not the essence then it cannot be said to be voidable, however, the
party has an option to claim compensation.

Consequences and Remedies

Section 64 provides for the consequences of rescission of Voidable Contract. When a

person at whose option a contract is voidable rescinds it, the other party need not
perform any promise contained in it, and the party rescinding must restore any benefit
received under the contract, so far as may be. This prevents unjust enrichment to any of
the parties. For example, If a buyer rescinds a voidable contract for fraud, they must
return any goods received, and the seller must refund any payment.

Section 65 states the obligation of person who has received advantage under void
agreement or contract that becomes void. When an agreement is discovered to be void,
or when a contract becomes void, any person who has received any advantage under
such agreement or contract must restore it, or make compensation for it, to the person
from whom they received it. If a contract for the sale of goods for instance is found to be
void, the buyer must return the goods or compensate the seller.

Section 75 states that the party rightfully rescinding contract is entitled to

compensation. A person who rightfully rescinds a contract is entitled to compensation
for any damage sustained through the non-fulfilment of the contract. For example if a
contractor rescinds a building contract due to the client's fraudulent misrepresentation,
the contractor can claim compensation for any loss incurred.

Mistake

A mistake in contract law refers to a misunderstanding or erroneous belief about a

material fact at the time of agreement formation. The Indian Contract Act, 1872,
addresses the concept of mistake under Sections 20, 21, and 22. There are two types of
mistake – of fact and of law.

Mistake of Fact is provided under Section 20 and 22.

Section 20 says that an agreement is Void where both parties are under mistake as to
matter of fact, i.e., when both parties to an agreement are under a mistake as to a matter
of fact essential to the agreement, the agreement is void. For example, if ‘A’ agrees to sell
his horse to ‘B’, both believing the horse to be alive when in fact the horse is dead, the
agreement is void.

Section 22 on the other hand deals with the contract caused by mistake of one party as
to matter of fact. A contract is not voidable merely because it was caused by one of the
parties being under a mistake as to a matter of fact. For example, if ‘A’, thinking he is
renting out Room 101 but mistakenly rents out Room 102, the contract remains valid
unless the mistake is mutual or induced by fraud/misrepresentation.

A mistake of fact operates to invalidate a contract because true intention of the parties
to make their contract on existence of some state of facts turns out not to have existed
on the date of the agreement. It is also possible that mistake may negate or nullify the
consent. Negating the consent means that both the parties understood the terms
differently and there was no consensus ad idem. In such cases there is no agreement
between the parties as there was no consent. Nullifying the consent on the other hand
means that even though there was consensus ad idem, but the mistake arose due to the
subject matter already being perished. Such agreements on the other hand are void, i.e.,
not enforceable by law.

In Raffles v. Wichelhaus (1864), A contract to ship cotton from Bombay was

misunderstood by both parties due to the existence of two ships with the same name.
The court held the contract void due to the mutual mistake about the ship. In this case
the consent was negated as there was no meeting of minds.
Mistake of Law is covered under Section 21. Section 21 states the effect of mistakes as
to law. According to it a contract is not voidable because it was caused by a mistake as
to any law in force in India. However, a mistake as to a law not in force in India has the
same effect as a mistake of fact. For instance if A and B enter into a contract under the
mistaken belief that a particular law in India allows their transaction, the contract is not
voidable. However, if the mistake pertains to a foreign law, the contract may be treated
as voidable under the same principles as a mistake of fact.

The key distinction between the two is that Mistake of Fact can void a contract if the
mistake is mutual and pertains to essential facts. It does not void a contract if only one
party is mistaken, whereas Mistake of Law does not void a contract if the mistake is about
the law in force in India. It may have similar effects as a mistake of fact if the mistake
pertains to foreign law.

Quasi Contract – Section 68 – 72

Quasi contracts are a unique form of contract recognized under the Indian Contract Act,
1872, specifically covered under Sections 68 to 72. These contracts are not formed by
mutual agreement but are imposed by law to prevent unjust enrichment. A quasi-
contract is not a real contract that people enter into by agreeing with each other. Instead,
it's a legal concept where the law creates obligations between two parties who haven't
actually made a formal agreement. The idea behind a quasi-contract is to ensure fairness
and prevent one person from unfairly benefiting at the expense of another.

Quasi-contracts help make sure no one gets an unfair advantage or suffers a loss without
a good reason. They're about fairness and justice, ensuring that people do the right thing
even when there’s no formal agreement in place.
For example:

1.If you find someone's lost wallet, you can't just keep it. The law says you should try
to return it to the owner because that's the fair thing to do.

2.If you pay a bill on behalf of a friend who couldn't pay it themselves, the law says
your friend should pay you back because you did them a favour they would have
had to do themselves.

3.If you provide essential items like food or medicine to a child or someone who can’t
make a contract (like a person with a mental disability), the law says you should
be paid back from their property because it's only fair.

4.If you accidentally send money to the wrong person, the law says they should give
it back to you because it was a mistake and keeping it would be unfair.

In the case of Mozes v. Maccferian (1760), Lord Mansfield held that if one person benefits
from another's actions and it would be unfair for them to keep that benefit without paying
for it, the law can require them to compensate the person who provided the benefit.
Section 68 deals with claim for necessaries supplied to a person Incapable of
contracting, or on his account. Under this section, in a situations where essential goods
or services (necessaries) are provided to individuals who are incapable of entering into a
contract (e.g., minors or persons of unsound mind). The law recognizes that despite their
incapacity, these individuals require certain essentials for their sustenance. For
example, If a shopkeeper provides food and clothing to a minor or a mentally unsound
person, the shopkeeper is entitled to reimbursement from the property of that individual.
The law ensures that the provider of the necessaries does not suffer a loss for their
support.

Section 69 talks about reimbursement of person paying money due by another, in

payment of which he is interested. This section applies when one person pays money on
behalf of another because they have an interest in the payment. The payer does not do
this out of charity but due to a legal obligation or interest in ensuring the payment is
made. For instance if person ‘A’ owns a property that is mortgaged with a bank, and
person ‘B’, who has a lease agreement with ‘A’, pays off the mortgage to prevent
foreclosure, ‘B’ is entitled to be reimbursed by ‘A’. This is because ‘B’ has a vested
interest in ensuring that the property is not foreclosed.

The essential ingredients of the above-mentioned section are:

1. The plaintiff should have made a payment of money
2. The plaintiff must have been compelled to pay this money to a third party for
protection of his own interest
3. The defendant must have been legally liable to pay the third party.

In the case of H.C. Mukherji v. K.P. Goswami (1961), the court upheld the tenant's right
to reimbursement for the payment made to the Municipal Board for excess water
consumption, placing the ultimate responsibility on the landlord due to the specific
municipal rules. The judgment ensures that tenants are not unfairly burdened with
charges that should legally be borne by the landlord.
Section 70 gives out obligation of person enjoying benefit of a non-gratuitous act, i.e.,
when a person lawfully performs an act or delivers something to another, expecting to be
paid, and the recipient benefits from it, the law obligates the beneficiary to compensate
the provider. For example if person ‘A’ repairs a road in front of ‘B’s house (with lawful
permission) and ‘B’ uses this repaired road, ‘B’ is required to pay ‘A’ for the benefit
derived from the repair work.

The essential ingredients of the above-mentioned section are:

1. The goods are delivered or something has been done for the other person lawfully
2. It is done without the intention of doing so gratuitously
3. The person to whom goods are delivered has enjoyed the benefit thereof.

A claim for compensation under Section 70 is not based on any subsisting contract
between the parties, but because something has been done by one party for the other,
which the other party has voluntarily accepted. In the case of State of West Bengal v. B.K.
Mondal & Sons (1962), the plaintiff constructed a structure for the government on its
request. The government benefited from the structure but refused to pay, arguing the
contract was not formally binding. The Supreme Court held that the government was
liable to pay under Section 70 as they enjoyed the benefit of the plaintiff’s non-gratuitous
act.

Section 72 discusses the liability of person to whom money is paid, or thing delivered, by
mistake or under coercion. This section ensures that if money or goods are received by
mistake or under coercion, the recipient must return them. The law prevents unjust
enrichment due to such errors or forceful situations.

If person ‘A’ mistakenly transfers money to person ‘B’s bank account, ‘B’ is legally
obligated to return the money. Similarly, if ‘A’ delivers goods to ‘B’ under coercion, ‘B’
must return the goods.

For the purpose of this section, the terms ‘coercion’ and ‘mistake’ are to be understood
as per their literal English meaning without attaching any legal connotation to them. In
the case of Sri Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi (1949), money
was paid under a mistaken belief that it was due. The court held that the recipient of the
money was liable to return it under Section 72 because the payment was made by
mistake. This case reinforced the principle that one cannot be unjustly enriched at the
expense of another.

Impossibility of Contract / Frustration of Contract

Impossibility of contract refers to situations where the obligations under a contract

cannot be fulfilled because it is impossible to do so. It prevents parties from being held
responsible for fulfilling contracts that have become impossible to perform due to
unforeseen events beyond their control. This ensures that no one is unfairly penalized for
circumstances they couldn't predict or prevent.

In simple terms, the impossibility of contract under the Indian Contract Act recognizes
that sometimes, due to unforeseen events, it is just not possible to carry out the terms of
a contract. When such events occur, the contract becomes void, meaning no party is
bound to perform their obligations under it.

The law recognizes two types of impossibility:

1.Initial Impossibility: When the contract is made, the performance is already

impossible. It is a void agreement, i.e., void ab initio. For instance, a person agrees
to sell a specific horse to someone, but unknown to both of them, the horse had
already died a day before the agreement. Such contract is void because it was
impossible to fulfill from the beginning.

2.Subsequent Impossibility: The performance was possible when the contract was
made, but becomes impossible later due to some unforeseen event. In such
circumstance, the contract becomes void. For instance, when someone agrees
to perform a concert on a certain date, but before the concert, the venue is
destroyed by a fire. This contract becomes void because it became impossible to
perform due to the fire.

Section 56 deals with agreement to do impossible act. Section 56(1) states that an
agreement to do an act impossible in itself is void and Clause 2 states that a contract to
do an act which, after the contract is made, becomes impossible, or by reason of some
event which the promisor could not prevent, becomes unlawful, shall become void when
the act becomes impossible or unlawful. Impossibility can be due to physical events (like
natural disasters) or legal changes (like new laws that make the contract unlawful).

Physical impossibility could include instances like destruction of subject matter, death
or disability, and war. Whereas legal impossibility means any subsequent change in the
law rendering the performance of a contract unlawful.

For a contract to be considered void due to impossibility, the impossibility should be due
to an unforeseen event that neither party could control or anticipate. For this section to
apply, the performance must be impossible, not merely difficult or more expensive.

In England, there was once a concept known as the Absolute Contract Theory. This
theory held that once a contract was made, a person was required to fulfil their
obligations, even if it later became impossible to do so. They couldn't use the
impossibility of performance as an excuse. However, in 1863, the decision in the case of
Taylor v. Caldwell, an exception to the said rule was introduced. The facts of the case are
that Taylor and Caldwell entered into a contract for the use of a music hall for concerts.
However, before the concerts could take place, the music hall was destroyed by fire. And
issue arose whether Taylor could sue Caldwell for breach of contract since the hall was
no longer available for use. The court decided that Caldwell was not liable for breach of
contract. The destruction of the hall made the performance of the contract impossible.

In English law, impossibility is called frustration. If an unexpected event makes it

impossible to carry out the contract as planned, and the contract doesn't address this
situation, the law allows the parties to be released from their obligations. Since the effect
of frustration is to kill the contract and discharge the parties from further liability under
it, the doctrine is not to be lightly invoked and must be kept within narrow limits and ought
not to be extended.
Force Majeure Clause

Where a contract contains a force majeure clause which provides for discharge of parties
on happening of some contingency, the contract becomes void under Section 32 and not
Section 56. Whereas, if the contract doesn’t provide for a term that would discharge the
parties on happening of a certain uncertain event, the contract will become void on
ground of frustration under Section 56(2).

In the case of Energy Watchdog v. Central Electricity Regulatory Commission (2017),

there was a dispute where power producers sought to revise the tariff rates due to
increased costs of imported coal caused by changes in Indonesian laws. They argued
that these changes made it commercially impossible to fulfil the contract at the agreed
rates. The question arose whether the change in Indonesian coal prices constituted a
force majeure event, allowing a revision of the tariff under the power purchase
agreements. The Supreme Court of India decided that the rise in coal prices due to
changes in Indonesian regulations did not constitute a force majeure event. As such, it
did not justify revising the tariff under the existing contracts.

Discharge of Contract

Discharge of a contract means termination of contractual relationship between the

parties. It may be discharged by:

• Performance of the contract under Section 37

• Agreement under Section 62 or 63
• Supervening impossibility under Section 56
• Discharge of Contract under Section 73
• Operation of law such as death or insolvency.

Performance of Contract

Section 37 deals with the obligations of parties to perform or offer to perform their
promises in a contract. Parties to a contract must perform their promises unless such
performance is excused under the provisions of the Act or any other law. If the nature of
the contract requires personal performance, the promise must be performed by the
promisor themselves or if the contract does not require personal performance, it can be
performed by the promisor or a competent representative. If the promisor dies before
performance, the representatives of the promisor are bound to perform the contract
unless it involves personal skills or qualifications peculiar to the promisor.

For example: A famous painter agrees to paint a portrait. Only the painter can perform
this promise because it involves personal skill. But if a person agrees to deliver a
package. This task can be performed by the promisor or someone else on their behalf.

Section 37 ensures that parties to a contract understand their obligations and the
conditions under which they must fulfil their promises.

Agreement

Under Section 62, the discharge is done by a bilateral agreement. This section discusses
the effect of Novation, Rescission, and Alteration of Contract.
Novation means when the parties to a contract agree to substitute the original contract
with a new one, the original contract is void. In such a case, the subsequent contract
would govern the relationship between the parties and the obliger will stand relieved of
his prior obligation. For example, a creditor and debtor agree to replace the existing debt
agreement with a new one.

Rescission on the other hand means if the parties mutually agree to cancel the contract,
neither party is bound by the original contract. For instance, two businesses mutually
decide to cancel their supply agreement.

In novation, new obligation arises, however, in recession, no new obligation arises, only
the contract is set aside.

Alteration means if the terms of the original contract are changed with mutual consent,
the original contract is void, and the new terms are binding.

None of these can be effected unilaterally by one party, it requires the consent of all the
parties involved.

Section 63 states that promisee may dispense with or remit performance of promise.
Dispensing with performance means that the promisee can release the promisor from
the obligation to perform, either wholly or partially. For instance, a lender tells a borrower
they don’t need to repay the entire loan.

Further it states that he may extend the time of performance, or the promisee can accept
a smaller sum or lesser performance than originally agreed upon.

These sections ensure that contracts can remain fair and relevant to the changing needs
and agreements of the parties involved.

Breach of Contract

A breach of contract occurs when one party fails to perform their obligations as
stipulated in the contract. There are two types of breach – Actual Breach and Anticipatory
Breach. Actual Breach occurs when a party fails to perform their obligations on the due
date or performs them inadequately. Whereas anticipatory breach occurs when one
party declares their intention not to perform their contractual obligations before the due
date.

Remedies available for breach of contract could be damages, specific performance,

injunction, recission and restitution. Damages, which are particularly essential when
there’s a breach are of four types – compensatory, special, nominal and liquidated.

In Compensatory Damages, one compensates for the loss directly caused by the breach.
In case of Special Damages, it covers losses that were foreseeable at the time the
contract was made; they must be in the specific knowledge of the defendant. Nominal
Damages are the small sums awarded when a breach occurred without significant loss.
And Liquidated Damages are the pre-determined amounts specified in the contract to be
paid in the event of a breach.
Consequences of Breach are that the non-breaching party is entitled to remedies to
address the breach. The court assesses the nature and extent of the breach to determine
the appropriate remedy. Contracts may include specific terms outlining the
consequences of a breach, which the court will consider.

Section 73 deals with the compensation for loss or damage caused by breach of
contract. According to it when a contract is breached, the non-breaching party is entitled
to compensation for any loss or damage caused by the breach. The compensation must
be for losses that naturally arose from the breach or those that the parties could foresee
at the time of contract formation.

This section is based on the case of Hadley v. Baxendale (1854). In the said case a miller’s
crankshaft broke, and he contracted a carrier to transport it for repairs. The carrier
delayed the delivery, causing the mill to stay closed longer, and the miller claimed for
lost profits. The court held that the carrier was not liable for the lost profits as the carrier
was unaware that the mill would be inoperable until the shaft was replaced. The loss was
not a natural consequence of the breach nor foreseeable.

This case laid down the principle that damages should be such as may reasonably be
considered as arising naturally from the breach or such as may have been in the
contemplation of both parties.

The explanation of the said section states that the non-breaching party must take
reasonable steps to mitigate (reduce) the loss or damage. In the case of Kishore Lal
Gupta & Bros. v. Cement Corporation of India Ltd. (1960), the plaintiff failed to supply the
agreed quantity of cement, causing the defendant to purchase at a higher price
elsewhere. The defendant claimed the difference in cost. The court held that the
defendant was entitled to compensation for the additional cost incurred due to the
plaintiff's breach as the plaintiff’s failure to supply the cement caused direct and
foreseeable losses to the defendant, who had to procure cement at a higher price
elsewhere. This case illustrates the principle of mitigation of loss where the non-
breaching party takes reasonable steps to reduce the damage.

Section 74 on the other hand deals with compensation for breach of contract where the
penalty is stipulated, i.e., if a contract specifies a predetermined amount to be paid in
the event of a breach, this is known as liquidated damages. This section provides for
liquidated damages, meaning thereby the pre-estimated damages. These can be in the
form of genuine pre estimate of damages or in the form of a penalty. Where there is a
genuine pre estimate, the court is not bound to pay the full amount. The court will apply
the test of reasonableness and will award reasonable damages. However, the upper limit
of these damages is the amount specified by the parties as a genuine pre estimate.

The purpose of penalty is to terrorise the other party so that they may not commit a
breach. The amount mentioned as penalty is always an exorbitant amount and an
unreasonable compensation. In this case also the court is not bound to grant the penalty
amount.

In the case of Fateh Chand v. Balkishan Dass (1963), in a sale agreement, an amount was
stipulated as compensation for breach. The purchaser breached the contract, and the
seller retained the amount. The Supreme Court held that the amount retained was
excessive and not a genuine pre-estimate of loss. It reduced the compensation to a
reasonable figure.

Under Section 74, the non-breaching party early didn’t have to prove actual loss or
damage to claim the stipulated sum. In the case of Oil & Natural Gas Corporation Ltd. v.
Saw Pipes Ltd. (2003), the contract included a liquidated damages clause for delays. The
party in breach argued that no actual loss was proven. The Supreme Court upheld the
claim for liquidated damages, stating that the non-breaching party did not need to prove
actual loss if a genuine pre-estimate was agreed upon. However, later in the case of
Kailash Nath v. DDA (2015), the court held that even in cases of genuine pre estimate,
actual loss need to be proved.

Later, in the case of Venezia Mobili (India) Pvt. Ltd. V. Ramprastha Promoter & Developer
(2019), the court held that Kailash Nath’s judgemnt did not overrule the earlier one, rather
it has to be harmoniously read. After doing so, Section 74 cannot be used as an
opportunity to get a windfall gain when no loss been caused. Thus, whenever possible,
actual loss must be proved and where it is not possible to prove the same, the court can
still award damages as per Section 74.

GOVERNMENT AS CONTRACTING PARTY, KINDS OF GOVERNMENT CONTRACTS

AND DISPUTE SETTLEMENT, STANDARD FORM CONTRACTS

When the government enters into contracts, it acts through its various departments,
agencies, and public sector undertakings. Government contracts are subject to specific
statutory provisions, guidelines, and principles to ensure transparency, fairness, and
public accountability. The key principles governing government contracts are:

1. Statutory Authority: Government contracts must be executed by individuals who

possess the requisite legal authority to bind the government. The President of India
or a Governor can authorize a public official to enter into contracts on behalf of the
government.

2. Article 299 of the Indian Constitution: It stipulates that all contracts executed in the
exercise of the executive power of the Union or a State must be expressed to be
made by the President or the Governor and executed on their behalf. The use of the
word “executed” in the Article means that the government contract must be in
writing. An oral agreement between the government and the other party would not
be valid for the purposes of Article 299.

3. Public Accountability and Transparency: Government contracts must adhere to

principles of transparency and accountability, and often include procedures like
tendering and competitive bidding to ensure fair selection of contractors. The
principle of transparency guarantees that the state authorities enter into contracts
with the other party through a medium which is objective and fair. The authorities
must also hold public hearings where proponents can express their doubts and
submit questions, clarifications and/or complaints. Furthermore, third party
documents and applications are also made public to ensure that the processes are
carried out in a fair and equitable manner by the government authorities.
 The selection procedure for government contracts must be arranged in such a
manner that only the procedures that are strictly essential and have connected
terms and urgent deadlines, the least amount of resources will be used should be
focused on by the government. Furthermore, before the selection of the party to a
government contract, the appropriate authority must ensure that it has the
appropriate financial allocations and preliminary research in place to determine the
contract’s aim.

The parties to a contract, that is the contractors, state entities, government officials,
etc. will be held accountable if any dispute arises out of the government contract.
Therefore, they will be held liable for civil, criminal, and disciplinary actions when
their acts and/or omissions caused damages or infringed any provision of the
contract.

The principle of contractual balance states that the government contracts must
maintain equality between the parties with respect to their obligations, rights and
consideration stated during the execution of the contract. Thus, if the balance
between the parties is not maintained then necessary steps must be taken to
restore the balance between the parties.

Essentials of Contract made under Article 299

1. The courts in various judgements have held that Article 299 is based on public policy
and the protection of the general public. The courts have stated that the conditions
laid down in Article 299 of the Constitution must be met in a government contract. If
either party fails to meet any requirement stated under Article 299, then such a
contract becomes null and void. Therefore, such a contract cannot be enforced by
any of the contracting parties. And the government cannot be sued or held liable for
damages for the breach of such a contract. Further, the government cannot enforce
such a contract against the contracting party.
2. A contract made under Article 299 of the Constitution must be a written contract. The
words ‘expressed to be made’ and ‘executed’ clearly state that the contract must be
in writing and not an oral agreement. This is a requirement of law that must be
fulfilled.
3. The next requirement under Article 299 of the Constitution is that a government
contract can be entered into on behalf of the Government by a person authorised for
that purpose by the President or the Governor, as the case may be. If the contract was
entered by any person not authorised by the President or the Governor then such
contract would not be valid. In Union of India v. N.K. (P) Ltd. (1972), the Director of
Railway Stores was authorised to enter into a contract on behalf of the President.
However, the contract was entered into by the Secretary of the Railway Board. The
Supreme Court held that the contract was entered into by an officer who was not
authorised by the President for the said purpose hence, it is not a valid and binding
contract.
4. The last essential condition is that a government must be expressed in the name of
the President or the Governor as the case may be. Even though the contract is entered
into by an officer authorised for such purpose, the contract would not be valid or
enforceable against the government if it is not expressed to be made on behalf of the
President or the Governor.
Kinds of Government Contracts

1. Fixed-price contracts: In fixed-price contracts, the payment amount is set in advance

and is not dependent on the resources used or the time spent. The contract specifies
a predetermined value for the goods or services. Provisions like contract changes,
economic pricing adjustments, or defective pricing may be included. These contracts
create certainty for both parties about the cost of the goods or services provided.
2. Cost reimbursement contract: In cost-reimbursement contracts, the contractor gets
reimbursed for the actual costs incurred while performing the work, plus an
additional fixed fee. Unlike fixed-price contracts, the total payment is not
predetermined. This type of contract allows the contractor to secure necessary labor
and materials without fitting everything into a tight budget. It ensures that the
contractor is compensated for all costs and any additional payments made.
3. Incentive contracts: Incentive contracts are designed to motivate contractors by
offering additional payments for outstanding performance. One party promises extra
remuneration if the other party completes the task exceptionally well. Types of
incentive contracts include fixed-price incentive contracts, cost-plus award fee
contracts, delivery incentives, performance incentives, multiple incentive contracts,
and cost-plus incentive contracts. These contracts encourage contractors to
maximize their efforts and prevent inefficiency.
4. Indefinitely delivery contract: In indefinite delivery contracts, the time for task
performance is known, but the exact delivery time is unspecified. These contracts
ensure the supply of an indefinite quantity of services within a fixed period.
Government often uses this type of contract when the exact quantity of services
needed is unknown. Types of indefinite-delivery contracts include definite quantity
contracts, indefinite-quantity contracts, and requirements contracts.
5. Time and materials contract: Time and materials contracts are used when the
duration and cost of a project are uncertain. Government surveillance is required to
monitor the work process and ensure compliance with contract terms. This type of
contract is used when no other contract type is suitable. It includes a ceiling price
that the contractor cannot exceed, except at their own risk.

Dispute Settlement in Government Contracts

1. Arbitration: Most government contracts contain arbitration clauses for resolving

disputes. The Arbitration and Conciliation Act, 1996, governs the arbitration
process. For instance, Public Works Department contracts often include arbitration
clauses to resolve disputes regarding construction delays and cost overruns.

2. Judicial Review: Disputes can be taken to the courts, where judicial review may be
sought to challenge the validity or fairness of government actions or decisions. For
example a contractor may approach the High Court or Supreme Court if they believe
the government has unfairly terminated the contract.

3. Administrative Tribunals: Specialized tribunals like the Central Administrative

Tribunal (CAT) and State Administrative Tribunals handle disputes involving
government employees and their terms of employment.
 4. Departmental Grievance Redressal Mechanisms: Many government departments
have internal mechanisms to address grievances and disputes arising from
contracts.

Difference between Government Contract and Ordinary Contract

Government Contract Ordinary Contract

According to Article 299, a government Whereas ordinary contracts which are

contract must be expressed. That is the formed under the Indian Contract Act,
words, ‘expressed to be made’ clearly 1872 which states that a valid contract
mention that a government contract must can be expressed or implied.
always be in writing.

A government contract must always be An ordinary contract does not require to

executed by an authorised person in order be executed by an authorised person.
to hold the government in contractual
liability. A contract between the
government and the other party would be
invalid if it is not executed by the
authorised person duly appointed by the
President or the Governor, as the case
may be.

A government contract must follow all the An ordinary contract is bound by the
provisions stated under Article 299 of the provisions mentioned in the Indian
Constitution. Contract Act, 1872.

Government contracts are distinct from private contracts due to the higher level of
scrutiny they undergo to protect public interest. This scrutiny manifests in two primary
ways: formal scrutiny and substantive scrutiny. Formal scrutiny focuses on the legal and
procedural aspects of government contracts. According to Article 298 of the Indian
Constitution, the government has the power to enter into contracts to carry out its
functions. However, this power is regulated by Article 299, which mandates that all
government contracts must be made in the name of the President or the Governor and
follow a specific procedure. These provisions ensure that the government adheres to a
clear, transparent, and lawful process when entering into contracts, thereby preventing
misuse of power and ensuring accountability. Substantive scrutiny is carried out by the
judiciary through the power of judicial review. Under Articles 14 (Right to Equality) and 21
(Right to Life and Personal Liberty) of the Constitution, courts have substantial powers to
examine the fairness and reasonableness of government contracts. Judicial review
allows courts to ensure that government contracts comply with constitutional principles
and are just and equitable. The judiciary may adopt different approaches in this review,
ranging from judicial restraint, where courts limit their interference, to judicial
interventionism, where courts actively scrutinize and correct executive actions to uphold
constitutional mandates.
In conclusion, government contracts are subjected to greater scrutiny compared to
private contracts to ensure they are lawful and fair. Formal scrutiny ensures that the
government follows proper procedures, while substantive scrutiny by the judiciary
ensures that these contracts are fair and reasonable. This dual scrutiny mechanism is
vital for maintaining transparency, accountability, and fairness in government actions,
thereby upholding the principles of the Constitution and safeguarding public interest.

Standard Form Contracts

The prevalence of standard form contracts in modern business transactions cannot be

overstated. These contracts, often pre-drafted by one party, are presented on a "take it
or leave it" basis, leaving little room for negotiation. While they offer efficiency and
uniformity, they also pose challenges, particularly when there is a significant imbalance
in the bargaining power of the parties involved.

Standard form contracts have become a cornerstone of contemporary business

practices, facilitating mass transactions in sectors like insurance, banking, and
telecommunications. Their evolution is marked by two key trajectories: one where equal
bargaining power among parties ensures fairness, and another where entities with
superior bargaining power exploit these contracts to impose favourable terms. Indian
courts have navigated these dual trajectories by developing specific rules and doctrines
to protect the weaker party in a contract. The courts have not only scrutinized the terms
of these contracts for fairness but also employed principles like "consensus ad idem"
(meeting of the minds) and the "knock-out rule" to address conflicting terms.

In simple terms standard form contracts are pre-drafted agreements used extensively in
both government and private sectors to streamline the contracting process and ensure
uniformity. They are especially prevalent in high-volume transactions or where the terms
of the contract are similar across multiple agreements. Characteristics of Standard Form
Contracts:

1. Pre-Drafted Terms: Standard form contracts consist of pre-drafted terms and

conditions, leaving little room for negotiation by the parties.

2. Efficiency: They streamline the contracting process, saving time and reducing the
cost of drafting individual contracts.

3. Uniformity: Ensure uniformity in contractual terms and conditions across multiple

transactions.

Advantages of Standard Form Contracts are:

1. Consistency: Ensures consistency in terms and conditions across similar

transactions.

2. Efficiency: Reduces the time and cost associated with drafting and negotiating
individual contracts.

3. Risk Management: Standard clauses help manage common risks associated with
the specific type of contract.
Disadvantages of Standard Form Contracts are:

1. Lack of Negotiation: The parties, especially the weaker party, have little or no room
to negotiate the terms.

2. Potential for Unfair Terms: May contain terms that are heavily biased in favour of the
party that drafted the contract.

PROMISSORY ESTOPPEL AND LEGITIMATE EXPECTATIONS

In legal contexts, especially within democratic frameworks like India, the doctrines of
Promissory Estoppel and Legitimate Expectation play crucial roles in ensuring
governance and public administration remain fair and just. Both doctrines aim to prevent
arbitrary actions by authorities, but they apply in different scenarios and contexts,
providing different forms of protection and remedies.

Promissory Estoppel is an equitable doctrine that prevents a party from reneging on a

promise, even if a formal contract does not exist, provided the promisee has relied on
that promise to their detriment. It upholds the principle of fairness by ensuring that
promises made are honored, thereby protecting individuals who act on those promises.
The elements of the same are:

1. A promise must be explicitly made by one party to another, aiming to create legal
obligations or induce action.

2. The promisee must have reasonably relied on this promise, altering their position
based on the assurance provided.

3. The promisee must have suffered a disadvantage or taken actions that they would not
have otherwise taken, placing them in a worse position if the promise is not fulfilled.

In Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P. (1979), the Supreme Court of
India held that if a promise is made by one party to another, which is intended to be acted
upon and is in fact acted upon, the promisor cannot go back on the promise. This
decision emphasized that promissory estoppel applies regardless of any pre-existing
legal relationship between the parties.

An example of it could be if a company promises a supplier future business in exchange

for immediate discounts. The supplier acts on this promise, and later, the company
cannot deny the agreement if the supplier has already offered the discounts and relied
on the future business to detriment.

The doctrine of Legitimate Expectation on the other hand arises when a public authority,
through promises, conduct, or a consistent practice, creates an expectation in the public
or an individual that they will act in a certain way. Failure to meet these expectations can
be challenged as arbitrary and unfair, ensuring the authority acts transparently and
justly. Elements of this are:

1. There must be a clear representation or a consistent practice from the public

authority that establishes a basis for the expectation.
2. This creates a legitimate expectation in the public or an individual that the authority
will act in a specific manner.

3. The public authority's deviation from this expectation must be shown to be unfair,
unreasonable, or arbitrary.

For instance, if a public authority has consistently renewed certain permits or licenses,
stakeholders may have a legitimate expectation that such renewals would continue
unless informed otherwise. Another example could be if a government announces a
policy to provide certain benefits to citizens and regularly implements it, citizens develop
a legitimate expectation that these benefits will continue unless there is a fair and
transparent process for change.

Legitimate Expectations Promissory Estoppel

This doctrine is broader as it takes into This doctrine considers only the promises
account not only the promises but also made by a party (both government and
the practices of the officials of the private parties)
Government. Hence, a promise is always
not necessary in this case.

It is a public law remedy because it It is a private law remedy as it seeks to

ensures that governmental bodies are enforce promises made by one party to
fair and non-arbitrary in their dealing another.
with citizens.

It is not necessary for a person to show It is required to be shown that the

that he has changed his position or promisee has acted upon the promise
suffered detriment in order to claim to irrespective of the losses suffered.
have legitimate expectation.

It is not a cause of action in itself as In this case, a mere violation of

certain resulting violations of Article 14 promise and subsequent action upon
have to be shown. the promise would itself constitute a
cause of action.

Both doctrines serve to maintain accountability and fairness but in different contexts.
Promissory Estoppel is more rigid, requiring a clear promise and reliance, whereas
Legitimate Expectation is broader, focusing on the fairness of administrative actions.
Understanding these doctrines allows individuals and organizations to better navigate
their rights and expectations in dealings with both private parties and public authorities.
By upholding these doctrines, the legal system reinforces trust and fairness, ensuring
that promises and established practices are adhered to, preventing arbitrary actions,
and promoting a stable and predictable legal environment.