Module 1: Indian Contract

Act, 1872
BUSINESS LAW AND POLICY
Learning Outline
•Meaning of contract,
•Agreement,
•Essential elements of a valid contract.
•Law of agency-meaning
•Creation and termination of agency.
•Bailment and Pledge - meaning
•Rights and duties of bailor and bailee
What is Law?

• The word “Law” is a general term and has different connotations for
different people
• E.g.,
• A citizen may think of law as a set of rules
• A lawyer may think law as a vocation(career / profession)
• A legislator may look at law as something created by him
• A judge may think law as a guiding principles to be applied in decision
making
• “Law includes all the rules and principles which regulate our
relations with other individuals and with the state”.
LAW OF CONTRACTS

• Law of contract is the branch of law which determines the

circumstances in which promises made by the parties to a contract
shall be legally binding on them.
• Its rules define the remedies that are available in a court of law
against a person who fails to perform his contract and the conditions
under which remedies are available.
• It’s the important branch of business law and of particular
importance to people engaged in trade, commerce and industry since
bulk of their business transactions are based on contracts.
Indian contract Act, 1872
• The Act deals with-
1. The general principles of law of contract (Sec. 1 to 75)
2. Some special contracts only (Sec. 124 to 238)
• I to VI chapters of the Act deals with the different stages in the
formation of a contract, its essential elements, its performance
or breach and the remedies for breach of contract.
• The remaining chapters deal with some of the special contracts
viz.,
• Indemnity and Guarantee(Chapter VIII, Sec. 124 to 147)
• Bailment and Pledge(Chapter IX, Sec. 148 to 181)
• Agency (Chapter X, Sec. 182 to 238)
• The Act does not affect the usage or customs of trade(sec 1, Para
1)
Definition of Contract

• A contract is an agreement made between two or more parties which

the law will enforce. Sec 2(h) defines a contract as an agreement
enforceable by law.
• This definition is based on Pollock’s definition which is as follows:
“Every agreement and promise enforceable at law is a contract. “
Agreement and its enforceability
• From the definition of contract we find that a contract essentially
consists of two elements viz.,
(i) an Agreement
(ii) its enforceability by law
• An agreement is defined as “every promise and every set of promises,
forming consideration for each other.” [Sec 2(e)]
• A promise is defined as “when a person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted”
• A proposal when accepted becomes a promise [Sec. 2(b)]. In other
words, an agreement is an accepted proposal.
• Therefore, to form the agreement, there must be a proposal or offer by
one party and its acceptance by the other. i.e.,
• Agreement = Offer + Acceptance
Consensus ad idem
• The essence of the contract means meeting of the mind of the parties in
full and final agreement: there must be consensus ad idem.
• This means that the parties in the agreement must have agreed about
the subject-matter of the agreement in the same sense and at the same
time.
• Unless there is consensus ad idem there can be no contract.
• e.g., A who owns 2 horses named H1 and H2, is selling Horse H1 to B. But B thinks
that he’s buying H2. There is no consensus ad idem and hence no contract.
• Attain consensus ad idem, we usually employs the language of offer and
acceptance.
• If A says to B “will you purchase my car?”(Offer) and B says “Yes” (Acceptance) to
it, there is consensus ad idem and an agreement comes into existence
Obligation
• Obligation: An agreement, to become a contract, must give rise to a legal
obligation or duty.
• The term ‘obligation’ is defined as a legal tie which imposes upon a
definite person or persons the necessity of doing or abstaining from
doing a definite act or acts.
• It may relate to social or legal matters.
• An agreement which gives rise to a social obligation is not a contract.
• It must give rise to a legal obligation in order to become a contract.
• e.g.,
• A agrees to sell his car to B for 10,000. The agreement gives rise to an obligation
on the part of A to deliver the car to B and on the part of B to pay 10,000 to A.
this agreement is the contract
 Agreement
• An agreement may be a social agreement or a legal agreement.
• If A invites B to a dinner and B accepts the invitation, it’s a social agreement.
• A social agreement does not give rise to contractual obligations and is
not enforceable in a court of law.
• The agreements which are enforceable in a court of law are ‘contracts’.
• E.g., A father promises his son to pay Rs 100 every month as pocket
allowance and later refuses to pay. The son cannot recover the money as
it’s a domestic agreement and there’s no intention on the part of the
parties to create legal relations. Hence,
Contract = Agreement + Enforceability by Law

• Thus, all contracts are agreements but all agreements are not
necessarily contracts
 Essential Elements of a Valid Contract
• According to Sec. 10, 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 expressly declared to
be void
• Element of a valid contract are:
1.Offer and Acceptance
• There must be two parties to an agreement, i.e., one party making the offer and
the other party accepting it.
• The terms of the offer must be definite and the acceptance of the offer must be
absolute and unconditional.
• The acceptance must also be according to the mode prescribed and must be
communicated to the person offered.
2. Intention to create legal relationship
• When two parties enter into an agreement, their intention must be to create the
legal relationship between them.
• If there is no such intention on the part of the parties, there’s no contract between
them.
• Agreement of social or domestic nature do not contemplate legal relationship
• e.g., A husband promised to pay his wife a household allowance of $30 every
month. Later the parties got separated and the husband failed to pay the money.
The wife sued for the allowance. Held, agreements such as these were outside the
realm of contract altogether
3. Lawful Consideration
• An agreement to be enforceable by law must be supported by consideration.
• ‘Consideration’ means an advantage or benefit moving from one party to the
other.
• It is the essence of bargain.
• It means something in return.
• The agreement is enforceable only when both the parties give something and
get something in return.
• A promise to something and nothing in return is usually not enforceable by law.
• Consideration need not be cash or kind. It could be an act or abstinence
(abstaining from doing something) or promise to do or not to do something.
• It may be past, present or future, but must be real and lawful [Sec. 2(d), 23 & 25]
4. Capacity of Parties – Competencies
• The parties to the agreement must be capable of entering into a valid contract.
• Every person is competent to contract if he/she is of the age of majority ,is of
sound mind & is not disqualified from contracting by any law to which he is
subject ( Sec 11 & Sec 12)
• Flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness
etc.
• If party suffers from any of the flaw in capacity, the agreement is not enforceable
except in some special cases.
5.Free and Genuine Consent
• It is essential to the creation of every contract that there must be a free and
genuine consent of the parties to the agreement.
• The consent of the parties is said to be free when they are of same mind on all
the material terms of contract.
• The parties are said to be of same mind when they agree about the subject –
matter in same sense & at same time.[Sec(13)]
• There is absence of free consent if the agreement is induced by coercion(by
force), undue influence, fraud, misrepresentation etc. [Sec(14)]
6. Lawful Object
• The object of the agreement must be lawful.
• In other words, the object must not be
(a) Illegal
(b) immoral, or
(c) opposed to public policy (Sec. 23).
• If the agreement suffers from any legal flaw, then it is not enforceable by law
7.Agreement not declared void
• The agreement must not have been expressly declared void (cancelled /
annulled) by any law in force in the country (Sec 24 to 30 and 56)
8.Certainty and possibility of performance
• The agreement must be certain and not vague or indefinite (Sec. 29).
• If it is vague and it’s not possible to ascertain its meaning, then it cannot be
enforceable by law.
• e.g., A agrees to sell to B “a hundred tons of oil”. There’s nothing whatever to show what
kind of oil was intended. The agreement is void for certainty.
• The terms of the agreement must also be such that they are capable of
performance.
• Agreement to do an act impossible in itself cannot be enforced by law (Sec.
56[1]).
• For example, A agrees with B to put life into B’s dead wife. The agreement is void as it is
impossible of performance.
9.Legal Formalities
• A contract may be made by words spoken or written.
• As regards to the legal effects, there is no difference between a contract in
writing and a contract made by word of mouth.
• It’s, however, in the interest of the parties that the contract should be in writing.
• When there is a statutory requirement that a contract should be made in writing
or in the presence of the witnesses or registered, the required statutory
formalities must be complied (Sec. 10 Para 2)
 Classification of Contracts
Classification according to validity - If one or more of contractual elements are
missing, the contract is voidable, void, illegal or unenforceable.
Voidable contract: An agreement which is enforceable by law at the option of
one or more of the parties but not at the option of the other or others is a
voidable contract.
• This happens when the essential element, free consent, is missing. That is, the consent of
a party to a contract is caused by coercion, undue influence, fraud etc.
Void agreement and void contract
• Void agreement: An agreement not enforceable by law is said to be void [Sec
2(g)].
• It does not create any legal rights or obligations.
• It is void ad initio i.e., from the very beginning e.g., an agreement with the minor or an
agreement without consideration
• Void Contract: A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable [Sec 2(f)].
• A contract when originally entered into, may be valid and binding in to the parties e.g., a
contract to import goods from a foreign country. When a war breaks out between the
countries, the contract becomes void
• Illegal agreement - An illegal agreement is one which transgresses some
rule of basic public policy or which is immoral.
• An illegal agreement is void but all void agreements or contracts not necessarily
illegal.
• e.g., B borrows Rs 5000 from A and enters into a contract with an unknown
person to import prohibited goods. A knows of the purpose of the loan. The
transaction between B and A is collateral to the main agreement. It is illegal since
the main agreement is illegal
• Unenforceable contract - An unenforceable contract is one which
cannot be enforced in a court of law because of some technical defect
such as absence of writing or remedy has been barred by lapse of time
etc
• Classification according to formation - A contract may be (a) made in writing
or by word of mouth or (b) inferred from the conduct of the parties or the
circumstances of the case.
• Express contract If the terms of a contract are expressly agreed upon
(whether by words spoken or written) at the time of the formation of the
contract, it is said to be an Express contract
• Implied contract An implied contract is one which is inferred from the acts or
conduct of the parties or course of the dealings between them. It is not the
results of any express promise but of their particular acts. It may also result
from continuing course of conduct of the parties.
• e.g., A fire broke in P’s farm and he called the upon fire brigade to put off the fire which the latter
did. P’s farm did not come under free service zone, which he believed to be so. Held, he was liable
to pay for the service rendered as the service was rendered on an implied promise to pay
• Quasi-contract - A quasi-contract is not a contract at all. A contract is
intentionally entered into by the parties. A quasi-contract, on the other hand,
is created by law.
• It resembles the contract in that of a legal obligation being imposed on a party who is
required to perform it.
• It rests on the ground of equity
• E.g., T, a tradesman leaves goods at C’s house by mistake. C treats the goods as his own. C is bound
to pay for the goods
 Classification according to performance - To the extent to which the
contracts have been performed, these may be classifies as follows:
Executed contracts
Executory contracts
• Executed contracts - ‘Executed’ means that which is done. An executed
contract is one in which both the parties have performed their
respective ‘obligations’
• Executory contracts – ‘Executory’ means that which remains to be
carried into effect.
• An executory is one in which both the parties have yet to perform their
obligation
Offer & Acceptance

• A person who’s making the offer is known as Offeror, Proposer or

Promisor.
• A person who to whom offer is being made is called Offeree or
Propose
• When the offeree accepts the offer, he’s called the Acceptor or
Promisee.
 How an offer is made?
• Express Offer-express words, spoken or written
• Implicit Offer-offer may also be implied from the conduct of the parties or
the circumstances of the case
• Specific Offer-made to a definite person
• General Offer-made to the world at large
• Case: Carlill v Carbolic Smoke Ball Company:- A company advertised in several
newspapers that a reward of € 1oo would be given to any person who contracted
influenza after using the smoke balls of the company according to its directions.
Accordingly one Mrs. Carlill used the smoke balls as per the directions, but
contracted the influenza.
• Held, she could recover the amount as by using the smoke balls she has accepted
the offer
 Essential Elements of a Valid Offer
• Offer must be such as in law is capable of being accepted and giving rise to legal
relationship
• E.g., social invitation
• Terms of offer must be definite, unambiguous and certain and not loose and
vague
• E.g., A offered to take a house on lease for 3 years at £ 285 per annum, if the house was
put thorough repair and drawing rooms handsomely decorated according to the present
style. Held: the offer was too vague to result in a contractual relation (Taylor v.
Portington)
• A tells to B, “ I will sell my car”. A owns 3 cars – offer is nor definite
• An offer may be distinguished from
i. A declaration of intention and an announcement – Eg. an auctioneer advertised in a
newspaper that a sale of office furniture would be held. A broker came from distant
place but all furniture was withdrawn. The broker sued for loss of time and money.
Held: declaration of intention to do a thing doesn’t create a binding of contract
ii. An invitation to make an offer or to do business-E.g., Display of goods by a
shopkeeper in his window, with prices marked on them, is not an offer but merely an
invitation to public
• Offer must be communicated:
• e.g., S offered a reward to anyone who returned his lost dog. F bought the dog to S
without having heard of the offer. Held: F was not entitled to the reward
• Offer must be made with the view to obtaining the assent – obtain approval
or permission of the other party addressed
• Offer should not contain a term the non-compliance of which may be
assumed to amount of acceptance
• Thus a man cannot say that if acceptance is not communicated by a certain time, the offer would
be considered as accepted
• A statement of price is not an offer
• e.g., three telegrams were exchanged between Harvey (H) and Fancey (F).
• “Will you sell us your Bumper Hall pen? Telegraph lowest cash price – answer paid” - H to F
• “Lowest price for Bumper Hall pen £900” F to H
• “We agree to buy , Bumper Hall Pen for the sum of £900 asked by you” H to F
• Held: there was no contract between Harvey and Fancey
• The first telegram asked two questions (i) the willingness of Fancey to sell and (ii) the
lowest price. Fancey replied only to 2nd question and no offer had been made by him
to sell. There could be a contract only of he had accepted Harvey’s last telegram
Classification of Offers
• General Offer – offer made to public in general
• Special Offer / Definite Offer – offer is made to a definite person e.g.,
offer to supply specified goods or services
• Cross Offer
• When two parties make an identical offer to each other, in ignorance of each other’s offer, the
offers are called as ‘cross offers’.
• Counter Offer - when an offer is accepted with some modification in the
terms of the offer
• Standing/ Open/ Continuing Offer
• when the goods or services are required, an order is placed with the person who submitted
tender and each time a distinct (different) contract is made.
 Lapse Of an Offer
• By communication of notice of revocation by the offeror at any time before
its acceptance is complete against him. [Sec 6(1)]
• e.g., at an auction sale, A makes the highest bid for B’s goods. He withdraws the bid
before the fall of the hammer. The offer has been revoked before its acceptance.
• By lapse of time -it is not accepted within the prescribed time. If however, no
time is prescribed it lapses by the expiry of a reasonable time [Sec 6(2)]
• By non-fulfillment by the offeree of a condition precedent to acceptance
• e.g., S, a seller, agrees to sell certain goods subject to the condition that B the buyer
pays the agreed price before a certain date. If B fails to pay the price by that date, the
offer stands revoked
• By death or insanity of the offeror, provided the offeree comes to know of it
before acceptance [Sec 6(4)]. If he accepts an offer in ignorance of the death
or insanity of the offeror, the acceptance is valid
• If a counter-offer is made to it: when an offer is accepted with some
modification in the terms of the offer or with some other condition not
forming part of the offer
• If an offer is not accepted according to the prescribed or usual mode,
provided the offeror gives notice to the offeree within a reasonable time
that the acceptance is not according to the prescribed or usual mode.
• If the offeror keeps quiet, he is deemed to have accepted the acceptance [Sec 7(2)]
• If the law is changed. An offer comes to an end if the law is changed so as
to make the contract contemplated by the offer illegal or incapable of
performance
• Rejection of the offer: an offeree may reject the offer. Rejection of the offer
may be express or implied
• Express rejection: by words -written or spoken
• Implied rejection: Rejection of the offer is implied by law –
• Where the offeree makes a counter-offer
• Where the offeree gives a conditional acceptance
ACCEPTANCE

• A contract emerges from the acceptance of an offer.

• Acceptance is the act of assenting by the offeree to an offer
• When the offeree signifies his assent to the offeror, the offer is said
to be accepted.
• An offer when accepted becomes a promise (Sec 2b).
• Who can accept?
• Acceptance of a particular offer – when an offer is made to a specific person,
it can be accepted by him alone. If it is accepted by any other persns, there is
not valid acceptance
• Acceptance of general offer – when an offer is made to world at large any
persons, any persons to whom the offer is made can accept it.
Essentials of valid Acceptance
• It must be absolute and unqualified
• An acceptance, in order to be binding, must be absolute and unqualified [Sec.
7(1)] in respect of all terms of the offer whether material or immaterial, major or
minor.
• It must be communicated to the offeror
• It must be according to the mode prescribed or usual and reasonable
mode
• It must be given with the reasonable time
• It cannot precede an offer
• Example: In a company, shares were allotted to a person who had not applied for
them. Subsequently when he applied for shares, he was unaware of the previous
allotment. The allotment of shares previous to the application is invalid
• It must show an intention on the part of the acceptor to fulfill terms of
promise
• It must be given to party or parties to whom the offer is made
• It must be given before the offer lapses or before the offer is withdrawn
• It cannot be implied from silence
• Example: A wrote to B “I offer you my car for Rs 50,000. If I don’t hear from you in
seven days, I shall assume that you accept”. B didn’t reply at all. There is no
contract.
 COMMINICATION OF OFFER & ACCEPTANCE AND REVOCATION
• Mode of communication
• Communication of offer [sec 4, Para 1]
• An offer is complete when it comes to the knowledge of the person to whom it is made.
• Communication of acceptance [Sec 4, Para 2]
• The communication of an acceptance is complete –
• as against the proposal when it is put into a course of transmission
to him, so as to be out of the power of the acceptance:
• as against the acceptor when it comes to the knowledge of the
proposer.
• Communication of revocation [Sec 4, Para 3]
• Revocation means “taking back”, “recalling” or “withdrawal”. It may be a revocation of offer or
acceptance
Time of revocation of offer and acceptance
• Time for revocation of proposal: (Sec 5, Para 1)
• A proposal may be revoked at any time before the communication of its acceptance
is complete as against the proposer, but not afterwards
• Time for revocation of acceptance: (Sec 5, Para 2)
• An acceptance may be revoked at any time before the communication of the
acceptance is completed as against the acceptor, but not afterwards.
• E.g., A proposes by a letter sent by post to sell his house to B. the letter is
posted on the 1st of the month. B accepts the proposal by a letter sent by
post on the 4th. The letter reaches A on the 6th.
• A may revoke his offer at any time before B posts his letter of acceptance (by 4th but
not afterwards)
• B may revoke his acceptance at any time before the letter of acceptance reaches A
(by 6th but not afterwards)
CONSIDERATION

• Consideration is one of the essential elements to support a contract.

Subject to certain exceptions, an agreement made without
consideration is void.
• Consideration is a technical term in the sense of quid pro quo i.e.,
something in return.
• When a party to an agreement promises to do something he must
get “something” in return. This “something” is defined as
consideration.
• In the words of Pollock “consideration is the price for which the promise
of the other is bought, and the promise thus given for value is
enforceable”
• Consideration is:
• An act i.e., doing of something. In this sense is in an affirmative form.
• An abstinence or forbearance i.e., abstaining or refraining from doing something.
In this sense, it is in negative form
• A return promise
 Essentials of a Valid Consideration
• It must move at the desire of promisor
• E.g., A saves B’s goods from fire without being asked to do so. A cannot demand payment for his
services
• It may move from the promisee or any other person
• Under Indian Law, consideration may move from the promisee or any other person i.e., even the
stranger
• It may be an act, abstinence or forbearance or a return promise
• e.g., A borrows from B Rs 100 at 20% pa but fails to pay the amount. When B is about to file a suit, A
agrees to pay a higher rate of interest. B, as a result, doesn’t file the suit. This forbearance on the
part of B to file a suit is sufficient consideration and B can enforce the promise by A to pay the
higher rate of interest
• It may be past, present or future:
• Past consideration
• E.g., A renders some service to B at latter’s desire. After a month, B promises to compensate A for
the services rendered to him. It’s past consideration. A can recover the promised amount.
• Present or Executed Consideration-When consideration is given simultaneously
with promise, at the time of the promise it is said to be present consideration
• Future or Executory consideration
• . E.g., D promises to deliver certain goods to P after a week: P promises to pay the price after a
fortnight. The promise of D is supported by the promise of P. consideration in this case is future or
executor.

• It need not be adequate

• “something in return” need not necessarily be equal in value to “something given”.
• It must be real and not illusionary
• Although, consideration need not be adequate, it must be real, competent and
of some value in the eyes of the law.
• Physical impossibility
• Legal impossibility
• Uncertain consideration
• Illusory consideration
• It must be something which the promisor is not already bound to do
• A promise to do what one is already bound to do, either by general law or under an existing
contract, is not a good consideration for a new promise
• It must not be illegal, immoral or opposed to public policy Sec 23
• The consideration given for an agreement must not be unlawful; the courts do not allow an
action on the agreement
“A CONTRACT WITHOUT CONSIDERATION IS
VOID” – EXCEPTIONS
• Sec 25 and Sec 185 deals with the exceptions to the
rule “an agreement made without consideration is
void”
• Love and affection [Sec 25(1)]
• Compensation for voluntary services [Sec 25(2)]
• Promise to pay a time-barred debt [Sec 25(3)]
• Completed gift [Expl 1 to Sec 25]
• Agency [Sec. 185]
Love and affection [Sec 25(1)]
E.g., F, for natural love and affection promises to give his son,
S , Rs 1000. F puts his promise to S in writing and registers it.
This is a contract
Compensation for voluntary services [Sec 25(2)]
e.g., A finds B’s purse and gives it to him. B promises to give A
Rs 50. This is a contract
Promise to pay a time-barred debt [Sec 25(3)]
e.g., D owes C Rs 1000 but the debt is battered by the
limitation act. D signs a return promise to pay C Rs 500 on
account of the debt. This is a contract
Completed gift [Explanation 1 to Sec 25]
The rule “No consideration, no contract does not apply to
completed gifts” e.g. X gave Y some property duly written &
registered as a gift.
Agency [Sec. 185]
No consideration is necessary to create an agency.
CAPACITY TO CONTRACT
• Sec 10 of the Indian Contract Act explains that an
agreement becomes a contract if it is made between
the parties who are competent to contract.
• Sec 11 explains that “every person is competent to
contract who is of the age of majority and who is of
sound mind, and is not disqualified from contracting
by any law to which he is subject.” Thus, Sec 11,
declares the following persons to be incompetent to
contract:
• Minors
• Persons of unsound mind
• Persons disqualified by any law to which they are
subject
 MINORS
• According to Sec 3 of the Indian Majority Act, 1875, a
minor is a person who has not completed 18 years of age.
• If a guardian of a minor’s person or property has been
appointed under the Guardians and Wards Act, 1890,
then age of 21 year is to be considered as the age of
majority.
• The rules governing minor’s agreements are based onto
fundamental rules
• The first rule is that the law protects minors against their own
inexperience and against the possible improper designs of those
more experienced
• The second rule is that, in pursuing the above object, the law
should not cause unnecessary hardship to persons who deal with
minor’s agreement
 Minor’s Agreements
• An agreement with or by a minor is void and inoperative ab initio
(from the beginning)
• He can be a promisee or a beneficiary
• His agreement cannot be ratified by him on attaining the age of
majority - consideration given during minority is no consideration
• If he has received any benefit under void agreement, he cannot be
asked to compensate or pay for it
• He can always plead minority - Minor cannot be sued either in
contract or in tort for fraud
• E.g., S, a minor, by fraudulently representing himself to be of full age,
induced L to lend him Rs 400. He refuses to pay it and L sued him for
money. Held, the contract was void and S was not liable to repay the
amount
• There can be no specific performance of the agreements entered
into by him as they are void ab initio
Minor’s Agreements (Cont..)
• He cannot enter into a contract of partnership
• He cannot be adjusted insolvent
• He is liable for ‘necessaries’ supplied or necessary
services rendered to him or anyone whom he is legally
bound to support
• He can be an agent - An agent is merely a connecting
link between his principle and a third party
• His parents or guardian are or is not liable for the
contract entered into by him
• A minor is liable in tort ( a civil wrong), but where tort
arises out of a contract a minor is not liable in tort as
an indirect way of enforcing an invalid contract
PERSONS OF UNSOUND MIND
• “A person is said to be 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 effects 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”
• Example: A patient in a lunatic asylum, who is at
intervals of sound mind, may contract during those
intervals.
 Contracts of persons of unsound mind:
• Lunatics: A lunatic is a person who is mentally
deranged due to some mental strain or other personal
experience.
• Idiots. An idiot is a person who has completely lost his
mental power.
• Drunken or intoxicated persons. A drunken or
intoxicated persons suffer from temporary incapacity to
contract i.e., at the time when he is so drunk or
intoxicated that he is incapable of forming a rational
judgment.
• Agreements entered into by persons of unsound mind
are void.
OTHER PERSONS (PERSONS DISQUALIFIED BY ANY LAW )
• Alien Enemies: An alien (the subject of a foreign state) is a
person who is not a subject of the republic of India. He may
be
• An alien friend or
• An alien enemy
• Contracts with an alien friend subject to certain restrictions
are valid.
• Contracts with an alien enemy may be studied under 2
heads, viz.,
• Contracts during the war
• Contracts made before the war
• During war he can neither have contract with an Indian
subject nor can sue in an Indian court or he can do so only
when he gets the license from the central government
• Foreign sovereigns and accredited representatives of
foreign states
• They can enter into contracts and enforce these contracts in
our courts. But they cannot be sued in our courts without the
prior sanction of the central government
• Corporations
• The contractual capacity of statutory corporations is limited by
the statute governing it. As regards a company registered
under the companies act, 1956, its contractual capacity is
regulated by its memorandum of association and the
companies act, 1956.
• Insolvents
• When a debtor is adjudged (considered) insolvent, he is
deprived of his power to deal in his property divisible among
his creditors.
• Convicts - A convict when undergoing imprisonment is incapable
of entering into a contract.
FREE CONSENT

• All agreements are contracts if they are made by the free

consent of the parties.
• Two or more persons are said to consent when they are
agree upon the same thing in the same sense (Sec 13)
Meaning of ‘Consent’ and ‘free consent’ (Sec 13 and Sec
14)
• Consent: It means acquiescence or act of assenting to an
offer. “Two or more persons are said to consent when they
agree upon the same thing in the same sense”
• Consent is said to be free when it is not caused by
• Coercion as defined in Sec 15 or
• Undue influence as defined in Sec 16 or
• Fraud as defined in Sec 17 or
• Misrepresentation as defined in Sec 18
• Mistake subject to the provisions of Sec 20, 21 and 22 (Sec 14)
• When there is no consent, there’s no contract
• Example: An illiterate woman executed a deed of gifting favor of her
nephew under the impression that she was executing a deed authorizing
her nephew to manage her lands. The evidence showed that the women
intended to execute such deed of gift, nor was the deed ever read or
explained to her. Held, the deed was void and inoperative.
• Effect of agreement without free consent:
• When consent to an agreement is caused by coercion, undue influence,
fraud or misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused (Sec 19-A)
• Example: A is forced to sign a promissory note at the point of pistol. A
knows what he is signing but his consent is not free. The contract in this
case is voidable at his option.
Figure 1 :Various Flaws in Consent

Flaw in
Consent

Undue
Coersion Misrepres
(Sec. 15)
Influence
entation
Fraud Mistake
(Sec 16)
Innocent or
Fradulent or
unintentional
Wilful(Sec 17)
(Sec 18)
 Mistake

Mistake of Mistake of
Law (Sec 21) Fact (Sec 20)

Of Both the Of only one

Of the foreign party
Of the country parties
country
( Bilateral (Unilateral
Mistakes) Mistake)

Possibility of Mistake as to
Subject matter the person
performing
regarding contracted with
con/t

1.Existence Mistake as to
Physical the nature of
2. Identity
Impossibility the contract
3.Quality

4.Quantity
Legal
5. Title
Impossibility
6.Price
1.COERCION
• When a person is compelled to enter into a contract by the use of
force by the other party or under a threat, ‘coercion’ is said to be
employed.
• Coercion is the committing, or threatening to commit, any act
forbidden by the Indian Penal Court 1860
• Coercion includes fear, physical compulsion and menaced goods
• E.g., A threatens to shoot B if he does not release him from a
debt which A owes to B. The agreement is entered under
coercion. Consent is said to be caused by coercion when it is
obtained by:
i. Committing or threatening to commit any act forbidden
by the Indian penal court, 1860
ii. Unlawful detaining or threatening to detain any property
• Effect of Coercion
• According to Sec 72, a person to whom money has been
paid, or anything delivered by mistake or under coercion
must repay or return it.
• Threat to commit suicide – Does it amount to coercion?
• A person held out a threat of committing suicide to his
wife and son if they did not execute a release in favor of
his brother in respect of certain properties. The wife and
son executed the release deed under the threat. Held, “the
threat of suicide amounted to coercion within Sec 15 and
the release deed was, therefore voidable
• Duress
• It is nearest equivalent of ‘Coercion’ (As per English Law).
Duress involves actual or threatened violence over the
person of another (or his wife, parent or child) with a view
to obtain consent to the agreement.
 2. UNDUE INFLUENCE
• Sec 16(1) defines ‘undue influence’ as follows:
• “A contract is said to be induced by ‘undue influence where the relations subsisting
(existing / surviving) between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that the position to obtain an unfair advantage
over the other”
• A person is deemed to be in a position to dominate the will of another –
• Where he holds a real or apparent authority over the other
• E.g. relation between doctor and patient or Master and servant
• Where he stands in a fiduciary relation (relation of trust and confidence) to the other.
• E.g., It’s suppose to exist between Father and son, solicitor and client, trustee and beneficiary and
promoter and company
• Where he makes a contract with a person whose mental capacity is temporarily to
permanently affected by reason of age, illness or mental or bodily distresses.
• Such a relation exist, for example, between a medical attendant and his patient Sec 16(2)
• Example: A having advanced money to his son, B, during his minority, obtains
upon B’s coming of age, by misuse of parental influence, a bond from B for a
greater amount than the sum due in respect of the advance. A employs undue
influence over B
 Difference Between Coercion And Undue
Influence

Coercion Undue Influence

The consent is given under the The consent is given by a
threat of an offence person who is so situated in a
relation to another that the
other person is in a position to
dominate his will.
Coercion is mainly of a Physical It is of moral character. It
character. It involves mostly use involves use of moral force or
of physical violent force mental pressure
There must an intension of Here the influencing party uses
causing any person to enter his position to obtain an unfair
into an agreement advantage over the other party
It involves a criminal act No criminal act is involved
Misrepresentation & Fraud
• A statement of fact which one party makes in the course
of negotiations with a view to inducing the other party to
enter into a contract is known as “representation”
• A representation, when wrongly made, either innocently
or intentionally, is a “misrepresentation”. [ this is
Misrepresentation]
• Misrepresentation may be –
i. a innocent or unintentional misrepresentation
ii. an intentional, deliberate or willful
misrepresentation without an intent to deceive or
defraud the other party.[ this is called Fraud]
3. Misrepresentation
• Misrepresentation is a false statement which the
person making it honestly believes to be true or which
he does not know to be false.
• Example: A, while selling his mare to B, tells him that
the mare is thoroughly sound.
• A genuinely believes the mare to be sound although
he has no sufficient ground for the belief.
• Later on, B finds the mare to be unsound. The
representation made by A is a Misrepresentation
 Requirements of misrepresentation
• It must be a representation of a material fact. Mere expression of
opinion does not amount to misrepresentation even if it turns out
to be wrong.
• It must be made before the conclusion of the contract with a view
to inducing the other party to enter into the contract.
• It must be made with the intention that it should be acted upon by
the person to whom it is addressed.
• It must actually have been acted upon and must have induced the
contract.
• It must be wrong but the person who made it honestly believed it
to be true
• It must be made without any intention to deceive the other party
• It need not be made directly to the plaintiff. A wrong statement of
facts made to the third person with the intention of communicating
it to the plaintiff, also amounts to misrepresentation
 4. Fraud
• According to Sec 17, fraud means and includes any of the
following acts committed by a party to a contract or with his
connivance (intentional active or passive acquiescence), or by
his agent with intent to deceive or induce a person to enter
into a contract:
• The suggestion that a fact is true when it is not true and the
person making the suggestion does not believe it to be true
• The active concealment of the fact by a person having
knowledge or belief of the fact
• A promise made without any intention of performing it
• Any other act fitted to deceive
• Any such act or omission as the law specially declares to be
fraudulent
• Example: A sells, by auction, to B a horse which A knows to
be unsound. A says nothing to B about horse’s
unsoundness. This is a fraud in A
Essential elements of Fraud
• There must be a representation or assertion and it must be
false:
• Without a representation or assertion, there can be no fraud
except in cases where silence may itself amount to fraud or
where there is an effective concealment of fact
• The representation must relate to a material fact which exists
now or existed in the past:
• A mere opinion commendatory or puffing expression or
heresy or flourishing description, is not regarded as
representation of fact
• The representation must have been made before the
conclusion of the contract with the intention of inducing the
other party to act upon it.
• Not only must the representation be false and made with
the knowledge of its falsity, but it must also be made with an
intent to deceive the other party
• The representation or statement must have been made with
knowledge of its falsity or without belief in its truth or recklessly, not
caring whether it is true or false.
• Further, the representation amounting to fraud must have been made
either by a party to the contract or with his connivance (involvement) or by
his agent
• The other party must have been induced to act upon the
representation or assertion
• A mere falsehood is not enough to give a right of action. It must have
induced the other party to act upon it. The other party cannot shut his eye
to the obvious defects or news which he could have easily ascertained by
reasonable investigation or inspection
• The other party must have relied upon the representation and must
have been deceived
• A mere attempt to deceit by one party is not fraud unless the other party is
actually deceived. It’s a representation which does not come to the notice
of a party, it cannot be said to have misled the party because it doesn’t lead
that party at all
• The other party, acting on the assertion or representation, must have
subsequently suffered some loss.
• It is a common rule of law “ that there is no fraud without damage” as such
“fraud without damage” or “ damage without fraud” doesn’t give rise to an
Difference between Fraud & Misrepresentation
Basis Misrepresentation Fraud
Intention There is a mis-statement or The intension is to deceive the
concealment of a material fact or other party. It is deliberate or
facts essential to the contract Willful
without any intention to deceive the
other party. It’s innocent
Belief The person making the suggestion He does not believe it to be
believe it to be true true
Rescission and The aggrieved party can rescind The remedy available to the
Damages (withdraw) the contract or sue for aggrieved party is not limited
restitution / compensation (Sec 64). to rescission alone. He can also
There can be no suit for damages claim damages

Discovery of The aggrieved party cannot avoid Where there’s active

Truth the contract if it had the means to concealment the contract is
discover the truth with ordinary voidable even though the
diligence aggrieved party has the means
of discovering the truth with
ordinary diligence.
 MISTAKE
• Mistake may be defined as an erroneous belief about something.
It may be a mistake of law or a mistake of fact.
• Mistake of Law: Mistake of law may be –
1. Mistake of law of the country
2. Mistake of law of a foreign country.
• Mistake of law of the country: Ignorantia non excusat i.e.,
ignorance of law is no excuse, is a well-settled rule of law.
• A party cannot allowed to get any relief on the ground that it
had done a particular act in ignorance of law. A mistake of law
is, therefore, no excuse.
• E.g., A and B enter in to a contract on the erroneous belief that a
particular debt is barred by the Indian Law of Limitation. This
contract is not voidable
• Mistake of law of foreign country: Such a mistake is treated as
mistake of fact and the agreement is , in such a case is void (Sec
21)
Mistake of Fact - Mistake of fact may be-Bilateral or
Unilateral
• Bilateral Mistake
• Where both the parties to an agreement are under a mistake as to a
matter of fact essential to the agreement, there’s a bilateral mistake.
In such a case, the agreement is void (Sec 20).
• The following 2 conditions have to be fulfilled for the application of sec
20:
1. Mistake must be mutual i.e., both the parties should
misunderstand each other and should be at cross-purposes
• e.g., A agreed to purchase B’s motor car which was lying in B’s
garage. Unknown to either party, the car and garage were
completely destroyed by fire a day earlier. Agreement is void
(cancelled)
2. The mistake must relate to a matter of fact essential to the
agreement. As to what facts are essential in an agreement will
depend upon the nature of the promise in each case.
• e.g., A buys an old painting for Rs 5000 thinking that it is an
excellent piece of art. Actually the painting is a new one and is
worth only Rs 500. A cannot avoid the contract on the ground of
mistake
The various cases which fall under bilateral mistake are as follows-
1.Mistake as to the subject-matter. Where both the parties to an
agreement are working under a mistake relating to the subject-
matter, the agreement is void. It covers the following cases:
a. Mistake as to the existence of the subject-matter. If both the
parties believe the subject-matter of the contract to be in
existence, which in the fact at the time of the contract is non-
existent, the contract is void. E.g., A agrees to buy from B, a
certain horse. It turns out that the horse was dead at the
time of the bargain, though neither party was aware of the
fact. The agreement is void.
b. Mistake as to the identity of the subject-matter. It usually
arises where one party intends to deal in one thing and the
other intends to deal in another.
c. Mistake as to the quality of the subject-matter. If the
subject-matter is something essentially different from what
the parties thought it to be the agreement is void
d. Mistake as to the quantity of the subject-matter. If both the
parties are working under a mistake as to the quantity of the
subject-matter, the agreement is void
 e. Mistake as to the title of the subject-matter. If the seller is
selling a thing which he is not entitled to sell and both the
parties are acting under a mistake, the agreement is void
f. Mistake as to the price of the subject-matter. If there’s a
mutual mistake as to the price of the subject-matter, the
agreement is void.
2. Mistake as to the possibility of performing the contract -
Consent is nullified if both the parties believe that an agreement
is capable of being performed when in fact this is not the case.
The agreement, in such a case, is void on the ground of
impossibility
• Impossibility may be -
• Physical impossibility: e.g., The contract for the hire of a room for
witnessing the coronation procession of Edward VII was held to
be void because, unknown to the parties, the procession has
already been cancelled
• Legal Impossibility: A contract is void if it provides that
something shall be done which cannot as a matter of law, being
done.
• Unilateral Mistake - Where only one of the parties is
under a mistake as to a matter of fact the contract is not
voidable (Sec 22).
• E.g., A offers to sell his house to B for an intended sum of Rs
44,000. By mistake he makes an offer in writing of Rs 40,000. He
cannot plead mistake as a defense (Protection / Security)
• There are however two exceptions to this rule :
• Mistake as to the identity of the person contracted with: If A
intends to enter into a contract with B, C cannot give himself any
right in respect of the contract by accepting the offer. In such a
case, the contract is void.
• Mistake as to the nature of contract: where a person is made to
enter into a contract through the judgment of another but
through no fault of his own, there is a mistake as to the nature of
the contract, and the contract id void
 Legality of object
• If the object of an agreement is the performance of an
unlawful act, the agreement is unenforceable.
• Sec 23 declares that the object or the consideration of
an agreement is not lawful in certain cases.
• The word ‘object’ means purpose or design.
• In some cases, consideration for an agreement may be
lawful but the purpose for which the agreement is
entered into may be unlawful, in such cases the
agreement is void.
• Both object and consideration must be lawful, otherwise
the agreement is void.
When consideration or Object is Unlawful (Sec. 23)
• If it’s forbidden by Law
• Object/Consideration is forbidden by law
• It’s punishable by the criminal law of the country
• It’s prohibited by special legislations or regulations
made my the competent authority
• E.g., A promises to obtain for B an employment in the
public service and B promises to pay Rs 1000 to A.
The agreement is void as consideration is unlawful
• If it’s of such a nature that, if permitted, it would defeat
the provisions of any law
• Though directly it’s not forbidden by law, it would
defeat the provision of any law
• E.g., A was licensed under an Excise Act to run a
liquor shop. The Act forbade the sale/transfer/sub-
lease/creation of partnership to run the shop. A took
B into a partnership. Held, the agreement was void.
• If it’s fraudulent
• If the purpose is fraudulent
• E.g., A, B & C enter into an agreement to sell bogus
plots of land in Delhi. The agreement is void as it is
fraudulent and thereby unlawful.
• If it involves or implies injury to the person or property of
another
• ‘Injury’ means ‘wrong’, ‘harm’, or ‘damage’, to a person
or property
• E.g., A promises to pay Rs. 500 to B if B beats C. It
involves injury to C, hence it is unlawful and void.
• If the court regards it as immoral
• An agreement, the consideration or object is immoral is
unlawful
• A agrees to give his daughter on hire to B for
concubinage. The agreement is void because it is
immoral, though the letting may not be punishable
under the Indian Penal Code.
• Where the court regards it as opposed to public policy
• Agreements opposed to public policy
 Agreement Opposed To Public Policy
1. Agreement of trading with enemy - An agreement made with an
alien enemy in time of war is illegal on the ground of public policy
• Contracts entered before war is either suspended or dissolved
depending on the intention of the parties
2. Agreements to commit crime - When the consideration in an
agreement is to commit a crime, agreement is opposed to public
policy
• E.g., A promises to indemnify B in consideration of his beating C.
The agreement is opposed to public policy
3. Agreements which interfere with administration of justice
a. Interference with the courts of Justice - An agreement which
obstructs the ordinary process of justice is unlawful. Thus an
agreement for using improper influence with the judge or officers
of justice is unlawful
b. Stifling Prosecution - It’s in public interest that if a person
has committed a crime, he must be prosecuted and punished.
Hence an agreement not to prosecute an offender is an
agreement for stifling prosecutions & is unlawful
c. Maintenance & Champerty
• ‘Maintenance’ is an agreement to give assistance, financial or
otherwise, to another to enable him to bring or defend legal
proceedings when the person giving assistance has got no
legal interest on his own in the subject-matter
• E.g., A offers to pay B Rs 2000 if B will sue C (A’s motive is to annoy
C)
• Champerty is an agreement whereby one party is to assist
another to bring an action for recovering money or property
and is to share in the proceeds of the action
• E.g., A agrees to pay the expenses to B, if B sues C; B agrees to
give A one-half of any proceeds received by B as a result of the
said suit
4. Agreement is restraint to legal proceedings
• Agreements restricting enforcement of rights
• Agreements curtailing period of limitation – which has been
prescribed by law of limitation
5. Trafficking in public offices and titles
• Agreements for the sale or transfer of public offices and titles
6. Agreements tending to create interest opposed to duty
• If a person enters into an agreement whereby he’s bound to
do something which is against his public or professional duty
7. Agreement is restraint of parental rights
• A father, in the absence of a mother, a legal guardian and
cannot be bartered away by any agreement
8. Agreement is restricting personal liberty
• Agreements which unduly restrict the personal freedom of
the parties to it are void as being against public policy
9. Agreement is restraint of marriage
• Every agreement in restraint of marriage of any person other
than a minor, is void. This is because the law regards marriage
and married status as the right every individual
10. Marriage brokerage or brokerage agreements
• A marriage contact whereby one or more persons receives
money or money’s worth in consideration of marriage
11. Agreements interfering with marital duties
• An agreement which interferes with the performance of marital
duties is void e.g., a promise by a married person to marry after
death of a spouse / an agreement in contemplation of divorce
etc
12. Agreements to defraud creditors or revenue authorities
• An agreement ‘s object is to defraud the creditors or revenue
authorities is not enforceable
13. Agreements in restraint of Trade
• An agreement which interferes with the liberty of a person to
engage himself in any lawful trade, profession or vocation
Unlawful and illegal agreements
• An unlawful agreement is one which, like void agreement,
is not enforceable by law. It is void ab initio and is
destitute of legal effects altogether.
• It affects only the immediate parties and has no further
consequences.
• An illegal agreement, on the other hand, is not only void
as between immediate parties but has this further effect
that the collateral transactions to it also become tainted
with illegality
• E.g., L lends Rs. 5,000 to B to help him to purchase some
prohibited goods from T, an alien enemy. If B enters into an
agreement with T, the agreement will be illegal and the
agreement between B and L shall also become illegal. L cannot
recover the amount. (He can recover the amount if he didn’t
know the purpose of the loan)
Special Contracts
•Agency
•Bailment
•Pledge
•Indemnity
•Guarantee