To form an agreement, the following ingredients are required:

• Parties: There need to be two or more parties to form an agreement.

• Offer/ Proposal: When a person signifies to another his willingness of doing or

omitting to do something with a view to obtain other’s assent. [Section 2(a)]

• Acceptance: When the person to whom the proposal is made signifies his assent for the
same thing in the same sense as proposed by the offeror. [Section 2(b)]

• Promise: When a proposal is accepted, it becomes a promise. [Section 2(b)]

• Consideration: It is the price for the promise. It is the return one gets for his act or
omission. [Section 2(d)]
An agreement is, therefore, a promise or set of promises forming consideration for all the
parties. [Section 2(e)]

Agreement = Promise or set of promises (offer + acceptance) + Consideration (for all the parties)

If a 7-year-old boy is buying an ice-cream from a shopkeeper and giving Rs. 10 in return, it becomes
an agreement. This is because the boy offers to buy ice-cream and the shopkeeper accepts the offer
which makes it a promise. The consideration for both was ice-cream and money respectively.

Contract (Section 2(h))

A contract is a lawful agreement. An agreement enforceable by law is a contract.

Contract = Agreement + Legal enforceability

Or

Contract = Legally enforceable Agreement

A type of agreement which is enforceable by law is a contract (Section 2(h) of the ICA).
Enforceable by law means that, if somebody is aggrieved then he may approach the court for
remedies.

Agreement + Enforceable by Law = Contract

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When an offer is made with the intention to create a legal obligation it becomes an offer for entering
into a contract. Thus an agreement becomes a contract when there is free consent of the parties,
capacity of the parties to contract, lawful consideration and lawful object or subject matter (Section
10 of the ICA).

So, an agreement is a contract when:

1. Free consent of the parties: When there is absence of Coercion (Section 15), Undue
Influence (Section 16), Fraud (Section 17), Misrepresentation (Section 18) and Mistake
(Section 20, 21, 22), the consent is said to be free.

2. Capacity of the parties to contract: Section 11 and 12 lay down that the competent
parties are persons who have attained majority

3. Lawful consideration and Lawful object: Section 23 lays down that the consideration
and object is lawful unless it is forbidden by law or it defeats provisions of any law or
is fraudulent or involves injury to person or property or is violative of public health,
morality, peace and order.

Offer/proposal (Section 2(a))

• The entire process of entering into a contract begins with the proposal or an offer made
by one party to another. The proposal must be accepted to enter into an agreement.

Features of a valid offer

The person making the offer/proposal is referred to as the “promiser” or the “offeror”. And the
person who accepts an offer is referred to as “promisee” or the “acceptor”.

• The offeror must express his willingness to do or abstain from doing an act.

• An offer can either be positive or negative. It can be a promise to do some act, and can
also be a promise to abstain from doing any act/service. Both are valid offers.

Acceptance (Section 2(b))

If the offer is accepted unconditionally by the offeree to whom the request is made, it will amount
to acceptance. When the offer is accepted it becomes a promise.

Consideration (Section 2(d))

• Must move at the desire of the promisor- Section 2d of the Indian Contract Act, 1872,
clearly mentions that the consideration should be at the desire of the promisor if the
consideration is made at the will of the third person or is not according to the promisor
then it is not a good consideration.

• Can move from the promisee or another person- In Indian law as long as there is
consideration it is immaterial as to who has completed it.

• Can be past, present or future:

PAST- When the consideration is given before the promise was made. For example- A saves B at
the latter’s desire. B after a month promises to pay A. the act of A will amount to past consideration
for the payment made by B.

PRESENT- When the consideration is given simultaneously to the promise made, then this is
present consideration or executed consideration. For example- cash sales.

FUTURE- When the consideration of the promise made is to be passed at a future date then that is
called future or executory consideration. For example- A promises to pay B, when the latter will
fetch newspaper for him.

Consideration need not be adequate- It is not necessary that the consideration is equal or adequate
for the promise made. However, it is mandatory that the consideration should be something in
which the law attaches some value.
Section 4. Communication when complete.—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.

Offer- Communication of offer is complete when it comes to the knowledge of the person to
whom the offer is made. So the first step for a valid contract is offer should be communicated
properly to the person to whom such offer is to be made.

Acceptance- Can be done in any manner. But acceptance can never be silent. Also acceptance
can never be conditional. If it is conditional then it becomes counter offer. Example- A asked
B that “will he purchase his car for 10lac rupees, B says that Yes I agree but I will purchase it
for 9 lac rupees” . This will not be considered as acceptance but this will be counter offer.

Revocation- Termination of contract is called as revocation. Either party to the contract can
revoke the offer or acceptance.

Offer – When offer comes into the knowledge of other person it is considered to be completed.

An offer cannot be accepted unless and until it has been brought to the knowledge of the person
to whom it is made. The landmark case on this principle is Lalman Shukla v Gauri Datt .
Defendant's nephew ran away from home. He sent his servant in search of the boy. When the
servant had left, the defendant announced a reward to pay Rs 501 to anybody discovering the
boy. The servant came to know of this offer only when he had already traced the missing child.
He, however, brought an action to recover the reward. But his action failed. The court held that
a suit can be brought only if there was a contract. In order to constitute a contract, there must
be an acceptance of an offer and there can be no acceptance unless there is knowledge of the
offer."
The principle has been held in R v Clarke where it was held that even if the person had once
known of the offer but had completely forgotten about it at the time of performing it. An offer
of £100 to any person who would swim a hundred yards in the harbour on the first day of the
year cannot be satisfied by a person who was accidentally thrown overboard on that date and
swam the distance simply to save his life, without any thought of the offer.

Williams v. Carwardine (1833), the plaintiff who knew that one reward had been announced
to be given to anyone who gave information about some murderers, gave the necessary
information in order ‘to ease her conscience’ and not intending to claim the reward. But later
on she brought an action to claim the reward. It was held that since the acceptance had been
made with a knowledge of the offer, there was a valid contract and, therefore, she was entitled
to claim the reward.

INTENTION TO CONTRACT - To create a contract there must be a common intention of

the parties to enter into legal obligations.

The case of Balfour v Balfour – Husband and his wife were enjoying leave in England. When
the husband was due to return to Ceylon, where he was employed, his wife was advised, by
reason of her health, to remain in England. The defendant agreed to send her an amount of £30
a month for her maintenance. He did send the amount for some time, but afterwards differences
arose which resulted in their separation and the husband stopped sending allowances. The
wife's action to recover the amount was dismissed.

Where two parties agree to take a walk together, or where you get invited to someone’s house
for dinner or lunch. They are not contracts because parties did not intend that they shall be
bound by legal consequences."

Jones v Padavatton- A divorced woman was living in Washington with her son where she
was employed as an assistant accountant in the Indian Embassy. Her mother was in Trinidad
and wished her daughter to come live with her. She was particularly attached to the grandson.
The mother persuaded her daughter, much against her will, to leave service, to take legal
education in England and finally to come back to Trinidad as a practising lawyer. The mother
undertook to pay the expenses. Subsequently, the mother bought a house in England, part of
which was allowed to the daughter rest was rented out. For five long years the daughter could
not complete her education. She also remarried in the meantime. Differences arose between
them and the mother stopped payments and also asked the daughter to leave the house. The
court held that promises made within family arrangements are not intended to be rigid, binding
agreements."

The daughter acting on her mother's promise left her job and gone to another country for
education. The daughter could not have expected her mother to support her, her son and
husband in perpetuity.

Rose & Frank Co VJ.R. Crompton & Bros Ltd- An exhaustive agreement was drawn
between one American and two English firms for their dealings in paper tissues. The agreement
contained the following clause: "This arrangement is not entered into as a formal legal
agreement and shall not be subject to a legal jurisdiction in the law courts either in the US or
in England." The agreement was terminated by one of the parties contrary to its terms. The
American firm brought an action for the breach. It was held that the document did not constitute
a binding contract as there was no intention to affect legal relations. Intention not to create a
legal relationship was expressly mentioned in the contract.

However, there is nothing that prevents persons in close relationship from entering into a legal
relationship. In Merrit v. Merrit (1970) the husband and wife were joint owners of a house
which was subject to mortgage to a building society. Husband went to live with another woman
and by signing a note agreed to transfer the house property to wife if she cleared all outstanding
amount with respect to the house. Here, it was held that there was a clear intention to create a
legal relationship.

Similar was the case of Mc Gregor v. Mc Gregor (1888).

Conclusion – Thus, it is the intention that is material. The intention can be seen from a variety
of facts. But generally in case of social relationships (particularly close relationships), such
intention is presumed to be lacking unless the contrary is proved.

Tests (1) Intention important to create legal relationship.

(2) Objective test - Facts to be seen.

(3) Intention at the time of the agreement is important.

Cross Offers- A contract can arise only if a party has knowledge of an offer from the other
party, and has accepted the same e.g. A, through a letter, offers to B to sell his radio to B for
Rs. 500/-; B receives the letter and validly accepts the offer. A valid contract results.

However, if A makes the offer through a letter on 1st January and B also makes the same offer
on the same date, there will be no binding contract as neither had the knowledge of the offer
from the other party and as a result there was no valid acceptance. Such offers are called cross
offers.

In Tinn v. Hoffmann, A wrote a letter to B indicating his willingness to sell 800 tons of iron
at 69 sq. per ton. On the same day, B wrote a letter to A offering to buy 800 tons of iron at 69
sq. per ton. The two letters crossed each other in post. Later on, B sued A for non performance
of contract. It was held that the two offers were only cross offers and there was no binding
contract.

A cross offer is different from a counter offer and a general offer.

Invitation to Offer- Sometimes a person may not make an offer but make some statement or
give some information with a view to invite offers on the basis of that information or statement.
e.g. Government tenders, a catalogue of goods sent to a customer by a shopkeeper etc. Such
cases are an invitation to make an offer e.g. A invites persons to an auction. This is an invitation
to offer. The bids made by the persons in the auction are an offer. This offer is accepted only
by the fall of the hammer.

The auctioneer is not bound to accept a bid. Similarly, a bidder can withdraw his bid (offer)
before the fall of the hammer.

An auctioneer can even cancel the auction sale announced by him. In Harris v. Nickerson
(1873), the defendant advertised an auction sale and the plaintiff travelled a long distance to
the venue of auction. There he found that the auction had been cancelled. He brought an action
against the auctioneer to recover the travel expenses. It was held that advertisement of the
auction was a mere invitation to offer and not an offer and hence there was no binding contract.
Thus, the defendant was not liable.

Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. (1952) The
defendants were having a business in sale of drugs. Medicines were displayed on the shelves
and their prices were also indicated. The question was whether the display of the goods with
their prices amounted to an offer? The mere exposure of goods for sale by a shopkeeper
indicates to the public that he is willing to offer but does not amount to an offer to sell. It was
further held that the display of goods was an invitation to offer and when customer takes the
goods to the counter, that amounted to an offer on the part of the customer. It is only when the
shopkeeper accepted the offer (i.e. agreed to sell) that the contract was complete. However, the
shopkeeper was free to reject the offer.

In Harvey v. Facey, the plaintiffs interested in purchasing a plot of land called Bumper Hall
Pen, owned by the defendants, sent a telegram to the defendant: “Will you sell us B.H.P.?
Telegraph the lowest cash price.” Reply of the defendant was: “Lowest price for B.H.P. is 900
pounds.” The plaintiff again sent a telegram: “We agree to buy B.H.P. for 900 pounds, asked
by you. Please send us your title deeds.” The question was whether the telegram of the
defendants amounted to an offer. Privy Council held that the defendants had replied to only the
second question of the plaintiff’s. It amounted only to an invitation to Offer.

GENERAL OFFERS- A general offer is an offer to the public at large and anyone who
performs the conditions of the offer is considered to have accepted the offer

e.g. A makes an offer that he would reward any person who finds his lost child. This is general
offer. Anyone who finds the child is considered to have accepted the offer and there arises a
valid contract. There is no need to communicate the acceptance of such an offer. The offeror
can be informed after the conditions have been fulfilled.

As per Section 8, ICA, “Performance of the conditions of a proposal is an acceptance of the

proposal. Though the offer is made to the public at large, the contract is concluded only with
the person or persons who completes the terms of the offer.

It was suggested in the old case of Weeks v Tybald that an offer must be made to a definite
person and cannot be made to public at large. The court said that in general offers it is not clear
as to whom the offer is made.

This was, however, soon over ruled. The modern position is that an offer may be made to the
world at large. But the contract is not made with all the world. Contract is made only with that
person who comes forward and performs the conditions of the proposal. Another case is Carlill
v Carbolic Smoke Ball Co (Smoke Ball case).
A company offered by advertisement to pay £ 100 to anyone "who catches flu, colds or any
disease after having used the ball according to printed directions". It was added that "£ 1000 is
deposited with the Alliance Bank showing our sincerity in the matter". The plaintiff used the
smoke balls according to the directions but she nevertheless subsequently suffered from
influenza. She was held entitled to recover the promised reward. It was contended by the
defendants that there was no intention to enter into legal relations as it was simply a casual
advertisement and that the offer was not made to any one person in particular and that the
plaintiff had not sent her acceptance to the offer. The court held that the statement made by
the company in the advertisement says that £ 1000 is lodged at the bank for the purpose.
Therefore, it cannot be said that the statement that £100 would be paid was intended to be a
mere joke." The court also held that offer can be made to public at large and anybody who
comes forward and performs the condition accepts the same. When the offer is made to the
world, the contract is made with that person who comes forward and perform the condition.

Proposals acceptable by conduct.

Acceptance-

A contract is created only after an offer is accepted. Before the acceptance, neither party is bound . After
the offer has been accepted it becomes a promise.

ESSENTIALS OF A VALID ACCEPTANCE

1) Acceptance should be communicated by the offeree to the offeror (Sections 3 and 4 of Indian Contract
Act).

2) Acceptance should be absolute and unqualified (Section 7 of Indian Contract Act).

3) Acceptance should be made in some usual and reasonable manner. (Section 7 of Indian Contract
Act).

4) Acceptance should be made while the offer is still subsisting.

COMMUNICATION OF PROPOSAL AND ACCEPTANCE

Section 2(b) of Indian Contract Act says that the proposal is accepted only when the person to whom
the proposal is made gives his assent to the proposal and gives his acceptance.

Section 3 of Indian Contract Act says that the communication of proposal/acceptance of proposals is
done by an act or omission by the party proposing, as he intends to communicate his offer.

About Communication of Acceptance: - The principle is that there should be some act of acceptance.
Acceptance can be in the form of express words (written or spoken) or may be signified through conduct
by which he intends to communicate such proposal/acceptance of proposals.

Communication by the offeree to the offeror only: - Acceptance must be communicated to the
offeror himself. A communication to any other will not be considered as valid acceptance.

Felthouse v. Bindley – Acceptance of an offer should be communicated to the offerer himself or to the
person he has authorised to receive the acceptance. A communication to a stranger will not do. Also
The offeror cannot say that if no answer is received within a certain time, the same shall be considered
to have been accepted.

Communication must be made by the offeree or his authorized agent: - Only offeree(person to
whom offer was made) can accept the offer. If an unauthorized person makes the communication it does
not result in a contract.
Powell v. Lee – There must be notice of acceptance from the person to whom offer was made.
Information by an unauthorized agent is insufficient. Communication of acceptance to a wrong person
is no acceptance. The offeror (person who gave the offer) becomes bound as soon as the letter of
acceptance is posted to him which means as soon the letter is posted and is in transmission, the offeror
gets bound in the contract.

Karan Singh v. The Collector Chattarpur - The offeror becomes bound in the contract immediately
as soon as the letter of acceptance is posted to him and it makes no difference that the letter is delayed
in transits or it is even lost in the post and the offeror never receives it. A complete contract arises on
the date when the letter of acceptance is posted or in due course. The only condition is that the letter
should be correctly addressed.

Household Fire and Carriage Accident Insurance Co. v. Grant – Letter lost in post/never received.
Held that the offeror is bound by the contract.

Dunlop v. Higgins – Due to the frosty weather the letter of acceptance was delayed. Held that the
offeror is bound by the contract.

Adams v. Lindsell – A complete contract arises on the date when the letter of acceptance is posted in
due course.

Entores Limited v. Miles Far East Corporation –Telex is a method of instant communication and “the
rule about instant communications between the parties is different from the rule about the post. The
contract is only complete when the acceptance is received by the offeror; and the contract is made at
the place where the acceptance is received.” Where, however, the proposal and acceptance are made by
letters, the contract is made at the place where the letter of acceptance is posted.

Bhagwandas Kedia v. Girdhair Lal – Telephone –When the words of acceptance are spoken into the
telephone, they are put into the course of transmission to the offeror so as to be beyond the power of
the acceptor. The acceptor cannot recall them. The communication being instant, the contract
immediately arises.

ACCEPTANCE SHOULD BE ABSOLUTE AND UNQUALIFIED –

Acceptance lapses by rejection or Counter-offer. An acceptance with a variation is no acceptance.

Hyde v. Wrench- By conditional acceptance or Counter-offer the original offer is deemed to be

rejected. Once the original offer is destroyed by counter offer it is a dead offer and cannot be accepted
unless renewed.
Badri Pd. v. State of MP- Acceptance should be of the whole of the offer. The offeree cannot accept a
part of its terms, which are favorable to him and reject the rest.

PROVISIONAL ACCEPTANCE- An acceptance is sometimes made subject to final approval; a

provisional acceptance of this kind does not ordinarily bind either party until the final approval is given.
When a provisional acceptance is subsequently confirmed, the fact would be notified to the offeror for
it is only then that he becomes finally bound.

An acceptance is sometimes made subject to final approval. A provisional acceptance does not bind
either party until the final approval is given.

Union of India v S. Narain - Where the conditions of auction sale of liquor shop expressly provide that
the acceptance of the bid shall be subject to the confirmation of the Chief Commissioner, there will be
no complete contract till the acceptance is finally given after the approval. When a provisional
acceptance is confirmed, the fact should be notified to the offeror, for it is only then that he becomes
finally bound. An acceptance is not complete till communicated.

MODE OF ACCEPTANCE - Usual/reasonable manner - In the manner prescribed or indicated by

the offeror. An acceptance given in any other manner will not be effective where the offeror clearly
mentions that the acceptance shall be made in the prescribed manner.

Elliasion v. Henshaw – A offered to B to send the acceptance by wagon, B sent it by post thinking it
would reach faster, the post arrived after the time of the wagon. A was held not bound by the acceptance.

WHILE OFFER SUBSISTING Acceptance should be made while offer is subsisting and not when it
has been withdrawn/lapsed/rejected.

Revocation- The Contract Act gives both proposer and acceptor the option of revoking their
communication, before a completed contract comes into existence. Thus, revocation is an option given
to the parties to stop the contract from coming into existence.

Revocation of Proposal Section 6 lays down the circumstances when an offer lapses i.e. modes of
revocation.

A proposal is revoked under the following circumstances:

Notice of revocation Section 5 provides that - a proposal can be revoked at any time before the
communication of its acceptance is complete as against proposer, but not afterwards”. As against the
proposer, the communication of acceptance is complete “when it is put in a course of transmission to
him, so as to be out of the power of acceptor” (Section 4). Thus, for the communication of revocation
to be effective, it must reach the acceptor before he mails his acceptance and makes it out of his power.
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Illustration: A proposes by letter sent by post, to sell his house to B. B accepts the proposal by a letter
sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of
acceptance, but not afterwards.

In Henthorn v. Fraser (1892) Section 5 provides that "a proposal may be revoked at any time before
the communication of its acceptance is complete as against the proposer, but not afterwards". A
revocation is completed only when it is brought to the mind of the person to whom the offer is made.

Alfred Schonlank v. M. Chetti (1892) 2 Mad LJ 57,

Notice of revocation is completed when it reaches the acceptor’s address. In the Brimmes (1974) 3 All
ER 88, a notice of revocation was sent by telex and was received by the plaintiff’s telex machine during
normal business hours, but the plaintiff read the message the next day. He was, however, held bound
by the notice when his machine received it.

Under the Indian law, it is necessary that the communication of revocation should be from the offeror
or from his duly authorised agent. However, under the English law, it is enough if the acceptor knows
from a stranger also that the offer has been withdrawn. Thus, in Dickinson v. Dodds (1876) 2 Ch D
463, the plaintiff was informed by a third person that the property (about which an offer was made) had
already been sold to another. This was considered as valid revocation.

Lapse of time- An offer lapses on the expiry of the time, if any, fixed for acceptance. However, it is
enough if the acceptor has ‘posted the acceptance before the stipulated time’, even if it reaches the
offeror after the stipulated date. Where no time for acceptance is prescribed, the offer has to be accepted
within a reasonable time.

By failure to fulfill a condition precedent - Where the offer clearly mentions a prior condition to be
fulfileed, it lapses if it is accepted without fulfilling the condition.

By death or insanity of offeror- An offer lapses on the death or insanity of the offeror, provided that
the fact comes to the knowledge of the offeree(acceptor) before he makes his acceptance. It means that
if such fact has not come to his knowledge while he accepts the offer, it is valid acceptance giving rise
to contractual obligations.

Revocation of Acceptance In India- ., An acceptor may cancel his acceptance by a speedier mode of
communication, which will reach earlier than the acceptance itself.
Illustration: A proposes, by letter sent by post, to sell his house to B. B accepts the proposal by a letter
sent by post. B may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches A, but not afterwards. Thus, if the letter of acceptance and the letter of
revocation reach together, then also the acceptance will be deemed to have been revoked. However,
some authors are of the view that in such a case, the formation of contract will depend on the fact that
which of the two letters is opened first; if letter of acceptance is opened first, the revocation is not
possible, and, if letter of revocation is opened first, revocation is valid. Thus such contracts are called
‘accidental form of contracts’.

CONSIDERATION Importance of Consideration

(a) Section 25 ICA: ‘an agreement without consideration is void.’

(b) Section 10 ICA: Enumerates essentials for a valid contract – includes consideration.

Without consideration, an agreement cannot be there. For any contract to form, apart from the other
essential elements, one very important element is that the promise should be to do something or to
deliver something. This something is what is called the consideration. Without the flow of the
consideration, there cannot be an intention to create a legal relationship which ripens into a contract.

Essentials of a valid consideration-

1. Consideration should be given at the desire of the promisor.

2. It should be given by the promisee or any other person.
3. Consideration may be past, present or future.
4. There should be some act or abstinence.

Consideration should be given at the desire of the promisor:- Durga Prasad v. Baldeo (1880) 3 All
221 [Oldfield J.] –

An act done at the desire of the plaintiff is a consideration even if it is of no personal benefit to
him- Kedar Nath v. Gorie Md.

P. Mudaliar v. S. Mudaliar –
District Board of Ramnad v. Md. Ibrahim – Defendant promised to pay Rs. 5000 for construction
of bridge. Held: Liable to pay said amount the moment construction of bridge is completed.

Doraiswamy v. Arunachala – Temple repair, was midway and more money was required. Funds were
raised and defendant promised Rs. 125 but did not pay. Held: Nothing new was done on the faith of the
defendant’s promise. The repair was already underway.

Unilateral Agreements:-

It is a promise from one side expecting some act from the other side. All that the promisee has to do is
to act. If Promisee acts that is considered as acceptance and consideration. Promisee alters his position
on the faith of the promise given by the promisor. Where Promisee does nothing to alter his position on
faith of promise there is no agreement. An act done at the request of the offerer in response to his
promise is consideration.

Abdul Aziz v Masum Ali

Errington v Errington and Woods- The owner of a house had mortgaged it. The house was in the
occupation of his son and daughter-in-law. He told them that the house would become their property if
they paid off the mortgage debt in instalments and they commenced payment. It could not be revoked
by father now as the couple acted on his promise and started paying installments but it would cease to
bind him if they left it incomplete and unperformed."

Consideration to be given by the promisee or any other person: As per section 2(d) as long as
there is consideration for promise it is immaterial who has furnished it. As per Section 2(d): “Any
other person”.

Dutton v. Poole – Son was held liable as he promised father that he would pay amount to his sister in
consideration if his father puts entire property in his name. Though the sister and her husband were
strangers to contract, but they were allowed to sue and the Son was held liable to pay the amount to his
sister.
Tweedle v. Atkinson - The plaintiff was to be married to the daughter of one G and in
consideration of this intended marriage G and the plaintiff's father entered into a written
agreement by which it was agreed that each would pay the plaintiff a sum of the money. G
failed to do so and the plaintiff sued his executors. No stranger to the consideration can take
advantage of a contract, although made for his benefit. Thus, although the sole object of the
contract was to secure a benefit to the plaintiff, he was not allowed to sue as the contract was
made with his father and not with him. The case laid the foundation of what subsequently came
to be known as the doctrine of "privity of contract", which means that a contract is a contract
between the parties only and no third person can sue upon it even if it is made for his benefit."

Thus the foundation of the doctrine of ‘Privity of Contract’ was laid.

Privity of contract- a contract is between parties only, third person can not sue even if it is
entirely for his benefit.

Dunlop Pneumatic Tyres Co. v. Selfridge – Consideration must move from the promisee only.
A contract cannot be enforced by a person who is not a party to it even though it is made for
his benefit. He is a stranger to the contract and can claim no rights under it.

These two propositions is not at all applicable in India. As per consideration in ICA ,it is not
necessary that consideration should be given by the promisee. A promise is enforceable if there
is some consideration for it and it is quite immaterial whether it moves from the promisee or
any other person. The leading authority is the decision of the Madras High Court in
Chinnaya v Ramayya: When a contract puts some benefit on a third party, the third party can
sue to enforce the same.

Beswick v Beswick- It was held that widow was entitled to enforce the, agreement, although
she was not a party to it. Where a contract is made for the benefit of a third person who has a
legitimate interest to enforce it, it can be enforced by the third person.

Later on again House of lords reversed this judgement. And kept privity of contract in England.
 Indian position: ICA does not have any clear law either for or against privity of contract. Privy
Council extended this rule to India in Jamna Das v. Ram Avtar.

Khwaja Md. Khan v. Hussaini Begum- Where a contract is made between 'A' and 'B' for the
benefit of 'C, 'C is entitled to sue the defaulting party.

Thereafter, certain High Courts believed that Privity of Contract was not applicable in India.
However, the Supreme Court finally cleared this confusion in:- M.C. Chacko v. State Bank
of Travancore – Privity of contract applicable in India. Therefore MC had settled the law.
Held: State Bank of Travancore could not sue because it was stranger to the gift deed.

Exceptions to Privity of Contract:-

1. Trust- In case one party ‘A’ promises the other party ‘B’ for the benefit of ‘C’, although being
the third party, ‘C’ can enforce the contract as ‘C’ is the trustee. This intention should be to
benefit a particular third party and not all the third parties. A landmark case for the defense of
trust in the privity of contracts is Rana Uma Nath Baksh Singh v. Jang Bahadur. The facts
of the case were that Rana Uma Nath Baksh Singh was given the possession of the entire estate
by his father. In return, Rana Uma Nath Baksh Singh was required to pay a certain some of the
money and a village to Jang Bahadur, the illegitimate child of his father. It was held in this case
that a trust was created for the benefit of Jang Bahadur and hence he is entitled to enforce the
contract.

2. Provision for maintenance or marriage under family arrangement:- For eg., If A gives his
Property in equal portions to his 3 sons with a condition that after his death all 3 of them will
give Rs 10,000 each to C, the daughter of A. Now C can prosecute if any one of them fails to
obey this.

S. Ammal v. Subramaniyan – Two brothers, on a partition of joint properties, agreed to invest

in equal shares a certain sum of money for the maintenance of their mother, she was held
entitled to require them to make the investment.

Daropati v. Jaspat Rai – The defendant’s wife left him because of his cruelty. He then executed
an agreement with her father, promising to treat her properly, or, if he failed to do so, to pay
 her monthly maintenance and to provide her with a dwelling. Subsequently, she was again ill-
treated by the defendant and also driven out. She was held entitled to enforce the promise made
by the defendant to her father.

3. Conduct, Acknowledgement or Admission:- If one of them by his conduct or acknowledgment

recognizes the right of the other, he may be liable. Narayani Devi v. Tagore Commercial
Corporation Ltd- Contract between plaintiff’s husband and defendant to pay him certain
amount, and after his death to pay the same to the plaintiff. The defendants paid the amount to
plaintiff for sometime, and then stopped payment. Held: By paying the amount for some days,
the defendants acknowledged the right of the plaintiff. Therefore, plaintiff was entitled to sue.

For eg., If A enters into a contract with B that A will pay Rs 5000 every month to B during his
lifetime and after that to his Son C. A also acknowledges this transaction in the presence of C.
Now if A defaults C can sue to him, although not being directly a party to contract.

4. Covenants running with the land: A person who purchases land knowing that the owner of the
land is bound by certain duties created by an agreement or covenant affecting the land, shall be
bound by them although he was not a party to the agreement. Smith and Snipes Hall Farm
Ltd. v. River Douglas Catchment Board - Though plaintiff not party to agreement yet
defendant board liable because covenant was running on the land for its benefit irrespective of
who the owner was.

Consideration may be past, present or future: For instance, A lost his dog and B found the
dog and returned it to A, then A promised to pay Rs.100 and in that case, it will be a past
consideration as the act of finding the dog happened before any agreement.
Section 25(2) of the Indian Contract Act,1872 defines that the past consideration is valid in
India. But under English law, past consideration is not valid.
A is a doctor. B is a patient. B was brought to A’s dispensary. A rendered his services for ten
days. After ten days B promises to compensate A for the services rendered to him. It is past
consideration. A can recover the promised amount.

A looks after the children of B at B’s request. A year later B agreed to pay A. a sum of Rs.
2000 for his services. For the promise of B, the services of A will be taken as past consideration.

A rendered some services to B in the month of June. In July, B promised to pay A Rs. 500. The
consideration of A is past consideration.

Past consideration in Indian law- In India, past consideration is a good consideration.

Section 2(d) of the Contract Act clearly lays down that consideration may be past, present or
future. Hence an agreement based on past consideration is perfectly valid in India. The English
law does not recognize a past consideration. In English, Law consideration may be present or
future but not past. Past consideration is no consideration at all in English Law. Hence an
agreement based on past consideration is void.

Exceptions to the rule that past consideration is no consideration in England

There are, nonetheless, certain special cases for the standard rule that past consideration is no
consideration.

1. Service is done by request- In Lampleigh v Braithwait, the respondent killed somebody

and asked the petitioner to try and acquire an apology for him from the King. The
claimant rode about the country on horseback to try and find the King which took a
long time and a lot of expense. The claimant found the king and obtained the pardon.
The claimant gave the pardon to the defendant who promised him £100.00 for his work.
The defendant didn’t pay up. The defendant argued that past consideration was no
consideration but the court held that it had been implied at the time. The past benefit
had been conferred at the defendant’s request and the claimant could reasonably expect
to be paid for it. Both parties would have understood at the time that payment would be
due. Thus, the agreement to pay was held enforceable.
 2. Promise to pay a time-barred debt- A owes Rs. 1,00,000 to B, but the debt is time-
barred under the Law of Limitation. Even so, if A gives a written promise to B to pay
50,000, it is deemed a valid contract.

Position in Indian Law vis-à-vis past consideration:

1. Past voluntary service- If a person renders voluntary services without any request or
promise from another and the person receiving the services makes a promise to pay for
the services, then such a promise is enforceable in India under Section 25(2) of the
Indian Contract Act, 1872 which states: ‘‘An agreement made without consideration is
void unless it’s a promise to compensate, wholly or in part, a person who has already
voluntarily done something for the promisor, or something which the promisor was
legally compellable to do; or unless. For Example- Peter finds Noah’s wallet on the
road. He returns it to him and Noah promises to pay Peter Rs 500. This is a valid
contract under the Indian Contracts Act, 1872.

2. Past act at request good consideration- The past act done for consideration would be
a good consideration. In the case of Lampleigh vs Brathwait, in which the defendant
requested the plaintiff to help him get a pardon from the king. The plaintiff put in
efforts, travelled up to the king etc.his request was not sanctioned. The defendant
promised to pay him for the same. Later he refused to do so. Plaintiff sued him in a
court of law. The court held that the defendant must pay the plaintiff because he has
himself requested him to help him. Hence the act of the plaintiff, although done in the
past, would still be regarded as a valid consideration.

3. Executory Consideration- There may be promises which form the consideration for
each other. Before the completion of a promise from one side, the other side cannot
perform their part. For example- if A promises to pay B when he will sell the goods to
him. Until time A does not get the goods, the consideration is executory, when he got
the goods and paid for the same, the consideration is executed. If B does not sell the
goods then A could also breach for the suit.
Consideration must be of some value:- The consideration should be of some value in the
eyes of law. White v. Bluett – Father said to son: “If you stop complaining, I will release you
from an outstanding loan. Held: Not a binding contract.

Chidambara v. P.S. Renga – The consideration should be something which not only the
parties shall regard but the law can also regard as having some value. It must be real and not
illusory, whether adequate or not.

Consideration need not be adequate – It is for the parties and not for the courts to consider
whether the consideration is adequate or not. Section 25, Explanation (2): “an agreement to
which the consent is freely given is not void merely because the consideration is inadequate.”
Illustration: “A agrees to sell a horse worth Rs. 1000 for Rs. 10. A’s consent to the agreement
was given freely. The agreement is a contract notwithstanding the inadequacy of consideration.
De La Bere v. Pearson

Illustration- A agrees to sell a horse worth Rs.1000 for Rs.10. A denies that his consent was
given freely. The inadequacy of the consideration is a fact which the court should take into
account in considering whether or not A’s consent was given freely. The party seeking to set
aside agreement on the ground of inadequacy to show that such inadequacy would lead to the
conclusion that he was victim of some imposition. [Held in Tennet v. Tennet.]

Held in Pridmore v. Calvert – Lady injured due to negligent driving of the defendant. Signed
a release for $331. Subsequently sued defendant. Damages assessed at $21,000. Held: Not
bound by the agreement because inequality of bargaining power regarding lack of advice for
assessing the damage.

Forbearance to sue is a valuable consideration – Plaintiff has a right of action against the
defendant but on a promise by the defendant, he refrains from bringing the action. Debi Radha
Rani v. Ram Das – Wife to sue husband for maintenance but husband promises to pay
maintenance. Wife’s promise of forbearance to sue is a valuable consideration. There can be
no real forbearance unless the claim is immediately due. Dispute is a bona fide one.
Performance of existing duties- Performance of legal obligations – A person may be bound
to do something by law or by contract. Performance of legal duties is no consideration for a
promise. (However, if something extra is done than it is good consideration. Collins v. Godefry
Promise to pay a police officer for investigating in a crime which he is already bound by law
to do, is without any consideration. Glassbrook Bros. Ltd. v. Glamourgan County - Special
form of protection given was beyond the scope of public duty. (Here the extra protection
provided was a good consideration for the new contract.

Performance of contractual obligations - Compliance with legal obligations imposed by a

contract with the promisor can be no consideration for a promise. Ramchandra Chintaman v
Kalu Raju: The plaintiff accepted a case from the defendant to act for him in a certain suit on
receiving his usual fee. Subsequently the defend ant agreed to pay him a certain sum as a special
reward , if the suit was decided in his favour. The suit was decided in favour of the defendant,
who, however, did not pay the amount. The plaintiff, therefore, brought the present suit against
him. Suit was rejected.

Exceptions to the rule that an agreement without consideration is void (Section 25):
Section 25 of the Contract Act lays down a few exceptions, when an agreement made
without consideration is not void.

Exception 1- Natural Love and Affection- A written and registered agreement based on
natural love and affection between near relatives is enforceable without consideration. The
expression ‘near relative’ will include parties related by blood or marriage. In Rajlukhy Dabee
v. Bhootnath Mookerjee (1900) 4 Cal WN 488, held that near relation between the two parties
does not necessarily imply natural love and affection between them. In this case, the defendant
promised to pay his wife a fixed sum of money every month for her separate residence and
maintenance. The court could find no trace of love and affection between the parties. The
agreement was held to be void for lack of consideration.
Exception 2 – Past Voluntary Service - A promise to compensate a person, who has already
voluntarily done something for the promisor, or something which the promisor was legally
compellable to do, is enforceable. However, such service should have been rendered
voluntarily and without promisor’s knowledge, and for the promisor only. It may be noted that
as per the exception the promise must be to compensate a person who has himself done
something for the promisor and not to a person who has done nothing for the promisor. An
illustration – A and B are friends. B treats A during A’s illness. B does not accept payment
from A for the treatment and A promises B’s son, C, to pay him Rs. 1000. Here, C, to whom
the promise was made, did nothing for A, so A’s promise is not enforceable.

Exception 3 – Time-barred Debt - A promise to pay a time-barred debt is enforceable.

Tulsi Ram v ,Sher singh AIR 1981 DEL 165-It was held that there must be distinct promise
to pay bring the document within the meaning of section 25(3) of Indian Contract Act.

Daulat Ram v. Som Nath AIR 1981 DEL 354-Held that it is not necessary that the new promise
should expressly mention the time barred debt.
CAPACITY TO CONTRACT

Section 10 of the Indian Contract Act mentions ‘capacity’ as one of the essentials of a valid
contract. Section 11 mentions persons who are incapable to contract. Such persons are: those
of unsound mind; minor (person disqualified from contracting by law).

WHO IS A MINOR?
According to Section 3 of the Indian Majority Act, 1875 a person below 18 years of age is a
minor. However, a person to whose person or property a guardian has been appointed by the
court remains a minor till the age of 21 years.

WHAT IS THE NATURE OF A MINOR’S AGREEMENT?

In India – Neither Section 10 nor 11 makes it clear whether the agreement entered by the minor
is voidable at his option or altogether void. This led to a controversy about the nature of minor’s
agreement, which was resolved in the Privy Council decision in Mohiri Bibi v. Dharmodas
Ghosh where it was held that the question whether a contract is void or voidable presupposes
the existence of a contract within the meaning of the Act, and cannot arise in the case of an
infant.

Minor’s agreement is thus absolutely void. A minor’s agreement being void ab initio it is
incapable of being validated by a subsequent ratification after the minor has attained the age of
majority. A child may show poor judgment in making a particular contract and it is a protection
against his own ignorance and immaturity.

Mohori Bibi v. Dharmodas Ghose Privy Council [1903] - The Privy council held that-

A contract with a minor is void-ab-initio. In England Minor’s contract is voidable at his option.

EFFECT OF MINOR’S AGREEMENT

(a) No estoppel against a minor – The convention is that the law of estoppel does not apply
against a minor. He is allowed to plead minority as a defence to avoid liability under the
agreement even though at the time of making the agreement he falsely stated that he has
 attained the age of majority. When the law of contract lays down that a minor shall not be
liable upon a contract entered into by him, he should not be made liable upon the same
contract by virtue of general rule of estoppel. Also, when the general principle laid down
in the ICA says that a minor’s agreement is void ab initio then the procedural principle of
estoppel cannot overpower that principle given in ICA.

THE DOCTRINE OF RESTITUTION

Can the minor be asked to return the benefits secured by him?
Khan Gul v. Lakhan Singh, and Ajudhia Pd. v. Chandan Lal. The former case said that
the minor should be made to pay back ill-begotten money, the latter case said that the
minor can’t be made to pay the compensation if he is a defendant and if it involves money.
Thus in view of the Law Commission the minor should pay if the compensation involves
repayment of money. Accordingly, the Specific Relief Act, 1877 was amended and Section
33 (containing the principle of compensation) was included. As per the provisions of this
Section (the rule is finally settled):

a) If a minor goes to a Court as a plaintiff urging the cancellation of an instrument the

Court may ask the minor to compensate for the benefits that he got;

(b) If the minor is a defendant and resists the enforcement of the suit on the ground of his
minority the Court may ask him to restore to the other party the benefits he has received
under the agreement.

CONTRACTS THAT ARE BENEFICIAL TO THE MINOR

IN INDIA: In India, only a contract for Apprenticeship is binding, (under the Indian
Apprenticeship Act, 1960), a contract for service is not binding upon a minor.

Raj Pani v. Prem Adib – The plaintiff, a minor, was allotted by the defendant, a film producer,
the role of an actress in a particular film. The agreement was made with her father. The
defendant subsequently allotted that role to another artist and terminated the contract with the
plaintiff’s father. The Bombay High Court held that neither she nor her father could have sued
on the promise. If it was a contract with the plaintiff, she being a minor, it was a nullity. If it
was a contract with her father it was void for being without consideration.
MINOR’S LIABILITY FOR NECESSARIES [SECTION 68] For the necessaries supplied
to a minor reimbursement is permitted to the person who supplies such necessities. This is so
because it is deemed to be a quasi-contractual obligation. Under Section 68 reimbursement is
allowed if:

a) Necessaries are supplied

b) To a person who is incapable of making a contract, or

c) To the dependants of such a person

d) Reimbursement is permitted from the estate of such a person.

Moreover the goods supplied must be necessary in his station in life and he mustn’t already
have a sufficient supply of such necessities. Illustrations: A supplies B, a lunatic with
necessaries suitable to his life. A is entitled to be reimbursed from B’s property. A supplies the
wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled
to be reimbursed from B’s property.

As evident from the provisions of Section 68 the liability is only for the necessaries.

Chappell v Cooper [(1844) : “Things necessary are those without which an individual can’t
reasonably exist. In the first place it comprises food, clothes and shelter. Then, since the proper
cultivation of mind is as expedient as the support needed for the growth of the body, education
and instruction in art and trade, etc may be necessary also.” Thus what comprises ‘necessaries’
is a relative thing. It is to be determined from the circumstances of the life of the concerned
persons.

1) the contract must be for goods reasonably necessary for his support in his station in life, and
2) he must not have already a sufficient supply of these necessaries.

Nash v. Inman (1908)– An undergraduate in the Cambridge University, who was amply
supplied with proper clothes according to his position, was supplied by the plaintiff with a
number of dresses, including eleven fancy waistcoats. The price was held to be irrecoverable.

Person of unsound mind

Section 12 of the ICA deals with the persons of unsound mind.

 • Idiots- An idiot, in medical terms, is a condition of mental retardation where a person
has a mental age of less than a 3-year-old child. Hence, idiots are incapable of
understanding the nature of the contract and it will be void since the very beginning.

• Lunatic- A person who is of sound mind for certain duration of time and unsound
for the remaining duration is known as a lunatic. When a lunatic enters into a
contract while he is of sound mind, i.e. capable of understanding the nature of the
contract, it is a valid contract. Otherwise, it is void.

Illustration- A enters into a contract with B for sale of goods when he is of sound mind. A later
becomes of unsound mind. The contract is valid.

• People under the influence of the drug- A contract signed under the influence of
alcohol/drug may or may not be valid. If a person is so drunk at the time of entering
into a contract so that he is not in a position to understand the nature and
consequences, the contract is void. However, if he is capable of understanding the
nature of the contract, it will be enforceable.
Illustration- A enters into a contract with B under the influence of alcohol. The burden of proof
is on A to show that he was incapable of understanding the consequence at the time of entering
the contract and B was aware of his condition.

In Lingaraj v. Parvathi (AIR1975) it was observed that the court must keep in view the
distinction between mere weakness of intellect on one hand and lunacy on the other.

FREE CONSENT

Free consent is an essential requirement of a valid contract under Section 10 of Indian Contract
Act. Consent is said to be not free when it would not have been given but for the existence of
Coercion (Section 15), undue influence (Section 16), fraud (Section 17), misrepresentation
(Section 18) or mistake (Section 20, 21 and 22).
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Coercion (Section 15)

Section 15 of the Indian Contract Act,1872 states that coercion is committing or threatening to
commit, any act is forbidden by the Indian Penal Code (45 of 1860) 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.

Coercion means forcing an individual to enter into a contract. When intimidation or threats are
used under pressure to gain the party’s consent, i.e. it is not free consent.
Coercion may involve the actual infliction of physical and psychological harm in order to
enhance the credibility of a threat. Then the threat of further harm can lead to the threatened
person’s cooperation or obedience.

Illustration- A’ went out for a walk, ‘B’ approaches ‘A’ with a stranger, pulls out his gun and
asks ‘A’ to give all his possessions. The consent of ‘A’ is obtained by coercion here.

Effect of coercion-

Coercion has the effect of making the contract voidable. It implies that at the discretion of the
party whose consent was not free, the contract is voidable. The aggravated party will, therefore,
determine whether to enforce the contract or to cancel the contract.

In the case of Ranganayakamma v Alwar Sett, The husband’s dead body was not allowed to
be removed from the house for cremation by the relatives until the widow adopted a boy. Held
that adoption was not binding on the widow as her consent had been obtained by coercion.

2. Undue Influence (Section 16)

According to Section 16 of the Indian Contract Act, 1872 an influence will be considered as
Undue Influence when: One party to the contract is in a position of trust and controls the other
party wrongfully. Such a person uses his dominant position to gain an unfair advantage over
the other.
There are two key elements of undue influence-

1. The relationship- trust, confidence, authority.

2. Unfair persuasion-
Fiduciary relationship means a relationship of trust and confidence. When a person imposes
faith and confidence on the other, he expects not to be betrayed. If the other party betrays the
confidence and trust reposed in him and gains an undue influence.

Where he makes a contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness or mental or bodily distress.

Examples of fiduciary relationship includes:

• Solicitor and client;

• Trustee and trust ;

• Spiritual adviser and devotee;

• Medical attendant and patient;

• Parent and child;

• Husband and wife;

• Master and servant;

• Guardian and ward.

In other words, we can say that Undue influence occurs when the decision of another party to
the transaction can be influenced by one party.

Example- ‘A’ sold his gold ring to his teacher ‘B’ for Rs 200 after he had been offered good
grades by his teacher. Here, A’s permission is not given freely, he was influenced by his
teacher.
Effect of Undue Influence- The effect of undue influence makes an agreement voidable at
the option of the party whose consent was caused. Any such contract can be set aside. Only a
party to the contract can avoid or rescind the contract. This right does not lie in the hands of
the third party. The law states that in order for a plaintiff to prove that he was under undue
influence, two things must be established

1. Not only must the defendant has a dominant position but,

2. He must use it.

It states that it’s not enough for the plaintiff to show the possibility of undue influence that may
have been exercised by the dominant party. It must be certain that a person used his position to
influence the plaintiff.

Raghunath Pd. v. Sarju Pd. – The first thing to be taken into account is the relation of the
parties. Here since the borrower failed to prove that the lender was in a position to dominate
his will and the only relation between the parties that was proved was simply that of lender and
borrower. The first requirement of Section 16 of the Indian Contract Act was, therefore, not
satisfied and the borrower got no relief.

Smt.Takri Devi v. Smt Rama Dogra AIR 1984-In this case the gift was made by an old
illiterate woman to her advocate. The gift was of valuable immovable property. The
relashionship was held to be fiduciary wherein the advocate was in a position to dominate the
will of the woman and the transaction being unconscionable.

(3) Fraud – Section 17 of the Indian Contract Act

Intentional Misrepresentation is the essence of fraud. Fraud dealt in Section 17 of the Indian
Contract Act includes any of the following with intent to deceive/to induce to enter into a
contract. (a) Suggestion, as a fact (b) Active concealment (c) A promise without intention to
perform (d) Any other act fitted to deceive (e) Law declares fraudulent .

Mere silence is no fraud - Explanation to Section 17 of the Indian Contract Act Ordinarily,
mere silence is no fraud even if its result is to conceal facts likely to affect the willingness of a
person to enter into a contract. A contracting party is not obliged to disclose each and
everything to the other party/disclosure of the whole information. In case of sale of goods, the
rule is that of Caveat Emptor ;i.e. buyers beware.

Sri Krishna v. Kurukshetra University – A candidate who had full knowledge of the fact
that he was short of attendance did not mention this fact in his examination form. This was held
to be no fraud, it being the duty of the University to scrutinize forms and to call for verification
of information in case of doubts. The University having failed to do so, it was estopped from
canceling the examination of the candidate.

When silence is fraud – Explanation contained in Section 17 of the Indian Contract Act

(a) Duty to speak – Where there is a duty to speak, keeping silence is fraud.

Case law – Mithulal Naik v. L.I.C. –

(b) Silence itself is equivalent to speech – When keeping silent creates an impression as to
existence of certain situation i.e. whenever silence itself is deception.

The contract arising from fraud is a null contract. The misled party has the right to withdraw
from the contract. Due to the fraudulent agreement, the party is responsible for recovering the
damages.

Misrepresentation-

A’ told ‘B’ that his radio is in good condition, because of the confidence he had in ‘A’, ‘B’
bought the radio from him. The radio did not work properly after some time, ‘B’ thought he
was misled by ‘A’, but ‘A’ believed his radio was in good condition and had no intention of
deceiving him. So, here misrepresentation is in the part of ‘A’, because he did not know that
the radio is not working properly.

Effect

If the party that has suffered as a result of the misrepresentation when entering into a contract
may choose to terminate the contract, rescind the contract within a reasonable time under the
Specific Relief Act 1963. Misrepresentation is about giving of inaccurate information by one
party (or their agent) to the other before the contract is made which induces them to make the
contract. If a person makes a contract in reliance on misrepresentation and has to face loss as a
result, they can revoke the contract or claim damages.

Kinds of Misrepresentation

There are two types of misrepresentation:

Negligent Misrepresentation

• It is considered to be a negligent misrepresentation when the misrepresentation

happens due to lack of any reasonable ground and carelessness;

• Negligent misrepresentation is only known when the representative owed a duty to

representee to handle carefully;

• An individual would only be liable if, in particular, he had ignored the duty
specified;

Innocent misrepresentation

• If the portrayal is based on a good reason to believe and there is no error and
malicious motive, then it is said to be an innocent misrepresentation.

The distinction between fraud and misrepresentation

Basis Fraud Misrepresentation

A fraudulent act intentionally Misrepresentation is known as the

committed by one party to induce representation of an innocent mistake, which
Meaning
the other party to enter into the persuades other parties to enter into the
contract is referred to as fraud. contract.

Section 17 of the Indian Contract

Section Section 18 of the Indian Contract Act, 1872
Act, 1872.
 In order to
mislead the other Yes No
party

In misrepresentation, the party making the

In fraud, the party making the
Variation in extent representation considers the statement made
representation knows that the
of truth by him to be valid, which later turned out to
declaration is not true.
be false.

The aggrieved party is entitled to The aggrieved party has no right to sue for
Claim
claim damages. damages to the other party.

The contract is voidable even if in

If the truth can be found with reasonable
Voidable usual diligence the truth can be
diligence, then the contract is not voidable.
found.

Mistake (Section 20)

Mistake’ is not defined in the Indian Contract Act. Section 20, 21 and 22 deals with
the concept related to mistake. ‘Mistake’ can be defined as any action, decision or
judgement that produced an unwanted and unintentional result. A Mistake is said to
have occurred where parties intending to do one thing by error do something
else. Phillips v. Brooks Ltd is an English contract law case concerning mistake. It was
held in this case that a person is deemed to contract with the person in front of them
unless they can substantially prove that they instead of them intended to deal with
another person.

There are two forms of mistake under Indian Contract Law:

1. The mistake of Fact,

2. The Mistake of Law.

Mistake of Fact

• A mistake of fact arises when one or both of the contracting parties have
misunderstood a term that is essential to the meaning of the contract;

• Such a mistake may be done due to confusion, negligence or omission, etc;

• A mistake is never intentional, it is an innocent overlooking.

• Such mistakes can be either unilateral or bilateral

Section 20 and 22 of the Indian Contract Act deals with ‘Mistake of Fact’. Mistake of Fact is
of three types: Bilateral mistake, Unilateral mistake and Common mistake.

Bilateral Mistake (Section 21)

When both the parties to a contract are under a mistake of fact, essential to the agreement, such
a mistake is known as a bilateral mistake. Bilateral mistakes are also sometimes referred to as
mutual or common mistakes. All the parties do not agree to the same thing and in the same
way, which is the concept of consent. Since there is no consent, the contract is null and void.

Example- ‘A’, agrees to buy a cow from ‘B’, but it turns out that the cow was dead at the time
of the deal, although the fact was not known to any party. The arrangement is considered
invalid.

Essentials elements of Bilateral mistakes are:

(i) Both parties must be under a mistake.

(ii) The mistake must be of fact, not of law.

(iii) The mistake must be related to an essential fact.

What facts are essential in Bilateral Mistake?

A bilateral mistake as to the subject matter includes the following:

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 1. Mistake as to the existence of subject matter.

2. Mistake as to the identity of subject matter.

3. Mistake as to the quantity of subject matter.

4. Mistake as to the quality of subject matter.

5. Mistake as to the price of subject matter.

6. Mistake as to the performance of subject matter.

Mistake as to the existence of subject matter

‘A’ and ‘B’ are involved in a contract to sell a horse in a specific amount. But, horse dies before
the contract is performed and both the parties (A and B) are unaware of this fact that the horse
does not exist. In this case, the Contract is void.

Mistake as to the quantity of subject matter

‘A’ and ‘B’ made a contract in which a transaction of 200 pens in return of some amount
involves. But 100 pens are sold early by the brother of ‘A’ before the contract could be
performed and both the parties (A and B) were unaware of this fact that only 100 articles do
exist. In this case, the contract is void.

Mistake as to the quality of subject matter

‘A’ and ‘B’ made a contract together in which ‘A’ sold his car in return of some amount to ‘B’.
They believed that the car is for racing purpose but the car was for tourism purpose. In this
case, the Contract is void.

Mistake as to the price of subject matter

‘A’ and ‘B’ made a contract to sell things in consideration for some money which was not a
valid amount and both the parties (A and B) are unaware of this fact. In this case, the Contract
is void.
Matter as to the identity of subject matter

‘A’ and ‘B’ made a contract in which ‘A’ promise to sell his car to ‘B’. ‘A’ has two different
types of car (one for racing and other for tourism purpose). Here, the real identity of the car is
not clear and both the parties are thinking about different types of car. In this case, the Contract
is void.

Matter as to the possibility of subject matter

Sometimes, a contract is made but during the performance of the same, we come to know that
it is impossible to fulfil the performance of the contract. The agreement is void where there is
a mistake as to the possibility of performance. Impossibility is an excuse for non-performance
of a contract. Impossibility can be of two types:

• Physical impossibility: Any performance of the contract when physically

impossible, can be taken up as an excuse for non-performance of duties under a
contract and contract will be void. For example- a painter made a contract with a
person to paint a house but before the performance of duties, the house burns. Now,
it is impossible for the painter to perform his duties under the contract. Thus, it is
considered as an excuse for non-performance of duties.

• Legal impossibility: Any performance of the contract is when legally impossible,

can be taken as an excuse for non-performance of duties under a contract and
contract will be void. For example- any amendment made by legislation which
makes it impossible to fulfil the performance of duties under the contract.

Unilateral Mistake (Section 22)- A unilateral mistake occurs when only one party
to the contract makes a mistake. The contract will not be void in such a case. It is
specified in Section 22 of the Act that the contract will not be void just because one
party made the mistake. So if only one party has made a mistake the contract remains
a valid contract.
Example- ‘A’ enters into an agreement with ‘B’ for the purchase of horse which he assumes
to be a racing horse. ‘A’ do not confirm from ‘B’. In actual a horse is not a racing horse. ‘A’
cannot rescind the contract.

Mistake of law- The mistake may be related to the mistake of Indian laws, or it may be a
mistake of foreign laws. If the mistake applies to Indian laws, the principle is that the law’s
ignorance is not a sufficiently good excuse. This means that either party cannot claim that it is
not aware of the law. However, similar treatment is not given to ignorance of foreign law.
Ignorance of foreign law provides some leeway, the parties are not expected to know foreign
law and its meaning. Therefore, under the Indian Contract Act, an error of foreign law is
actually treated as a mistake of fact.

Mistake of Law can be of two types:

• Mistake of Indian Law: “Ignorantia Juris non excusat” is a Latin maxim which
means “Ignorance of the law is not excused”. If a person takes part in a contract
without knowing any specific provisions of Indian Law (which is essential for that
contract), then Contract is not voidable because everyone is supposed to know the
law of his country. For example: According to the provisions of Indian law, we have
to recover the amount of loan within 3 months from the due date, after that time-
barred debt is imposed. Now if we do not show any interest in the recovery of loan
amount during these 3 months because of not knowing the law (mistake of law),
then we can not take it up as an excuse or defence.
A murdered B, A cannot apply for the defence of mistake of law that is; he was not aware of
law related to the murder.

• Mistake of Foreign Law:- If a person takes part in a Contract without knowing any
specific provisions of Foreign Law (which is essential for that contract), then that
mistake is treated as a mistake of fact i.e, the contract is void if both the parties under
a mistake as to a foreign law because one can not be expected to know the law of
other foreign countries.
LEGALITY OF OBJECT AND CONSIDERATION

One of the essentials for formation of a valid contract is that the party must contract for a lawful
object. Because every agreement of which the object and consideration is unlawful is void
according to Section 23.

The consideration or object of an agreement is lawful, unless – It is forbidden by law; or Is of

such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or
Involves or implies, injury to the person or property of another; or The Court regards it as
immoral, or opposed to public policy. In each of these cases, the consideration or object of an
agreement is said to be unlawful.

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

Forbidden by Law - Where the object of an agreement is forbidden by law, the agreement is
unlawful. If the intention of the Legislature is to forbid an act in public interest, a contract to
do the forbidden act will obviously be void. In Nandlal v. Thomas, the plaintiff was licensed
under an Excise Act to work a liquor shop. The Act forbade the sale, transfer or sublease of the
license or the creation of a partnership to run the shop. The plaintiff took the defendant into
partnership. The agreement of partnership was held void as it would defeat the policy of law if
persons could find their way into working liquor shops.

Defeat the provisions of any law - If the object or consideration of an agreement is of such a
nature that if it is permitted, it would defeat the provisions of any law, such an agreement is
void. In Abdul Jabbar v. Abdul Muthalif, the plaintiff who was residing in Malaysia remitted
money to the defendants in India through unofficial channels, in contravention of the FERA.
The money thus received was utilized for the purchase of a site and the construction of a rice-
mill thereon for the benefit of the plaintiff. On his return to India, the plaintiff got the licence
transferred in his name but the defendants tried to interfere with his possession etc. of the mill.
The plaintiff filed a suit for declaration that he was the absolute owner of the ricemill and an
injunction to restrain the defendants from interfering with his possession and enjoyment. Held
that although the remittances were illegal, the construction of the rice-mill by itself did not
involve the execution of any unlawful object and, therefore, the plaintiff entitled to the relief
sought by him.

Fraudulent in Nature- The object and the consideration of the contract must not be fraudulent
as then, the contract will become void.
Example - A enters into a contract with B where he agrees to pay B if he embezzles money
from C. This is considered a fraudulent object and the contract is not valid. The Court invoked
the clause for e.g. ex turpi causa non oritur actio i.e. no Court ought to enforce an illegal
contract or allow itself to be made the instrument of enforcing obligations alleged to arise out
of a contract or transaction which is illegal.
A decides to sell goods to B and smuggle them outside the country. This is a fraudulent transaction
as so it is void. Now B cannot recover the money under the law if A does not deliver on his promise.

Agreement injurious to the person or property of - In case the consideration or object of

agreement is to cause an injury or harm which is unlawful it is void. The object of the contract
must not cause any destruction to property or cause injury to another person.

Examples:

• Publishing a book on the life of a person without his consent.

• Destruction of a property.

• Violation of licenses.

• Violation of copyrights.

A enters into a contract with B whereby he agrees to pay a sum of money to B if he destroys a
city landmark. This contract does not have a lawful consideration and lawful object and it is
not deemed legal.

Immoral as Per Law- If the object and/or consideration of the contract are considered
immoral, the contract will not be deemed void. Immoral acts are against the reasonable and
acceptable general behaviour or personal conduct accepted by society. Example - A lends
money to B on the condition that B will divorce C, and later get married to A. If B does not
divorce C, then A cannot pursue legal proceedings against B to recover the money. The basic
premise of this contract is immoral so it will be deemed void.

In Fender v. St. John Mildmay, the defendant, who was a married man at the time, met the
plaintiff at a nursing-home where she was a nurse. He told her that he was unhappy with his
wife and later asked her whether, if his wife divorced him, she would marry him after the
divorce. She consented and thereupon sexual relations took place between them. The wife
petitioned for a divorce on the ground of this adultery and a decree was pronounced. The
defendant then promises to marry the plaintiff as soon as the decree was made absolute. But he
committed breach of this promise by marrying another woman. The plaintiff sued him. She
was held entitled to recover.

Against the Public Policy- A lawful object in business law means that it should not be against
public policy. The purpose of public policy is not to curtail any individual’s rights but to
maintain and protect the general welfare of the community. Kind of contracts are considered
to be against the public policy:

1. Entering into an agreement with a party that belongs to a country with which India
does not have peaceful relations, makes the agreement void. Trading with the Enemy:
Entering into an agreement with a person from a country with whom India is at war,
void be a void agreement. For example, a trader entering into a contract with a
Pakistani national during the Kargil war.

2. Restraining from prosecution: A contract that prohibits a person from pursuing legal
recourse is considered void. Stifling Prosecution: This is a pervasion of the natural
course of law, and such contracts are void. For example, A agrees to sell land to B if he
does not participate in the criminal proceedings against him. Stifling Prosecution – It
is in public interest that criminals should be prosecuted and punished. Hence, an
agreement not to prosecute an offender or to withdraw a pending prosecution is void
if the offence is of public nature. Such agreements are those of stifling prosecution.
 3. Maintenance and Champerty: In a maintenance agreement, a person promises to
maintain a lawsuit in which he has no vested interest. Champerty is when a person
agrees to assist another party in litigation in return for a portion of the damages or
proceeds received. Maintainance agreement is when a person promises to maintain a
suit in which he has no real interest. And champerty is when a person agrees to assist
another party in litigation for a portion of the damages or proceeds.

4. An agreement to indulge in trafficking in public offices..

5. An agreement to induce judiciary or state officials to act in a corrupt manner and

interferes with legal proceedings.
6. Interfering with the Courts: An agreement whose object is to induce a judicial or state
officials to act corruptly and interfere with legal proceedings

The provision in substance means that if a part of the consideration or the object which is
unlawful can be separated from the other part which is lawful. The Court will enforce that part
which is lawful and set aside that part which is unlawful. If no such severance of the illegal
from the legal part is possible, the whole of the agreement is void

VOID AGREEMENTS (SECTIONS 23 – 30 AND 56)

Section 2(g) provides that ‘an agreement not enforceable by law is said to be void’.

The following types of agreement are declared to be void:-

(1) Agreements having unlawful object or consideration (Section 23) and Agreements
unlawful in part (Section 24) (already discussed)

(2) Agreements without consideration (Section 25) (already discussed)

(3) Agreements in restrain of marriage (Section 26)

(4) Agreements in restrain of trade (Section 27)

(5) Agreements in restrain of legal proceedings (Section 28)

(6) Uncertain agreements (Section 29)

(7) Wagering agreements (Section 30)

(8) Agreements to do impossible acts (Section 56)

“Every agreement in restraint of the marriage of any person, other than a minor, is void.” It is
the policy of law to discourage agreements which restrain freedom of marriage. An agreement
which restrains a person’s freedom to marry or to marry any person of his choice is against
public policy, it is void. The restraint may be general or partial i.e. the party may be restrained
from marrying at all or from marrying for a fixed period or from marrying a particular person
or a class of persons, the agreement is void. A penalty upon remarriage may not however be
construed as a restraint of marriage. Thus, an agreement between two co-widows that if any of
them remarried she should forfeit her right to her share in the deceased hireland’s property has
been upheld (Rao Rani v. Gulab Rano).

Section 26 of the Act mentions that all agreements in restraint, either partial or full, of a
marriage except that with a minor, would be void. For example, if Ria’s father provides Amit
with some incentives only to prevent him from marrying his daughter, then such an agreement
would stand void in the eyes of the law, provided the parties involved are not minors. In the
case of Shrawan Kumar v. Nirmala, the plaintiff held that the defendant had promised to
marry him and therefore her present marriage should be injuncted by the court. This petition
was dismissed by the Court on the grounds of restraint of marriage. An agreement in restraint
of marriage of adults is void whereas the same in the case of the minor would not be held void.
But this clause doesn’t apply in case of remarriage.
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