Indian Contract Act III

Recap
• Agreement and contract
• Communicating offer and acceptance, time of communication
• Essential Conditions
• Lawful Consideration, Free consent, Capacity of parties, Lawful consideration
and Lawful object,
• Need not be in writing
Types of contracts
• On the Basis of creation
• Express or implied
• Quasi contract - created by law. (A leaves his goods at B’s shop by mistake, it is
for Mr. B to return the goods or to compensate the price. In fact, these contracts
depend on the principle that nobody will be allowed to become rich at the
expenses of the other.
• E contract - entered into between two parties via the internet
• On the basis of validity
• Void or Voidable Contracts
• Illegal Contracts
• Unenforceable Contracts
• Contingent Contract
• Unilateral Contract – take it or leave it
Unilateral Contract
• A unilateral contract is created by an offer to be accepted by performance.
• To form the contract, the party making the offer (offeror) makes a promise in
exchange for the act of performance by the other party.
• First party not under any obligation to perform; second party only needs to fulfill the
duty if they wish to.
• Promise must be an express promise. The contract must clearly offer something
valuable in exchange for the other party performing a service.
• A lease option is a unilateral contract until the option is exercised.
• Request to find any lost item - if someone finds the dog, he gets paid, but he is not
promising to go and look for the lost item.
• Complications can arise when it comes to unilateral contracts, especially in areas
pertaining to – acceptance, consideration and offer
• Take it or leave it
• Consumer Protection Act and RERA rules for contracts
Flaws in Contracts
• Under certain circumstances a contract made under these rules may be bad, because
there is a flaw, vice or error somewhere.
• Impossibility
• Incapacity
• Mistake
• Misrepresentation
• Fraud
• Undue Influence
• Coercion
• Illegality
• In such cases, three remedies are possible
• The resultant contract will have no effect and it will then be known as void, or
• The law may give the party aggrieved the option of getting out of his bargain, and the contract
is then known as voidable, or
• The party at fault may be compelled to pay damages to the other party.
Flaw in Capacity - Capacity and Persons
• All natural persons have full capacity to make binding contracts,
except minors, lunatics, and persons otherwise disqualified
• Minor's Contract
• Mohiri Bibee case - a minor has no capacity to contract and minor's contract
is absolutely void. But if the minor has carried out his part of the contract, he
can proceed against the other party. The rationale is to protect minor's
interest.
• If the minor has obtained any benefit, such as money on a mortgage, he
cannot be asked to repay, nor can his mortgaged property be made liable to
pay.
• Since the contract is void ab initio, it cannot be ratified by the minor on
attaining the age of majority.
• Estoppel does not apply to a minor
• Lunatic or unsound mind
• A person of unsound mind cannot enter into a contract and is therefore void.
But if he makes a contract when he is of sound mind, i.e., during lucid
intervals, he will be bound by it.
• A sane man delirious from fever, or unable to understand the terms of a
contract due to effect of alcohol or drugs cannot contract whilst such delirium
or state of drunkenness lasts. Hypnotism or mental decay included
• Persons Disqualified from Entering into Contract
• Alien Enemies
• Foreign Sovereigns and Ambassadors
• Corporations
Mistake
Contracts are essential for smooth conduct of business. No one is allowed to evade
consequences on the plea that he was mistaken. However mistakes do occur and if
these are fundamental than there may be no contract at all.
• Mistake of Law: Contract is binding; ignorance of law is no excuse. Mistake of foreign
law is treated as mistakes of fact.
• Mistake of fact: Fact must be so essential so as negate the contract and must be on the
part of both the parties
• A mistake in the nature of miscalculation or error of judgement by one or both the parties has no
effect on the validity of the contract. Paying excessive price for goods under a mistake as to their
true value, the contract is binding on him.
• Mistake could be about existence or title of the subject matter or identity of the
subject matter, or Quantity or Quality of the subject matter
• Bilateral - both parties under a mistake. Parties have not consented to the same thing
in the same sense, absence of consent makes the agreement void.
• Unilateral when only one party to the contract is under a mistake. Contract will not be
void.
 Misrepresentation (Section 18)
Could be innocent or wilful (intent to deceive - fraud.)
• Misrepresentation under a genuine belief is innocent misrepresentation. Any false representation
made with an honest belief in its truth is innocent.
• To avoid a contract on this ground
• There must be a representation or assertion (not merely an opinion or hearsay), inducing the aggrieved party
to enter into the contract.
• The assertion must relate to a matter of fact (not of law)
• It must have been made with an honest belief in its truth.
• Aggrieved party can avoid the contract, cannot get damages for, except in the following cases
• From a promoter or director who makes innocent misrepresentation in a company prospectus inviting the
public to subscribe for the shares in the company;
• Against an agent who commits a breach of warranty of authority:
• From a person who (at the Court's discretion) is estopped from denying a statement he has made where he
made a positive statement intending that it should be relied upon and the innocent party did rely upon it and
thereby suffered damages;
• Negligent representation made by one person to another between whom a confidential relationship, like
that of a solicitor and client exists.
Wilful Misrepresentation or Fraud (S. 17)
An untrue statement made knowingly with the intent to deceive.
• A false representation or assertion of fact (not a mere opinion) made with the
intention that it should be acted upon, and the representation must have actually
induced the other party to enter into the contract
• To aver that a fact is true when it is not true and the person making it knows that it
is not true
• Active concealment of a fact by a person having knowledge or belief of the fact
• A promise made without any intention of performing it or any other act to deceive
• Any such act or omission as the law specially declares to be fraudulent
• Immaterial whether the representation takes effect by false statement or with
concealment. The party defrauded can avoid the contract and also claim damages.
• Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless silence is in itself equivalent to speech, or where it is
the duty of the person keeping silent to speak
Contracts where law imposes a duty to disclose all
material information.
Failure to disclose all required information will render the contract voidable at the option
of the other party.
• All Insurance Contracts - assured to disclose to the insurer all material facts and
whatever he states must be correct and truthful.
• Company prospectus inviting the public to subscribe for its shares must disclose
truthfully the various matters set out in the Companies Act. Non-disclosure of any of
these matters is liable to damages. A contract to buy shares is voidable where there is a
material false statement or non-disclosure in the prospectus.
• Contract for the sale of land - The vendor is under a duty to the purchaser to show good
title to the land he has contracted to sell.
• Contracts of family arrangements: When the members of a family make agreements or
arrangements for the settlement of family property, each member of the family must
make full disclosure of every material fact within his knowledge.
Void Contracts
• These contracts are void ab initio and hold no validity under law
• In a legal sense, a void contract is treated as if it was never created
and becomes unenforceable in court.
• No legal effects as these cannot be enforced and thus confers no
rights on either party.
• These are not really contract at all; non-existent.
• Technically the words 'void contract' are a contradiction in terms.
• Situation that arises when a 'contract' is claimed but in fact does not
exist.
Void Contracts – Causes
• Incompetence
• Inclusion of an unlawful object or consideration
• Impossibility of performance

• Acceptance of Offer: Both parties must be fully aware of all elements of the contract. They
must accept all aspects of the contract and what it entails.
• Intention to Create Legal Relations: A contract is not merely a promise between parties. The
nature of the relationship between the individuals engaging in the contract must be
evaluated, as well as the contract itself.
• Consideration: There must be an exchange of value between parties. If one party is
knowingly benefiting from a contract at the expense of the other party, the contract is void.
• Complete: The contract must be complete and specific in nature, or it will be considered
void.
S. 2(g) - “An agreement not enforceable by law is said to be void”,
S.2(j) - “A Contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable”.
Thus Void Contracts can be of following two types :-

• Void ab initio :- void-ab-initio i.e. unenforceable from the very beginning

• Void due to the impossibility of its performance
• Void agreements as per the provisions of ICA
• Any agreement with a bilateral mistake is void.(Section 20)
• But a contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as to a matter of fact . (Section 22)
• Agreements having unlawful consideration and objects are void.(Section 23 & 24)
• Agreement made without consideration is void.(Section 25) Exceptions
• Agreement in restraint of marriage of any major person is void
• Agreement in restraint of trade is void. (Section 27)
Agreements expressly declared void
Agreements, based on any of the subjects mentioned here, are void. There is
no liability for not enforcing the contract based on these agreements and thus,
the conditions of the contract are not binding upon any of the parties.
• Agreements restricting a marriage (section 26)
• An agreement which in effect prevents either party to marry. It does not differentiate
between partial or absolute restraint.
• one exception is an agreement in restraint of marriage of a minor being against Public
policy
• Agreements restricting trade (section 27)
• Every agreement by which a person is restrained from exercising a lawful profession,
trade or business of any kind, is to that extent void.
• It must be noted that the contract will be void only to such extent by which a person is
restrained. Thus the entire contract will not be declared void.
• It is immaterial if the restraint is reasonable or not.
Agreements expressly declared void
• Agreements in restraint of proceedings (section 28)
• An agreement by which any party to the contract is completely or absolutely restricted in
enforcing their rights to move courts, or which limits their time within which he may
enforce his legal rights, is void.
• However, an agreement which provides for arbitration when a dispute arises, then that
clause is not void.
• Agreements void due to uncertainty (section 29)
• A contract, whose terms are capable of being misunderstood, or are ambiguous and vague
• It should be capable of being reasonably interpreted by the courts.
• Certainty is achieved, when intentions of the parties, safeguards, expectations,
performances, are clear or can be objectively ascertained.
• Agreement of wager are void (section 30)
• Wagering agreements are void and no suit can be brought to make a person abide by the
result of any game or any other uncertain event if such an event was the subject of a bet.
Voidable Contract
• S.2(i) An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others, is a voidable contract;
• Voidable contract is a formal agreement between two parties that may be rendered
unenforceable for any number of legal reasons, which may include:
• Failure by one or both parties to disclose a material fact
• A mistake, misrepresentation, or fraud
• Undue influence or duress
• One party's legal incapacity to enter a contract (e.g., a minor)
• One or more terms that are unconscionable
• A breach of contract
• Finding a defect in a contract is a common way to void that contract.
• One party can put a voidable contract to an end by exercising his option, if his consent
was not free.
• Contract binding, if option not exercised within a reasonable time.
• The simplest way to void a contract is for both parties to agree that voiding is the best
option.
Voidable Contracts
• Voidable contract is initially considered legal and enforceable but can be rejected by
one party if the contract is discovered to have defects.
• If a party with the power to reject the contract chooses not to reject the contract
despite the defect, the contract remains valid and enforceable.
• Most often, only one of the parties is adversely affected by agreeing to a voidable
contract in which that party fails to recognize the misrepresentation or fraud made by
the other party.
• Voidable contract occurs when one of the involved parties would not have agreed to
the contract originally if they had known the true nature of all of the elements of the
contract prior to original acceptance.
• With the presentation of new knowledge, the aforementioned party has the
opportunity to reject the contract after the fact.
• Alternatively, a contract is voidable when one or both parties were not legally capable
of entering into the agreement—for example, when one party is a minor.
Initially voidable, Subsequently voidable or Voidable by law
• Initially voidable contracts
• S19 - consent caused by coercion, fraud or misrepresentation
• not voidable if the party whose consent was so caused had the means of discovering the truth
with ordinary diligence
• S19A - Consent caused by undue influence, voidable at the option of the aggrieved
party. Any such contract may be set aside either absolutely or, if the party who was
entitled to avoid it has received any benefit thereunder, upon such terms and
conditions as to the Court may seem just.
• Subsequently voidable contracts
• Contracts that turn about to be voidable following certain events that have taken place. These
contracts are known by such a name since they begin as valid but include the option for one of
the parties to cancel it or continue with it at a later time.
• S. 39 - Effect of refusal of a party to perform promise wholly
• S. 53 - Liability of party preventing event on which the contract is to take effect
• S. 55 - Effect of failure to perform at a fixed time, where time is essential
Voiding a Contract – Steps
• Determine which elements of the contract may render it void.
• Pinpoint exactly which laws and reasons relate to the contract being
void.
• Ensure all available information relating to the contract is collected
(e.g., communication between parties, signed documents, etc.).
• Determine whether a new contract can be drafted or whether the
agreement should be completely abandoned altogether.
• Legal proceedings may ensue to assess the situation and determine
whether the contract is void or not.
Void and Voidable
• A void contract is inherently unenforceable. A contract may be deemed void
should the terms require one or both parties to participate in an illegal act, or if
a party becomes incapable of meeting the terms as set forth, such as in the
event of one party’s death.
• A contract that is deemed voidable can be corrected through the process of
ratification. Contract ratification requires all involved parties to agree to new
terms that effectively remove the initial point of contention that was present in
the original contract.
• If it was later discovered that one of the parties was not capable of entering into
a legally enforceable contract when the original was approved, for example, that
party can choose to ratify the contract when they are deemed legally capable.
• A contract may be ruled null and void should the terms require one or both
parties to participate in an illegal act, or if one party becomes incapable of
meeting the contract terms.
 Basis for
comparison Void Contract Voidable Contract

Meaning The type of contract which cannot The contract in which one of the two
be enforceable is known as void parties has the option to enforce or
contract. rescind it, is known as voidable contract.
Defined in Section 2 (j) Section 2 (i)
The contract is valid, but
Nature subsequently becomes invalid due The contract is valid, until the party whose
to some reasons. consent is not free, does not revokes it.
Subsequent illegality or
Reasons impossibility of any act which is to If the consent of the parties is not
be performed in the future. independent.
Rights to party
No Yes, but only to the aggrieved party.

Not given by any party to another

Suit for damages party for the non-performance, but
any benefit received by any party Damages can be claimed by the aggrieved
must be restored back. party.
Illegal Contract

• Like the void contract, an illegal contract has no legal effects as

between the immediate parties.
• Further transactions collateral to it also become tainted with illegality
and are, therefore, not enforceable.
• Parties to an unlawful agreement cannot get any help from a Court of
law.
• An illegal agreement is entirely void; All illegal contracts are void, all
void contracts may not be illegal
• No action can be brought by a party to an illegal agreement. The maxim
is 'Ex turpi cause non-oritur actio' - from an evil cause, no action arises;
• Money paid or property transferred under an illegal agreement cannot
be recovered.
• In cases where only a part of a contract is illegal, and the rest of the part
which is legal can be separated from the illegal one, then the Court will
enforce the legal one. If the legal and the illegal parts cannot be
separated the whole agreement is illegal; and
• Any agreement which is collateral to an illegal agreement is also tainted
with illegality and is treated as being illegal, event though it, would have
been lawful by itself
Quasi Contracts
• Contracts create obligations; no agreement - no contract.
• However, some obligations do not have their origin in an agreement.
• The obligation not to harm another person or his property (Torts), judgments or orders of courts, quasi-
contractual obligations, etc. are not ‘contracts’ by definition, but they are enforceable in a court of law.
• It is a retroactive arrangement between two parties who have no previous obligations to one
another. Created by law to correct a circumstance in which one party acquires something at
the expense of the other.
• Not a contract - an obligation which the law creates,
• No one allowed unjust enrichment, i.e. to enrich himself unjustly at the expense of another.
• A quasi contract is a legal obligation imposed by law to prevent unjust enrichment. This is also
called a contract implied in law or a constructive contract.
• One party (the plaintiff) must have furnished a tangible item or service to another party with
the expectation or implication that payment would be given.
• Other party (the defendant) must have accepted, or acknowledged receipt of, the item but
made no effort or offer to pay for it.
• It is legally enforceable even if a party does not agree to it.
Quasi Contracts in ICA
ICA mentions the following situations giving rise to Quasi contracts
• Sec 68-Necessaries supplied to a person who is incapable of contracting.
• When any necessary goods are supplied to a person who is not capable of contract
(minor or a lunatic), then the person who is supplying such goods has the right to
recover the amount from such person’s property.
• Sec 69-Reimbursement by an interested party.
• A person who is interested in the payment of money which another is bound by
law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
• Sec 70-Obligation of a person who enjoys the benefit of any non
gratuitous act
• When one person enjoys the benefit of any act done by other person lawfully and
intending to do it non gratuitously then the former person who has benefited from
it is liable to compensate the later for his act.
Quasi Contracts in ICA
• Sec 71 -Finder of the goods
• When any person who finds the goods and knows that such goods belong to another person
then he is responsible for the safety of the goods and to return it back to the owner of such
goods.
• Sec 72-Liability of a person to whom payment is made, by mistake or under
coercion
• Where any person receives payment under some misunderstanding or coercion then he is
liable to return such payment made to him by the other person.
• Quasi contracts are not contracts as per ICA but are obligations imposed by law in
certain situations. Quasi contracts creates obligation to ensure that there is no
unjust enrichment on one party.
• With a quasi-contract, one of the parties does not have intent; however, despite
the lack of mutual assent, the court has created a quasi-contract to prevent one
party from being unfairly enriched. In most cases, damages do not exceed
materials and labour costs.
Contingent contracts (Section 31 to 36)
• Section 31 of the Act defines ‘contingent contract’ as a contract to do or not to
do something, if some event, collateral to such contract does or does not
happen.
• Every contingent contract is thus a contract primarily.
• Like any other contract, it is also a contract to do or not to do something.
• However, it is not an absolute and unconditional one, without any reservations
or conditions, which is to be performed under any event.
• Its performance is dependent on some event’s happening or not happening-
the contingency.
• In other words, contingent contracts are the ones where the promisor perform
his obligation only when certain conditions are met. The contracts of insurance,
indemnity, and guarantee are some examples of contingent contracts.
Contingent contract and wagering agreement
• A wagering agreement is absolutely void (S.30) while on the other
hand contingent contract is a valid contract.
• In a contingent contract, the future uncertain event is merely
collateral whereas in a wagering agreement the uncertain event is a
sole determining factor of the agreement.
• In a wager, the parties are not interested in the occurrence of the
event except for winning or losing the best amount while in a
contingent contract the parties have a real interest in occurrence or
non-occurrence of the event.
• All wager agreements are contingent, but all contingent contracts are
not by way of the wager.
32. Enforcement of contracts contingent on an event happening

• Contingent contracts to do or not to do anything if an uncertain

future event happens cannot be enforced by law unless and until that
event has happened.
• If the event becomes impossible, such contracts become void.
• A makes a contract with B to buy B‟s horse if A survives C. This contract
cannot be enforced by law unless and until C dies in A‟s lifetime.
• A makes a contract with B to sell a horse to B at a specified price, if C, to
whom the horse has been offered, refuses to buy him. The contract cannot be
enforced by law unless and until C refuses to buy the horse.
• A contracts to pay B a sum of money when B marries C. C dies without being
married to B. The contract becomes void
33. Enforcement of contracts contingent on
an event not happening
• Contingent contracts to do or not to do anything if an uncertain
future event does not happen can be enforced when the happening
of that event becomes impossible, and not before.

• A agrees to pay B a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks
• 34. When event on which contract is contingent to be deemed
impossible, if it is the future conduct of a living person.—If the future
event on which a contract is contingent is the way in which a person
will act at an unspecified time, the event shall be considered to
become impossible when such person does anything which renders it
impossible that he should so act within any definite time, or
otherwise than under further contingencies.
• A agrees to pay B a sum of money if B marries C. C marries D. The marriage of
B to C must now be considered impossible, although it is possible that D may
die and that C may afterwards marry B.
• 35. When contracts become void which are contingent on happening of
specified event within fixed time.—Contingent contracts to do or not to do
anything if a specified uncertain event happens within a fixed time become void
if, at the expiration of the time fixed, such event has not happened, or if, before
the time fixed, such event becomes impossible.
• When contracts may be enforced, which are contingent on specified event not
happening within fixed time.—Contingent contracts to do or not to do
anything, if a specified uncertain event does not happen within a fixed time may
be enforced by law when the time fixed has expired and such event has not
happened or, before the time fixed has expired, if it becomes certain that such
event will not happen.
• A promises to pay B a sum of money if a certain ship returns within a year. The contract
may be enforced if the ship returns within the year, and becomes void if the ship is burnt
within the year.
• A promises to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship does not return within the year, or is burnt within
the year.
• 36. Agreement contingent on impossible events void.—Contingent
agreements to do or not to do anything, if an impossible event
happens, are void, whether the impossibility of the event is known or
not to the parties to the agreement at the time when it is made.

• A agrees to pay B 1,000 rupees if two straight lines should enclose a space.
The agreement is void.
• A agrees to pay B 1,000 rupees if B will marry A‟s daughter C. C was dead at
the time of the agreement. The agreement is void.
Essentials of Contingent contract
• A valid contract to do or abstain from doing something
• Enforcement of the contingent contract could be on the happening or not happening of
the events respectively.
• The contract will be valid only if it is about performing or not performing an obligation.
• Performance of the contract must be conditional
• The condition for which the contract has been entered into must be a future event, and it should
be uncertain. If the performance of the contract is dependent on an event, which is although a
future event, but certain and sure to happen, then it’ll not be considered as a contingent
contract.
• The said event must be collateral to such contract
• The event on whose happening or non-happening of the event on which the performance of the
contract is dependent should not be a part of the consideration of the contract. The happening or
non-happening of the event should be collateral to the contract and should exist independently.
• The event should not be at the discretion of the promisor
• The event so considered as for contingency should not at all to be dependent on the promisor. It
should be totally a futuristic and uncertain event.
Commercial applications of contingent contracts
• Insurance is a contract to do something if the future event occurs that will
be contracted by the parties and liability will be taken by the offeror.
• In all Insurance (Life, Marine, Fire etc.), the Offeror promises to take the
risk of the offeree against the incident to do or not to do something and
for that the offeree agrees to pay a certain amount of money.
• Contingent contract can be used in the contract of guarantee as well as
the contract of warranty.
• Contingent contract in negotiation may occur when negotiating parties
fail to reach an agreement.
• CC in mergers and acquisitions (M&A) as well. Depending on the M&A
deal, contingent payments may be part of the Seller’s proceeds.
• It can also be used in the contract of indemnity.
Discharge or Termination of Contracts
A contract is said to be discharged or terminated when the rights and
obligations arising out of a contract are extinguished.
• Contracts may be discharged or terminated by any of the following
modes:
• performance, i.e. by fulfilment of the duties undertaken by parties or by
tender.
• mutual consent or agreement.
• lapse of time;
• operation of law;
• impossibility of performance; and
• breach of contract.