2.the indian contract act

8/2/2019 2.the Indian Contract Act

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THE INDIAN CONTRACT ACT, 1872

NATURE OF CONTRACT

The law of contract is that branch of law which determines the circumstances in

which promises made by the parties to a contract shall be legally binding on them.

Its rules define the remedies that are available in a court of law against a person

who fails to perform his contract, and the conditions under which the remedies are

available.

The law of contract introduces definiteness in business transactions.

The Indian Contract Act, 1872

The law relating to contracts is contained in the Indian Contract Act, 1872. The

Act deals with

(1) The general principles of the law of contract.

(2) Some special contracts only.

Nature of the law of contract

The law of contract differs from other branches of law in an important respect. It

does not lay down a number of rights and duties which the law will enforce; it

consists rather of a number of limiting principles, subject to which the parties may

create rights and duties for themselves which the law will uphold. The parties to a

contract, in a sense, make the law for themselves. So long as they do not infringe

some legal prohibition, they can make what rules they like in respect of the

subject-matter of their agreement, and the law will give effect to their decisions.

Definition of Contract

A contract is an agreement made between two or more parties which the law will

enforce. Sec. 2(h) defines a contract as an agreement enforceable by law. Every

agreement and promise enforceable at law is a contract.


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AGREEMENT AND ITS ENFORCEABILITY

Contract = Agreement + Enforceability by law

An agreement is defined as every promise and every set of promises, forming

consideration for each other. A promise is defined thus: When the person towhom the proposal is made signifies his assent thereto, the proposal is said to be

accepted. A proposal, when accepted, becomes a promise. This, in other words,

means that an agreement is an accepted proposal. In order, therefore, to form an

agreement, there must be a proposal or offer by one party and its acceptance by the

other.

Agreement = Offer + Acceptance.

Consensus ad idem

The essence of an agreement is the meeting of the minds of the parties in full and

final agreement. There must, in fact, be consensus ad idem. This means that the

parties to the agreement must have agreed about the subject-matter of the

agreement in the same sense and at the same time. Unless there is consensus ad

idem, there can be no contract.

Example: A, who owns two horses named Rajhans and Hansraj, is selling horse

Rajhans to B. B thinks he is purchasing horse Hansraj. There is no consensus ad

idem and consequently no contract.

Obligation

An agreement, to become a contract, must give rise to a legal obligation or duty.

The term obligation is defined as a legal tie which imposes upon a definite personor persons the necessity of doing or abstaining from doing a definite act or acts.

Example: A agrees to sell his car to B for Rs. 10,000. The agreement gives rise toan obligation on the part of A to deliver the car to B and on the part of B to pay Rs.

10,000 to A. This agreement is a contract.

ESSENTIAL ELEMENTS OF A VALID

CONTRACT


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According to Sec. 10, all agreements are contracts if they are made by the free

consent of parties competent to contract, for a lawful consideration and with a

lawful object and are not expressly declared to be void. In order to become a

contract, an agreement must have the following essential elements:

1. Offer and acceptance: There must be two parties to an agreement, i.e., one

party making the offer and other party accepting it. The terms of the offer must be

definite and the acceptance of the offer must be absolute and unconditional. The

acceptance must also be according to the mode prescribed and must be

communicated to the offeror.

2. Intention to create a legal relationship: When the two parties enter into an

agreement, their intention must be to create legal relationship between them. If

there is no such intention on the part of the parties, there is no contract between

them. Agreements of a social or domestic nature do not contemplate legalrelationship; as such they are not contracts.

3. Lawful consideration: An agreement to be enforceable by law must be

supported by consideration. Consideration means an advantage or benefitmoving from one party to the other. In simple words, it means something in

return. The agreement is legally enforceable only when both the parties givesomething and get something in return. Consideration need not necessarily be in

cash or kind. It may be an act or abstinence (abstaining from doing something) or

promise to do or not to do something. It may be past, present or future. But it

must be real and lawful.

4. Capacity of parties-competency: The parties to the agreement must be capable

of entering into a valid contract. Every person is competent to contract if he-

(a) is of the age of majority,

(b) is of sound mind, and

(c) is not disqualified from contracting by any law to which he is subject.

5. Free and genuine consent: It is essential to the creation of every contract thatthere must be free and genuine consent of the parties to the agreement. The

consent of the parties is said to be free when they are of the same mind on all the

material terms of the contract.

6. Lawful object: The object of the agreement must not be (a) illegal, (b) immoral,

or (c) opposed to public policy. If an agreement suffers from any legal flaw, it

would not be enforceable by law.


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7. Agreement not declared void: The agreement must not have been expressly

declared void by law in force in the country.

8. Certainty and possibility of performance: The agreement must be certain and

not vague or indefinite.

Example: A agrees to sell to B a hundred tons ofoil. There is nothing whateverto show what kind of oil was intended. The agreement is void for uncertainty.

9. Legal formalities: A contract may be made by words spoken or written. As

regards the legal effects, there is no difference between a contract in writing and a

contract made by word of mouth. It is, however, in the interest of the parties that

the contract should be in writing.

CLASSIFICATION OFCONTRACTS

1. Classification according to validity.

Voidable contract. An agreement made 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. When the consent of a party to a contract is not free, the

contract is voidable at his option. [Sec. 2 (i)].

Example: A promises to sell his car to B for Rs. 2,000. His consent is obtained by

use of force. The contract is voidable at the option of A. He may avoid the

contract or elect to be bound by it.

Void agreement and void contract.

Void agreement. An agreement not enforceable by law is said to be void. A void

agreement does not create any legal rights or obligations. It is a nullity and isdestitute of legal effects altogether. It is void ab initio.

Void contract. A contract which ceases to be enforceable by law becomes void

when it ceases to be. A contract, when originally entered into, may be valid and

binding on the parties, e.g., a contract to import goods from a foreign country. It

may subsequently become void, e.g., when a war breaks out between the importing

country and the exporting country.


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Illegal agreement: An illegal agreement is one which transgresses some rule of

basic public policy or which is criminal in nature or which is immoral.

Unenforceable contract: An unenforceable contract is one which cannot be

enforced in a Court of law because of some technical defect such as absence of

writing or where the remedy has been barred by lapse of time.

2. Classification according to formation.

Express Contract: If the terms of a contract are expressly agreed upon (whether by

words spoken or written) at the time of formation of the contract, the contract is

said to be an express contract.

Implied Contract: An implied contract is one which is inferred from the acts or

conduct of the parties or course of dealings between them.

Example: there is an implied contract when, A gets into a public bus,

Quasi Contract: Strictly speaking, a quasi-contract is not a contract at all. A

contract is intentionally entered into by the parties. A quasi contract is created by

law. It resembles a contract in that a legal obligation is imposed on a party who is

required to perform it.

Example: T, a tradesman, leaves goods at Cs house by mistake. C treats the goods

as his own. C is bound to pay for the goods.

3. Classification according to performance.

1. Executed Contract: Executed means that which is done. An executed contract is

one in which both the parties have performed their respective obligations.

Example: A paints a picture of B and B pays for the same.

2. Executory Contract: Executory means that which remains to be carried intoeffect. An executory contract is one which both the parties have yet to perform

their obligations.

Example: A agrees to engage the services of B as his servant from next month.

3. Unilateral or one-sided Contract: Only one party has to fulfill his obligation at

the time of the formation of the contract, the other party having fulfilled his

obligation at the time of the contract.


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Legal Rules as to Offer:

1. Offer must be such as in law is capable of being accepted and thus giving rise to

legal relationship. An offer must be such as would result in a valid contract when

it is accepted.

2. Terms of offer must be definite, unambiguous and certain and not loose and

vague.

Example: A says to B, I will sell you a car. A owns three different cars. The

offer is not definite.

3. An Offer may be distinguished from:

(a) A declaration of intention and an announcement: A declaration by a personintending to do something gives no right of action to another. Such a declaration

only means that an offer will be made or invited in future and not that an offer is

made now.

Example: An advertisement for a concert or an auction sale does not amount to an

offer to hold such concert or auction sale.

(b) An invitation to make an offer or do business: Display of goods by a

shopkeeper in his window, with prices marked on them, is not an offer but merely

an invitation to the public to make an offer to buy the goods at the marked price.

Newspaper advertisements are not offers. A recognized exception to this is a

general offer of reward to the public.

4. Offer must be communicated. An offer to be complete must be communicated

to the person to whom it is made.

For example, A proposes, by letter, to sell a house to B at a certain price. The

communication of the proposal is complete when B receives the letter.

An acceptance of an offer, in ignorance of the offer, is not acceptance and does not

confer any right on the acceptor.

5. Offer must be made with a view to obtaining the assent. Offer must be made to

obtain the assent of the party addressed and not merely with a view to disclosing

the intention of making an offer.


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6. Offer should not contain a term the non-compliance of which may be assumed to

amount to acceptance. Thus a man cannot say that if acceptance is not

communicated by a certain time, the offer would be considered as accepted.

Example: A writes to B, I will sell you my horse for Rs. 5,000/- and if you do notreply, I shall assume you have accepted the offer. There is no contract if B does

not reply.

7. A statement of price is not an offer. Merely stating of the price does not amount

to an offer.

Cross Offers: When two parties make identical offers to each other, in ignorance of

each others offer, the offers are cross offers. In such a case, the Court will notconstrue one offer as the offer and the other offer as the acceptance and as such

there can be no concluded contract.

ACCEPTANCE

A contract emerges from the acceptance of an offer. Acceptance is the act of

assent by the offeree to an offer.

Acceptance may be express or implied. It is express when it is communicated by

words, spoken or written or by doing some required act. It is implied when it is to

be gathered from the surrounding circumstances or the conduct of the parties.

Who can accept?

Acceptance of a particular offer: When an offer is made to a particular person, it

can be accepted by him alone and no one else.

Acceptance of general offer: When an offer is made to world at large, any persons

to whom the offer is made can accept it.

Legal Rules as to acceptance.

1. The offer must be absolute and unqualified i.e., it must conform to the offer. An

acceptance, in order to be binding, must be absolute and unqualified in respect of

all terms of the seller, whether material or immaterial, major or minor. It is well

settled that both offer and acceptance must be based on three components-

certainty, commitment and communication. If any of the three components is

lacking either in the offer or in acceptance it does not give rise to a valid contract.


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2. It must be communicated to the offeror. To conclude a contract between the

parties, the acceptance must be communicated in some perceptible form. A mere

resolve or mental determination on the part of the offeree to accept an offer, when

there is no external manifestation of the intention to do so, is not sufficient.

Example: A tells B that he intends to marry C, but tells C nothing of his intention.

There is no contract, even if C is willing to marry A.

3. It must be according to the mode prescribed or usual and reasonable mode. If

the acceptance is not according to the mode prescribed, or some usual and

reasonable mode, where no mode is prescribed the offeror may intimate to the

offeree within a reasonable time that the acceptance is not according to the mode

prescribed and may insist that offer must be accepted in the prescribed mode only.

Example: A makes an offer to B and sayif you accept the offer, reply by wire.

B sends the reply by post. It will be a valid acceptance unless A informs B that the

acceptance is not according to the mode prescribed.

4. It must be given within a reasonable time. If any time limit is specified, the

acceptance must be given within that time. If no time limit is specified, it must be

given within a reasonable time.

5. It cannot precede an offer. If the acceptance precedes an offer, it is not a valid

acceptance and does not result in a contract.

6. It must show an intention on the part of the acceptor to fulfill terms of the

promise. If no such intention is present, the acceptance is not valid.

7. It must be given by the party or parties, to whom the offer is made.

8. It must be given before the offer lapses or before the offer is withdrawn.

9. It cannot be implied from silence. The acceptance of an offer cannot be impliedfrom the silence of the offeree or his failure to answer, unless the offeree has by his

previous conduct indicated that his silence means that he accepts.

Communication of Offer, Acceptance and its Revocation.

When is communication complete?


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The communication of an offer is complete when it comes to the knowledge of the

person to whom it is made.

Example: A proposes, by a letter, to sell a house to B at a certain price. The letter

is posted on 10th

July. It reaches B on 12th

July. The communication of the offer is

complete when B receives the letter, i.e., on 12th July.

Communication of acceptance

The communication of acceptance is complete

1. as against the proposer, when it is put into a course of transmission to him, so as

to be out of the power of the acceptor.

2. as against the acceptor, when it comes to the knowledge of the proposer.

Communication of revocation

Revocation means taking back, recalling or withdrawal. It may be arevocation of offer or acceptance. The communication of 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 reach of the power of the

person who makes it.

-As against the person to whom it is made, when it comes to his knowledge.

Time for revocation of offer and acceptance.

Revocation of proposal: A proposal may be revoked at any time before the

communication of its acceptance is complete as against the proposer, but not

afterwards.

Revocation of acceptance: An acceptance may be revoked at any time before the

communication of the acceptance is complete as against the acceptor, but not

afterwards.


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Sec 2(a)

(1989) 2 SCC 163 ABC Laminart Pvt.Ltd v/s A.P.Agencies

Agreement- whether a particular clause formed part of theagreement or were merely general term- where parties transactedthe business, inter alia, on the basis of that clause, held, it formedpart of the agreement and the parties would be bound by it. Itwould not be open to any party to deny its existence on the groundof it being only a general term-Estoppel.

CONSIDERATIONConsideration is one of the essential elements to support a contract. Subject to

certain exceptions, an agreement made without consideration is nudum pactum

(a nude contract) and is void.

Consideration is a technical term used in the sense of quid pro quo (i.e.,something in return). When a party to an agreement promises to do something, he

must get something in return. This something in return is defined as

consideration.

Example: A agrees to sell his car to B for Rs. 10,000/-. Car is the consideration for

B and price is the consideration for A.

Definition of Consideration:

A valuable consideration in the sense of the law may consist either in some right,

interest, and profit or benefit accruing to one party, or some forbearance,

detriment, loss or responsibility given, suffered or undertaken by the other.

The contract act defines consideration as- When at the desire of the promisor, the

promisee or any other person has done or abstained from doing, or does or abstains

from doing, or promises to do or to abstain from doing, something, such act or

abstinence or promise is called a consideration for the promise.

Example: A promises to B to guarantee payment of price of the goods which B

sells on credit to C. Here selling of goods by B to C is consideration for As

promise. (An act of doing something.)


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A promises B not to file a suit against him if he pays him Rs. 500. The abstinence

of A is the consideration for Bs payment.

Need for consideration:

The reason why the law enforces only those promises which are made for

consideration is that gratuitous or voluntary promises are often made rashly and

without due deliberation.

Legal Rules as to consideration:

1. It must move at the desire of the promisor. An act constituting consideration

must have been done at the desire or request of the promisor.

Example: A saves Bs goods from fire without being asked to do so. A cannot

demand payment for his services.

2. It may move from the promisee or any other person. Under the Indian law,

consideration may move from the promisee or any other person, i.e., even a

stranger. This means as long as there is consideration for a promise it is

immaterial who has furnished it. But the stranger to contract will be able to sue

only if he is a party to the contract.

3. It may be anact, abstinence or forbearance or a return promise.

(a) Forbearance to sue. If a person who could sue another for the enforcement of a

right agrees not to pursue his claim, this constitutes a good consideration for a

promise by the other person.

(b) Compromise of a disputed claim. Compromise is a kind of forbearance.

(c) Compromise with creditors. A debtor, financially embarrassed, may call a

meeting of his creditors and request them to accept a lesser amount in satisfactionof their debt. If the creditors agree to it, the agreement is binding both upon the

debtor and the creditors and this amounts to a compromise of the claims of the

creditors.

4. A consideration may bepast, present or future.

Example: A renders some service to B at latters desire. After a month B promisesto compensate A for the services rendered to him. It is past consideration.


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A receives Rs. 5,000/- in return for which he promises to deliver certain goods to

B. The money A receives is the present consideration.

D promises to deliver certain goods to E after a week. E promises to pay the price

after a month. This is future consideration.

5. It need not be adequate. Consideration, as already explained, means

something in return. This something in return need not necessarily be equal in

value to something given. The law simply provides that a contract should be

supported by consideration. So long as consideration exists, the Courts are not

concerned as to its adequacy, provided it is of some value.

6.It must be real and not illusory. Although consideration need not be adequate,

it must be real, competent and of some value in the eyes of the law.

Example: A promises to put life into Bs dead wife should B pay him Rs. 500/-.

As promise is physically impossible of performance.

7. It must be something which the promisor is not already bound to do. A

promise to do what one is already bound to do either by general law or under an

existing contract is not a good consideration for a new promise.

8. It mustnot be illegal, immoral or opposed to public policy.

STRANGER TO CONTRACT

It is a general rule of law that only parties to a contract may sue and be sued on that

contract. This rule is known as the doctrine of privity of contract. Privity ofcontract means relationship subsisting between the parties who have entered into

contractual obligations. It implies a mutuality of will and creates a legal bond or

tie between the parties to a contract.

Exceptions:

The following are the exceptions to the rule that a stranger to a contract cannotsue.

1. A trust or charge. A person (called beneficiary) in whose favour a trust or

other interest in some specific immovable property has been created can enforce it

even though he is not a party to the contract.

2. Marriage settlement, Partition or other family arrangements.


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3. Acknowledgement or estoppel. Where the promisor by his conduct,

acknowledges or otherwise constitutes himself as an agent of a third party, a

binding obligation is thereby incurred by him towards the third party.

4.Assignment of a contract.

5. Contracts entered into through an agent.

6. Covenants running with the land.

A contract without consideration is void

Exceptions :

The general rule is ex nudo pacto non oritur action i.e., an agreement made

without consideration is void. There are exceptions to this rule. They are:

1. Love and affection: A written and registered agreement based on natural love

and affection between near relatives is enforceable even if it is without

consideration.

2. Compensation for voluntary service: A promise to compensate, wholly or in

part, a person who has already voluntarily done something for the promisor, is

enforceable, even though without consideration.

Example: A finds Bs purse and gives it to him. B promises to give A Rs. 50/-.This is a contract.

3. Promise to pay a time-barred debt: A promise by a debtor to pay a time-

barred debt is enforceable provided it is made in writing and is signed by the

debtor or by his agent generally or specially authorized in that behalf.

Example: D owes C Rs. 1,000/- but the debt is barred by the Limitation Act. Dsigns a written promise to pay C Rs. 500/- on account of the debt. This is a

contract.

4. Completed gift.

5. Agency: No consideration is necessary to create an agency.

6. Charitable subscription.


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(1990) 1 SCC 731 Bihar State Elec. Board v/s GreenRubber Industry-

Sec 10- Contract deed once signed, even without reading thecontents, becomes binding on the parties-Maxim- nudumpactum ex quo non orituractio- a voluntary promise, withoutany other consideration other than mere goodwill or naturalaffection. A naked pact, a bare agreement.

CAPACITY TO CONTRACT

The parties who enter into a contract must have the capacity to do so. Capacityhere means competence of the parties to enter into a valid contract. An agreement

becomes a contract if it is entered into between the parties who are competent to

contract.

Every person is competent to contract who -

(a) Is of the age of majority according to the law, to which he is subject,(b) Is of sound mind and

(c) Is not disqualified from contracting by any law to which he is subject.

The following persons are incompetent to contract:

1. Minors

2. Persons of unsound mind

3. Persons disqualified by any law to which they are subject

1. MINORSA minor is a person who has not completed eighteen years of age. In the

following two cases, he attains majority after twenty-one years of age:

(1)Where a guardian of a minors person or property has been appointedunder the Guardians and Wards Ac 1890, or

(2)Where the superintendence of a minors property is assumed by aCourt of Wards.


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Minors Agreements:

1. An agreement with or by a minor is void and inoperativeab initio.

2. He can be a promisor or a beneficiary. Incapacity of a minor to enter into a

contract means incapacity to bind himself by a contract. Nothing debars him

from becoming a beneficiary.

3. His agreement cannot be ratified by him on attaining the age of majority.

Consideration which passed under the earlier contract cannot be implied into

the contract which the minor enters on attaining majority.

Example: M, a minor, borrows Rs. 5,000 from L and executes a promissorynot in favour of L. After attaining majority, he executes another promissory

note in settlement of the first note. The second promissory note is void for

want of consideration.

(1)If he has received any benefit under a void agreement, he cannot be

asked to compensate or pay for it. Sec.65 which provides for

restitution in case of agreements discovered to be void does not apply

to a minor.

Example: M, a minor, obtains a loan by mortgaging his property. He is not

liable to refund the loan. Not only this, even his mortgaged property cannot

be made liable to pay the debt.

(2)He can always plead minority. Even if he has, by misrepresenting his

age, induced the other party to contract with him, he cannot be sued

either in contract or in tort for fraud because if the injured party were

allowed to sue for fraud, it would be giving him an indirect means of

enforcing the void agreement.

(3) There can be no specific performance of the agreements entered into

by him as they are void ab initio. A contract entered into on his behalf by

his parent/ guardian or the manager of his estate can be specifically

enforced by or against the minor provided the contract is (a) within the

scope of the authority of the parent/guardian/ manager, and (b) for the

benefit of the minor.


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(4) He cannot enter into a contract of partnership, but he may be admitted

to the benefits of an already existing partnership with the consent of the

other parties.

(5)He cannot be adjudged an insolvent.

(6)He is liable for necessaries supplied or necessary services rendered

to him or anyone whom he is legally bound to support.

(7)He can be an agent.

(8)His parents/ guardian are/ is liable for the contract entered into by

him, even though the contract is for the supply of necessaries to the

minor.

Minors liability for necessaries:

A minor is liable to pay out of his property for necessaries supplied to him or to

anyone whom he is legally bound to support (Sec.68). The claim arises not out of

contract but out of what are called quasi-contracts. Again, it is only the property of

the minor which is liable for meeting the liability arising out of such contracts. He

is not personally liable.

2. PERSONS OF UNSOUND MINDOne of the essential conditions of competency of parties to a contract is that they

should be of sound mind. A test of soundness of mind reads as follows:

A person is said to be of sound mind for the purpose of making a contract if, at

the time when he makes it, he is capable of understanding it and of forming a

rational judgment as to its effect upon his interests.

A person, who is usually of unsound mind but occasionally of sound mind, may

make a contract when he is of sound mind.

A person, who is usually of sound mind, but occasionally of unsound mind, may

not make a contract when he is of unsound mind.

Lunatics: A lunatic is a person who is mentally disturbed due to some mental

strain or other personal experience. He suffers from intermittent intervals of sanity


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and insanity. He can enter into contracts during the period when he is of sound

mind.

Idiots: An idiot is a person who has completely lost his mental powers. He does

not exhibit understanding of any ordinary matter. An agreement with an idiot, like

that of a minor, is void.

Drunken or intoxicated persons: A drunken or intoxicated person suffers from

temporary incapacity to contract, i.e., at the time when he is so drunk or

intoxicated that he is incapable of forming a rational judgment. The position of a

drunken or intoxicated person is similar to that of a lunatic.

Agreements entered into by persons of unsound mind are void. However, persons

of unsound mind are liable for necessities supplied to them or to anyone whomthey are legally bound to support.

3. OTHER PERSONSAlien enemies: An alien is a person who is not a subject of the Republic of India.

Contracts with an alien friend, subject to certain restrictions, are valid. Contracts

with alien enemy (an alien whose State is at war with the Republic of India).

FREE CONSENTIt is essential to the creation of a contract that the parties have a consensus ad idem,

i.e., they agree upon the same thing in the same sense at the same time and their

consent must be free and real. All agreements are contracts if they are made by

the consent of parties.

Meaning of free consent

Consentis said to be free when it is not caused by

Coercion,

Undue influence,

Fraud,

Misrepresentation and

Mistake.


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Where there is no consent, there is no contract.

When consent is not free, i.e., where it is caused by coercion, undue influence,

fraud or misrepresentation, the contract is voidable at the option of the party whose

consent is so obtained.

Example: A is forced to sign a promissory note at the point of pistol. A knowswhat he is signing but his consent is not free. The contract in this case is voidable

at his option.

COERCION

When a person is compelled to enter into a contract by the use of force by the other

party or under a threat, coercion is said to be employed. Coercion is the

committing, or threatening to commit, any act forbidden by the Indian Penal Code,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.

The threat amounting to coercion need not necessarily proceed from a party to the

contract. It may proceed even from a stranger to the contract.

Coercion includes fear, physical compulsion and menace to goods.

Example: A threatens to shoot B if B does not release him A from a debtwhich A owes to B. B releases A under the threat. The release has been

brought about by coercion.

Consent is said to be caused by coercion when it is obtained by:

1. Committing or threatening to commit any act forbidden by the Indian Penal

Code.

2. Unlawful detaining or threatening to detain any property.

Effect of coercion:

When consent to an agreement is caused by coercion, fraud or misrepresentation,

the agreement is a contract voidable at the option of the party whose consent was

so caused.

The contract act says a person to whom money has been paid, or anything

delivered by mistake or under coercion, must repay or return it.


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Duress

In the English Law, the near equivalent of the term coercion is duress. Duress

involves actual or threatened violence over the person of another (or his wife,

parent or child) with a view to obtaining his consent to the agreement. If the threat

is with regard to the goods or property of the other party, it is not duress.

1.Chikkim Ammiraju vs. Seshamma:

In this case a person threatened his wife and son that he would commit suicide if

she doesnt transfer her property in his brothers favour. The wife and son executedthe release of the deed under the threat. Held, the threat of suicide amounted to

coercion within Sec 15 and the release deed was therefore voidable.

This also is a very important case to prove that threat to commit suicide amounts to

coercion

2.RanganayakammaAlwarSetty:

A young widowed girl of 13 years was forced to adopt a boy by her relatives who

prevented the removal of his body for cremation until she consented. Held the

consent was not free but was induces by coercion. Consequently the adoption was

set aside.

3.Muthia.vs.Muthu.Karuppa:

An agent refused to hand over the account books of a business to the new agent

unless the principal released him from all liabilities. The principal had to give a

release deed. Held the deed was given under coercion and was voidable at the

option of the principal.

4.Bansraj.vs.Secretary of State

The government gave a threat of attachment against the property of P for the

recovery of the fine due from his son. P paid the fine. Held contract was

induced by coercion

UNDUE INFLUENCE

Sometimes a party is compelled to enter into an agreement against his will as a

result of unfair persuasion by the other party. This happens when a special kind of

relationship exists between the parties such that one party is in a position to

exercise undue influence over the other. undue influence is defined as follows:


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A contract is said to be induced by undue influence where the relationssubsisting between the parties are such that one of the parties is in a position to

dominate the will of the other and uses that position to obtain an unfair advantage

over the other.

Where a person holds an apparent authority over the other.

Example: The relationship between master and servant, doctor and patient. Or

Where a person stands in a fiduciary relation. E.g. relation of trust and confidence

to the other.

Where a contract is made with a person whose mental capacity is temporarily or

permanently affected by reason of age, illness or mental or bodily distress.

Example: A, a man enfeebled by disease or age, is induced by Bs influenceover him as his medical attendant, to agree to pay B an unreasonable sum for his

professional services. B employs undue influence.

Effect of undue influence

When consent to an agreement is obtained by undue influence, the contract is

voidable at the option of the party whose consent was so obtained. Any such

contract may be set aside either absolutely or if the party who is entitled to avoid it

has received any benefit thereunder, upon such terms and conditions as to the

Court may seem just and equitable.

Relationships which raise presumption of undue influence:

The following relationships usually raise a presumption of undue influence, viz;

i. parent and child,

ii. Guardian and ward,

iii. Trustee and beneficiary,iv. Religious adviser and disciple,

v. Doctor and patient,

vi. Solicitor and client and

vii. Fianc and fiance.


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Burden of proof

In an action to avoid a contract on the ground of undue influence, the plaintiff has

to establish that

The other party was in a position to dominate his will. Mere proof of nearness of

relationship is not sufficient for the Court to assume that one relation was in a

position to dominate the will of the other;

The other party actually used his influence to obtain the plaintiffs consent to the

contract; and the transaction is unconscionable (unreasonable).

Raniannapurna.Vs.SwaminathanA poor Hindu widow was persuaded by a money lender to agree to pay 100% rate

of interest on money lent by him. She needed the money to establish her right tomaintenance. It was a clear case of undue influence and the court reduced the rate

of interest to 24%

MISREPRESENTATION AND FRAUD

A statement of fact which one party makes in the course of negotiation with a view

to inducing the other party to enter into a contract is known as a representation. It

must relate to some fact, which is material to the contract. It may be expressed by

words spoken or written or implied from the acts and conduct of the parties.

A representation, when wrongly made, either innocently or intentionally, is a

misrepresentation. Misrepresentation may be

An innocent or unintentional misrepresentation, or

An intentional, deliberate or willful misrepresentation to deceive or defraud the

other party.

The former is called misrepresentation and the latter fraud.

MISREPRESENTATION

Misrepresentation is a false statement which the person making it honestly believes

to be true or which he does not know to be false. It also includes non-disclosure of

a material fact or facts without any intent to deceive the other party.


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Example: A, while selling his mare to B, tells him that the mare is thoroughlysound. A genuinely believes the mare to be sound although he has no sufficient

ground for the belief. Later on B finds the mare to be unsound. Therepresentation made by A is a misrepresentation.

Accordingly, there is misrepresentation

When a person positively asserts that a fact is true when his information does not

warrant it to be so, though he believes it to be true.

When there is any breach of duty by a person which brings an advantage to the

person committing it by misleading another to his prejudice.

When a party causes, however innocently, the other party to the agreement to make

a mistake as to the substance of the thing which is the subject of the agreement.

Requirements of misrepresentation

A misrepresentation is relevant if it satisfies the following requirements:

1. It must bea representation of a material fact. Mere expression of opinion does

not amount to misrepresentation even if it turns out to be wrong.

2.It must be made before the conclusion of the contract with a view to inducing

the other party to enter into the contract.

3. It must be made with the intention that it should be acted upon by the person to

whom it is addressed.

4. It must actually have been acted upon and must have induced the contract.

5. Itmust be wrong but the person who made ithonestly believed it to be true.

6. It must bemade without any intention to deceive the other party.

7. Itneed not be made directly to the plaintiff.

A wrong statement of facts made to a third person with the intention of

communicating it to the plaintiff, also amounts to misrepresentation.

Consequences of misrepresentation

The aggrieved party, in case of misrepresentation by the other party, can

1. Avoid or rescind the contract; or

2. Accept the contract but insist that he shall be placed in the position in which he

would have been if the representation made had been true.


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Loss of right of rescission

The aggrieved party loses the right to rescind or avoid the contract for

misrepresentation or fraud

If he, after becoming aware of the misrepresentation or fraud, takes a benefit under

the contract or in some other way affirms it.

Ifrestitutio in integrum (i.e., restoration to the original position) of the parties is

not possible, e.g., where the subject matter of the contract has been consumed or

destroyed.

If a third party has acquired rights in the subject matter of the contract in good faith

and for value.

Babul vs. R.A.SinghM was a marriage broker who gave Y the photograph of a man and told him that

the man was young and rich. Y conveyed the same to his daughter who agreed for

the proposal. But on the day of marriage it was discovered that the man was the

age of 60. There is fraud between M and Y. whereas the is misrepresentation

between Y and his daughter.

FRAUD

Fraud exists when it is shown that

A false representation has been made-

a. Knowingly, or

b. Without belief in its truth, or

c. Recklessly, not caring whether it is true or false and the maker intended the other

party to act upon it, or

d. There is a concealment of a material fact or that there is a partial statement of a

fact in such a manner that the withholding of what is not stated makes that which is

stated false.

Fraud means and includes any of the following acts committed by a party to acontract, or with his connivance intentional active or passive acquiescence, or by

his agent with intent to deceive or to induce a person to enter into a contract:

The suggestion that a fact is true when it is not true and the person making the

suggestion does not believe it to be true;

The active concealment of a fact by a person having knowledge or belief of the

fact;


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A promise made without any intention of performing it;

Any other act fitted to deceive;

Any such act or omission as the law specially declares to be fraudulent.

Example: A sells, by auction, to B a horse which A knows to be unsound. A says

nothing to B about horses unsoundness. This is not fraud in A.

Essential elements of fraud

There must be a representation or assertion and it must be false. Without a

representation or assertion there can be no fraud except in cases where silence may

itself amount to fraud or where there is an effective concealment of a fact.

The representation must relate to a material fact which exists now or existed in

the past.The representation must have been made before the conclusion of the contract

with the intention of inducing the other party to act upon it. Not only must the

representation be false and made with the knowledge of its falsity, but it must also

be made with intent to deceive the other party.

The representation or statement must have been made with knowledge of its

falsity or without belief in its truth or recklessly, not caring whether it is true or

false.

The other party must have been induced to act upon the representation or

assertion. A mere falsehood is not enough to give a right of action. It must have

induced the other party to act upon it.

The other party must have relied upon the representation and must have been

deceived.

The other party, acting on the representation or assertion must have subsequently

suffered some loss.

It is common rule of law thatthere is no fraud without damage.

Consequence of fraud

A contract induced by fraud is voidable at the option of the party defrauded. Untilit is avoided, it is valid. The party defrauded has, however, the following remedies:

He can rescind the contract. Where he does so, he must act within a reasonable

time. If in the interval, while he is deliberating, an innocent third party has

acquired an interest in the property for value, he cannot rescind the contract.


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Example: A purchases certain goods from B by making a misrepresentation. A

sells the goods to X before B avoids the contract. B loses the right to avoid the

contract.

He can insist on the performance of the contract on the condition that he shall be

put in the position in which he would have been if the representation made had

been true.

He can sue for damages.

Contract not necessarily voidableExceptions

When consent to an agreement is caused by coercion, fraud or misrepresentation,

the agreement is a contract voidable at the option of the party whose consent was

so caused, but in the following cases, the contract is not voidable.

Where the consent of a party to a contract was caused by misrepresentation or

fraud and that party could discover the truth by ordinary diligence. The phrase

ordinary diligence means such diligence as a prudent man would take in his

own case under similar circumstances.

Example: A, by a misrepresentation, leads B erroneously to believe that five

hundred tonnes of indigo are made annually at his factory. B examines the

accounts of the factory, which show that only four hundred tones of indigo have

been made. After this B buys the factory. The contract is not voidable on account

of As misrepresentation.

Where a party enters into contract in ignorance of the misrepresentation or fraud.

Where, before the contract is avoidable, the interests of third parties intervene. But

it is important that the third parties acquire interest in the subject matter for value

and act bona fide.

Where a party to a contract, whose consent was caused by misrepresentation or

fraud, cannot be put in the position in which he would have been if therepresentation made had been true.

Silence as to facts

The general rule is that a person before entering into a contract need not disclose to

the other party the material facts which he knows, but he must refrain from making

active concealment (like concealing a crack on the surface of a table by filling it

and repolishing it). This means mere silence is not fraud.


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Example: Before letting his house, a landlord failed to tell the tenant that it was in

a ruinous condition. Held, he was not liable in deceit as the tenant should have

inspected the house.

Mere silence as to facts likely to affect the willingness of a person to enter into a

contract is not fraud.

Statutory exceptions: There are two statutory exceptions to the above rule:

Where the circumstances of the case are such that, regard being had to them, it is

the duty of the person keeping silence to speak. Where silence iss, in itself,

equivalent to speech.

MISTAKE

Mistake may be defined as an erroneous belief about something. It may be amistake of law or a mistake of fact.

Mistake of Law

Mistake of law of the country. Ignorantia Juris non excusat, i.e. Ignorance of law is

no excuse, is a well settled rule of law. A party cannot be allowed to get any relief

on the ground that it had done a particular act in ignorance of law. A mistake of

law is, therefore, no excuse and the contract cannot be avoided.

Mistake of law of a foreign country. Such a mistake is treated as a mistake of fact

and the agreement in such a case is void.

Mistake of fact

Mistake of fact may be :

1) A bilateral mistake, or

2) A unilateral mistake

Bilateral mistake

Where both the parties to an agreement are under a mistake as to a matter of fact

essential to the agreement, there is a bilateral mistake. In such a case, the

agreement is void.

The following two conditions have to be fulfilled for the above:


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1. The mistake must be mutual, i.e. both the parties should misunderstand each

other and should be at cross purposes.

Example: A agreed to purchase Bs motor car which was lying in Bs garage.Unknown to either party, the car and garage were completely destroyed by fire a

day earlier. The agreement is void.

2. The mistake must relate to a matter of fact essential to the agreement. As to what

facts are essential in an agreement will depend upon the nature of the promise in

each case.

But an erroneous opinion as to the value of a thing which forms the subject matter

of an agreement is not to be deemed a mistake as to a matter of fact.

The various cases which fall under bilateral mistake are as follows:

Mistake as to the subject matter: where both the parties to an agreement are

working under a mistake relating to the subject matter the agreement is void.

Mistake as to the subject covers the following cases:

Mistake as to the existence of the subject matter. If both the parties believe the

subject matter of the contract to be in existence, which in fact at the time of the

contract is non-existent, the contract is void.

Example: A agrees to buy from B a certain horse. It turns out that the horse was

dead at the time of the bargain, though neither party was aware of the fact. The

agreement is void.

Mistake as to the identity of the subject matter. It usually arises where one party

intends to deal in one thing and the other intends to deal in another.

Example: In an auction sale, the auctioneer was selling tow.(fiber) A bid for a lot,

thinking it was hemp.(plant from which rope is made) The bid was extravagant for

tow, but reasonable for hemp. There was no contract in such a case.

Mistake as to the quality of the subject matter. If the subject matter is something

essentially different from what the parties thought it to be, the agreement is void.

Example: Table napkins were sold at an auction by a description with th e crest of

Charles I and the authentic property of that monarch. In fact the napkins wereGeorgian. The agreement was void as there was a mistake as to the quality of the

subject matter.


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Mistake as to the quantity of the subject matter. If both the parties are working

under a mistake as to the quantity of the subject matter, the agreement is void.

Mistake as to the title to the subject matter. If the seller is selling a thing which he

is not entitled to sell and both the parties are acting under a mistake, the agreement

is void.

Example: A person took a lease of a fishery which, unknown to either party,

already belonged to him. Thus, the lease is void.

Mistake as to price of the subject matter. If there is a mutual mistake as to the price

of the subject matter, the agreement is void.

Mistake as to the possibility of performing the contract. Consent is nullified if

both the parties believe that an agreement is capable of being performed when infact this is not the case. The agreement, in such case, is void on the ground of

impossibility.

Impossibility may be

i) Physical impossibility

ii) Legal impossibility

A contract is void if it provides that something shall be done which cannot, as a

matter of law, be done.

Unilateral mistake

When in a contract only one of the parties is mistaken regarding the subject matter

or in expressing or understanding the terms or the legal effect of the agreement, the

mistake is a unilateral mistake. 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. A

unilateral mistake is not allowed as a defence in avoiding a contract unless themistake is brought about by the other partys fraud or misrepresentation.

Example: A offers to sell his house to B for an intended sum of Rs. 44,000. By

mistake he makes an offer in writing of Rs. 40,000. He cannot plead mistake as a

defence.


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Exceptions

Mistake as to the identity of the person contracted with. It is a fundamental rule of

law that if one of the parties represents himself to be some person other than he

really is, there is a mistake as to the identity of the person contracted with.

Mistake as to the nature of contract. If a person enters into a contract in the

mistaken belief that he is signing a document of a different class and character

altogether, there is a mistake as to the nature of contract and the contract is void.

He can successfully pleadnon est factum (it is not his deed, i.e., document). The

very basis of the contract, i.e., consent, is missing in this case. Thus, where in

signing a document the mind of the signer does not go with signature, there is amistake which would vitiate the contract.

Example: M, an old man of poor sight, indorsed a bill of exchange thinking it was

a guarantee. There was no contract on the ground that the mind of the signer did

not accompany the signature.

(1990) Supp SCC 216 Dularia Devi v/s Janardhan Singh-

Sec17-19Where a document containing an agreement obtained by fraud andmisrepresentation as to the character of the document itself, thecontract is void and not voidable- different from fraudulentrepresentation as to the contents of the document.There is a clear distinction between fraudulent misrepresentation asto the character of the document and fraudulent misrepresentationas to the contents there of. The former is void the later is voidable.

(1990) 1 SCC 207 Bismillah v/s Jnaneshwar Prasad

Sec19- non est factum( it is not his deed or document) The commonlaw defence of non est factum to actions on specialities in its originwas available where an illiterate person, to whom the contents of adeed had been wrongly read, executed it under a mistake as to itsnature and contents, he could say that it was not his deed at all. Inits modern application, the doctrine has been extended to casesother than those of illiteracy and to other contracts in writing. In


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most of the cases in which this defence was pleaded the mistakewas induced by fraud, but that was not, perhaps, a necessary factoras the transaction is invalid not merely on the ground of fraud,where fraud exists, but on the ground that the mind of the signer

did not accompany the signature, in other words he never intendedto sign and therefore, in contemplation of law never didi sign.

(1994) 1 SCC 1 S.P.Chengalvaraya Niadu v/sJagannath

Sec17- Fraud- A fraud is an act of deliberate deception with thedesign of securing something by taking unfair advantage of another.It is a deception in order to gain by anothers loss. It is cheatingintended to get an advantage.

(1989) 2 SCC 1 ITC Ltd. v/s George Joseph Fernandes

Sec.20- Mistake as to fact- it must be a common mistake of boththe parties about the same vital fact- Distinction between CommonMistake and Mutual Mistake- Mistake must also be as to thesubstance or essential and integral element of the contract.

Where parties make mutual mistake misunderstanding each other

and are at cross purposes, there is no real correspondence of offerand acceptance and the parties are not really consensus ad idem. There is thus no agreement at all and the contract is void. Acommon mistake is their where both parties are mistaken about thesame vital fact although both parties are ad idem e.g.: The subjectmatter of the contract has already perished. The contract in such acase is void.

Sec 20 is concerned with common mistake of fact and not mutual

mistake. A common mistake is made or shared alike by both whilemutual mistake is made or entertained by each of the partiestowards or with regard to each other.

LEGALITY OF OBJECT AND

CONSIDERATION

One of the essentials of valid contract is that the consideration and the object


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should be lawful. Every agreement of which the object or consideration is unlawful

is void. Section 23 of the Indian Contract Act elaborates this in the following

manner. All agreements are contracts if they are made for a lawful consideration.

According to Sec.23:

What consideration and object are lawful, and what not - The consideration or

object of an agreement is lawful, unless

1. It is forbidden by law or

2. Is of such nature that, if permitted, it would defeat the provisions of any law; or. Is

fraudulent; or

3. Involves or implies injury to a person or property; or

4. 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 beunlawful. Every agreement of which the object or consideration is unlawful is

void.

The above acts, which are unlawful, are discussed as under.

1. FORBIDEN BY LAW - An agreement to what has been prohibited by the

Indian Penal Code or by some other law cannot be enforced e.g. An agreement to

sell liquor without license, when a license is required to sell the same is void. A

contract to pay some money if a crime is committed is prohibited by law. If the

agreement does not satisfy the requirement of the Statute, it is void. In the case of

Mehmood and Isfani, during the war the sale of linseed oil without a license from

the Food Controller had been forbidden. The plaintiff agreed to sell linseed oil to

the defendant, on a false assurance from defendant that he had such a license.

Subsequently when the oil was supplied, the defendant refused to accept the same

on the ground that he did not possess necessary license. In an action against the

defendant for damages for breach ofcontract it was held that he was not liable, as

there was no valid contract between the parties.

2. IS OF SUCH NATURE THAT IF PERMITTED. IT WOULD DEFEATTHE PROVISIONS OF ANY LAW - If such agreements are made they are void.

Law may not expressly forbid certain acts, but if they result in circumventing any

law they cannot be encouraged. We can explain the above point with the help of

following examples.

Examples- The agreement between the partners with a view to evading payment of

lncome Tax and Sales Tax was aimed at defeating the provisions of Tax Laws and

was opposed to public Policy and therefore the same was not enforceable.


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A's estate is sold for arrears of revenue under the provisions of an act of the

legislature by which the defaulter is prohibited from purchasing the estate. B, upon

an understanding with A, becomes the purchaser, and agrees to convey the estate to

A upon receiving from him the price B has paid. The agreement is void as it

renders transactions to defeat the object of Law.

3. IS FRAUDULENTIf the consideration or the object of an agreement is to

commit fraud, the agreement is void e.g. A, B & C enter into an agreement for the

division among them of gains acquired, or to be acquired, by them by fraud. The

agreement is void, as its object is unlawful. Similarly if a debtor has made a

compromise with his creditors, agreeing to pay them one third of the sum due, but

makes a secret agreement with the plaintiff agreeing to pay him in full, the secret

agreement with one creditor is fraud on the other.

The case on Manni Ram vs Purshottam Lal is cited. A knew that the railway

company would not grant him a contract, he entered into a contract with B that B

should put forward an application for the contract and after the contract was

granted, A shall serve as the real contractor. A brought an action to put his claim as

a real contractor. It was held by the court that the agreement was to commit fraud

upon the railway company therefore the contract was void.

4. INVOLVES OR IMPLIES INJURY TO A PERSON OR PROPERTY - If

the consideration or the object of an agreement is to cause injury to a person or

property of another the agreement is unlawful and will be treated as void. Injury

means to harm person or property. For example, A promises B, an editor of a local

daily to pay Rs. 5000/- for publishing a defamatory article against C. This

agreement involves injury to C and hence is void. Similarly agreement made

between two parties to injure a person or harm property of another person is void

agreement.

5. COURT REGARDS IT AS IMMORAL - What is immoral has not been

defined by the Indian Contract Act, it depends on the norms accepted by the

society at a particular point of time. The immoral Act, which the Law has dealt, issexual immorality e.g. illicit cohabitation, prostitution, and interference with the

marital relations. Any contract, which involves or assists or promotes sexual

immorality, is void.

Examplesa) A man let out his house, to a prostitute; knowingly well the fact in advance is

immoral.

b) A bachelor entering into a contract with a married woman to obtain divorce


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from her husband and thereafter to marry him is a void contract on the basis of

immorality.

c) An agreement to let her daughter hire to a person for concubine age for a

consideration is immoral and punishable under the law.

6. OPPOSED TO PUBLIC POLICY - The law seeks to prevent any transaction,

which is opposed to public policy; The courts do play a great role in interpreting

whether the agreement is in consonance with the recognised public policy or not.

The following acts can be treated as unlawful.

a) Trading with enemy country

b) Interfering with the administration of Justice

c) Traffic in Public Offices

d) Restraining personal liberty

e) Champerty interfering parental dutyf) Creating Monopolies

g) Marriage brokerage contract

h) Agreement in Restraint of Marriage (Section 26)

i) Agreement in Restraint of Trade

TRADING WITH ENEMY COUNTRY - If the country declares any country as

enemy country according to its political status, any agreement with such country

amounts to oppose to public policy. If the performance of the contract made in

time of peace is rendered unlawful by the outbreak of war, the obligation of the

contract is suspended or dissolved accordingly as the intention of the parties can or

cannot be substantially carried on by postponing the performance till the end of

hostilities.

INTERFERING WITH THE ADMINISTRATION OF JUSTICE - An

agreement to stifle prosecution tends to be perversion or abuse of justice therefore

such an agreement is void. Thus, where A, agrees to sell certain land to B, in

consideration of B abstaining from taking criminal proceedings against his son

amounts to interference with the administration of Justice. Similarly if an

agreement with a robber for restoration of property with the promise not to takeaction in the court in a criminal case pending against the said robber in the same

case is interfering with administration of Justice.

TRAFFIC IN PUBLIC OFFICES - The agreement for the sale or transfer of

public offices or to obtain public titles like Padma Shree is illegal on the ground of

public policy.

RESTRAINING PERSONAL LIBERTY - An agreement which unduly restricts


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the personal liberty of any person is void on the ground of public policy thus an

agreement by a creditor with debtor to work as bonded labour is an example of

restraining personal liberty.

CHAMPERTY INTERFERING PARENTAL DUTY - When a person helps in

litigation in exchange of a promise to hand over a portion of fruits of litigation, if

any, is called Champerty. Under the Indian Contract Act such agreements are void

and are against public policy. Thus an agreement with the lawyer to give three

fourth share of the popery if recovered was held to be champertous and void.

CREATING MONOPOLIES - Agreements having for their object the

establishment of monopolies are opposed to public policy and therefore void. It is

also hit by MRTP act.

MARRIAGE BROKERAGE CONTRACT - The marriage of a minor daughterfor some consideration by a father is opposed to public policy

AGREEMENT IN RESTRAINT OF MARRIAGE (SECTION 26) - Thus an

agreement by a person, being a major agrees for good consideration not to marry a

particular person is void and not binding since the same is void and against public

policy.

AGREEMENT IN RESTRAINT OF TRADE (SECTION 27) - Every

agreement by which anyone is restrainedfrom exercising a lawful profession, trade

or business of any kind is to that extent void. Thus an agreement by A with B for a

good amount of consideration not to do a certain business in a certain area is in

restraint of trade and opposed to public policy.

PERFORMANCE OF CONTRACT

In a Contract, the parties have to fulfil their contractual obligations. When such

obligations come to an end, the contract is said to be discharged. In other words,discharge of contract means termination of contractual relationship between theparties.

A contract is said to be discharged, when it ceases to operate/ exist.

A contract may be discharged in positive (i.e. by performance) or in negative (i.e.

by breach or failure to perform by either or both the parties).


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For instance, a students contract with the college stands discharged on expiry ofthe term of his course, i.e. he will have to leave the college after completion of the

course irrespective of his success or failure in the examination.

Modes of Discharge

1. By Performance of Contractual Obligation.

2. By Subsequent Agreement (Doctrine of Novation).

3. By Impossibility of Performance (Doctrine of Frustration).

4. By Breach of Contract.

5. By lapse of Time.

6. By Operation of Law.

1. Discharge by Performance

A contract is said to be discharged, if the parties had fulfilled their respective

obligations under the contract.

For example: A offers to sell his house to B for Rs. 50,000/- and B accepts thesame. Later B pays the entire amount and A hands over the house. Here the

parties have fulfilled their respective obligations. The contract is said to be

discharged.

2. By Subsequent AgreementDoctrine of Novation

Sec.62 of the Indian Contract Act, 1872, deals with the Doctrine of Novation. The

expression Novation means substitution of a new contract in the place of anexisting contract. With the creation of a new contract, the existing contract stands

extinguished / terminated.

The contract or Novation may take place between:-

a. The same parties with the same terms and conditions.

b. The same parties with altered terms and conditions.c. With the change of parties with same/old terms and conditions.

d. With the change of parties and with altered terms and conditions.

The new contract in the above cases must be supported by a lawful consideration.

The mutual discharge of the old contract may be treated as a consideration for the

new contract.


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a. Same parties and same terms and conditions:

The parties to the contract may mutually agree to enter into a new contract with the

same terms and conditions in order to discharge the existing /old contract. Then old

contract stands terminated and new contract will come into force.

Example: If a promissory note is about to expire on limitation, the parties may

execute a new promissory note.

b. Same parties with altered terms and conditions:

sThe parties may enter into a new contract by changing or altering the terms and

conditions of the existing/old contract.

Example: In the above example if the debtor, before the expiry of the promissorynote, gives the creditor some gold as security, the parties remain unchanged but the

terms of the contract are altered from promissory note to mortgage deed.

c. Change of parties with the terms and conditions:

A new contract may be entered into with the change of parties under the same

terms and conditions of the existing /old contract in order to discharge the old

contract.

Example: A offered to sell his house to B for Rs. 50,000/- payable in twoinstalments in 6 months. B accepts to purchase the same. Later B with the

consent of A and C withdraws from the contract and C accepts to purchase itby entering into a new agreement with A. Here, the parties are changed, but the

terms and conditions are the same.

d. Change of parties and change of terms and conditions:

A contract between two parties may stand discharged against a new contract

entered into by the change of parties with altered terms and conditions.

Example: In the above example, if the parties (A and B) agree to discharge the

old contract against a new contract of mortgage of the said house between A andC for Rs. 30,000/-. Here the parties are changed and terms and conditions are also

changed.

Rules of Novation


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For Novation to be valid, the essential conditions are :-

1. To substitute new contract, the old contract must exist.

2. The new contract must fulfil the essentials of a valid contract. (Sec.10 of Indian

Contract Act).

3. Discharge by impossibility of performance- Doctrine of Frustration

One of the essential elements of a valid contract is possibility of performance. If

the performance of a contract is impossible, it is void. Impossibility of

performance renders the contract void.

Thus, Sec.56 of the Act lays down that an agreement to do an act impossible itself

is void.

In English Law, impossibility of performance is known as the Doctrine of

Frustration. It is based on two maxims,

(i) Lex non cogit and impossibilia It means Law does not recognise what is

impossible, and

(ii) Impossibillium mulla obligatio estIt means what is impossible does not

create an obligation.

According to Sec.56 of the Act, impossibility of performance takes place under the

following circumstances:

1. Impossibility existing at the time of agreement.

a. Initial impossibility known to parties.

Example: An agreement to put life into a dead body.

b. Initial impossibility unknown to parties.

Example: A enters into an agreement with B to supply goods in transit. But

A could not supply since the goods were destroyed (unknown to both).

2. Impossibility after formation of contract or subsequent impossibility:

The performance is possible at one time of entering into a contract, but later, it

becomes impossible due to non-happening of certain unforeseen events.

Example: Natural Calamities, Act of God, Countries at War, etc..


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Rabinson vs. Devison

In this case, the defendants wife, a piano player, promised to play piano at concert

on an occasion. But she could not give her performance due to ill health. In an

action by the plaintiff, the defendant was held not liable.

Kerell vs. Henry

The defendant agreed to hire a flat from plaintiff on 26th

and 27th

June 1902 for

viewing the proposed coronation procession of King Edward-VII. Owing to sudden

illness of the King, the procession was cancelled. In an action against the defendant

for rent, it was held not liable.

4. Breach of Contract

It may be classified as

i. Anticipatory Breach

ii. Present Breach

In anticipatory breach, one party expresses his inability to perform his part before

the due date of its performance.

Present breach is simply a breach of contract or actual breach of contract. It takes

place either at the time when the performance of the contract falls due or during the

performance of the contract.

5. Discharge by Lapse of Time

The Limitation Act, 1963, imposes an obligation on the parties in respect of certain

contract to perform within a specified period.

6. Discharge by Operation of Law

A contract may be discharged by operation of Law in case of death, insolvency,

unauthorised alteration of terms of the contract, etc.

REMEDIES FOR BREACH OF

CONTRACT


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A contract gives rise to correlative rights and obligations. A right accruing to a

party under a contract would be of no value if there were no remedy to enforce that

right in a Court of Law in the event of its infringement or breach of contract. A

remedy is the means given by law for the enforcement of a right.

When a contract is broken, the injured party (i.e., the party who is not in breach)

has one or more of the following remedies:

1. Rescission of the contract

2. Suit for damages

3. Suit upon quantum meruit

4. Suit for specific performance of the contract

5. Suit for injunction

1. RESCISSION

When a contract is broken by one party, the other party may sue to treat the

contract as rescinded and refuse further performance. In such a case, he is

absolved of all his obligations under the contract.

Example: A promises B to supply 10 bags of cement on a certain day. B agrees to

pay the price after the receipt of the goods. A does not supply the goods. B is

discharged from liability to pay the price.

When a party treats the contract as rescinded, he makes himself liable to restore

any benefits he has received under the contract to the party from whom such

benefits were received. But if a person rightfully rescinds a contract he is entitled

to compensation for any damage which he has sustained through non-fulfillment of

the contract by the other party.

2. DAMAGES

Damages are a monetary compensation allowed to the injured party by the Courtfor the loss or injury suffered by him by the breach of a contract. The object of

awarding damages for the breach of a contract is to put the injured party in the

same position, so far as money can do it, as if he had not been injured i.e., in the

position in which he would have been had there been performance and not breach.

1.Damages arising naturallyordinary damages.


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When a contract has been broken, the injured party can recover from the other

party such damages as naturally and directly arose in the usual course of things

from the breach. This means that the damages must be the proximate consequence

of the breach of contract. These damages are known as ordinary damages.

Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs. 475

per quintal, the price to be paid at the time of delivery. The price of wheat rises to

Rs. 500 per quintal and A refuses to sell the wheat. B can claim damages at the

rate of Rs. 25 per quintal.

2.Damages in contemplation of the partiesspecial damages.

Damages other than those arising from the breach of a contract may be recovered if

such damages may reasonably be supposed to have been in the contemplation of

both the parties as the probable result of the breach of the contract. Such damages,known as special damages, cannot be claimed as a matter of right. These can be

claimed only if the special circumstances which would result in a special loss in

case of breach of a contract, are brought to the notice of the other party.

3. Vindictive or exemplary damages.

Damages for the breach of a contract are given by way of compensation for loss

suffered, and not by way of punishment for wrong inflicted. Hence, vindictive or

exemplary damages have no place in the law of contract because they are

punitive (involving punishment) by nature. But in case of breach of a promise to

marry, and dishonour of a cheque by a banker wrongfully when he possesses

sufficient funds to the credit of the customer, the Court may award exemplary

damages.

4.Nominal damages.

Where the injured party has not in fact suffered any loss by reason of breach of

contract, the damages recoverable by him are nominal.

5.Damages for loss of reputation.

In case of a banker who wrongfully refuses to honour the customers cheque. Ifthe customer happens to be a tradesman, he can recover damages in respect of any

loss to his trade reputation by the breach.

6.Damages for inconvenience and discomfort.


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Damages can be recovered for physical inconvenience and discomfort. The

general rule in this connection is that the measure of damages is not affected by the

motive or the manner of the breach.

7. Mitigation of damages.

It is the duty of the injured party to take all reasonable steps to mitigate the loss

caused by the breach. He cannot claim to be compensated by the party in default

for loss which he ought reasonably to have avoided.

8.Difficulty of assessment.

Although damages which are incapable of assessment cannot be recovered, the fact

that they are difficult to assess with certainty or precision does not prevent the

aggrieved party from recovering them. The Court must do its best to estimate theloss and a contingency may be taken into account.

9. Cost of decree.

The aggrieved party is entitled, in addition to damages, to get the cost of getting

the decree for damages. The cost of suit for damages is in the discretion of the

Court.

10.Damages agreed upon in advance in case of breach.

If a sum is named in a contract as the amount to be paid in case of its breach, or if

the contract contains any other stipulation by way of a penalty for failure to

perform the obligations, the aggrieved party is entitled to receive from the party

who has broken the contract, a reasonable compensation not exceeding the amount

so named.

Liquidated damages and penalty.

Sometimes parties to a contract stipulate at the time of its formation that on thebreach of the contract by either of them, a certain specified sum will be payable as

damages. Such a sum may amount to either liquidated damages or a penalty.

3. QUANTUM MERUIT

The phrase quantum meruit means as much as earned. A right to sue on a

quantum meruit arises where a contract, partly performed by one party, has

become discharged by the breach of the contract by the other party. The right is


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founded not on the original contract which is discharged or is void but on an

implied promise by the other party to pay for what has been done.

4. SPECIFIC PERFORMANCE

In certain cases of breach of a contract, damages are not adequate remedy. The

Court may, in such cases, direct the party in breach to carry out his promise

according to the terms of the contract. This is a direction by the Court for specific

performance of the contract at the suit of the party not in breach.

Some of the cases in which specific performance of a contract may, in the

discretion of the Court, be enforced are as follows:

(a) When the act agreed to be done is such that compensation in money for its non-

performance is not an adequate relief.

(b) When there exists no standard for ascertaining the actual damage caused for its

non-performance is not an adequate relief.

(c) When it is probable that the compensation in money cannot be got for the non-

performance of the act agreed to be done.

5. INJUNCTION

Where a party is in breach of a negative item of a contract (i.e., where he is doing

something which he promised not to do), the Court may, by issuing an order,

restrain him from doing what he promised not to do. Such an order of the Court is

known as an injunction.

RECTIFICATION OR CANCELLATION

When through fraud or a mutual mistake of the parties, a contract or other

instrument does not express their real intention; either party may institute a suit to

have the instrument rectified. In such a case, if the Court finds that there has beena fraud or mistake, it may ascertain the real intention of the parties, and may, in its

discretion, rectify the instrument so as to express that intention.

(1994) 3 SCC 324 FCI v/s New India Assurance company ltd.

Sec 28- Agreement in respect of legal proceeding- object andnature- how to be construed-


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Agreement limiting time for assertion of rights by laying claim interms of the agreement but not for enforcement of right in court notvoid- purpose of prescribing such time limit is to put the other sideon notice and not to restrict the statutory period of limitation.

(1991) 3 SC 79 Gurumukh Singh v/s Amar Singh

Sec23- Unlawful object of agreement- opposed to public policy- testto determine object and public policyvide Halsburys laws of EnglandAny agreement which tends to be injurious to the public or againstthe public good is invalidated on the grounds of public policy. Thequestion whether a particular agreement is contrary to public policyis a question of law, to be determined like any other by the proper

application of prior decisionsThe public policy is not static. It is variable with the changing timesand the needs of the society.

(1989) 4 SCC 1 Mahabir Kishore v/s State of M.P.-

Sec72- Money paid under mistake of law is refundable.

(1989) 2 SCC 163 ABC Laminart Pvt.Ltd v/s A.P.Agencies

Sec 28 and 23- Agreement excluding courts jurisdiction-Absolute exclusion void- but where more than one court hasjurisdiction, agreement to submit to one, to the exclusion of othersvalue.

(1989) 1 SCC 76 Jawaharlal Wadhwa v/s Haripada Chakraborty

Sec 38 and 73- Anticipatory breach of contract by a party to the

contract-Claims open to the other party-Specific performance of the contract can, inter alia, be claimed onlyby showing his willingness to perform the contract.


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(1993) 4 SCC 181 Deokabai v/s Uttam

Sec56- Frustration of Contract- whatever the alleged source offrustration, contract is not discharged merely because it turns out

to be difficult to perform or is onerous.

This doctrine cannot be invoked where question of non performanceof mandatory terms of the contract and not of impossibility ofperformance of the contract is involved.

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2.the indian contract act

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