1. Introduction-The term contract is defined in Section 2(h) of the Indian Contract Act.

It is
defined as an agreement enforceable by law. What happens herein is that one party puts
forth a proposal before the other party. When the proposal is accepted by the other party,
it becomes a promise. This promise, backed by a consideration (in cash or kind), is an
agreement. An enforceable agreement, that is, an agreement to which the parties want
legal backing and rules according to which it must comply, is a contract.

The necessities associated with the formation of a contract-An enforceable agreement is a

contract only if the contact is valid. A contract that is invalid, vitiated or irregular will
either be void, voidable or unenforceable. Therefore, a contract must be formed keeping
in mind certain conditions and terms that have to be met with before and during the
formation of the contract. The Indian Contract Act, 1872, prescribes the law relating to
contracts in India.

The key ingredients in a contract and their respective provisions

The requirements of a contract are as follows:

There must be offer and acceptance Section 2(d)

There must be a consideration - Section 25 Parties must be competent to contract - Section

11 and 12

There must be free consent of the parties - Section and 22

The object of the contract must be lawful - Section 23 and 30

When these requirements are not met, the contract will be invalid and could be rendered
void.

Offer and acceptance

There needs to be a proposal (offer) and the acceptance of this proposal to form a
contract.

The communication of the proposal and the acceptance need to be complete. A proposal
needs to be communicated to the promisee or the offeree who is willing to accept it. This
proposal or acceptance can be express or implied:

A proposal or offer is implied when the party expresses his or her desire to do something
or to get something done by their actions.

An express proposal or acceptance is when the offer or acceptance is expressed in some

form, written, oral, or by words. Implied acceptances and offers are valid.

The communication of a proposal is said to be completed when it is brought to the

knowledge of the person to whom the proposal is made. An acceptance can be made only
if the offeree knows that an offer has been made to him/her, that is, when the
communication of the offer is complete.
Upton-on-Severn RDC v. Powell (1942)

In this case, a person who received services from a fire brigade under the impression that
the area was entitled to free service, had to pay the fire brigade when he found out that
the area did not service charge free. He had made an implied promise to pay for the
service while availing of benefits.

Lalman Shukla v. Gauri Datt (1913)

In this case, the servant (petitioner) could not claim the reward for finding the defendant's
nephew. The communication of an offer that a reward would be granted for finding the
nephew came to the knowledge of the servant after he had found the nephew.

The communication of acceptance under the Contract Act has different rules for different
modes used to communicate the acceptance.

For the postal mode of acceptance, the acceptance of the offer is complete when the letter
of acceptance has been put into transmission by the offeree. This acceptance is complete
against the offeror and the offeree and the contract will be created. This has been
reiterated in the case of Adams v. Lindsell (1817). The court's reasoning in this judgment
was that if one party is given an option of knowledge/ information the other party must
also be given the option to receive an acknowledgmen If this is given it will go on ad
infinitum. To stop this chain at the first instance, the contract is concluded when the letter
of acceptance has been put into the transmission.

For an instantaneous mode of communicating acceptance, the Indian courts have accepted
the principle followed in the case of Entores Ltd v. Miles Far East Corporation (1955),
where it was held that the communication of acceptance is completed when the
acceptance reaches the offeror. Therefore, for an instantaneous mode of communication,
the acceptance is complete when it reaches the party to whom the acceptance is
conveyed.

The acceptance of a contract must be absolute and unqualified as given in Section 7 of the
Act. An acceptance that has a variation or is a partial acceptance is not treated as an
acceptance. It is rather a counter-proposal/offer. This when accepted by the original
offeror gives rise to a new contract and the previous offer becomes non-existent. Thus, an
acceptance needs to be absolute and unqualified to give rise to a valid contract.

Consideration-Consideration is another major essential for a contract to be valid. Section

25 of the Contract Act states that a contract without consideration is void. Consideration is
defined under Section 2(d) of the Act. Fundamentally, consideration is the price for which
the promise of the other party is bought, and this promise which has been given for value
is enforceable.
An act done at the request of another, express or implied, is sufficient consideration to
support a promise.

A promise to pay a subscription becomes enforceable as soon as any definite steps have
been taken in furtherance of the object and on the faith of the promised subscription.

Doraswami lyer v. Arunachala Ayyar (1935)

In this case, the defendant promised to pay some amount for renovation. he promised
while the renovation was going on, but later refused to pay. Since the renovation was
going on when he made the promise, it cannot be said that it was done at the desire of the
promisor. Therefore, there was no consideration and he was not liable to pay the amount.

Hudson Re. (2011)-In this case, it was held that if there is no consideration to pay a
particular sum towards a charity, a person cannot be held for non-payment.

Past consideration is an act done without any promise. In Indian Law, a promise to
compensate for a past act that is voluntarily done is enforceable. An act done by one party
at the request of another is also enforceable.

Lampleigh v. Brathwait (1615)-In this case, imprisoned person asked an acquaintance to

get him out of the prison. When this request was made, he had not promised to give the
acquaintance anything in return. His friend got him out, after which he promised to pay
him a certain amount, but he didn't pay. Therefore, the friend filed a case. The court held
that the person is liable to pay since the was done at his request.

Therefore, the consideration in a contract must be valid without which the contract will be
void and unenforceable.

Competency to contract-Section 10 of the Contract Act states the parties must be

competent to contract. Competency is defined in Section 11. Minors, persons of unsound
mind, and persons disqualified by law to which they are subject are incompetent to
contract. A contract entered into by a minor is void

A minor's guardian can enter into a valid contract on behalf of the minor. Such contracts
can also be enforced by the minor.

There cannot be reliance-based estoppel. The minor cannot be estopped from the original
agreement. The defence of infancy acts in the minor's favour.

The doctrine of restitution- a minor obtains property of goods by misrepresenting the age.
The property can be restored from the minor if it is in their possession.

Srikakulam Subramanyam v. Kurra Subba Rao (1948)

In this case, there was a minor and the minor's mother, who sold a piece of land to
discharge a debt of the minor's father. This property was mortgaged. Subsequently, the
minor had second thoughts and claimed that the contract was void. The privy council
found that the contract was within the competence of the guardian. The contract was thus
enforceable since the mother contracted on behalf of the minor. The contract had also
been made for the benefit of the minor. Thus, it was not a void contract.

Leslie (R) Ltd. v. Sheill (1914)-In this case, a minor deceived a moneylender with respect to
age and secured some amount. The moneylender sued the minor for the restitution of
money. The money could not be traced therefore, this doctrine does not apply to money.
The minor was not liable.

The agreement of a person who is of unsound mind is id similar to a minor's agreement in

India. 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. is of sound mind.

Inder Singh v. Parmeshwardhari Singh (1957)-In this case, individual sold a property worth
a lot more for a smaller amount. The mother of this person showed that the person was of
unsound mind. The court found that the person was of unsound mind when the contract
was made and thus it was void

Free consent of the parties-Section 10 specifies that free consent essential requirement of
a contract. Section 14 of the Contract Act defines free consent. Both the parties entering a
contract must enter the contract by their own will and must give free consent to the
contract. There must be a meeting of the minds of the parties on the same subject, to
form a valid contract.

When consent to an agreement is given by coercion, uque influence, fraud,

misrepresentation, contract is voidable at the option of the party whose consent was so
caused. According to Section 2(i), a voidable contract has been classified as a contract that
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.

If consent is caused by mistake the agreement is void and cannot be enforced by either of
the parties.

Allcard v. Skinner (1887)

Religious influence is very dangerous and powerful. The court, in this case, stated that she
cannot recover the amount due to the law of limitation. She had claimed to recover the
amount after 6 years which is a delay and limits her from claiming the share. The court did
recognize that it case of undue influence.
Lawful object-Section 23 of the Contract Act states what considerations in a contract are
lawful and unlawful. An object that is forbidden by law defeats the purpose of any law, is
fraudulent, opposed to public policy is unlawful. Contracts in which the consideration is
unlawful are void.

Mohinder Singh v. State of Punjab (1963)-In this case, a person, who was elected as a
sarpanch for a period of five years, made an agreement with another member that the
latter would be given two-year term and the elected one, the remaining three years. The
agreement was held to be void as it would have defeated the purpose and provisions of
the Punjab Panchayat Raj Act, 1994.

The consequences associated with not forming an appropriate contract

When a contract is formed without complying with the section of the Contract Act, it will
lead to the contract being void or voidable due to which the parties intending to contract
might face losses or would fail to acquire services or goods from the other party. A void
party is not enforceable, due to which, except in rare cases, the parties cannot be
compensated. A voidable contract can be deemed as void at the choice of one of the
parties to the contract. Therefore, to avoid such situations, it is of utmost significance to
form contracts that are in complete compliance with the Indian Contract Act.

OFFER &ACCEPTANCE

.1 Character of an offer

An offer has been described as an unconditional statement of a person’s intention to be

bound by the terms of the offer made and thus the intention to contract with the other
person.

Hence an offer is an expression of willingness to be bound by certain terms.

The person making an offer is called the offeror, and the person to whom the offer is made is
called the offeree

Treitel – Definition of offer

‘an expression of willingness to contract on certain terms, made with the intention that it
shall become binding as soon as it is accepted by the person to whom it is addressed’.

.1.1 Offers can be addressed to the general public and are accepted when the offer is acted
upon by a member of the general public.

Advertisements for unilateral contracts are generally treated as offers.

Key case: Carlill v Carbolic Smoke Ball Co (1893)

the defendants were the manufacturers of ‘smokeballs’ which they claimed could prevent
flu. They published advertisements stating that if anyone used their smokeballs for a
specified time and still caught flu, they would pay that person £100, and that to prove they
were serious about the claim, they had deposited £1,000 with their bankers.

Mrs. Carlill bought and used a smokeball, but nevertheless ended up with flu. She therefore
claimed the £100, which the company refused to pay. They argued that their advertisement
could not give rise to a contract, since it was impossible to make a contract with the whole
world, and that therefore they were not legally bound to pay the money. This argument was
rejected by the court, which held that the advertisement did constitute an offer to the world
at large, which became a contract when it was accepted by Mrs. Carlill using the smokeball
and getting flu. She was therefore entitled to the £100.

1.1.2 The terms of the offer must be certain

If the words of the offer are too vague then the parties might not really know what they are
contracting for and should not then be bound.

Key case: Guthing v Lynn (1831)

When a horse was purchased a promise to pay £5 more ‘if the horse is lucky’ could not be an
offer. It was too vague.

1.1.3 The offer must be communicated to the offeree

It is impossible to accept something of which you have no knowledge.

Key case: Taylor v Laird (1856) 25 LJ Ex 329

The claimant captained the defendant’s ship. He then decided to give up the captaincy but
worked his passage back home as a crew member. He then tried to claim wages but failed.
The court held that, since the ship owner was unaware of the claimant’s decision to quit as
captain and had received no offer to work in an alternative capacity, there was no contract.
A person can only accept an offer that has been communicated to him.

1.1.4: It is possible to withdraw an offer, at any time before the offer is accepted

Key case: Routledge v Grant (1828) 4 Bing 653

The defendant offered his house for sale, the offer to remain open for six weeks only. He
then took the house off the market before this period ended and was sued. The court held
that withdrawal of an offer is lawful any time up to acceptance. Since there had been no
acceptance he acted lawfully.

1.1.5: The offeror must communicate the withdrawal of the offer to the offeree

Key case: Byrne v Van Tienhoven (1880) 5 CPD 344

Concerning: communication of revocation On 1 October, a letter offering to sell tinplates was

posted from Van Tienhoven in Cardiff to Byrne in New York.
On 8 October, the offerors changed their minds and posted a letter of revocation
withdrawing the offer made by letter on 1 October. On 11 October, Byrne received the letter
offering to sell (from 1 October) and accepted by telegram.

On 15 October, Byrne confirmed the acceptance (from 11 October) by letter. On 20 October,

Byrne received the letter of 8 October withdrawing the offer.

Legal principle

The offer of 1 October had not been withdrawn at the time that it was accepted and
therefore, the contract was formed on acceptance on 11 October.

This was so despite the lack of agreement between the parties.

1.1.6: Communication of withdrawal of the offer can be by a reliable third party

It need not be done personally but the third party must be a reliable source of information.

Key case: Dickinson v Dodds (1876) 2 Ch D 463

Dodds offered to sell houses to Dickinson, the offer to remain open until 9.00 am on 12 June.
Dickinson intended to accept the offer but did not do so at once. Berry, a mutual
acquaintance,

then told Dickinson that Dodds had withdrawn the offer and Dickinson sent an acceptance,
but when it was received the house was already sold. Dickinson claimed unlawful revocation
and breach of contract. The court held that revocation must be communicated any time
before

acceptance but this can be through a reliable third party – as Berry was shown to be. The
offer was validly withdrawn.

1.1.7: A unilateral offer cannot be withdrawn while the offeree is performing

In a unilateral contract the offeree actually accepts by performing his/her side of the bargain
(as in Carlill). It would clearly be unfair to prevent this once the other party had begun.

Key case: Errington v Errington & Woods [1952]1 KB 290

A father bought and mortgaged a house in his own name for his son and daughter-in-law to
live in, promising that, when theyhad paid off the mortgage, he would transfer legal title to
them.

The father later died and other family members sought possession but failed. The court held
that the father’s promise could not be withdrawn while the couple kept up the mortgage

repayments, after which the house would be legally theirs. There was a unilateral contract
where acceptance and performance were one and the same.

.2 Distinguishing between Offer and Invitation to Treat

Some kinds of transaction involve a preliminary stage in which one party invites the other to
make an offer. This stage is called an invitation to treat.

.2.1 Examples of invitation to treat

a) Goods displayed on shelves in a self-service shop.

These are not an offer that is then accepted when the customer picks the goods from the
shelves. They are an invitation to treat an invitation to the buyer to make an offer to buy.
This is done by the customer taking them to the cash desk where the contract is formed
when the sale is agreed.

The rule preserves the freedom of contract of the shopkeeper and sensibly allows the
shopkeeper to accept or refuse a sale. Thismight be particularly important where a child
selects alcoholfrom shelves in an off license and tries to buy it.

Key case; Pharmaceutical Society of GB v Boots Cash Chemists

Ltd (1953)

Boots altered one of their shops to self-service. Under s18 Pharmacy and Poisons Act 1933 a
registered pharmacist was required to be present at the sale of certain drugand poisons. It
was important to know where the contract wasformed. Court held that the contract was
formed when goods were presented at the cash desk where a pharmacist was presentnot
when taken from the shelf.

b) Goods on display in a shop window

Again, there is no offer, only a display of the goods that the customer might go into the shop
and offer to buy.

Key case: Fisher v Bell (1961)

A prosecution under the Offensive Weapons Act 1959 failed dueto bad drafting of the Act.
The offence was to offer for sale prohibited weapons. The shopkeeper displaying a flick knife
in

the window was not offering it for sale. It was a mere invitation to treat.

c) Goods or services advertised in a newspaper or magazine

Here, a contract will not be formed until the person seeing thadvertisement has made an
offer to buy, which has then been accepted.

Key case: Partridge v Crittenden (1968)

A prosecution for ‘offering for sale’ a wild bird under the Protection of Birds Act 1954
failed.The advertisement (Bramblefinch cocks, bramblefinch hens, 25s each’) was not an

offer but an invitation to treat.

d) An invitation to council tenants to buy their property

key case: Gibson v Manchester City Council

In Gibson v Manchester City Council (1979) a council tenant was interested in buying his

house. He completed an application form and received a letter from the Council stating that
it ‘may be prepared to sell the house to you’ for £2,180. Mr Gibson initially queried the

purchase price, pointing out that the path to the house was in a bad condition. The Council
refused to change the price, saying that the price had been fixed taking into account the
condition ofthe property. Mr Gibson then wrote on 18 March 1971 asking theCouncil to
‘carry on with the purchase as per my application’.

Following a change in political control of the Council in May 1971, it decided to stop selling
Council houses to tenants, and Mr Gibson was informed that the Council would not proceed
with the sale of the house. Mr Gibson brought legal proceedingsclaiming that the letter he
had received stating the purchase price was an offer which he had accepted on 18 March
1971. The House of Lords, however, ruled that the Council had not made an offer; the letter
giving the purchase price was merely one step in the negotiations for a contract and
amounted only to an invitation to treat. Its purpose was simply to invite the making of a
‘formal application’, amounting to an offer, from the tenant.

e) A mere statement of price

The mere fact that a party has indicated a price which (s)he would find acceptable does not
make it an offer.

Key case: Harvey v Facey [1893] AC 552

Harvey wanted to buy Facey’s farm and sent a telegram: ‘Will you sell me Bumper Hall?
Telegraph lowest price.’ Facey’s telegram replied ‘Lowest price acceptable £900’.

Harvey argued that he had then accepted this and sued when the farm was sold to another
person. His action failed. The court held that the statement was merely a statement of price
and was not an offer open to acceptance.

f) Lots at an auction

The rule in fact derives from auctions. The lot is the invitation to make a bid. Bidding is an
offer to buy, and the acceptance is the fall of the auctioneer’s hammer at which point the
contract is formed. The contract is formed between the highest bidder and the owner of the
goods. The auctioneer is merely acting on behalf of the owner of the goods.The
consequence of this is that there is an absolute entitlement to withdraw any lot prior to the
fall of the auctioneer’s hammer. This is no more than an example of the rule that an offer
can be withdrawn any time prior to acceptance

Key case: Harris v Nickerson (1873) LR 8 QB 286

The claimant attended an auction hoping to buy some furniture that was advertised in the
auction catalogue. The auctioneer withdrew the items from sale and the claimant sued
unsuccessfully for the cost of travel and lodgings.

The court held that the presence of the goods in the catalogue was no more than an
invitation to treat, and that there was no contract since this could only be formed on the fall
of the auctioneer’s hammer.

Key case: British Car Auctions v Wright (1972)

A prosecution for offering to sell an unroadworthy vehicle failed. At the auction there was no
offer to sell, only an invitation to bid.

1.2.3. Situations which are not invitation to treat

Sometimes, in situations that we would normally associate with invitation to treat, the
circumstances involved or the nature of the words used mean that there has in fact been an
offer rather than an invitation to treat. These include:

(i) Advertisements involving a unilateral offer -If the advertisement indicates a course of
action in return for which the advertiser makes a promise to pay, then (s)he is bound by this
promise.

Key case Carlill v The Carbolic Smoke Ball Co. Ltd (1893)

(ii) A statement of price where an offer is also intended

A mere statement of price is not binding, but if other factors indicate that an offer is
included in the statement then it will be binding if it is accepted.

Key case: Biggs v Boyd Gibbins (1971)

In response to the offer of a lower price the claimant wrote ‘For a quick sale I will accept

£26,000’. The defendant replied ‘I accept your offer’. The claimant then wrote ‘I thank you
for accepting my price of £26,000. My wife and I are both pleased that you are purchasing

the property’. His first letter was an offer that the defendant had accepted.

(iii) Competitive tendering

Normally, an invitation to tender for the supply of goods or services is no more than an
invitation to treat. For instance, a company wants its office painted. It invites tenders and
various decorators will respond with different prices for the work. The company is free to
choose any of the decorators, not necessarily the cheapest. If, however, the company has in
its advertisement agreed that the work will go to the tender with the lowest price, then it is
bound to give the work to the bidder with the lowest price.

Key case: Harvela Investments Ltd v Royal Trust Co. of Canada

The Trust Company wanted to sell a large quantity of land that it owned, in a single
transaction. To achieve this it had invited tenders from two interested parties for the
purchase of all of the

land. It indicated to both prospective purchasers that the sale of the land would go to the
party making the higher bid. The party making the lower bid had tendered a price of
$2,100,000 but had also included in the bid an alternative bid of $101,000 in excess of any
other offer (a so-called ‘referential bid’). The Trust Company accepted this referential bid and
Harvela, the party that in fact had made the higher bid, found out and then sued the

Trust Company successfully. It was for the court to determine whether the invitation to
tender was, as would usually be the case in tenders, only an invitation to treat. It also
needed to

decide which of the bids was in fact the higher. In answer to the first issue, the court held
that the wording of the invitation to tender made it an offer that could only be accepted by
the highest bidder. In answer to the second question, the court held that the referential bid
could not be accepted as binding in law.

As the court explained, if both parties had entered such a bid then no contract could emerge
from the tender since each referential bid in turn would be higher than the other one, which
in turn would invoke the other referential bid, and so on without end. The contract in those
circumstances could never be complete and the court could not accept the referential bid as
a valid bid.

There may also be an obligation on the party inviting tenders to consider all tenders
regardless of whether a tender is accepted.

Key case: Blackpool and Fylde Aero Club Ltd v Blackpool

For many years, the aero club had held the concession to run pleasure flights from the
council’s airport. When the concession was due for renewal the council put it out to
competitive tender, and invited tenders from other parties. All tenders were to be submitted
in unmarked envelopes in a particular box by 12 noon on a specific date. The council stated
that it would not be bound to accept any bid. The club placed its bid in the box at 11.00 a.m.
but by accident the box was not emptied after this time and its bid was not therefore
considered. The concession was given to another group, R.R. Helicopters. When the council
later discovered its mistake it at first decided to repeat the exercise but was threatened with
legal action by R.R. Helicopters. The club claimed breach of a contract to consider all tender
delivered by the due time. Its claim was upheld. The court felt that there was an implied
undertaking to operate by the rules that it had set, even though the invitation to tender for
the concession was only an invitation to treat.

(iv) Auctions advertised as ‘without reserve’ -Traditionally, an auction might take two forms.
The first includes a ‘reserve price’(a minimum price acceptable to the seller) and in this case
no sale can take place, and thus no contract is formed, unless the bidders reach this reserve
price.

See McManus v Fortescue (1907). In the case of an auction held by reserve then there is
only one possible outcome: the goods will become the property of the highest bona fide
bidder. It has, however, been held obiter, that no contract of sale can materialize between
the owner of the goods and the highest bidder where the auctioneer refuses the sale or for
any reason fails to accept the bid of the highest bona fide bidder. In this instance it was said
that a collateral contract is created between the highest bona fide bidder and the auctioneer
himself, so that the auctioneer may then be sued for breach of contract. See Warlow v
Harrison (1859). This point has been examined more recently.

Key case: Barry v Heathcote Ball & Co. (Commercial Auctions)

Here, in an auction advertised as ‘without reserve’, the auctioneer withdrew two lots,
machinery worth £14,251, from the auction. In doing so he refused bids of £200 for each
machine made by the claimant and which were the highest bids. The auctioneer then sold
them on privately at £750 each. The claimant bidder sued, arguing that the highest bid rule
should apply. The court, approving Warlow v Harrison, accepted the existence of a collateral
contract between the bidder and the auctioneer and awarded the claimant £27,600
damages.

Automated machines- posed an interesting question for the court in Thornton v Shoe

Lane Parking [1971] 2 QB 163. The court ruled that the operation of an automatic machine
is considered an offer. The reasoning behind this was mainly based on the inability of the
machine to negotiate with the customer and they cannot reject a customer.

An interesting debate can be had about exactly when acceptance occurs. It may be
contended that the acceptance is made once an individual inserts the coins and chooses an
option. Acceptance is not at the point of the insertion of coins because the customer can still
choose to cancel and get their coins returned. However, if there is no coin return option,
acceptance would likely be held to be on insertion of payment.

2.3. Termination of offer

An offer can be terminated in a number of ways:

● It can be accepted, in which case there is a contract. (or indeed

it could be refused or met with a counter-offer, in which case there is no contract).

● It can be properly withdrawn, as we have seen above.

● The time for acceptance can lapse.

● A reasonable time can have lapsed. (It would be rare that an offer could stay open
indefinitely.)
Other than this an offer can end in one of three ways:

a) By passage of time:

because the time set for acceptance has passed; because a ‘reasonable time’ has passed – it
would be unfair to expect an offeror to indefinitely keep open an offer for sale ofperishable
goods. What is a ‘reasonable time’ is thus a question of fact in each case (Ramsgate Victoria
Hotel v Montefi ore (1866)).

Key case: Ramsgate Victoria Hotel Co Ltd v Montefi ore (1866)Montefiore had offered to
buy shares in June but the company only issued the shares in November. It was held that his
offer to buy had lapsed. The courty recognised that no offer could stay open indefinitely and
that after a reasonable time an offer would lapse. In the case of a transaction where the
value of the goods or services could change rapidly, as in the case here, then a reasonable
time is

likely to be short.

b) By failing to comply with a condition precedent (Financings v Stimson (1962)) (e.g. an

offer of employment made subject to production of a satisfactory reference or medical
report).

Key case: Financings Ltd v Stimson [1962] 3 All ER 386

This involved an agreement for the purchase of a car under a hire purchase agreement. A
condition implied by law into such agreements was that the car would remain in the same
condition from the time of the offer up to the point of acceptance. The car was actually
stolen from the car showroom before the contract was concluded. As a result, the court held
that the purchaser was not bound by his agreement to buy it.

c) Because of the death of either party.-If the offeror dies and the offeree knows of this, it is
unlikely that (s)he would be able to accept and bind the estate of the offeror to a contract.

If the offeree, however, accepts an offer in ignorance of the death of the offeror then a
contract may be formed (Bradbury v Morgan (1862)).

If the offeree dies then it is unlikely that the executors or administrators of the estate can
accept on his/her behalf (Reynolds v Atherton (1921)).

2.4 Acceptance

2.4.1 The role of acceptance in agreement

1 A contract is not formed until an offer is accepted.

2 An agreement occurs when a ‘valid’ acceptance follows a ‘valid’ offer, and the contract is
formed immediately on acceptance.
3 It is vital to establish that the response to the offer is in fact an acceptance and is properly
communicated to the offeror.

4 However, not all negotiations are easily identifiable as offer and acceptance, particularly
negotiations in a commercial context.

2.4.2 The basic rules of acceptance

1 A valid acceptance is an intention to be bound by the terms of the offer,

so, it must: be unequivocal and unconditional; and correspond exactly with the terms of the
offer – the‘mirror image rule.

2 An attempt to vary the terms of the offer is a counter offer, which is a rejection of the offer
that is no longer open to acceptance (Hyde v Wrench (1840)).

Key case: Hyde v Wrench [1840] 49 ER 132

The defendant offered to sell his farm to the claimant for £1,000 who instead offered the
lower price of £950. When the defendant rejected this price, the claimant tried to accept the
original price and claimed breach of contract when the sale did not occur. The court held
that the counter offer was a rejection of the original offer, meaning that it was no longer
open to acceptance.

3 A rejection of an ancillary subject may still be a counter offer, although the main terms are
accepted (Jones v Daniel (1894)).

4 However, a mere enquiry that does not seek to vary the terms of the offer is not a counter
offer (Stevenson v McLean (1880)).

Key case: Stevenson v McLean (1880) 5 QBD 346

The defendant offered to sell iron to the claimant, who in his reply wanted to know if
delivery could be staggered over two months. On receiving no reply, the claimant then sent
a letter of acceptance and sued successfully when the iron was sold to another party. The
court held that the claimant’s initial response was not a counter offer and thus a rejection of
the offer; it was merely an enquiry about details, so that the offer was still open to
acceptance. The claimant had done this and so a contract was formed which was breached.

5 If arrangements continue after a counter offer is made then it is the terms of the counter
offer that are included in the contract (Davies & Co v William Old (1969)).

6 But the courts will not allow a party to benefit from both the counter offer and the original
offer (Pars Technology v City Link Transport Holdings Ltd (1999)).

Key case: Pars Technology Ltd v City Link Transport Holdings

In a dispute over an earlier agreement, the parties negotiated a settlement under which the
defendant offered to pay £13,500 plus a refund of carriage charges of £7.50 plus VAT. The
claimant then accepted by letter. The defendant argued that the acceptance was invalid
because the claimant’s letter stated that VAT should be paid on the whole amount and
therefore was a counter offer. The court held that the whole correspondence between the
parties should be considered in deciding if there was a contract. It held that the claimant
had clearly accepted the defendant’s offer in its letter and a binding contract resulted from
the defendant’s offer. The defendant could not escape its own clearly accepted obligations
just because the claimant restated them in a contrary way.

7 This may not result if the parties are not interested in ancillary terms and have overlooked
the discrepancy in terms (Brogden v Metropolitan Railway Co (1877)).

Key case: Brogden v Metropolitan Railway Co (1877) 2 App Cas

The parties had a long-standing informal arrangement for supply of coal. They then decided
to make it formal and a draft contract was sent to Brogden by the Railway Company.
Brogden inserted the name of an arbitrator into a section left blank for that purpose, signed
it and returned it. The Railway Company secretary signed it without looking at it.

Brogden continued to supply coal and was paid for deliveries. After some conflict over other
matters Brogden tried to avoid his obligations, arguing that there was no contract because of
a counter offer by the Railway Company, which then sued. The court accepted that
technically the insertion of the arbitrator name was a counter offer, but held that this had no
real effect as coal was still supplied and paid for. The parties had accepted the counter offer
as part of the agreement and the contract was valid.

2.3.4 Communication of the acceptance

1 There is no contract unless acceptance is communicated. An acceptance does not usually

take effect until it is communicated to the offeror. As Lord Denning explained in Entores Ltd v
Miles Far East Corporation (1955), if A shouts an offer to B across a river but, just as B yells
back an acceptance, a noisy aircraft flies over, preventing A from hearing B’s reply, no
contract has been made. A must be able to hear B’s acceptance before it can take effect. The
same would apply if the contract was made by telephone, and A failed to catch what B said
because of interference on the line; there is no contract until A knows that B is accepting the
offer. The principal reason for this rule is that, without it, people might be bound by a
contract without knowing that their offer had been accepted, which could obviously create
difficulties in all kinds of situations.

Where parties negotiate face to face, communication of the acceptance is unlikely to be a

problem; any difficulties tend to arise where the parties are communicating at a distance, for
example by post, telephone, telegram, telex, fax or messenger.

1 Only a genuine offeree can accept the offer, so an offer made without authority cannot be
accepted (Powell v Lee (1908)).
2 It follows that silence cannot amount to an acceptance (Felthouse v Bindley (1863)). Legal
Principle: Merely remaining silent cannot amount to an acceptance, unless it is absolutely
clear that acceptance was intended.

Key case: Felthouse v Bindley

In Felthouse v Bindley (1862) an uncle and his nephew had talked about the possible sale of
the nephew’s horse to the uncle, but there had been some confusion about the price. The
uncle subsequently wrote to the nephew, offering to pay £30 and 15 shillings and saying, ‘If I
hear no more about him, I consider the horse mine at that price.’ The nephew was on the
point of selling off some of his property in an auction. He did not reply to the uncle’s letter,
but did tell the auctioneer to keep the horse out of the sale. The auctioneer forgot to do this,
and the horse was sold. It was held that there was no contract between the uncle and the
nephew. The court felt that the nephew’s conduct in trying to keep the horse out of the sale
did not necessarily imply that he intended to accept his uncle’s offer – even though the
nephew actually wrote afterwards to apologise for the mistake – and so it was not clear that
his silence in response to the offer was intended to constitute acceptance. This can be
criticised in that it is hard to see how there could have been clearer evidence that the
nephew did actually intend to sell, but, on the other hand, there are many situations in
which it would be undesirable and confusing for silence to amount to acceptance.

Acceptance can be construed from the conduct of the parties

(Brogden v Metropolitan Railway Co (1877)). but only if it can be objectively demonstrated

to have been the

intention of the offeree (Day Morris Associates v Voyce (2003)).

4 In some situation’s communication can be waived (e.g. unilateral contracts or customary

conduct between parties).

5 Generally, acceptance can be in any form, but if a specific method of acceptance is known
to be required then acceptance must be in that form to be valid (Compagnie de Commerce
et

Commissions S.A.R.L. v Parkinson Stove Co (1953)).

6 Acceptance of a unilateral offer need not be communicated, because performance is the

same as acceptance (Carlill v Carbolic Smoke Ball Co (1893)).Postal rule

7 In one situation the acceptance takes place before the offeror receives notification of it –
this is the ‘postal rule’.

a) Where use of the post is the normal, anticipated method of acceptance, the acceptance is
valid and the contract formed when the letter is posted, not when it is received by the
offeror (Adams v Lindsell (1818)).
Key case: Adams v Lindsell

The postal rule was laid down in Adams v Lindsell (1818). On 2 September 1817, the
defendants wrote to the claimants, who processed wool, offering to sell them a quantity of
sheep fleeces, and stating that they required an answer ‘in course of post’. Unfortunately,
the defendants did not address the letter correctly, and as a result it did not reach the
claimants until the evening of 5 September. The claimants posted their acceptance the same
evening, and it reached the defendants on 9 September.

It appeared that if the original letter had been correctly addressed, the defendants could
have expected a reply ‘in course of post’ by 7 September. That date came and went, and
they had heard nothing from the claimants, so on 8 September they sold the wool to a third
party. The issue in the case was whether a contract had been made before the sale to the
third party on 8 September. The court held that a contract was concluded as soonas the
acceptance was posted, so that the defendants were bound from the evening of 5
September, and had therefore breached the contract by selling the wool to the third party.
(Under current law there would have been a contract even without the postal rule, because
the revocation of the offer could only take effect if it was communicated to the offeree –
selling the wool to a third

party without notifying the claimants would not amount to revocation. However, in 1818 the
rules on revocation were not fully developed, so the court may well have considered that
the

sale was sufficient to revoke the offer, which was why an effective acceptance would have to
take place before 8 September.)

Legal Principle: An acceptance by post takes effect when it is posted, rather than when it is
communicated.

b) The rule applies where the letter of acceptance is received after notice of revocation of
the offer is sent (Henthorn v Fraser (1892))

Key case: Henthorn v Fraser (1892) CA

The plaintiff (who could not write) was at the defendants’ office in Liverpool on 7 July 1891
when they handed him an offer to sell him certain houses. The plaintiff took the letter home
to Birkenhead. On 8 July, between 12.00 and 1.00 pm the defendants posted to the plaintiff
a withdrawal of their offer. At 3.50 pm, the plaintiff’s solicitor posted the plaintiff’s
acceptance of the offer. The defendants’ withdrawal arrived at 5.30 pm and the plaintiff’s
acceptance arrived at 8.30 pm. Held there was a contract because acceptance was complete
at the moment of its posting, even though the offer was not made by post. Lord Herschell
and Kay LJ both rejected the idea that the postal rule was based on implied authority from
the offeror to the offeree to reat the post office as the offeror’s agent. Per Lord Herschell:
I should prefer to state the rule thus: where the circumstances are such that it must have
been within the contemplation of the parties that, according to the ordinary usages of
mankind, the post might be used as a means of communicating the acceptance of an offer,
the acceptance is complete as soon as it is posted. Lindley LJ did not comment on this
aspect, but concurred with the judgment of Lord Herschell. Q Is there any possible case
where Lord Herschell’s formulation of the basis of the postal rule would give a different
result from Lindley formulation in Byrne & Co v Leon Van Tienhoven & Co (above)?

c) It can also apply even though the letter of acceptance I never received (Household Fire
Insurance Co v Grant (1879)).

Key case: Household Fire Insurance v Grant (1879)

Grant made a written offer to purchase shares. Notification of acceptance was posted but
never received. When the company went into liquidation, Grant’s claim that he was not a
shareholder and should not be liable for the value of the shares failed. He had become a
shareholder, even though unaware of it.

d) The postal rule can be excluded by the terms of the offer itself (Holwell Securities v
Hughes (1974)).

Key case: Holwell Securities v Hughes (1974)

An attempt to use the postal rule failed where the acceptance was required to be ‘by notice
in writing’. The fact that actual notice was required meant that the postal rule did not apply.

8 The postal rule has limited application to modern communications technology.

Key case: In Entores Ltd v Miles Far East Corp. (1955),

offer and acceptance communicated by telex were valid because the method was so
instantaneous that the parties were deemed to be dealing as if face-to-face, even though
they were in different countries. To put it more clearly,

In Entores v Miles Far East Corporation (1955) the claimants were a London company and
the defendants were an American corporation with agents in Amsterdam. Both the
Londoncompany and the defendants’ agents in Amsterdam had telex machines, which allow
users to type in a message, and have it almost immediately received and printed out by the
recipient’smachine. The claimants in London telexed the defendants’

Amsterdam agents offering to buy goods from them, and theagents accepted, again by telex.
The court case arose when theclaimants alleged that the defendants had broken their
contract

and wanted to bring an action against them. The rules of civil litigation stated that they
could only bring this action in Englan if the contract had beenmade in England. The Court of
Appeal held that because telex allows almost instant communication, the parties were in the
same position as if they had negotiated in each other’s presenc or over the telephone, so
the postal rule did not apply and an acceptance did not take effect until it had been received
by the claimants. Because the acceptance had been received in London, the contract was
deemed to have been made there, and so the legal action could go ahead.

When an acceptance is made by an instant mode of communication, such as telephone or

telex, the postal rule does not apply. In such cases the acceptor will usually know at once
that they have not managed to communicate with the offeror, and will need to try again. the
reason is that such forms of communication are usually instantaneous (Brinkibon v Stahag
Stahl (1983)).

Key case: Brinkibon v Stahag Stahl (1983).

The facts here were similar, except that the offer was made by telex from Vienna to London,
and accepted by a telex from London to Vienna. The House of Lords held that the contract
was therefore made in Vienna. In both cases the telex machines were in the offices of the
parties, and the messages were received inside normal working hours. In Brinkibon the
House of Lords said that a telex message sent outside working hours would not be
considered instantaneous, so the time and place in which the contract was completed would
be determined by the intentions of the parties, standard business practice and, if possible,
by analysing where the risk should most fairly lie. the time when these forms of
communication are used may cause problems in determining if a contract is made, as when
a fax is sent out of office hours.

What is standard-form contract?

Standard form contract is a pre-written contract where the terms and conditions are non-
negotiable and are usually drafted by one party and presented to the other party for
signature. Standard form contracts are also known as adhesion contracts or boilerplate
contracts.

In India, standard form contracts are recognised under the Indian Contract Act, 1872.

The Indian Contract Act, 1872 does not provide a specific definition of standard form
contracts, but it does recognise their existence. Section 23 of the Act states that any contract
that involves a certain degree of unfairness or unconscionability, or which is against public
policy, is void. This provision applies to standard form contracts as well, and any clause in
such a contract that is found to be unconscionable or against public policy can be held to be
void.

Use of standard form contracts

The purpose of standard form contracts is to streamline the contracting process by providing
a pre-written set of terms and conditions that can be used for a large number of
transactions. These contracts are often used in situations where one party has significantly
more bargaining power than the other, such as in consumer contracts or employment
contracts.

Standard form contracts can save time and resources by avoiding the need for negotiations
and individualized drafting of contracts for each transaction. However, they can also be used
to take advantage of consumers or other parties who may not fully understand the terms
and conditions of the contract.

Standard form contracts are commonly used in various sectors such as insurance, banking,
and telecommunications, among others. These contracts often contain a large amount of
legal jargon, and the terms and conditions can be difficult for the average consumer to
understand.

Why do people accept standard form contracts?

Here are some points on why people accept standard form contracts:

1. Convenience: Standard form contracts offer pre-drafted terms that can be easily
accepted or rejected without the need for time-consuming negotiations or
customizations. This can save parties time and resources, particularly in cases where
the transaction is routine or standardized.

2. Familiarity: These contracts are widely used and accepted in a particular industry or
market. Parties may feel more comfortable using a standard form contract that they
are familiar with, rather than negotiating new terms or using an unfamiliar
document.

3. Perceived lack of bargaining power: In some cases, parties may believe that the
other party is in a stronger position and that they have little leverage to negotiate
more favourable terms. In these cases, accepting a standard form contract may be
seen as the only viable option, even if the terms are not entirely satisfactory.

4. Lack of legal expertise: Some parties may lack the legal expertise to effectively
negotiate or draft a contract, and may prefer to use a standard form contract as a
way to ensure that the basic terms and provisions are covered.

5. Cost: Negotiating or drafting a custom contract can be expensive, particularly for

small businesses or individuals. In these cases, using a standard form contract may be
a more cost-effective option.

Legal status of standard form contracts

The standard form contracts are considered to be legally binding agreements, assuming that
the parties have freely and voluntarily agreed to the terms in India.

Important rules related to standard form contracts

To address the unequal bargaining power between parties, several rules have been
developed to protect the weaker party. Some of these rules include:

Doctrine of unconscionability

Under this doctrine, a court may refuse to enforce a contract if it is found to be

unconscionable or oppressive to the weaker party. This means that if the terms of a contract
are overly harsh or one-sided, a court may declare the contract void or modify the terms to
make them more equitable.

Statutory protections

Certain statutes have been enacted to provide protections to consumers, employees, and
other weaker parties in standard form contracts. For example, the Consumer Protection Act,
2019 provides consumers with the right to file complaints against unfair trade practices and
seeks to promote fair competition.

Implied terms

In some cases, courts may imply certain terms into a contract to protect the interests of the
weaker party. For example, in a contract of employment, courts may imply a duty of good
faith and fair dealing on the part of the employer towards the employee.

Duty to disclose

The party with greater bargaining power has a duty to disclose any relevant information that
may affect the weaker party’s decision to enter into the contract. Failure to disclose such
information may result in the contract being held void.

Right to rescind

The weaker party may have the right to rescind the contract if they were induced to enter
into it by misrepresentation, fraud, or undue influence.

Landmark cases on standard form contracts

Road Transport Corporation v. Kirloskar Brothers

The court held that the contractual terms must be properly brought to the knowledge of the
party who is sort to be bound thereby. If the consignment note is not signed at the time of
delivery of goods for carriage the terms of the consignment note exclude the jurisdiction of
certain courts and are not binding on the consignor or consignee. Hence, the court in this
case held that there should be a reasonable notice of contractual terms.

Lily white v. Munuswami

In this case, the court held that if a dryer issues a receipt stating that the dry cleaner’s
liability is limited to the extent of 50% of the value of the article the dryer is still liable to pay
the full cost if he loses the new saree of the customer. Hence, the terms of the contract must
be reasonable.

Conclusion

Reasonable and fair contractual terms are essential for the smooth operation of any
business relationship. Various legal rules and protections have been developed to ensure
that the terms of a contract are not unconscionable and that the weaker party is not
exploited by the stronger party. The duty to disclose, the right to rescind, statutory
protections, and implied terms are all crucial in ensuring that contracts are reasonable and
fair.

Unit-3 Doctrine of Consideration

In English Law, a promise becomes an agreement when it is supported by some

consideration. Agreements are not enforceable in the court of law if it is not backed by some
consideration. Thus, consideration becomes an important element in the formation of
contracts. However, it is not only the English law wherein consideration is a peculiar
element. In some civil law countries, promises without consideration are not enforceable
and binding in nature unless they are made in some special form. "Consideration means
something which is of some value in the eyes of the law, moving from the plaintiff. Without
consideration, the transaction is merely a voluntary gift." It is based on the idea of
reciprocity.

Defined as- When, at the desire of the promisor, the promise 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 consideration of a promise."

Essentials of a valid consideration

With the help of the above definition, we can identify the following essentials to be fulfilled
to form a consideration that is valid in the eyes of law.

1. Consideration should be done at the promisor's desire. This is called Promissory Estoppel.

2. Consideration should always be of some value on the eyes of law. So, if a party is already
under a legal obligation towards another then the act done to fulfill that legal obligation
would not be considered as a valid consideration to become a basis of the contract which is
enforceable in the eyes of law.

3. According to Indian law, the act of consideration can be done by the promisor or any
other person. Therefore, it becomes immaterial who has furnished the consideration as long
as there is a consideration. However, this is not the case in English law. In English law, the
fundamental propositions state that the consideration should be furnished by the promisee
only and not by any other person.

4. There must be the performance of an act, abstinence or promise by the promisee.

Legal rules to the concept of consideration

1. Consideration must be at the promisor's desire-The act or omission to do or not to do

something should be at the desire of the promisor. An act done at the desire of the third
party does not constitute consideration. In Durga Prasad v. Baldeo [1], a promise to pay the
plaintiff commission on the articles sold not at the will of the defendant but through the
agency is void as consideration does not move at the desire of the promisor.

2. Consideration can be from promisor or from any other person-In the Indian Contract Act,
it has been clearly stated that the consideration can be provided by the promise himself or
by any other person. According to this, it is not relevant who has furnished the consideration
as long as consideration has provided. An important case to be taken into account here is
Chinnava v. Ramayya [2].

3. Consideration can be past, executed or executory.-According to Section 2(d) of the Indian

Contract Act, 1872, the types of considerations for a contract are as follows:

Past Consideration

Past consideration refers to the act that has been done before a promise is made. According
to the Indian Law, this type of consideration is valid in the eyes of law, if all other conditions
for a valid consideration is fulfilled. However, according to the English law, past consideration
is not recognized as valid consideration for a contract. It is considered to be a form of a gift
or gratitude.

Executed Consideration-When one party to the contract performs his part of the promise
and has given his part of the consideration to the other party and now only the part of the
promise on the side of the other party is left to be performed is referred to as an Executed
consideration. It is also called present consideration.

Executory Consideration-Before the formation of a legally binding contract, when a person

makes a promise after the other person has also promised then it is termed to be an
executory consideration, wherein both the parties are yet to perform their part of the act.
This is also called future consideration.

Consideration is not required to be adequate-It is not necessary for consideration to be in an

adequate amount as per the promise. This is because it becomes difficult to establish what is
adequate consideration for a given promise. It was provided in the landmark case of Bolton
v. Madden [3] that "The adequacy of the consideration is for the parties to consider at the
time of making the agreement, not for the court when it is sought to be enforced."

Performance of the legal obligations does not constitute a consideration-If a party is already
under a legal obligation towards another then the act done to fulfill that legal obligation
would not be considered as a valid consideration to become a basis of the contract which is
enforceable in the eyes of law.
Consideration must be real and not unsubstantial- According to the law, consideration
should be real and not unsubstantial. For example, in the case of White Bluett [4], the father
promised to his son that if he stopped complaining about the share of property given to him,
he would release him of his debts. However, it was held by the court that the consideration
was not a good consideration and hence the son was found to be liable for the debts.

Consideration must not be unlawful, immoral or opposed to public policy

According to Section 23 of the Indian Contract Act, in an agreement where consideration is

unlawful, the agreement becomes void. Section 23 declares what considerations are
unlawful and would render an agreement void. A consideration forbidden by law can be
understood in two sense:

. The promise is of something which is considered unlawful in the eyes of law;

2. Though the promise is not unlawful, the law will not enforce the promise keeping in mind
the public policies.

Privity of Contract-The doctrine of privity of contract states that only the parties to the
contract can enforce the contract or take action against it. A person who is not a party to the
contract but perceives some benefits from the contracts is not entitled to take any
enforcement.

"The doctrine of privity means that a contract cannot, as a general rule confer rights or
impose obligations arising under it on any person other than the parties to it."

For example, if a party 'A' promised 'B' to pay Rs.100 to the third party 'C'. Thus, 'A' and 'B'
can sue each other in case of a breach of contract. However, 'C' cannot sue the parties. This
is known as the privity of contract.

Different courts in India have different views regarding the concept of privity of contract.

There have been cases where the third party is not able to sue in case of a default due to the
operation of the rule of privity of contract while there are some cases where the rule of
privity of contract is completely disregarded. Hence, the rule of privity of contract is a topic
of great debate amongst scholars.

Privity of consideration states that only a person who has provided consideration can
enforce the contract and take action against it. In the above case, 'C' cannot sue the parties
as he has not provided any consideration for the contract.

Exceptions to the Doctrine of Privity of Contract

There are some exceptions to the doctrine of privity which makes the third party capable of
enforcing the contract. These are as follows:

1. Agency

In case of a principal-agent relationship between the third party and the contracting party,
wherein the third party i.e. the principal party has expressly consented that the other has to
act on his behalf and the contracting party i.e. the agent consents to act in that manner, the
third party, being the principal party, can also enforce the contract.

2. Trust-In case one party 'A' promises the other party 'B' for the benefit of 'C', although
being the third party, 'C' can enforce the contract as 'B' is the trustee of 'C'. 'A' person can
become a trustee of the other person if he fulfills the following criterion:

The party should have the intention of creating trust.

This intention should be to benefit a particula third party and not all the third parties.

A landmark case for the defense of trust in the privity of contracts is Rana Uma Nath Baksh
Singh v. Jang Bahadur. The facts of the case were that Rana Uma Nath Baksh Singh was given
the possession of the entire estate by his father. In return, Rana Uma Nath Baksh Singh was
required to pay a certain some of the money and a village to Jang Bahadur, the illegitimate
child of his father. It was held in this case that a trust was created for the benefit of Jang
Bahadur and hence he is entitled to enforce the contract.

3. Collateral contract

In case of a contract is accompanied by a collateral contract, then the party to the collateral
contract can enforce the contract. For example, when a party 'A' purchases goods from 'B',
there is a contract between A and the manufacturer of that good.

The doctrine of privity of contract is subject to various debates despite being accepted in
many jurisdiction. In the case Debnarayan Dutt vs Chunilal Ghose "The Indian Contract Act is
unlike the English Contract Act and the limits with which the doctrine of privity of contracts
operates in English law cannot, with the same vigor be applicable to the Indian Contract
Act." As given in the definition of consideration in Section 2(d), as long as there is a
consideration it does not matter who has furnished it.

What Is the Controversy?

The controversy surrounding the abolition of consideration relates to academic debates

and judicial interpretations that question whether the doctrine of consideration should
continue to be an essential requirement in all contracts.

This debate stems from:

1. Modern commercial realities

 2. Inconsistencies in application

3. Doctrinal rigidity

Let’s explore each issue.

🔶 1. Evolution of Contractual Principles

In modern commercial practices, intention to create legal relations and mutual assent (offer
and acceptance) are often seen as more fundamental than consideration.

⚠️Issue:

Critics argue that insisting on consideration sometimes defeats valid commercial

expectations, particularly when:

 Contracts are made without a traditional "exchange"

 One party provides a past service or gratuitous promise, later honored

Example:
In the UK case of Williams v Roffey Bros (1991), the court recognized a practical benefit as
valid consideration, despite the absence of new obligations. This shows a relaxation of the
doctrine.

🔶 2. Confusion Due to Exceptions (Section 25, Indian Contract Act)

India, unlike English law, provides for specific enforceable contracts even without
consideration, under Section 25:

Clause Scenario Explanation

25(1) Natural love and affection Must be in writing and between close relations

25(2) Past voluntary services Must be for an act already performed

25(3) Time-barred debts Must be a written promise to repay

⚠️Issue:

These exceptions undermine the necessity of consideration, creating ambiguity:

Why is consideration essential in some cases but not others?

Legal scholars and judges have questioned whether the doctrine has outlived its usefulness,
especially when courts enforce contracts based on intention, fairness, and reliance, even
without consideration.
🔶 3. Rise of Promissory Estoppel

The development of the doctrine of promissory estoppel—which allows enforcement of

promises without consideration in certain cases—further weakens the strict application of
the consideration requirement.

⚠️Issue:

Promissory estoppel functions like a substitute for consideration. This gives rise to the
question:

“If equity can enforce promises without consideration, is the doctrine of consideration still
essential?”

In Central London Property Trust Ltd v High Trees House Ltd (1947), Denning LJ enforced a
promise without consideration using promissory estoppel.

In India, this principle has also been accepted and applied, e.g., in Motilal Padampat v U.P.
Government (1979).

🔶 4. Doctrinal Rigidity vs. Commercial Flexibility

Critics argue that the doctrine of consideration often acts as a technical trap, invalidating
contracts where there is a clear agreement and intent to be bound.

⚠️Issue:

Should legal doctrine prioritize formality (consideration) or substance (actual intent and
fairness)?

This tension is especially problematic in:

 Employment arrangements

 Family settlements

 Modern commercial dealings

🧑‍⚖️Judicial Attitudes

Some courts have taken a more flexible approach:

 India: Courts have upheld contracts based on reliance, intention, and public policy,
even in absence of strict consideration.

 UK: Cases like Re Selectmove Ltd (1995) and MWB Business Exchange v Rock
Advertising (2018) show fluctuating approaches.
However, many judges are cautious about completely discarding the doctrine, fearing legal
uncertainty.

⚖️Arguments for Abolishing Consideration

Pros Explanation

Simplifies contract law Focus shifts to consent and intention

Matches modern practices Reflects real-world commercial dealings

Prevents injustice Avoids denying valid promises on technical grounds

Harmonizes with promissory estoppel Avoids duplication or contradiction in doctrines

⚖️Arguments Against Abolishing Consideration

Cons Explanation

Legal certainty Consideration offers a test of enforceability

Prevents casual promises being

Acts as a safeguard against impulsive claims
binding

Historically entrenched Deeply rooted in legal systems and precedent

Without consideration, what distinguishes contracts

Need for boundary
from gifts?

Unit -4

What is Capacity to Contract?

The primary element of a valid partnership contract is the capability or eligibility of

partners to form a business agreement. The capacity to contract here means the legal
ability of an individual or an entity to enter into a partnership. According to business law,
the partner must be competent and fulfill the specified criteria before signing a contract.

Section 11 of the Indian Contract Act, 1972 details the capacity in contract law. It defines
the ability to form contracts based on three aspects. They are as follows.
  Attaining specified age

 Being of sound mind

 Not be disqualified from entering into a contract on the basis of any law he is
subjected to

Apart from contractual capacity, partnership contracts must also include the following.

 Offer

 Consideration

 Intent

 Legality

 Acceptance

The meaning of contractual capacity can be understood in detail through norms and
examples.

Refer to the official website of Vedantu for a detailed explanation.

Detailed Explanation of Capacity to Contract in a Business

Given below is a thorough explanation of the contractual norms to judge an individual’s

capacity to enter into a contract.

1. Attaining the Age of 18

A minor does not hold the capacity of holding a contract in business. Any agreement made
with a minor in business is void ab-initio, which means ‘from the beginning’. If any person
aged below 18 years enters into a contract, he cannot ratify the agreement even when he
turns 18. This means that an invalid agreement can never be ratified.

 Minor being a Beneficiary in a Contract.

Even though a minor is prohibited from entering a contract, he can register himself as a
beneficiary of an agreement. Section 30 of the Indian Partnership Act, 1932 mentions that
a minor cannot participate as a partner in the business, but he can enjoy the benefits
earned by the firm.

 A Minor always enjoys the benefits of being a Minor

A minor gets to enjoy some extra benefits in business. This contractual benefit needs to be
explained in terms of the capacity to contract with examples. For instance, if a minor
pretends to be a major and enters into a contract, he can later plead the minority through
some simple formalities. The rule of estoppel is not applicable to a minor.

 Contract through the means of a Guardian

In some cases, a guardian can enter into a valid business contract on behalf of a minor
individual. Here, the guardian has no right to bind a minor to buy any immovable property
under the contract. However, with proper certification and approval, the minor’s property
can be sold when required.

 Insolvency

According to business law, a minor cannot be declared insolvent at any point in time. Even
if the minor owes some dues to the firm, he will not be held personally liable for it.

 Mutual contract by a Minor and an Adult individual

When a joint contract is signed between a minor and major, it has to be done in the
presence of the minor’s guardian. In such contracts, the liability of the contract is held by
the adult.

2. An individual has to be of Sound Mind

Section 12 of the Indian Contract Act (1872) necessitates a person to be of sound mind,
have a complete understanding of the contract terms and conditions, and hold the ability
to judge its impact on his interests.

Here, the capacity of parties to the contract also applies to an individual who is usually of
unsound mind and occasionally in sound mind. However, in this case, the contract has to
be signed when he is in a state of complete soundness. A contract made by an individual
of unsound mind shall be considered as null and void according to capacity law definition.

A person under the influence of any sort of intoxication is considered incapable of entering
into a contract. Such individuals can make a contract only when they are sober and have a
complete understanding of the contractual terms.

3. People Disqualified under Law

Other than minors and people of unsound mind, some individuals might be restricted
from entering into any contract as well. Such individuals do not hold the capacity to
contract under valid business laws. Disqualification under contractual laws could include
reasons related to politics, legal status, etc. This could also happen when a person is a
foreign sovereign, national enemy, convict, or insolvent.

 Alien enemies: people who are having citizenship in countries who don't have
cordial relationships with India or in a war situation are called Alien enemies.
People signing the contract during a war situation is not encouraged and a contract
during a peace situation is valid.

 Married women: married women are not allowed to enter a contract regarding
their husband’s property.

 Pardanashin Women: Pardanashin women who will be under influence are not
eligible to be involved in the contract as they cannot understand the contract.

 State Ambassadors: The ambassadors are incompetent to contract.

 Convict Serving Sentence: People who are on Bail or serving their sentence are not
allowed to sign a contract.

 Patent Officers: People having patent rights are issued by their owners to them. A
patent is a monopoly right given to its owner. Hence patent officers are not allowed
to sign the contract.

 Legal professionals: People who work as judges, advocates, public prosecutors are
not allowed to sign a contract related to their connections.

For example, Advocate has taken a case from a Y person, the legal proceedings are going
on. So advocates cannot sign a contract with that person in buying that property.
  Insolvent: The insolvent person is allowed to purchase the property but cannot sell
his own property.

 Company: The company is formed under the law. Different companies are bound
by different laws. Here, the company is considered as an artificial person. The
company cannot sign contracts outside its limits.

4.Capacity contract limited due to Mental Illness

Persons with mental illness or disorders are also having limited capacity to contract
irrespective of age. Some of the instances related to campsity are listed below-

1. Intellectual disability: People with intellectual disability are having an exception for
capacity to contract, it also includes the severity of the disorder.

2. Advanced dementia: People suffering from dementia are exempted from involving
or signing the contract.

3. Hallucinations and visions: People who are in hallucination and visualize things
without any reference are exempted from signing the contract.

4. Affective disorders: People having depressions or bipolar disorder will have

frequent mood changes. So people with these problems are not allowed to be
involved in any contract.

Contracts signed by people with disabilities are considered to be null. Court will determine
whether the contract is legal or illegal. To determine, as a part of the process, individuals'
mental health is determined. People with stress and are mentally challenged are not
allowed to be involved in any contract, if they are involved then it is invalid.

Who is a Minor under Indian Contract Act, 1872?

In India, individuals below the age of 18 are considered minors under the law. Even a
person who is 17 years and 364 days old would be regarded as a minor. The age of
majority, defining when a person becomes an adult, is determined by the Indian Majority
Act of 1875.

According to the Indian Contract Act 1872, minors are deemed legally incompetent to
enter into any form of contract. This means that contracts involving minors are considered
void and unenforceable. The law recognises the need to protect the interests and well-
being of minors by limiting their contractual capacity until they reach the age of majority.
Nature of Minor’s Agreement

An agreement entered into by a minor is considered void and has no legal effect. As a
result, it lacks any enforceable contractual obligations on both parties. Since a contract
with a minor is deemed invalid from the beginning, it is essentially non-existent in the
eyes of the law.

Therefore, neither party is legally bound by any contractual obligations or duties arising
from such an agreement. The concept of a void minor’s agreement ensures that the legal
framework recognises the minor’s limited capacity to enter into binding contracts,
providing protection and safeguarding their rights and interests.

What are the Rules Regarding Minor’s Agreement?

The rules regarding minor’s agreement are:

An Agreement With or By Minor is Void

Section 10 of the Indian Contract Act states that a contract involving a minor is considered
void. Similarly, Section 11 clarifies that a minor lacks the competence required for entering
into a contract. Prior to 1903, Indian courts had differing opinions on whether a contract
with a minor was void or voidable. However, the Mohri Bibi v. Dharmo Das Ghose (1903)
case settled this matter definitively.

In this case, a minor borrowed Rs. 20,000 from B and provided a mortgage as security.
After reaching adulthood a few months later, the minor filed a lawsuit seeking the
cancellation and voidance of the mortgage executed during their minority. The court ruled
that the mortgage by the minor was void, and B was not entitled to any repayment.

Absence of Ratification

An agreement with a minor is entirely void. Even upon attaining a majority, a minor
cannot ratify the agreement because a void agreement cannot be ratified. The Act of
ratification cannot confer validity on an act authorised by an incompetent person.

However, if a minor, upon reaching adulthood, makes a new promise supported by fresh
consideration, that new promise will be binding.

Minor as a Promisee or Beneficiary

A minor can be a promisee or beneficiary in a contract and have the right to enforce such a
contract. There are no restrictions on a minor being a beneficiary, such as being a payee or
promisee in a contract. Therefore, a minor is capable of purchasing immovable property
and can sue for the recovery of possession upon tendering the purchase money. Similarly,
a minor in whose favour a promissory note has been executed can enforce it.

No Estoppel against a Minor

If a minor misrepresents their age and induces the other party to enter into a contract, the
minor cannot be held liable for that contract. Estoppel does not apply to a minor, which
means that they are not prevented from using their minority as a defence to avoid a
contract.

Specific Performance Except in Certain Cases

Since a minor’s contract is absolutely void, there is no possibility of specific performance

of such a contract. A guardian of a minor cannot bind the minor through an agreement for
the purchase of immovable property. Therefore, the minor cannot seek specific
performance of a contract that the guardian lacked the authority to enter into.

However, a contract entered into by a guardian or manager on behalf of a minor can be

specifically enforced if:

(a) The contract falls within the authority of the guardian or manager.

(b) It is for the benefit of the minor.

(Lalchand v. Narhar 89 IC 896)

No Insolvency

A minor cannot be declared insolvent since they are incapable of incurring debts. Any dues
or debts would be payable from the minor’s personal properties, and the minor is not
personally liable for them.

Partnership

Due to their inability to enter into contracts, a minor cannot be a partner in a partnership
firm. However, under Section 30 of the Indian Contract Act, a minor can be admitted to the
benefits of a partnership.

Minor as an Agent

A minor can act as an agent. However, they will not be held liable to their principal for
their acts. A minor can draw, deliver, and endorse negotiable instruments without
assuming personal liability.

Minor’s Inability to Bind Parent or Guardian

Without express or implied authority, an infant is incapable of binding their parent or

guardian, even for necessaries. Parents can only be held liable when the child is acting as
their agent.

Joint Contract by Minor and Adult

In a joint contract involving a minor and an adult, the adult will be held liable for the
contract, while the minor will not be held accountable. In the case of Sain Das vs. Ram
Chand, where there was a joint purchase with one of the purchasers being a minor, it was
determined that the vendor could enforce the contract against the adult purchaser but not
the minor.

Surety for a Minor

In a contract of guarantee where an adult acts as a surety for a minor, the adult is liable to
the third party as there is a direct contract between the surety and the third party.

Minor as Shareholder

Since a minor cannot enter into a contract, they cannot become a company shareholder. If
a minor mistakenly becomes a member, the company has the right to rescind the
transaction and remove the minor’s name from the register. However, a minor, acting
through their lawful guardian, can become a shareholder by transferring or transmitting
fully paid shares.

Liability for Necessaries

The provision for necessaries supplied to a minor or to a person whom the minor is legally
bound to support is governed by Section 68 of the Indian Contract Act. A claim for
necessaries supplied to a minor is enforceable by law. However, a minor is not personally
liable for the price he may have promised and is only liable for the value of the
necessaries. The minor’s property, not the minor personally, is liable.

To hold the minor’s estate liable for necessaries, two conditions must be met:

(a) The contract must be for goods reasonably necessary for the minor’s support according
to their station in life.

(b) The minor must not already have a sufficient supply of these necessities.

Conclusion

There are several important rules regarding a minor’s agreement. In conclusion, the rules
regarding a minor’s agreement include its void nature, exceptions for enforceability,
limited liability for necessaries, inability to bind others, and specific considerations for
torts, partnerships, and suretyship.

What is Doctrine of Restitution?

At its core, the doctrine of restitution is concerned with the restoration of benefits received
by one party under a contract that is either void or becomes unenforceable. The underlying
rationale is simple: a party should not be allowed to retain an advantage that is not rightfully
theirs.

When a contract fails—for reasons such as a lack or failure of consideration, mistake,

coercion, or fraud—the law mandates that the party who has received any benefit must
restore it to the rightful owner. This ensures that the original status quo is maintained, and
neither party gains an unjust enrichment from a contract that has failed to materialise as
legally valid.

It is important to note that the purpose of restitution is not to create a new contract
between the parties or to compensate for any loss suffered. Rather, it is solely aimed at
undoing the transfer of benefits that occurred under the invalid contract. For instance, if one
party receives an advance payment under an agreement that later turns out to be void, the
doctrine requires that this sum be returned, regardless of any additional costs or losses
incurred by the paying party.

Legal Framework on Doctrine of Restitution under the Indian Contract Act, 1872

Section 65 of Indian Contract Act

Section 65 of the Indian Contract Act, 1872, stands as the principal statutory provision
governing the doctrine of restitution. This section provides that when an agreement is
discovered to be void or becomes void after its formation, the party who has received any
advantage under such an agreement is bound either to restore that benefit or to
compensate the party from whom it was received.

Key aspects of Section 65 include:

 Void Agreement vs. Void-Ab-Initio: The section applies only when the contract,
originally valid, later becomes void. It does not apply to agreements that are void ab
initio (i.e., void from the very beginning).

 Restoration of Benefits: The obligation is to restore or compensate only the benefit

which has been wrongfully acquired. This does not extend to losses or additional
expenses incurred by the aggrieved party.

 Objective: The fundamental objective is to prevent unjust enrichment. The law

ensures that the party receiving the benefit is not unjustly enriched at the expense of
the other, thereby restoring the pre-contractual status quo.

Application of Doctrine of Restitution in Various Scenarios

Restitution under Section 65 finds application in multiple contexts:

 Void Contracts: When a contract is declared void, both parties must return the
benefits conferred. This ensures that neither party retains any advantage from a
contract lacking legal validity.

 Failure of Consideration: If a contract fails due to the non-fulfilment of the agreed

consideration, the benefit already received by one party must be returned. This
principle ensures fairness in transactions where one party fails to perform its
contractual obligations.
  Contracts Affected by Mistake, Coercion, or Fraud: In instances where a contract is
tainted by mistake, coercion, or fraud, the innocent party is entitled to restitution.
This protects parties who have been misled or unduly influenced, restoring them to
their pre-contractual position.

 Quasi-Contracts: The doctrine also extends to quasi-contractual situations—cases

where there is no express contract, but the law imposes an obligation to return
benefits conferred under circumstances of unjust enrichment. Here, restitution is
often sought on a quantum meruit basis (i.e., “as much as he has earned”).

Exceptions to the Doctrine of Restitution

While the doctrine of restitution is a robust mechanism for preventing unjust enrichment,
there are notable exceptions where it does not apply:

 Pre-Acquaintance with Voidness: If both parties are aware at the time of entering
the contract that the agreement is void, restitution cannot be claimed. The rationale
is that no party should be able to invoke the doctrine when they knowingly entered
into an unenforceable agreement.

 Incompetent Parties: When an agreement is entered into by parties who lack the
competence to contract (such as minors or persons of unsound mind), restitution is
generally not available. The classic case of Mohori Bibee v. Dharmodas Ghose (1903)
established that restitution under Section 65 does not apply where one of the parties
is legally incompetent.

 Earnest Money Arrangements: In certain transactions, such as those involving

earnest money or security deposits, if the party fails to meet the stipulated
conditions (for example, in property transactions), restitution may not be applicable.
The forfeiture of earnest money in some instances is deemed to be a part of the
agreed security measure and thus not subject to restitution.

Restitution in Quasi-Contractual Relationships

Beyond express contracts, the doctrine of restitution finds relevance in quasi-contracts.

Although these are not contracts in the strict sense, they create legal obligations where one
party receives a benefit which, in equity and good conscience, must be returned.

Types of Quasi-Contracts under Indian Contract Act, 1872

The Indian Contract Act, 1872, addresses various quasi-contractual obligations in Sections 68
to 72, including:

 Necessaries Supplied: A person who supplies the necessaries of life (food, clothing,
shelter, education, etc.) to someone unable to contract is entitled to restitution from
the recipient’s estate.
  Reimbursement of Money Paid: If a person pays money on behalf of another who is
legally bound to make such a payment, the payer is entitled to be reimbursed.

 Non-Gratuitous Acts: When a person does something for another with an

expectation of compensation, and the recipient benefits from the act, restitution is
due.

 Quantum Meruit: In cases where the compensation for work done is not pre-
determined, the principle of quantum meruit applies. The performing party is
entitled to a reasonable payment based on the value of work rendered.

 Restitution of Goods and Benefits Received by Mistake or Coercion: This ensures

that if goods are found or benefits received due to a mistake or coercion, the
recipient must return them.

The central principle in these quasi-contractual scenarios is that the recipient of the benefit
should not retain it if it results in an unjust enrichment at the expense of another.

Supplementary Legal Provisions on Restitution

Specific Relief Act, 1963

Section 33 of the Specific Relief Act, 1963, also incorporates the concept of restitution.
Under this provision:

 Cancellation or Voidance of Instruments: When an instrument (such as a deed or

contract) is cancelled or declared void or voidable, the party who has received any
benefit under such an instrument may be required to restore the benefit or pay
compensation.

 Discretionary Relief: The grant of restitution under the Specific Relief Act is
discretionary and rests on the court’s assessment of fairness and justice in each case.

Code of Civil Procedure, 1908

Section 144 of the Code of Civil Procedure, 1908, recognises the doctrine of restitution in
the context of judicial decrees:

 Erroneous Decrees: If a party benefits from an erroneous decree that is subsequently

modified or reversed, the doctrine requires that the unjust enrichment be reversed.

 Actus Curiae Neminem Gravabit: This maxim, meaning “the act of the court shall not
harm anyone”, underpins the principle that courts must ensure their actions do not
unjustly affect any party. Accordingly, if a decree or order is reversed, restitution is
ordered to restore the original position of the aggrieved party.

 Inherent Judicial Power: It is emphasised that the power to order restitution is

inherent in the courts and is essential to delivering complete justice.
Landmark Judgements Related to Doctrine of Restitution

Over the years, several landmark judgements have contributed to the evolution and
clarification of the doctrine of restitution in Indian law.

Mohori Bibee v. Dharmodas Ghose (1903)

This seminal case laid the foundation for the doctrine of restitution in contracts involving
minors or incompetent parties. The Privy Council held that restitution under Section 65
cannot be invoked where one of the parties is incompetent to contract. This judgement has
since been a cornerstone in delineating the limits of restitution in cases involving void
agreements due to incapacity.

Kuju Collieries Ltd. v. Jharkhand Mines Ltd. (1974)

In this case, the Supreme Court examined a situation where a lease agreement became void
ab initio due to legislative changes. The Court observed that since the contract was void
from the outset, Section 65 could not be applied to claim restitution. This case underscores
the principle that restitution applies only when the contract was initially valid and later
became void.

Sadasiva Panda v. Prajapati Panda (2017)

The facts of this case involved an agreement to sell land wherein the plaintiff advanced a
sum of money as consideration. Despite the agreement, the defendant sold the property to
another party. The court, applying Section 65 of the ICA, ruled that the defendant’s actions
amounted to wrongful retention of benefits and directed the restitution of the advance
payment. This decision reinforced the protective scope of the doctrine in ensuring that an
aggrieved party is restored to its original position.

Loop Telecom and Trading Ltd. v. Union of India (2022)

In a recent application of the doctrine, the Supreme Court held that restitution could not be
granted when the party seeking it was equally culpable (in pari delicto) for engaging in an
unlawful policy. This case clarified that restitution is not available where both parties share
equal fault, thereby preventing the court from favouring a party that has also participated in
wrongful conduct.

Conclusion

The doctrine of restitution is an indispensable facet of Indian contract law, designed to

safeguard against unjust enrichment. By ensuring that any benefits received under a void or
unenforceable contract are duly returned, the law restores the pre-contractual equilibrium
and upholds the principles of fairness and justice.
While Section 65 of the Indian Contract Act, 1872, forms the statutory bedrock of the
doctrine, its reach extends into quasi-contractual obligations as well as provisions under the
Specific Relief Act, 1963, and the Code of Civil Procedure, 1908.

Unit-5

Meaning and Definition of Free Consent

Consent exists when one person voluntarily acknowledges the proposal or desire of another
person. The definition of Free consent under the Indian Contract Act is consent that is free
from coercion, undue influence, fraud, misrepresentation, or mistake.

According to Section 13, “Two or more persons are said to be in consent when they agree
upon the same thing in the same sense (consensus-ad-idem)”. Free consent means consent
given to an individual for the performance of an act on his will.

Free consent under the Indian Contract Act has been defined in Section 14. The section says
that consent is considered free consent when it is not caused or affected by the following:

 Coercion

 Undue influence

 Fraud

 Misrepresentation

 Mistake

Importance of Free Consent

 Protects the validity and enforceability of an agreement

 It protects parties from coercion, undue influence, misrepresentation, fraud and

mistake.

 The principle of consensus-ad-idem is followed.

Illustration

“A” is an old man who stays with “B”, his nephew and he takes care of him. “B” demanded to
get the property of “A” as he was taking care of him and forced him to sign the papers. Here
in this case, “A” is under undue influence.

Case Law- Nokhia vs State of H.P[1]

In this case it was observed that consent to an acquisition cannot be described as real
consent. In the absence of these vitiating factors the contract binds and no one can get rid of
it by unilateral action.
Vitiating Factors to Free Consent

The main vitiating factors in the law of contracts are:

 Coercion

 Mistake

 Undue influence

 Fraud

 Misrepresentation

Coercion under the Indian Contracts Act

Definition of Coercion (Section 15)

Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal
Code or the unlawful detaining, or threatening to detain, any property, to the prejudice of
any person whatever, with the intention of causing any person to enter into an agreement.

Chikkam Ammiraju v. Chickam Seshamma[2]

In this case, the husband by a threat of suicide induced his wife and son to execute a release
deed in favour of his brother in respect of certain proprieties claimed as their own by the
wife and son.

The court held that to commit suicide amounted to coercion within the meaning of section
15 of the Indian Contract Act and therefore release deed was voidable.

Illustration

‘B’ gives his car, causing his agreement to be coerced. ‘A’ threatens to hurt ‘B’ if he doesn’t
give his son, ‘C’ a large sum of money. ‘B’ believes the threat and gives ‘C’ the money. This
agreement is believed to be coerced.

Undue Influence under the Indian Contracts Act

Undue Influence is the manipulation of a person who is vulnerable or dependent on

someone else. It occurs when an individual is able to persuade another’s decision due to the
relationship between the parties.

Definition of Undue Influence (Section 16)

A contract is said to be induced by ‘undue influence’ where the relations subsisting between
the parties are such that one of the parties is in a position to dominate the will of the other
and uses that position to obtain an unfair advantage over the other. A contract is said to be
induced by ‘undue influence’ where the relations subsisting between the parties are such
that one of the parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.”

In particular and without prejudice to the generality of the foregoing principle, a person is
deemed to be in a position to dominate the will of another—

(a) where he holds a real or apparent authority over the other, or where he stands in a
fiduciary relation to the other; or

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

(3) Where a person who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that such contract was not induced
by undue influence shall be upon the person in a position to dominate the will of the other.
Nothing in the sub-section shall affect the provisions of section 111 of the Indian Evidence
Act, 1872.

Illustration

James, an old man suffering from cancer, is induced by Daniel, his doctor, to pay a huge
amount for his treatment. James transfers the money to Daniel’s account. Here, Daniel
employs undue influence.

Lakshmi Amma Vs T. Narayana[3]

In this case, a person was suffering from a number of ailments, which confined him to a
nursing home. There he made a deed gifting all his properties to one of his sons to the
exclusion of others. The court held that the gift was caused by undue influence voidable.

Fraud under the Indian Contracts Act

Section 17 of the Indian Contract Act, includes to essentials to prove that an act is a fraud;

1. A person should make a false statement having the knowledge that the facts are
false.

2. There should be a wrongful intention to deceive the other party.

Illustration

‘A’ sells, by auction, to ‘B’, a horse which ‘A’ knows to be unsound. ‘A’ says nothing about the
horse’s unsoundness. This is not fraud in ‘A’.

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is
not a fraud.

In English law ‘fraud’ was defined in the very well-known case of “Derry v. Peek”[4]
“Fraud is proved when it is shown that a false representation is being made-

1. Knowingly

2. Without belief in its truth

3. Recklessly careless whether it be true or false.

Facts of the Case: Derry v. peek

The Plymouth, the Development and District Tramways company issued a prospectus stating
that the company had permission to use steam trams, which would replace their horse-
powered trams. In fact, the company had no such permission because the right to use steam
power was subject to the Board of Trade’s consent. The company applied, honestly believing
that they would get permission because it was a mere formality. In reality, after the
prospectus was issued, permission was refused and the company ended up in liquidation.

Led by Sir Henry Peek, shareholders who had purchased their stakes in the company on the
faith of the states sued the directors in misrepresentation.

Judgment in Derry v. Peek

The House of Lords held that the shareholders’ action failed because it was not proved that
the director lacked an honest belief in what they had said. [4] Lord Herschell, however,
pointed out that although unreasonableness of the grounds of belief is not deceitful, it is
evidence from which deceit may be inferred. There are many cases,

“where the fact that an alleged belief was destitute of all reasonable foundation would
suffice of itself to convince the court that it was not really entertained and that the
representation was a fraudulent one.”

Active Concealment in Contracts

Active concealment can cause a contract to be invalid or result in liability to the concealing
party, it includes hiding information from the other party by concealment intentionally.

EX- A husband persuaded his illiterate wife to sign certain documents telling her that by
them he was going to mortgage her two lands to secure his indebtedness and in fact
mortgaged four lands belonging to her. This was an act done with the intention of deceiving
her.

Mere Silence is not Fraud

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is
not fraud unless the circumstances of the case are such that, regard being had to them, it is
the duty of the person keeping silence to speak, or unless his silence, is, in itself, equivalent
to speech.
A party is under no obligation to disclose all material facts unless there exists a duty to speak
or when silence amounts to fraud, or when half-truths are uttered or when there is a change
of circumstances.

Ex- when ‘A’ agrees to sell a horse to ‘B’ and ‘A’ knows that horse is not mentally stable and
‘B’ does not ask then in that instance, ‘A’ cannot be made liable as there was no duty to
speak.

Keates v Lord Cadogan

A let his house to B which he knew was in ruinous condition. He also knew that the house is
going to be occupied by B immediately. A didn’t disclose the condition of the house to B. It
was held that he had committed no fraud.

When Silence is Fraud

1. When there is a Duty to Speak

2. Where silence is deceptive

3. Change of circumstances

4. Half-truths

Case Laws

(1) A.L Mustaneer Establishment v. Varuna Overseas Pvt. Ltd.[5] In this case, it was held
that Fraud is a facet of dishonesty, fraud in connection with letters of credit.

(2)Ratan lal Ahluwalia v. Jai Janider Parsad– Under common law, fraud will not only render
the contract voidable at the option of the party whose consent is obtained but will also give
rise to an action for damages in respect of deceit.

Misrepresentation under the Indian Contracts Act

Misrepresentation means misstatement of a fact material to the contract.

Misrepresentation is defined in Section 18 of The Indian Contract Act. A misrepresentation is

an untrue or false statement of law or fact made by one party, which induces the other party
to enter into an agreement or contract.

 Misrepresentation is false statements of truth that affect another party’s decision

related to a contract.

 Misrepresentation can void a contract and in some cases allow the other party to
seek damages.

 Misrepresentation is a basis for contract breach for transactions, no matter the size.

 Misrepresentation applies only to statements of facts, not to opinions or predictions.

Types of Misrepresentation

There are three types of misrepresentation present in the contract:

1. Fraudulent Misrepresentation– Fraudulent misrepresentation is where a false

representation has been made knowingly, or without belief in its truth, or recklessly
as to its truth. The injured party can seek to void to contract and recover damages
from the defendant.

2. Negligent Misrepresentation- Negligent misrepresentation under the

misrepresentation act befalls where a declaration is made by one contracting party
to another negligently or without reasonable grounds for believing its truth. The
remedy for negligent misrepresentation is contract rescission and possibly damages.

3. IInnocent Misrepresentation- Misrepresentation made completely without fault can

be described as an innocent misrepresentation. The remedy in this situation is
usually rescission or cancellation of the contract.

Difference Between Fraud and Misrepresentation

Fraud Misrepresentation

Fraud is more or less an intentional wrong. Misrepresentation may be quite innocent.

Fraud means willful misrepresentation of a Misrepresentation means a bonafide representation

material facts. is false.

Fraud id done to deceive the other party. Misrepresentation is not done to deceive the other p

Fraud is defined in Sec 17 Misrepresentation is defined in sec 18

In fraud, the aggrieved party can claim damages for Misrepresentation, the aggrieved party cannot
any loss sustained. damages for any loss sustained.

Damages under Sec 75 Indian Contract Act

SEC 75- Party rightfully rescinding contract entitled to compensation- A person who rightfully
rescinds a contract is entitled to compensation for any damage which has been sustained
through the non-fulfilment of the contract.[6]

Raharman Prodhan v. State of West Bengal[7]

A work order for repairing the bank of the river was issued directing the work to be
completed within 45 days. The alignment was given after 10 months which turned out to be
wrong. Correct alignment was given subsequently when a substantial portion of the work
had already been done. The work already done was not taken into account. The wrong
alignment became the cause of washing away by devastating floods. The plaintiff’s claim for
compensation for the work already done was taken to be established.

Illustration- A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her 100 rs for
each night’s performance. On the sixth night, A willfully absents herself from the theatre,
and B in consequence, rescinds the contract. B is entitled to claim compensation for the
damage which he has sustained through the non-fulfilment of the contract.

Mistake under the Indian Contracts Act

Mistake is not defined in the Indian Contract Act. Sections 20, 21 and 22 deal with the
concept of mistake. A mistake is said to occur when parties intend to do one thing by error
to do something. Where both parties to an agreement are under a mistake as to a matter of
fact essential to the agreement, the agreement is void.

Case Law- Phillips v. Brooks Ltd.- In this case, it was held that a person is deemed to contract
with the person in front of them unless they can substantially prove that they instead of
them intended to deal with another person.

Illustration- A agrees to sell to B a specific cargo of goods supposed to be on its way from
England to Bombay. It turns out that, before the day of the bargain, the ship conveying the
cargo had been cast away, and the goods were lost. Neither party was aware of these facts.
The agreement is void.

Section 20 will come into play:

1. When both parties to an agreement are mistaken

2. Their mistake is as to matter of fact

3. The fact about which they are mistaken is essential to the agreement.[8]

Section 21 Effect of mistake of law

A contract is not voidable because it was caused by a mistake as to any law in force in India,
but a mistake as to a law not in force in India has the same effect as a mistake of fact.

Grant v. Borg– In this case, the person was not knowing the clauses of the Immigration Act
1971, for staying beyond the time by the leave. Here, he cannot apply for defence under the
mistake of law.

Section 22

Contract caused by mistake of one party as to matter of fact- A contract is not voidable
merely because it was caused by one of the parties to it being under a mistake as to matter
of fact.
The State of Maharastra v. Mayer Hans George– In this case, A is an officer of the court and
he is ordered to arrest Y. A arrests Z by mistake, as he believes Z is Y. Here, A can take the
basis of bona fide intention as a defence in the mistake.

Effect on Contracts Influenced by Any Factor Vitiating Free Consent

Coercion

Coercion means forcing an individual to enter into a contract. When intimidation or threats
are used under pressure to gain the party’s consent, i.e. it is not free consent.

Effect of Coercion

Coercion can make the contract voidable. This means the contract is voidable at the option
of the party whose consent was not free. So the aggravated party will decide whether to
perform the contract or void the contract.

Undue Influence

It states that when the relations between the two parties are such that one party is in a
position to dominate the other party.

Effect of Undue Influence

If the consent is not free due to undue influence, the contract becomes voidable at the
option of the aggravated party. And the burden of proof will be on the dominant party to
prove the absence of influence.

Fraud

It means deceit by one of the parties i.e. when one party makes a false statement knowingly.

Effect

1. The contract arising from fraud is a null contract.

2. The misled party has the right to withdraw from the contract.

3. Due to the fraudulent agreement, the party is responsible for recovering the
damages.

Misrepresentation

It means the truth is misrepresented. It is also when a party makes a representation that is
false, inaccurate, incorrect etc.

Effect

If misrepresentation is identified, the contract can be declared void. If the party that has
suffered as a result of the misrepresentation when entering into a contract may choose to
terminate the contract, rescind the contract within the reasonable time under the specific
relief act 1963.

Mistake

It is a misunderstanding between the parties entering into a contract as to a material fact.

Effect

A mutual mistake will only affect the validity of the contract if the mistake is so fundamental
that it nullifies the contract. If the mistake goes to the heart of the contract, the contract will
be rendered void

Absence of Consent or Free Consent – Detailed Explanation

Under the Indian Contract Act, 1872, a valid contract requires the consent of the parties to
be free. Section 13 defines consent as when two or more persons agree upon the same
thing in the same sense. However, Section 14 clarifies that consent is said to be free only
when it is not caused by coercion (Section 15), undue influence (Section 16), fraud (Section
17), misrepresentation (Section 18), or mistake (Sections 20–22). If consent is caused by any
of these factors, the contract may become void or voidable, depending on the
circumstances.

🟥 1. Coercion (Section 15)

Coercion is defined under Section 15 of the Act as committing or threatening to commit any
act that is forbidden by the Indian Penal Code, or unlawfully detaining or threatening to
detain any property, with the intention of compelling a person to enter into an agreement. If
a contract is entered into under coercion, the consent is not free, and the aggrieved party
has the right to treat the contract as voidable at their option. For example, if A forces B to
sell his house by threatening to harm B’s family, the contract is made under coercion. As per
Section 19, B may later choose to either affirm or rescind the contract. The court in
Ranganayakamma v. Alwar Setti (1889) held that consent obtained under coercion rendered
the contract voidable.

🟧 2. Undue Influence (Section 16)

Undue influence refers to a situation where one party is in a position to dominate the will of
another and uses that position to obtain an unfair advantage. The Act outlines relationships
like parent-child, guardian-ward, doctor-patient, and spiritual advisor-devotee as examples
where undue influence is presumed. The consent obtained under such conditions is not free,
and the contract is again voidable at the option of the influenced party. The court may direct
the agreement to be set aside or enforced in a modified form. In Allcard v. Skinner (1887), a
gift made by a young woman to a religious superior was later declared voidable on the
ground of undue influence.

🟨 3. Fraud (Section 17)

Fraud includes deliberate deception made to induce another party into entering a contract.
Acts of fraud include the suggestion of false facts, active concealment, promises made
without any intention of performing them, and other acts or omissions intended to deceive.
When consent is obtained through fraud, the deceived party may rescind the contract and
also claim damages. However, if the aggrieved party had means of discovering the truth
with reasonable diligence, the contract may not be voidable. A classic case, Derry v. Peek
(1889), explained that fraud must involve a false representation made knowingly or
without belief in its truth.

🟩 4. Misrepresentation (Section 18)

Misrepresentation is a false statement of fact made innocently, without intent to deceive,

but which nevertheless induces another to enter into a contract. Misrepresentation differs
from fraud primarily in intent. A contract entered into under misrepresentation is voidable,
though generally, damages cannot be claimed unless negligence is proven. If the party had
the means of discovering the truth through reasonable diligence, then such a contract is not
voidable. For instance, in With v. O’Flanagan (1936), a doctor misrepresented his earnings
while selling his practice—although made innocently, it induced the buyer to enter the
contract and rendered it voidable.

🟦 5. Mistake (Sections 20–22)

A mistake can either be bilateral or unilateral. Under Section 20, a bilateral mistake occurs
when both parties are mistaken about a fact essential to the agreement. In such cases, the
contract is rendered void because there is no genuine consent. For example, if A and B
contract for the sale of a specific ship, both believing it is afloat, but it had sunk prior to the
contract, the agreement is void. On the other hand, under Section 22, a unilateral mistake
by one party does not make the contract voidable unless the mistake relates to the identity
of the person or the nature of the contract. Thus, the effect of mistake on consent depends
on whether it is shared by both parties or not.

🔷 Legal Consequences of Absence of Free Consent

When consent is not free due to coercion, undue influence, fraud, or misrepresentation, the
contract is generally voidable at the option of the aggrieved party under Section 19. The
aggrieved party can choose to rescind (cancel) the contract and restore parties to their
original position. In cases involving fraud or misrepresentation, the victim may also be
entitled to damages. However, in the case of bilateral mistake, the contract is void ab initio
(invalid from the beginning) and has no legal effect. In contrast, if a unilateral mistake occurs,
the contract generally remains valid, unless it concerns identity or nature of the contract.

UNIT-6

The legality of Object and Agreements with Unlawful Consideration

When a person or an organisation makes a proposal to another person or organisation and

the other person or organisation accepts it forming consideration, which is enforced by law,
is called a contract.

The object or the proposal must be lawful i.e.,

1. When it is prohibited by law: when the consideration or the object is prohibited by

law, the proposal is deemed to be invalid.

2. If the consideration is of such nature that it would defeat the provisions of any law: if
any of the parties defies any provision of law, the consideration will be not lawful.

3. Fraudulent Consideration or Object: if the nature of the transaction contains

fraudulent consideration or object, i.e., smuggling, the agreement will be void.

4. If the Court regards it as immoral, or opposed to public policy: if the court regards
any part of the consideration as immoral, or opposed to public policies, the
consideration will be termed as unlawful.

For Example: C promises to superintend, on behalf of A, a legal manufacturer of indigo, and

illegal traffic in another article A promises to pay C a salary of 10,000 rupees a year. The
agreement is void, the object of C’s promise, and the consideration for A’s promise, being in
part unlawful.

Agreements without Consideration (section 25)

According to sec 25 of the Indian contract act, an Agreement without consideration is void,
unless it is a promise to compensate for something done or is a promise to pay a debt barred
by limitation law or it is in writing and registered.

An agreement without consideration is void unless: –

1. It is expressed in writing and is registered. It is a contract arising out of natural love

and affection.

2. It is promised to compensate fully or in part by the promisor to a person who is

already done something voluntarily for the promisor.
Agreements in Restraint of Marriage

Under section 26 of the Indian contract act, agreements which are made in order to restrain
someone from marrying other than a minor are not valid, i.e., void. The main idea which
made this section was that marrying someone of their own choice is a basic right of every
individual and it should not be snatched away. Therefore, any agreement which prohibits
someone from marrying another person of his own choice will come under the restraint of
marriage.

Rao Rani v. Gulab Rani

In this case, the two parties were the widows of the same man. After the death of their
husband, a dispute aroused between them as to who will inherit the land. This case took
place in the division bench of the Allahabad High Court.

Agreements in Restraint of Trade

Under section 27 of the Indian Contract Act, a contract between two persons shall not
bound a person from not practising or starting his own trade or profession for some
consideration. Therefore, a person restraining someone to practice a trade or profession for
his own benefit, or restraining him to trade in a particular way for his own benefit will come
under restraint of trade.

Conditions that make restraint of trade valid

There are certain conditions that make a restraint on trade during a sale of goodwill valid,
these are:

1. The seller can be restrained only from carrying out a similar business.

2. The restraint can be applied only to certain local limits.

3. The limits/restraint should appear to be reasonable.

Agreements in Restraint of Legal Proceedings (section 28)

Under section 28 of the Indian contract act, agreements that restrain either one or both of
the parties from going to the courts are not valid or void. When a contract debars a party to
the contract from going to the appropriate courts or tribunals or which limits the time to
approach a court is void and it comes under agreements in restraint of legal proceedings.

Vulcan Insurance Co. Ltd v. Maharaj Singh

The Supreme Court held that an insurance agreement provision stating that the insurer will
not be liable for any damage if the claim is made 12 months after the loss is

not invalid, as it merely allows for the right accrued to a party under the contract to be forfei
ted and does not attract the inconvenience of Article 28 of the Contract Act. This new clause,
which does not allow for any retrospective effect, would
from the date of entry into force of this amendment, make this decision not a good rule.

Another Supreme Court case can be reviewed in this regard.

National Insurance Corporation Ltd. v. Sujir Ganesh Nayak and CO.

It was held that the clause in the insurance policy relieving the insurer from responsibility for
loss and damage was such a condition, unless the claim was made before the expiry of the
stated period from the beginning of the loss or damage, even if the period specified therein
was less than that prescribed by the law for damage.

Amended Section 28 is not retrospective

It is not retrospective to Section 28. A contract states that the party would forfeit the right to
seek relief under arbitration if the arbitration is not claimed within the prescribed time. In an
insurance plan, the agreement stipulates that the insurance claim must be made within the
time stated therein. Otherwise, the advantages resulting from the strategy would have been
removed. The time defined is less than the limitation period for a suit under the contract
provided for in the Limitation Act.

However, under the amended Section 28 of the Contract Act, such an extension of the right
is impermissible. However, having regard to the fact that the amendment was prospective
and that the contract was entered into prior to the amendment, it was found that the
condition of the policy was valid in the light of the provisions of Section 28 prior to its 1996
amendment, as was the case with Oriental Insurance Co. Ltd v. Bank of Karur Vysya Ltd[4].

Ambiguous and Uncertain Agreements

Either because the words are unclear or undefined in an agreement or because the
agreement is incomplete and may be uncertain. The general rules are that, if the conditions
of an arrangement are ambiguous or unlimited, and the intention of the parties cannot be
determined with reasonable certainty, no contract shall be enforceable by law.

Section 29 Provides the interpretation, as in Kovuru Kalappa Devara vs. Kumar Krishna
Mitter[ii], of a settlement which is to be apparent on the face of it, but the impact can be
made on the contract if it is fair to be clear in its significance.

The contract will not be enforceable if this is not so. It is not regarded as ambiguous merely
difficult to read. As a party requesting a remedy of the Court in violation of the contract, the
principle should be formulated. The duty must be able to describe with sufficient accuracy
the obligation to warrant the remedy. The legislation therefore mentioned is more versatile
and acknowledges that the solutions which require various degrees of certainty.

Wagering Agreements under Indian Contract Act

When two parties agree and enter into a condition that one party will receive money from
the other party on the happening of a future uncertain events, the other party will receive
the money from the first party on the non-happening of a future uncertain events. This kind
of agreement is a wagering agreement.
In a wagering agreement, there should be shared chances of profit and loss. Wagering deals
are usually void.

Wager means bet. It’s a chance game where the chance to win or lose is unknown. The prob
ability of winning or losing depends solely on an unpredictable occurrence.

Example: B and C agree with each other of it will rain on Saturday. B will pay C Rs 200 if it
rains on Saturday and c will pay B if it does not rain on Saturday. This agreement between B
and C is a wagering agreement and it is void.

Exceptions of a wagering agreement

An insurance policy is not an investment

Contracts for insurance are reimbursement contracts. They are signed in order to secure one
party’s interest in the deal. The insured is insurable in the property or life in this contract;
hence, it is not a settlement.

Competitions for skills are not competitive

Skill plays a significant role in overcoming these competitions successfully. For eg,
competitions for crosswords, pictures, puzzles, etc. The awards are awarded here in
conjunction with the merits of the solution. These are not wagering competitions. If prizes
are contingent upon an opportunity, however, that’s a lottery and a gamble.

For example: – A crossword in a newspaper was provided that the crossword solution would
correlate to the solution held with the publisher. It was also specified in the newspaper that
the first prize would be awarded. It’s a luck game and therefore a lottery. And then, it’s a bet.
[iii]

The market for horse races is not a wager

State governments can, if allowed by local law, award horse race competitions. Any
subscription or donation to any reward or amount of money to be awarded to a winner of a
horse race of Rs. 500 or higher is, in these cases, not unlawful. In short, agreements are also
binding and enforceable to subscribe for or contribute to certain prizes or numbers.

The transaction of the share market is not a wager

The purchase and selling transactions of shares and securities are not wagered in order to
receive and distribute stocks. Nevertheless, the contract will only be wagered if the goal is to
overcome the price gap.

Sports competitions are not wager

Sports events like athletics, wrestling, indoor games, football, boxing, cricketing, hockey and
so on are not fortunate games. It is measured by competence. They’re not wagers,
therefore.

What is a Wagering Agreement?

In simple terms we can say that Wagering agreements are futuristic where winning and
losing are unforeseen and the event on which it depends is also uncertain.

The literal meaning of the term ‘wager’ is ‘risk something valuable against someone else’s
on the outcome of an unseen event’ or simply ‘bet’.

Sir William Anson defines ‘wager’ as ‘a promise to give money or money’s worth upon the
determination or ascertainment of an uncertain event.

However, there is no definition of ‘wager’ or ‘wagering agreement’ given in Indian Contract

Act, 1872. According to Section 30 of the Indian Contract Act, 1872

“Agreement by way of wager is void, and no suit shall be brought for recovering anything
alleged to be won on any wager, or entrusted to any person to abide the result of any game
or other uncertain event on which any wager is made”
[1]
Carlil v. Carbolic Smoke Ball Co. defines a wagering agreement as:

“A wagering contract is one by which two persons, professing to hold opposite views
touching the issue of a future uncertain event, mutually agree that dependent on the
determination of that event, one shall win from the other, and that other shall pay or hand
over to him, a sum of money or other stakes; neither of the parties having any other interest
in that contract than the sum or stake he will so win or lose, there is no other consideration
for the making of such contract by either of the parties. If either of the parties may win but
cannot lose, or may lose but cannot win, it is not a wagering contract”.

I have seen my friends at the time of IPL dealing with each other that one would give some
small amount of money or something else if his team loses and the same was promised by
the other person as well. At that time the lost party was bound to pay as it was a promise
made between both of them and generally, breaking a promise was considered bad. As this
was a childhood thing, we didn’t take serious notice of it. But if analyzed logically, the lost
party is not bound to pay as the deal they entered into was by way of wager and has no legal
force.

From this incident, one thing is clear wagering agreements are always made for something
unforeseen.

History of Wagering Contracts

The history of wagering agreements can be traced long back from the times of
Mahabharata, where one’s potential was judged not through battle but by the game of dice.
And in British India, laws related to wagering were governed by common law in England.

These kinds of activities existed in our country from ancient times and have not been
particularly mentioned in the Indian Contract Act, 1872 and Hindu Law and are considered
illegal that is why these are not protected under Article 19 and 301 of the Indian
Constitution and Section 30 of Indian Contract Act, 1872 also gives no protection to any
agreement by way of the wager.

Essentials of Wagering Agreements

 An uncertain event: The first essential to a wagering agreement is that the event on
which betting is done should be uncertain and the result must be unknown to both
the contracting parties. In Jethmal Mandanlal Jokotia v. Nevatia &

Co. [2], it was held that wagering agreements can be made for the future events as well as for
the events which have already happened in the past, but the parties must not be aware of
the result of both, the future event or the past one.

 Mutual chances of profit and loss: In the wagering agreement the

chances to win or lose the bet stands equal for both the parties. The risk of loss or the
chance of gain should be equal for both the contracting parties. In Baba Saheb v. Raja
Ram [3], it was held that the essence of the wagering agreement lies in the fact that both the
parties stand equal to win or lose to the result of an uncertain event. It was held that if an
agreement lacks the desired profit or loss then such an agreement cannot be considered a
wagering agreement.

In Narayana Ayyangar v. K.V. Ambalam [4] Madras High Court holds the view that a chit fund
does not come within the scope of a wagering agreement as there is no chance of loss and
the mutual possibility of gain and loss is the prerequisite condition for wagering agreement.

 Two Parties Involved: Wagering agreements require two parties to be involved

holding contradicting views on an uncertain event.

 Neither Party Should Have Control Over the Event:

Wagering agreements are agreements of luck and chance, therefore neither party should
have control over it. Birdwood J in the case of Dayabhai

Tribhovandas v. Lakshmichand [5] held that if the event is in the hands of one of the parties, it
lacks the basic elements of a wagering agreement.

 No Interest Other Than Gain or Loss: The sole purpose of a wagering agreement is
winning or losing in the event on which they have staked their money. So, there must
be no other consideration involved in the event.
Indian Law Vis-a-Vis English Law

Section 30 of Indian Contract Act, 1872 is influenced by The Gaming Act, 1845 of England.
Under section 18 of The Gaming Act, all the agreements by way of wager are null and void
but it exempts certain dealings in investments by way of business from being invalid even
though they are wagering contracts. However, under Section 30 of The Indian Contract Act,
primary agreements by way of wager are void but agreements collateral to it are valid and
enforceable.

Major Questions Related to Wagering Agreements

Are Wagering Agreements and Insurance Contracts the same?

Insurance contracts are slightly different from wagering agreements. Insurance contracts fall
under Contract of Indemnity, where the insurer promises to indemnify the policy-holder
from any uncertain loss. Whereas in a wagering agreement two people hold opposite views
on an uncertain event and intentionally enter into a contract where the chance of winning
and losing is mutual. Unlike wagering agreements, insurance contracts are valid and
enforceable.

Are Wagering Agreements and Contingent Contracts the Same?

Contingent contracts are defined under section 31 of the Indian Contract Act, it says that “a
‘contingent contract’ is a contract to do or not to do something, if some event, collateral to
such contract, does or does not happen”. Contingent contracts have a wider concept and
wagering contracts fall under the category of contingent contracts the parties may have
other interests in contingent contracts but in wagering contracts, it should only be the profit
or loss on the amount they have bet upon. Contingent contracts are valid and enforceable
whereas wagering agreements are not.

Is Gambling a Wagering Agreement Or Not?

In the Indian constitution, it is written that states are allowed to formulate their gambling
laws. “Gambling and betting” are mentioned in list-II of the seventh schedule of the
Constitution, and therefore states are empowered to make laws on it on their own. This
means that each state in India has its own “betting and gambling” laws, and hence even the
online “betting and gambling” will depend upon those laws. However, Betting or gambling is
not illegal or prohibited in India if it involves both skills and chance. but in some states, for
example, Maharashtra it is illegal.

Are Wagering Agreements Illegal?

There has been a huge confusion about the legality of wagering agreements among legal
professionals. Section 30 of the Indian Contract Act does not declare wagering agreements
as illegal rather it renders them void. It only distinguishes the contracts which are void and
which have unlawful consideration. An illegal agreement is not allowed by the law or you
can say that it is forbidden by the law whereas in the case of a void agreement it may not be
forbidden, “the law may merely say that if it is made, the courts will not enforce it”. The
reason to treat the wagering agreement as void is that the law discourages people to enter
into games of chance and make earnings by trying their luck instead of spending their time,
energy, and labor on more fruitful and useful work held in Subhash Kumar Manwani v. State
of Madhya Pradesh [6].

Are Wagering Agreements Enforceable?

Section 30 of the Indian Contract Act declares the wagering agreement as void ab initio. This
means that even though wagering agreements are not illegal, a suit for recovery cannot be
filed for any award regarding the agreement. Even section 65 of this act does not apply as
the agreement is void.

In the case of Badri Kothari v. Meghraj Kothari [7], it was held that although a promissory
note was executed to repay the incurred debt due to a wagering agreement, the same is not
enforceable in the court. Thus, a winner cannot recover the money won upon wager.

In Gehruala Parakh v. Mahadeodas Maiya [8], it was held that although wagering agreements
are not unlawful but void under section 23, any transaction collateral to the main
transaction is enforceable. So, we can say that wagering agreements are not enforceable but
any transaction collateral to the main transaction being lawful is enforceable.

Exceptions To Wagering Agreements

However, Section 30 of the Indian Contract Act declares all agreements by way of wager as
void, but there are certain exceptions to this. Thus, the exception to Section 30 read as

“this section shall not be deemed to render unlawful a subscription or contribution, or

agreement to subscribe or contribute, made or entered into for or toward any plate, prize or
sum of money, of the value or amount of five hundred rupees or upwards, to be rewarded to
the winners of any horse race”. In addition to that “nothing in this section shall be deemed
to legalize any transaction connected with horse racing, to which the provision of section
294A of the Indian Penal Code applies”.

In the case of K.R. Lakshman v. State of Tamil Nadu [9], it was held by the Apex court that the
“horse-racing is a game where the winning depends substantially and preponderantly more
on skills of the rider and the horse rather than luck”. The Court also said that “horse-racing is
a sport which primarily depends on the special ability acquired by training. It is the speed
and stamina of the horse, acquired by training, which matters”.

In Moore v. Elphick [10], it was held that “if skill plays a substantial part in the result and prizes
are awarded according to the merits of the solution, the competition is not a lottery. It is,
otherwise, thus literary competitions involve the application of skills and in which an effort is
made to select the best and most skillful competitors are not wagers”. So, an agreement that
is dependent more on skill rather than luck is exempted from the domain of wagering
agreements.

Issues Relating to Section 30 of the Indian Contract Act

Section 30 is ambiguous. Firstly, it does not define ‘wager’ or ‘wagering agreement’ it only
declares them as void and unenforceable. It also confuses people regarding the legality of
such agreements.

And the most important issue is that most the state governments have prohibited gambling
and betting but gambling and betting on horse races are allowed. But the question that
arises here is that there is not only horse racing that involves skills but many other games
too which are mainly skills-based rather than purely of chance, then why aren’t they
exempted from the provision of wagering agreements?

If we refer to State of Andhra Pradesh v. Satyanarayana and Ors.[11] the

The Supreme court tried to differentiate Rummy from other games based on luck and
chance as it was based more on the skills of the player. It was held that “Rummy requires a
certain amount of skill because the fall of the cards has to be memorized and the building up
of Rummy requires considerable skill in holding and discarding cards. We cannot, therefore,
say that the game of Rummy is a game of chance. It is more a game of skill rather than of
chance”.

So, all games which are based on skills are under the control of the party who possesses the
required skills making high chances of winning the bet if made on that game., and this
eliminates the most important feature of wagering agreements that neither party should
have control over it. So, such exceptions mentioned under Section 30 should be applied to
those games as well. But Section 30 specifically talks about horse racing as an exception
leaving behind all the more skill-based games rather than chance. It’s high time that
lawmakers of our country should look into this matter and propose an amendment to
Section 30 to increase its scope.

Introduction

A contract is said to be discharged when the obligations created by it come to an end or

ceases to operate, i.e., when the rights and obligations created by it come to an end. In
other words, Discharge of Contract means ‘termination of contractual relationship between
the parties’.

Discharge of Contract

A contract may be discharged by –

1. Performance
 2. Agreement or consent

3. Impossibility of Performance

4. Lapse of Time

5. Operation of Law

6. Breach of Contract

Discharge of Contract by Performance:

When the parties to the contract perform their share of promises, the contract is said to be
discharged. It is the natural mode of discharge. Performance may be

 Actual Performance under which all the parties perform their agreed share of
promise.

 Attempted Performance (Tender or Offer of Performance) in which the promisor

attempts to perform the promise, but the promise refuses to accept the same.

 Performance of Contract by Joint Promisors- Joint promises may take any of the
following shapes:

o i. Where several joint promisor make a promise with a single promise, e.g. A,
B C jointly promise to pay Rs.5,000 to D, or

o ii. Where a single promisor makes a promise with several joint promises e.g. A
promises to pay Rs.5000 to B and C jointly, or

o iii. Where several joint promisor make a promise with several joint promises,
e.g. A, B and C jointly promise to pay Rs.3000 to P, Q and R jointly.

Discharge of Contract by Agreement or Consent:

Sec 62 of the Indian Contract Act, 1872 provides that, “if the parties to the contract agree to
substitute a new contract for it, or to rescind or alter it, the original contract need not be
performed”. A contract can be discharged by the fresh agreement between the parties. A
contract may be terminated by agreement in any of the following ways by:

Novation

Novation which means replacement of an existing contract by another contract. In novation

parties may change and is they not then the material terms of the contract must be altered
in the new contract because a mere change or variation of some of the terms of the contract
is not novation but alteration. In the supreme court case of Lata Construction v Dr
Rameshchandra Ramniklal Shah[1] it was held that “there should be a complete substitution
of a new contract. It is in this situation that the original contract need not be performed”.
Example: A is indebted to B and B to C. By mutual agreement B’s debt to C and B’s loan to A.
The contracts are cancelled and G accepts A as his debtor. There is novation involving change
of parties.

Alteration

Alteration of a contract takes place when one or more of the terms of the contract are
changed. If a material alteration in a written contract is made with the consent of all the
parties the original contract is discharged by alteration and a new contract takes its place. An
alteration may be a change in the amount of money, the rate of interest, or the names of the
parties. Alteration results in the discharge of the original contract. (Sec. 62 of Indian
Contract Act, 1872). Where a contract is embodied in a deed and the party who has the
custody of the deed alters it without the consent of the other in a material particular, the
effect would exactly be the same as that of cancelling the deed. Both parties will be
discharged from their respective obligations. The meaning of the expression “material
alteration” was considered by the Supreme Court in Kalianna Gounder v Palani Gounder[2]

Example: A agrees to supply B 1000 kgs of salt at Rs.50/kg within 3 months from date. Later
on, A and B alter the agreement in the following way: A agrees to supply 800 kgs of salt at
the same rate within 2 months instead of three. The latter agreement puts an end to the
former.

The difference between “novation and “alteration” is that in case of novation there may be a
change of parties but in case of alteration parties remain the same and only the terms of the
contract are changed.

Recession

Recession which means cancellation of contract by mutual consent. A contract may be

cancelled by agreement between the parties at any time before it is discharged by
performance. The cancellation of agreement releases the parties form their obligation
arising out of the contract.

Example: A promised to deliver certain goods to B on a certain date. Before the date of
performance, A and B mutually agree that the contract will not be performed. The parties
have cancelled the contract.

Remission

Remission means the acceptance of lesser sum than what was due from promisor. According
to the section 63, a person who has a right to demand the performance of a contract may:

i. Remit or give up the whole or part of a debt.

ii. Extend the time for performance.

Example: A owes B Rs.5,000. A pays to B and B accepts in full satisfaction Rs.2000. The
whole debt is discharged.

Where a promise remits a part of the debt and gives a discharge for the whole debt on
receiving a smaller amount, such discharge is valid.

Principle of Accord and Satisfaction:

An accord and satisfaction is a legal contract whereby two parties agree to discharge a
contract, a tort or claim, or a liability for an amount based on terms that differ from the
original amount of the contract or claim. Accord and satisfaction is also used to settle claims
prior to bringing them to court. It is a new agreement that suspends the terms of an existing
agreement in favour of a new one. It is a settlement of an unliquidated debt.

The accord is the agreement on the new terms of the contract, and the satisfaction is the
performance of those terms according to the agreement. When there is an accord and
satisfaction, and the performance (or satisfaction) has been executed, all prior claims
relating to the matter are extinguished.

Accord and Satisfaction in the Discharge of Debt Obligations:

Accord and satisfaction is a concept from contract law that usually applies to the purchase of
a release from debt obligation. An accord and satisfaction may occur in debt negotiations.

In the case of Snow View Properties Ltd v Sindh and Punjab Bank[3], The petitioner floated a
loan and mortgaged his property to secure the loan. The petitioner was unable to clear the
loan in the given time so the bank authorities seized the mortgaged property. The petitioner
after the breach of the contract entered into a contract with the bank to pay a certain
amount of money in exchange of his property. The bank authorities agreed to this and later
did not release his property even after receiving the promised amount.

Example: For example, a builder is contracted to build a garage for Rs.50,000. The contract
called for Rs.20,000 prior to starting construction, to disburse Rs.10,000 during various
stages of construction, and to make a final payment of Rs.20,000 at completion. At
completion, the homeowner complained about inferior work quality and refused to make
the final payment. After a mutual settlement agreement, the builder accepted Rs.10,000 as
full payment. Thereby, a new contract was formed by offer, acceptance, and consideration.

Benefits of Accord and Satisfaction:

An accord and satisfaction can be used as a form of compromise that benefits both parties
when the original terms of a contract cannot be upheld for whatever reason. When an
accord and satisfaction is reached to discharge a debt, the creditor still receives some
payment of the debt, while the debtor benefits from not being held to the full obligation.

Discharge of contract by Impossibility of Performance:

Impossibility of Performance is yet another ground on which the parties are discharged from
their obligations under the contract.

 Initial Impossibility – According to Sec.56, “An agreement to do impossible act is void

ab-initio.” It means agreement which is obviously impossible cannot be binding, e.g.,
an agreement to discover treasure by magic is void agreement.

 Subsequent Impossibility – Sometimes, a contract capable to be performed after

formation becomes impossible or unlawful and as a result void.

Doctrine of Frustration:

When performance of the contract becomes impossible the purpose is said to be

frustrated. Sec. 56 of the Indian Contract Act, 1872 deals with different situations when it
becomes impossible to perform the contract. Impossibility may be at the time of making
of agreement or may be supervening impossibility or illegality. In the case of Satyabrate
Ghosh v. Mugneeram Bangur and Co.[4] where their Lordships of the Supreme Court
rejected the plea of frustration of the contract, but, as the said case has been sought to be
distinguished on facts and a seemingly new question has also been raised for our
consideration and as it his been further argued that this Court, though bound by the
Supreme Court’s statement or enunciation of the principle, is not bound by any particular
application of that principle, made by it in any particular case, and may make a different
application of that principle even to the similar facts before it and reach a different
conclusion, it is necessary to examine the whole position and record our views on the same
in some detail.

Destruction of subject-matter –

When the parties make a contract for a particular subject matter, the contract is discharged
if the subject matter is destroyed without the fault of the promisor or promise.

Example: A, let out a banquet hall to B for a party on a certain day. The hall was destroyed by
fire before the date of the party. The plaintiff sued the defendant for damages. It was held
that the contract has become void and the defendant was not liable.

The authority, in this case, is Taylor v Caldwell[5] in which a contract to lease out a music hall
for a certain date was held frustrated due to the destruction of the hall. The performance of
the contract became physically impossible due to destruction of the subject-matter hence
the contract was held frustrated.

Death or Personal Incapacity –

Where the performance of a contract depends upon the personal skill, or qualification or the
existence of a given person, the contract is discharged on the illness or incapacity or the
death of that person. In other words the death or illness of a particular person whose action
is necessary for the promised performance discharges the duty to render that performance.
Example: A and B contract to marry each other. Before the time fixed for the marriage, A
dies. The contract becomes void.

This has been well-established in the case of Robinson v. Davison[6] where there was a
contract between the plaintiff and the defendant’s wife who agreed to perform piano at a
concert of the plaintiff on a stipulated date. But due to sudden illness she was unable to
perform at the concert and this was informed to the plaintiffs on the morning of the date of
performance. This caused the concert to be postponed and caused losses to the plaintiff.

The plaintiffs filed for breach of contract. The court quashed their claim and said that the
contract was frustrated as she became ill without there being any mistake or negligence on
her part. The nature of the contract was such that the terms required personal performance
and incapacity by the means of illness put the contract to an end.

Change of Law –

Contracts, which are lawful when made but become unlawful later due to change in law,
become impossible to be performed. A subsequent change in law may render the contract
illegal and in such cases the contract is deemed discharged. Impossibility created by law is
valid excuse for non-performance. This was recognised in the case of Easun Engineering Co
Ltd v. Fertilizers and Chemicals Travancore Ltd.[7] In this case, there was a price hike of 400%
of a certain type of oil due to the outbreak of war in the Middle East. The appellants plead
that this is a mere case of commercial hardship and hence damages should be awarded for
breach of performance.

The court quashed this argument and said that the price escalated out of all proportions
making things impossible for the respondents to supply the oil. Commercial Hardship is
about not allowing a party to avoid the contract for lack of profitability. But an escalation of
400% in the prices makes the performance of the contract impossible and hence the court
held the contract frustrated. In this case had there been mere marginal rise in the prices
frustration could not have been availed.

Example: A sold to B 100 bags of sugar at Rs.150 per bag. But before delivery the
government banned the sale and purchase of sugar by private traders. The contract was
discharged by subsequent change in law.

Declaration of War –

A contract entered into with an alien enemy during war is illegal and void ab initio. Contract
entered into before the commencement of war is suspended during the war. However, such
contracts may be revived after the war is over if the nature of the contract so permits.

Example: A contracts to take in cargo for B at a foreign port. A’s government afterwards
declared war against the country in which the port is situated. The contract becomes void.

Discharge of Contract by Lapse of Time:

A contract is discharged by lapse of time. The Limitation Act, 1908 laws down that a contract
should be performed within a specified period. If the contract is not performed and no legal
action is taken by the promise within the period of limitation, he is deprived of his remedy at
law, the contract is terminated in such a case.

Example: A owes Rs.10,000 to B. The last date for the repayment of the loan has expired and
B does not file a suit against A for three years. B loses the rights to recover the money back.

Discharge of Contract by Operation of Law:

A contract terminates by operation of law in the following cases:

Insolvency – The Insolvency Act provides for discharge of contracts under particular
circumstances. Where the court declares a person as insolvent, the rights and duties of such
person are transferred to the officer of court, known as Official Receiver. After the order of
the court such person is discharge from his liabilities incurred before his insolvency.

Example: A promises to sell his house to B for Rs.10 lacs. Before the performance of the
contract A is declared insolvent by court. The contract between A, & B is discharged.

Merger takes place when an inferior right available to a party merges into a superior right
available to the same party under, some other contract. As a result of merger, the former
contract stands discharged automatically.

Example: A was a part-time lecturer at Mumbai University. After some time, he was made a
full-time lecturer. Hence, when A, a part-lime lecturer was made full-time lecturer, the
contract of part-time lectureship is discharged by merger.

Unauthorised Material Alteration – Where a party to the contract makes any material
alteration in the contract, without the consent of the other party, the contract can be
avoided by the other Party. A material alteration is one, which changes the legal identity or
character of the contract or the rights and duties of the parties to the contract. An alteration
which is not material or which is authorized will not affect the validity of the contract. An
alteration even by a stranger will entitle the other party to avoid the contract, but where the
alteration is unintentional, contract cannot be avoided.

Example: A executes a promissory note in favour of B for Rs.3,000. B by alteration exceeds

the amount from Rs.3,000 to 30,000. A may refuse to pay Rs.3,000.

Discharge of Contract by Breach:

A breach of contract occurs when a party renounces his/her liability under the contract, or
by his/her own act makes it impossible that he/she should perform his/her obligations under
the contract or totally or partially fails to perform his/her part of the contract. Breach of
contract may be of two kinds-

Actual Breach takes place in course of or at the time of performance.

Example: A degrees to deliver 10 bags of rice on 10 th September. He does not deliver the
wheat on the day. This is an actual breach of contract.

Anticipatory Breach occurs when promise expressly or implicitly refuses to perform his/her
party of obligation, before due date of performance has arrived. This type of breach may
happen in two ways:

Express Breach is in which a party to the contract communicates to the other party, his
intention not to perform the contract, before the due date of performance has arrived.

Example: A contracts with B to supply 50 bags to wheat for Rs.10,000 on 1 stMarch. On

15th February, A informs B that he will not be able to supply the wheat. This is express
rejection of contract.

Implied Breach is when a party to the contract does an act, which makes the performance of
the contract impossible.

Example: A promises to sell his horse to B on 1 st Mrach and before that date he sells the
same horse to C.

In Fazal Ilahi v. East Indian Railway Co.[8] , the plaintiff delivered to the defendant railway
company at Kanpur boxes of crackers for consignment to Allahabad. The crackers were
required for sale at an on-coming festival. However, the same was not communicated to the
defendant company. The delivery of boxes were delayed and they reached after the
conclusion of festival. It was held that the plaintiff was not entitled to claim the profits which
he would have made as the special purpose for which the crackers were being sent was not
communicated to defendant company.

NIT-9

What Is An Implied Contract Definition?

An implied contract is a legally binding agreement that is not explicitly stated in words but is
inferred or deduced from the conduct, actions, or circumstances of the parties involved.
These contracts are based on the principle of “meeting of minds” between the parties, even
though their intentions may not have been expressly communicated.

Implied contracts can be formed in various contexts, including employment relationships,

business transactions, and everyday interactions. They often arise when one party provides
a good or service, and the other party accepts it without any explicit discussion of payment
terms or contractual obligations. In such cases, the law recognizes the existence of an
implied contract to ensure fairness and prevent unjust enrichment.

Types of Implied Contracts

Implied contracts can be further classified into two main types:

Implied-In-Fact Contract Definition

These contracts are inferred from the parties’ conduct, actions, or circumstances, which
demonstrate an intent to enter into a contract. The terms and obligations are not explicitly
stated but can be deduced from the parties’ behavior or the nature of their relationship.
Implied-in-fact contracts are enforceable in court, just like express contracts.

Implied-At-Law Contract Definition

Unlike implied-in-fact contracts, implied-at-law contracts, also known as quasi-contracts, are

not based on the parties’ actual intentions or agreement. Instead, they are imposed by the
court to prevent one party from being unjustly enriched at the expense of another. Quasi-
contracts are typically used when no actual contract exists, but one party has received a
benefit and would be unfair to keep it without compensating the other party.

For example, if a contractor mistakenly performs renovations on the wrong house but
increases its value, the court may impose a quasi-contract to ensure that the contractor is
compensated for the benefit provided.

What Are Implied Contract Examples

To better understand how implied contracts work, let’s consider a few examples:

Implied Contract Example 1: When you visit a grocery store and place items in your cart, an
implied contract is formed between you and the store. By taking the items and proceeding
to the checkout, you implicitly agree to pay the listed prices. Although you may not have
explicitly agreed to any terms, your conduct demonstrates your intention to enter into a
contractual relationship.

Implied Contract Example 2: Implied contracts often arise in employment settings. When an
individual accepts a job offer and begins working, an implied contract is formed between the
employer and the employee. The terms and conditions of employment, such as salary,
benefits, and job responsibilities, may not be explicitly outlined but are understood based on
industry norms, prior discussions, or the behavior of the parties.

Implied Contract Example 3: Suppose you hire a contractor to renovate your kitchen. Even if
you didn’t sign a written implied agreement, an implied contract exists based on your
discussions, the contractor’s actions in starting the work, and the expectation of payment
upon completion. The law recognizes the existence of an implied contract to ensure that
both parties fulfill their obligations.

Also Read: Contract administration vs contract management

Implied Contract vs Express Contract

Most express and implied contracts involve mutual consent and a meeting of the minds. An
express contract, on the other hand, is formally negotiated by an oral or written agreement.
Circumstances or the acts of parties create an implied contract. A real estate contract is an
express contract that must be in writing to be executed. Ordering a pizza is an implied
contract because the pizza business is bound to serve pizza to the customer once the
purchase is complete.

Also Read: Contract lifecycle management blockchain

Are Oral Contracts Enforceable?

The enforceability of oral contracts can vary depending on the jurisdiction and the nature of
the contract. In some cases, oral contracts are valid and enforceable, while in others, they
may be subject to limitations. It is generally advisable to have contracts in writing to avoid
potential misunderstandings and disputes. However, certain contracts, such as those for
small-scale transactions or personal services, may be oral and still enforceable if there is
sufficient evidence to prove the existence and terms of the agreement.

How Are Implied Contracts Enforced?

Implied contracts, whether implied-in-fact or implied-at-law, are generally enforceable in a

court of law. The court will examine the conduct, actions, and circumstances of the parties
to determine the existence and terms of the contract and ensure that both parties are
treated fairly.

To establish the enforceability of an implied contract, certain elements must be satisfied:

Mutual Assent: The parties involved must demonstrate a mutual understanding and
agreement, even if it is not explicitly stated. Their actions and conduct should indicate a
meeting of minds.

Offer and Acceptance: Implied contracts require an offer by one party and acceptance by
the other. This can be implied through actions or conduct rather than explicit statements.

Consideration: Like express contracts, implied contracts also require consideration, which
refers to something of value exchanged between the parties. Consideration can be in the
form of goods, services, or a promise to perform or pay.

Legality: Implied contracts must involve lawful activities and cannot be formed for illegal
purposes.

If these elements are met, the court can enforce the implied contract and hold both parties
accountable for their obligations.

Also Read: Adding an addendum to a contract

Challenges in Proving an Implied Contract

While useful, proving the existence and terms of an implied contract can be challenging due
to several factors:

 Ambiguity: The primary hurdle is often ambiguity. Without a clear written or spoken
agreement, determining the exact intentions of each party can be difficult. One side
might argue no contract was ever intended, while the other insists it was.

 Conflicting Evidence: Courts rely on evidence like witness testimony, past dealings
between the parties, and common industry practices. This evidence can be
contradictory, making it hard to reach a definitive conclusion about the implied
terms.

 The “Reasonable Person” Standard: Courts often apply a “reasonable person” test:
Would an objective observer, looking at the parties’ actions and the surrounding
circumstances, believe they intended to enter into an agreement? This standard is
subjective, meaning different judges could potentially reach different conclusions
based on the same facts.

 Lack of Documentation: Since implied contracts arise from behavior and context,
explicit documentation like emails or confirmations is usually absent. This lack of
tangible proof can complicate proving the case, requiring careful assembly of
circumstantial details.

 Varying State Laws: Contract law principles can differ between states. What
constitutes a valid implied contract in one jurisdiction might not suffice in another,
adding complexity to predicting legal outcomes.

Avoiding Implied Contracts

While implied contracts can sometimes be beneficial, there may be situations where parties
prefer to avoid them. To avoid the formation of an implied contract, it is important to be
clear and explicit in your intentions and expectations. Here are a few strategies to consider:

1. Written Contracts: Whenever possible, formalize agreements in writing. A written

contract explicitly states the terms, conditions, rights, and obligations of the parties
involved, leaving no room for ambiguity or misunderstandings.

2. Clear Communication: Ensure that there is clear and open communication between the
parties involved. Clearly articulate your intentions, expectations, and any conditions or
requirements you may have.
3. Express Agreements: Clearly express your agreement or disagreement with any proposed
terms or conditions. If you do not agree to something, make it known explicitly to the other
party.

4. Documentation: Maintain records of discussions, agreements, and any changes made to

the terms of an agreement. These records can serve as evidence in case of disputes or
misunderstandings.

5. Seek Legal Advice: If you are uncertain about the terms or implications of a contract,
consult with a legal professional who can provide guidance and ensure that your rights and
interests are protected.

Conclusion

Implied contracts play a vital role in contract law by recognizing and enforcing agreements
that are formed implicitly through the actions, conduct, or circumstances of the parties
involved. They provide a mechanism to ensure fairness and uphold the principle of mutual
assent, even in situations where the terms are not explicitly discussed.

UNIT-10

Introduction

With the rapid increase in corporate and commercial transactions in our growing economy
and other allied areas, contracts have assumed increased importance. It is nonetheless
inevitable that with contracts governing almost all forms of transactions and other relations
between parties, the disputes arising out of them have also increased.

In situations wherein the Parties fail to honour the obligations set forth in the contract
governing their relation, it is essential to evaluate the resources and remedies available in
such situations. One such recourse provided under law is that of Damages in lieu of breach
of a contract.

Damages have to be determined keeping in mind a lot of factors, thus this article will aim to
systematically list down all the key factors to be kept in mind while assessing damages and
will critically examine the same through the help of statutory provisions, case laws and
illustrations.

Breach of contract and statutory provisions

Taking the aspect of breach of contract under consideration, the very foremost essential for
breach of contract to happen is the existence of a valid contract.

A contract is an agreement that binds parties and obligates them to perform certain
specified tasks as envisaged in the agreement between them. The term contract is defined in
the Indian Contract Act, 1872 under Section 2(h) as "An agreement which is enforceable by
law".

From the definition it is clear when the agreement becomes enforceable by law, it
transforms into a contract, creating legal obligations for the parties. There are certain
essential defined under the India Contract, 1872 which need to be met in order for a
contract to qualify as a valid contract. Some of these conditions are offer and acceptance,
the intention of parties to create a legal obligation, consideration, and consensus among
other essentials.

Section 39 of the Indian Contract Act, 1872 gives out the concept of "breach of contract".
Although this Section doesn't use the term breach of contract, yet the conditions set out
form the basis of a breach of contract.

According to this Section, breach of contract happens when the party to a contract refuses
or has failed or omits or disables himself, to perform his part of the promise as set out in the
contract between the parties.

This may put an end to the contract unless the breaching party signifies on words or
conducts his acquiescence in continuing to perform his obligations. It is basically a violation
of the contract terms when one party fails to fulfil its promises.

Example:

A enters into an agreement with B to deliver certain goods to B within a period of 20 days,
starting from the date of execution of the agreement. A fails to deliver these goods to B.
There is a breach of contract on part of A.

A breach can be of various types, from material breach of contract wherein the breach is so
grave in nature that it dishonours the entire purpose of the contract; to an actual breach of
contract wherein, the party fully refuses to perform its part of the promise or an anticipatory
breach of contract, wherein from the conduct of one party, its intention of non-
performance can be clearly made out. Section 73 of the Indian Contract, 1872, further lays
the provision for governing breach of contract;

Remedies available in case of breach of contract

"Ubi jus, ibi remedium", meaning that where there is a right there is a remedy. Thus, since a
contract creates some rights in favour of the parties, in case of a breach there is always a
remedy available.

There can be numerous remedies available in case of a breach of contract, depending upon
the nature of the contract, the surrounding circumstances and the intention and position of
parties. Some of these remedies. an award for damages, specific performance, restitution,
and rescission, injunctions.

The Indian Contract Act, 1872, along with the Specific Relief Act, 1963, provides for various
remedies in case of breach of contract:

Damages

This implies that compensation in monetary terms is provided by the breaching party to the
party who has suffered loss or injury on account of the breach. Section 73 and Section 74 of
the Indian Contract Act, 1872 lays down the provisions relating to the same.

Restitution

Restitution is a remedy that is used to restore the status quo of the injured party to the
contract in a position before the contract or as if the contract never happened. For example,
the breaching party can be directed to return the property of the injured party on account of
the breach.

Rescission
Rescission happens when a contract is terminated on the order of the court. This remedy
comes into the picture when the consent to contract is obtained vifraud or undue influence
and the contract terms are detrimental to one party in such a case and it would only be
justified to rescind the contract.

Specific performance

When monetary damages are not adequate to compensate the injured party, the court
could direct specific performance of the contract under dispute. It basically means that the
court could direct the breaching party to specifically perform his promise or some part of it.
The provisions for the same are laid down in the Specific Relief Act, 1963.

Injunction

Injunction basically implies a restraint from breaching the contract by the other party. It is
basically in the form of a court direction.

What are damages and their kinds

The term damages is not defined per se defined under the Indian Contract Act, 1872.
However, in a common general sense, damages mean an award in terms of money to be
paid by the breaching party to the injured party as compensation for the loss that it suffered
on account of the breaching party's default of the terms and conditions of the contract.

In the case of Common Cause v. Union of India, the Supreme Court of India, emphasized on
the definition of Damages as, "Damages are the pecuniary compensation, obtainable by
success in an action, for a wrong which is either a tort or a breach of contract, the
compensation being in the form of a lump sum which is awarded unconditionally".

There are three basic essential of damages that were pointed out by the Supreme Court in
the case of Organo Chemical Industries v. Union of India;

1. The detriment caused to one party by the wrongdoing or not doing of another;
2. Reparation to be awarded to the injured party through the legal remedies; and

3. Determination of quantum on the basis of pecuniary compensation for the loss suffered
and punitive addition as a deterrent.

Consequences of breach of contract

Section 73 to 75 of the India Contract Act, 1872, layout the provisions for consequences of
breach of contract and for an award of Damages.

Compensation for damage due to breach of contract (Section 73)

When one party breaches the contract and another party suffers the consequences of such a
breach, then the injured party is entitled to compensation. The compensation will not be
given for any remote or indirect damage.

Example: A contracts with B, to buy an exclusive car for 5 crores rupees from B, on delivery
of the car, B fails to make the payment, B is entitled to compensation.

Compensation for breach of contract where penalty stipulated (Section 74)

It might be possible that in some cases, the amount of compensation is envisaged under a
clause in the contract itself, in case of a breach of contract. In such cases, the compensation
should be paid which is not exceeding the amount already stipulated in the contract.

Example: X contracts with Y to supply lentils to Y on an agreed amount, in the contract it is

stipulated that on the failure of any party to perform their obligations, the injured party will
be liable to compensation of 5 Lacs. Thus, the compensation amount cannot exceed 5 Lacs.

Party rightfully rescinding contract entitled to compensation (Section 75)

A person who rightfully rescinds a contract under the Indian Contract Act, 1872 is thereby
entitled to compensation for any damage that he might have suffered due to the rescission
of the contract.

Kinds of damages

Unliquidated damages

Damages in the monetary form are awarded by the court after due assessment of the
situation of the breach. This is provided for under Section 73 of th Indian Contract Act, 1872.

Liquidated damages

Damages that are stated and stipulated specifically in the contract are called liquidated
damages; the amount is specified in the contract itself. This is provided for under Section 74
of the Indian Contract Act, 1872.

Ordinary or general damages

Section 73 of the Indian Contract Act, 1872 identifies general damages to mean the damages
which naturally occurred in the usual course events or things from the breach that has been
caused, or which the parties were sure would arise in the event of a breach.

Example: Anish decides to sell and transport 10 bags of potatoes to Ram for Rs 5,000
subsequently after two months. On the date of transfer, the rate of potatoes increased and
Anish denies to complete his promise. Ram buys 10 bags of potatoes for Rs 5,500. He can
receive Rs 500 from Anish as ordinary damages arising directly from the breach.

Special damages or consequential damages

Special damages can arise on account of unusual or differing circumstances affecting the
injured party, which couldn't have been foreseen and eventually result into consequential
damages.
These damages are usually not recoverable unless the special varyug circumstances are
brought to the due knowledge of the breaching party, so the possibility of loss can be
evaded by them.

Consequential Damages are losses above the general losses incurred due to the breach of
contract and don't directly flow from the act of the party but as a consequence of a wrongful
act. They focus on the cost outside the contract as was held in the case of Reliance General
Insurance v. Anish Sebastian.

Punitive damages

Punitive Damages refer to those damages which are a penalty to the breaching party in the
form of punishment to act as a deterrent. Courts rarely award punitive darnages in breach of
contract cases. They are generally awarded in cases of torts.

Nominal damages

Nominal damages are basic to bare minimum damages awarded to the injured party who
might not have suffered a heavy monetary loss due to the breach.

Factors to be considered while assessing damages

Causation

For a claim of damages to succeed and for the purpose of affixing liability on the defaulting
party, there needs to exist a causal connection between the breach committed by the party
and the loss or injury that has been suffered.

This causal connection is said to be established if it is the act of the defendant that has
ultimately amounted to the breach of the contract and it is the only "real and effective"
cause with respect to the injury or loss that has been incurred for which damages are being
claimed.
For establishing a causal link, the courts follow various tests with consideration to the facts
and circumstances of each case, out of which the most prominent test is the "but for" test,
wherein the court seeks to determine whether the damage would have accrued but for the
acts of the defendant. (Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144)

If it is found out by the court that the breach of contract cannot be asserted to the acts of
the defendant, it may decide in favour of not awarding damages in any form to the plaintiff.

Remoteness of damage

One of the vital requirements for an award for damages to suceed is to that the loss or the
damage should arise in the normal or usual course of things from such a breach; or that the
parties knew that such damage could arise, at the time of entering into the contract.
Thereby, absolving the defendant of any liability that may have arisen as a remote
consequence of a breach of contract.

This aspect is related to special or consequential damages as enumerated in the above

Section. It was in the landmark case of Hadley v. Baxendale, that the principle of the
remoteness of damage was laid down..

Damages for direct, consequential and incidental losses and damage

In the event of a breach of contract, besides the compensation that is payable due to the
loss or the damage caused, the defendant is also liable to compensate for the damages that
arise directly in consequence of such loss or damage.

For example, In a contract of construction by a builder, if the construction is so bad that it

falls down and is to be rebuilt and subsequent to that it cannot be let out, the builder would
be held liable to compensate for the expenses incurred in rebuilding along with the loss of
potential rent. If the losses are reasonably foreseeable, they can be compensated for, be it
consequential or indirect loss.

Damages for loss of profit

Usually, the defendant is accountable for the loss of profits that emerge directly from the
breach of the contractual obligations. For instance, loss of normal profits due to delay in
delivery of relevant material by the defendant can be covered under this head. However, if
loss of profits, which are not direct consequences of the breach of contract, wouldn't attract
such damages.

Date of valuation for period of loss

For claiming damages for loss for any kind of profit, the period of loss and the date from
which it is calculated become important factors for claiming damages. For instance, it might
be possible that a person has incurred a loss of profit during his business, but he might not
be functioning under an obligation to the contract, thus the other party is not liable to make
good that loss during that period.

Future losses

Generally, future losses are problematic to determine than past losses and courts don't tend
to award compensation in the context of future losses. The more evidence there is of the
ability to generate future cash flows and profits, the higher the chance there is that the
court may award damages in such a situation. For there to be more evidence, it is important
to keep copies of all transactions that take place bagween the parties and to even
incorporate such a situation of future losses in the contract.

Damages for non-pecuniary losses

In normal circumstances, damages are usually as compensation for pecuniary losses incurred
due to the breach of contract. There may arise situations wherein the plaintiff claims
damages for non-pecuniary losses that might have been incurred to him. Courts are usually
not inclined to award compensation for such losses however, damages for such nature can
be awarded wherein the essence of the contract itself is relating to a non- pecuniary subject.
(Ghazibad development Authority v. Union of India AIR 2000 SC 2003.)

Mitigation

For an award of damage, it is necessary that the party which is claiming damages on account
of the breach, itself was willing to perform its part of the promise under the contract or has
already performed it. Therefore, the duty to mitigate losses is indispensable, prior to
claiming damages. The party claiming damages has a duty to take all reasonable steps
necessary to avoid such damages.

A party cannot just let the situation worsen without taking any affirmative steps on its part
to avoid such a breach. The duty of implementing reasonable steps to alleviate the loss is
supplemented by the duty to hold back from resorting to unnecessary means that would
further aggravate such a loss (Burn & Co. Ltd. V. Thakur Sahih Lakhdirjee AIR 1924 Cal 42.).
Thus, it is necessary to evaluate whether the party clang damages undertook such steps or
not.

For instance, a builder breaches a contract by failing to repair a leak in the roof of an office
building and then when the owner of the property discovers the same, he let all his
computer equipment sit there without shifting them, where he could have easily done that.

Later if the owner claims damages for damage to the computer due to the leaking roof, the
court would dismiss his claim to that extent because he didn't take any steps to mitigate the
situation.

Contributory Negligence

Contributory negligence refers to a situation wherein the party claiming damages has itself
contributed to the negligence that leads to the loss. The basic principle is that no one can
benefit from his own fault. If the court finds that the plaintiff has contributed towards the
breach, then the finding of contributory negligence can lead to a reduction in the award of
damages.

For example, in a contract to repair a computer, if after reparation, the user uses it
negligently and drops it and spills water on it, he has contributed towards the damage thus
his claim of award for damages will be affected.

Measures and calculation of damage-The aim of an award of damages in case of breach of a

contract is to restore the party against whom the breach has been committed in a position
that would have persisted if the contract never took place. Therefore, the damages awarded
cannot exceed the loss suffered by the party or are likely to be suffered by the party. The
Supreme Court in the case of Murlidhar Chiranjilal vs. Harishchandra Dwarkadas had laid
down two important principles with respect to the calculation of damages subsequent to
breach of contract:

On proof of breach of contract, the claiming party is to be placed so far as money can do it in
as good a situation as if the performance of the contract took place;

It is the duty of the plaintiff to take all reasonable steps to mitigate the loss incurred due to
the breach, and he cannot claim any damage resultant of his failure to mitigate such a loss.

With respect to the time and place for assessment of damages, generally, the value of goods
is calculated on the basis of where and when the goods were originally to be delivered under
the contract or where and when such services were to be performed

Interest on damages-Interest, despite the fact that it is statutory or contractual, depicts the
profits the creditor might have made if he was in a position to use that money or the loss he
suffered because he couldn't use it (as held in the case of Dr. Shamlal Narula Commissioner
of Income Tax. AIR 1964 SC 1878.)

Grant of interest in the case of a contractual breach greatly depends upon the terms and
conditions of the agreement, the customs that govern those payments and the relevant
provisions of the statutes.

Interests that are granted as damages would be calculated at the rate of interest that the
person to whom it ought to have been paid would have got on it, if it had been paid per the
terms of the contract. Section 34 of the Civil Procedure Code provides that rates for such
interests shall not exceed 6%.

Taxation-If a compensation amount received as damages, qualifies as income under the

Income Tax Act, 1961, then it may be liable to tax in certain situations. In a case where the
applicable tax rate on profits is equivalent to the rate of tax on a damages award, then the
damages. claim may be calculated on a pre-tax (or grossed-up) basis. Care should be taken,
however, to ensure that any claim for interest on the tax payable for the award is calculated
in line with the underlying cash flows. Thus, the tax laws can affect the value of the award

Conclusion

Many of the issues encountered by courts and experts in the assessment of damages are
based on the above-laid criteria and factors, thus it is important to keep these points in not
only while assessing damages but also while entering into contracts. It is always preferable,
to whatever extent possible it is favourable to specify the number of damages in the
contract itself, which saves a lot of litigation costs and effort and other resources of both.
parties. Thus, it is always suggested to do intense research before entering into contracts
and draft the contracts with utmost diligence.