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Contract act notes


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Notes for F.Y.BMS.

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Contract act notes

  1. 1. What is Contract? Discuss Essentials of Contact.<br />According to Section 2 (h) of the Indian Contact Act, 1872, " A contract is “an agreement enforceable by law”. A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. <br />From the above definition, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law.<br />As per section 2 (e) " Every promise and every set of promises, forming the consideration for each other, is an agreement." Thus it is clear from this definition that a 'promise' is an agreement. Section 2 (b) states that " When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise." <br />An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i.e., gives his acceptance) thereto. In short, an agreement is the sum total of 'offer' and 'acceptance'.<br />Example, A promises B to sell his horse for Rs. 10,000/-.<br />The Law of Contract deals with such promises which create legal obligations. This excludes those promises made in common life which may be morally binding but creates no legal binding. Promises which do not give rise to legal obligations are not contracts. For example, if A promises B to attend the dinner and fails to attend then B cannot sue A for the price of non-consumed food. The Law of contract creates obligation between the parties to the contract and not against the whole world.<br />According to Section 10, “All agreements are contracts if they are made by free consent of parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void”. The essential elements of a valid contract are: <br /><ul><li>At least two person: There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself.
  2. 2. Proposal and acceptance: The first step towards creating a contract is that one person shall signify or make proposal or offer to the other, with a view to obtaining the acceptance of that another person to whom the offer is made. A proposal when accepted becomes a promise.
  3. 3. Consensus-ad-idem (meeting of minds): To constitute a valid contract, there must be meeting of minds i.e. consensus-ad-idem. The parties should agree to the same thing in the same sense and at the same time.
  4. 4. Intention to create legal relationship: When the two parties enter into an agreement, there must be an intention by both parties to legally bind the other as a result of such agreement. Thus, agreements of social or household nature are not contracts.
  5. 5. Consideration: Consideration is the most important element of contract. Consideration has been defined as the price paid by one party for the promise of the other. Consideration means “something in return” (quid pro quo). A promise is often made in return for a promise, e.g. a buyer realizes the goods for the price. Therefore price for goods is consideration. The promise for a promise in return is Consideration.
  6. 6. An agreement is a contract only if it is made for a lawful consideration and with a lawful object. The consideration or object of an agreement is unlawful if-
  7. 7. it is forbidden by law; or
  8. 8. is of such a nature that, if permitted it would defeat the provisions of any law; or
  9. 9. is fraudulent; or
  10. 10. involves or implies injury to the person or property of another; or
  11. 11. is immoral; or is opposed to public policy.
  12. 12. Every agreement of which the object or consideration is unlawful is void. (Section 23)
  13. 13. Capacity of parties (competence): The parties to the agreement must be capable of entering into a valid contract. According to Section 11, every person is competent to contract if he or she,
  14. 14. is of the age of majority;
  15. 15. is of sound mind; and
  16. 16. is not disqualified from contracting by any law to which he is subject.
  17. 17. Free consent: To constitute a valid contract the parties must give their free and genuine consent. 'Consent' means that the parties must have agreed upon the same thing in the same sense (sec. 13). Mere consent is not enough. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake. If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void (sec. 20)
  18. 18. Lawful object: For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or the other of the reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law.
  19. 19. Writing and registration: A contract may be oral or in writing. If, however, the law requires for a particular contract, it should comply with all the legal formalities as to writing, registration and attestation.
  20. 20. Certainty: Section 29 of the contract Act provides that "Agreements, the meaning of which is not certain or capable of being made certain, are void." The terms of contract should be clear. In other words the contract must be not vague. Contracts which are vague cannot be enforced. Such a contract can be avoided by showing that there is ambiguity. In such a case there is nothing which either party can enforce. Illustration. A, agrees to sell B "a hundred ton of oil" there is nothing whatever to show what kind of oil was intended. The agreement is void because of uncertainty.
  21. 21. Possibility of performance: Contracts based on impossibility of performance are not valid. Section 56 lays down that "An agreement to do an act impossible in itself is void". If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law. Illustration. A agrees with B, to discover treasure by magic. The agreement is not enforceable.
  22. 22. Not expressly declared void: The agreement must not have been expressly declared to be void under the Act. For example, an agreement in restraint of marriage, an agreement in restraint of trade, and an agreement by way of wager have been expressly declared void under sections 26, 27 and 30 respectively.</li></ul>All agreements are Contract, but all contracts are agreements:<br />A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce.<br />An agreement in order to constitute a contract must possess essentials elements. All the essential elements must exist together. <br />All contracts are agreement because there must be mutual understanding between two parties for a contract to be formed. All parties should agree and adhere to the terms and conditions of an offer. Therefore, we can say that all agreements are not contract but all contracts are agreements. When any of the essential elements is missing, it ceases to be a contract though it may be a valid agreement. An agreement is a wider term than a contract. <br />LAW OF CONTRACT CREATES RIGHT IN PERSONAM AND NOT RIGHT IN REM<br />“Right in Rem” means a right available against the whole world or world at large. Example, A is a owner of a flat in Mumbai. He has a right to possess and enjoy the flat against the whole world.<br />“Right in Personam” means a right against a particular person. Example, A owes a sum of Rs. 25,000/- to B. Here B has a right to recover Rs. 25,000/- from A only. This right of B is called Right in Personam.<br />The Contract creates obligations between the parties to the contract and not against the whole world. It is, therefore, rightly said that the law of contract creates right in personam and not right in rem.<br />KINDS OF CONTRACT<br />1. Voidable Contract: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. A contract is voidable when one of the parties to the contract has not exercised his free consent. One of the essential elements of a formation of a contract for example, free consent, is absent. All voidable contracts are those which are induced by coercion fraud or misrepresentation. The person whose consent is not freely given may avoid a contract. It therefore continues to be valid till the party whose consent is caused by coercion, undue influence, fraud or misrepresentation choose to avoid the contract within a reasonable time. Contract then is not binding on the other party. <br />2. Void Contract: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable. A void contract is a nullity from its inception. No rights accrue there under. A contract may also be originally valid when entered into but subsequently due to change in the events or circumstances, it may become void. It should be noted that there cannot be a void contract because when the contract is void, it is no contract at all. The right expression therefore is void agreement and not void contract. <br />3. Unenforceable Contract: A contract which cannot be enforced is a valid contract in law, but is incapable of proof, and therefore cannot be enforced in the Court of Law. <br />4. Executed Contract: Where both the parties have performed their obligation, it is an executed contract. Even when one party to the contract has performed his share of the obligation, the contract is executed though to the other party is still under an outstanding obligation to perform his part of the promise. <br />5. Executory Contract: Here neither party to the contract has performed his share of the obligation, for example, both the parties have yet to perform their promises, the contract is executory. In an executed contract one party has already performed his part of he agreement while the other party has to perform his par. In an executory contract both the parties have to perform their mutual promises and the fact that they have to perform their parts of the contract does not affect the validity of the contract. <br />6. Express Contract: When the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation, the contract is express. <br />7. Implied Contract: The terms of a contract are inferred from the conduct or dealing between the parties. When the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied. Such an implied promise leads to an implied contract. For example, A boards a bus. It is implied from his conduct that A has entered onto an implied promise to purchase a ticket. <br />8. Quasi-Contract: ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created in absence of any agreement. It is based on equity. There are certain relations resembling those created by contract. These are termed as ‘quasi contracts’.  These are – (a) Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (e) Goods or anything delivered by mistake or coercion (section 72). <br />Illustration:<br />‘A’ supplies necessities to ‘B’ who is not capable of contracting and reimbursing to ‘A’. A is entitled to be reimbursed from B’s property. <br />Quasi contracts rise out of obligation enjoyed by one person from the voluntary acts of the other which are not intended to be performed gratuitously <br />9. Contingent Contract: A contingent is one in which a promise is conditional and the contract shall be performed only on the happening of some future uncertain event. <br />Illustrations:<br />‘A’ contracts to pay B Rs 10,000, if B’s house is burnt. This is a contingent contract. Here the liability of A arises, only when a particular event takes place, i.e. burning of B’s house. This is an event, collateral to the main contract.<br />10. Contracts of Record: A contract of record is one which is taken to the records of a Court, for example judgment of a court. Such judgments create a binding effect through the authority of the Court. <br />11. Specialty Contract: A specialty contract is a contract which is in writing signed, sealed and delivered by the parties. It is also called a contract under seal. Consideration is not necessary in a specialty contract. <br />12. Simple Contract: A simple contract s one which is not under seal. All contracts which are not under seal are simple contracts. All simple contracts require consideration. They may be made by written or spoken words. Contracts of Record and Specialty Contracts are also known as Formal Contracts. The classification of contracts into Contracts of Record, Specialty and simple is under the English Law. Indian Law does not recognize contracts without consideration. All contracts must have consideration in order the valid subject to exceptions under section 25 of the Act.<br />13. Statutory Contract: When all or some of the terms and conditions of contract are statutory then the entire contract, or that extent as the case may be, would be regarded as statutory contract.<br />Quasi Contract<br />Quasi means “almost” or apparently but not really or as if it was. A Quasi contract is a contract that exists by the order of the court, not by agreement of the parties. Courts create quasi contract to avoid unjust enrichment of a party in a dispute over a payment for a good or service. Sections 68 to 72 of the Indian Contract Act, 1872 deal with “certain relations resembling those created by contract”. <br />Illustration<br />A victim slips on a banana skin and falls down a flight of stairs. Doctor, a stranger, who happened to be walking by, administers emergency treatment to unconscious victim. Doctor does not enter into a contract with the Victim. But, Doctor could now recover fee for his services on the theory of unjust enrichment. This is where “Quasi Contract” comes into play. The law in this case creates a fictional contract to grant benefits to the doctor.<br />Kinds of Quasi contracts:<br />(a) Supply of necessaries (section 68)<br />(b) Payment of lawful dues by interested person (section 69)<br />(c) Person enjoying benefit of a gratuitous act (section 70)<br />(d) Finder of goods (section 71)<br />(e) Goods or anything delivered by mistake or coercion (section 72)<br />Supply of necessities [S.68] - When necessities are supplied to a person who is incompetent of contract or to someone who is legally bound to support, the supplier is entitled to recover the price from the property of the incompetent person. “incompetency to contract”, here, would mean parties that are not competent to contract as per sec. 10 of the Act, i.e., in following circumstances:<br />Minors<br />Persons of unsound mind<br />Persons disqualified by law to which they are subject<br />Illustration- A supplies B, lunatic with necessaries suitable to his conditionof life, is entitled to be reimbursed from B’s property.<br />Payments by interested persons [S.69] - A person who is interested in the payment of money which another is bound by law to pay and who therefore pays it is entitled to be reimbursed by the other. This section is subject to certain conditions:<br />The plaintiff must be interested in making the payment. The interest which the plaintiff seeks to protect must be legally recognizable;<br />It is necessary that the plaintiff himself should not be bound to pay. He should be interested in making the payment in order to protect his own interest;<br />The defendant should have been “bound by law” to pay the money;<br />The plaintiff should have made the payment to another person and not to himself.<br />Liability for non-gratuitous act [S.70] - S.70 creates liability to pay for the benefit of an act which the doer did not intend to do gratuitously. Where a person does something for another person not intending to do so gratuitously and such person is entitled to enjoy benefits from it. And then such a person who has used the thing has to compensate the other or restore or deliver the thing.<br />For example, A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay A for them. Conditions of liability under this section are as follows:<br />One of the purposes of the section is to assure payment to a person who has done something for another voluntarily and yet with the thought of being paid.<br />The person for whom the act is being done is not bound to pay unless he had the choice to reject the services<br />It is necessary that the services should have been rendered without any request<br />Services should have been rendered lawfully <br />The person rendering services should not have intended to act gratuitously<br />Finder of goods [S.71] - Section 71 lays down the responsibility of a finder of goods. The duties and liability of a finder is treated at par with the bailee. The finder’s position, therefore, has been considered along with bailment.<br />Duties of the finder of the goods:-<br />He must find out the owner: The finder of the goods shall make reasonable effort to find the actual owner of the goods. If he does not do that, he will be held to be responsible of interfering with the another’s property as a trespasser.<br />He must not use the goods: He must not use the goods for his own purpose and he shall not fix the goods with his own goods.<br />Taking due care of the goods: It is the duty of the finder of the goods to take due care of the goods as a prudent man would take care of the goods of the same value and quantity.<br />Return goods to the owner: It become duty of the finder of the goods to return the goods to the actual owner of the goods.<br />Rights of the finder of the goods:-<br />Right to retain the goods: The finder of the goods is entitled to retain the goods until he receives the lawful charges or compensation for retaining the goods and for care and preservation thereof.<br />Right to possess the goods: He is entitled to possess the goods till the true owner is not found.<br />Right to sue for reward: He is entitled to any reward which the owner of the goods has offered for the return of the goods.<br />Right to sell goods: He can sell the goods if-<br />The commodity is perishable<br />The owner cannot be found;<br />The owner refuses to pay the lawful charges;<br />The lawful charges amount to the two-third of the value of the commodity.<br />Mistake or coercion [S. 72] - Section 72 states that payments or delivery made under mistake or coercion must be made good or be returned.<br />Illustration<br />A and B jointly owe Rs. 1,000/- to C. A pays alone the amount to C and B not knowing this fact pays Rs. 1,000/- over again to C. C is bound to repay the amount B.<br />A Railway company refuses to deliver certain goods to the consignee except upon the payment of an illegal charge for carriage, The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charges as was illegally excessive.<br />PROPOSAL<br />Definition - Section 2(a)<br />A proposal is the first step towards formation of contract. Proposal is a medium through which a person signifies to another his willingness to do or not to do something with a view to obtain assent of that other to such act or abstinence.<br />The person making an often is called the offerer or Proposer. The person to whom the offer is made called Offeree.<br />When the offeree accepts the offer he is called acceptor or promise and the offere is called as promisor.<br />Example, A says B, “Will you buy my house for Rs. 10,00,000/-“<br />In this example A is making an offer to B, because he signifies to B his willingness to sell his house for Rs. 10,00,000/- with a view to obtain B’s assent to purchase his house.<br />TOWHOM CAN A OFFER BE MADE?<br />To definite person (specific offer): An offer can be made to a particular person. It is called as specific offer. Example, A says to B,”will you buy my car for Rs. 50,000/-?“ Here A is specifically offering B to purchase his car. This is an offer to a definite person i.e. B.<br />To definite class of persons: An offer can be made to a group of class of persons. Example, College puts a up a notice to offer a reward of Rs. 100/- to any student who return the lost book. Here a offer is made to a definite class of persons i.e. the students of college.<br />The world at large (General Offer): An offer can be made to public in general. Example, A advertises in newspaper a reward of Rs. 1000 to anyone who would found and reyurn the lost passport. This is an offer to the world at large.<br />RULES / ESSENTIALS OF VALID PROPOSAL OR OFFER<br />To obtain Acceptance: - The offer must be made with a view to obtain acceptance of the person to whom the offer is made.<br />Intention to create legal obligation: - Offer must be made with the intention to create legal obligation between the parties. In such intention is not present then it is not an offer in the eyes of law. Example, A invites B for tea. Even if B accepts the invitation it does not creates any legal obligation.<br />Definite terms: - The terms of the offer must be definite, unambiguous and certain and not vague. Example, A says to B, “I will sell you a horse.” A owns 10 different horses, the offer is not definite.<br />Different from mere declaration of Intention: - The offer must be distinguished from mere declaration of intention or invitation of offer. Example, A advertises in the newspaper that he wants to sell his house. B and C offer to purchase the house at particular prise. Here A has not made an offer but only invites people to make an offer. B and C have made an offer and it is for A to accept the same or not.<br />Communication: - An offer must be communicated to offeree. Unless an offer is properly communicated thee can be no acceptance of it. An acceptance of offer, in ignorance of the offer is no acceptance at all and does not create any legal rights or obligation. Example A sent his servant B in search of his missing nephew. A then announced a reward for the information concerning the boy. B traced the boy in ignorance of such announcement. Therefore, B cannot claim reward as he was not aware of the announcement regarding reward.<br />No burden of acceptance:- offer should not contain the non-compliance of which may be assumed to amount to acceptance. Example, A writes to B, “I will sell you my cycle for Rs. 100/-. If you do not reply, I shall assume you have accepted the same.” Here the offer is not vale. Mere silence cannot amount to acceptance.<br />Conditional offer:- An offer may be conditional but the conditions must be clearly communicated. A conditional offer lapses, when the condition is not accepted by the offeree.<br />Made to a definite person: - The offer must be made to a definite person to create legal relationship.<br />Implied or Express offer: - The offer can be express or implied from the circumstances. Example, stepping into a restaurant and consuming food creates an implied promise to pay.<br />ACCEPTENCE<br />The acceptance of an offer is the second and very important step towards forming contract. A contract is formed when an offer is accepted. The offeree's willingness to be bound by the terms of the offer is known as " acceptance" . Section 2 (b) of the Contract Act defines acceptance as " when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise" . Thus acceptance is the assent or consent given to a proposal. <br />Effect of acceptance<br />Acceptance converts offer into a promise. Acceptance is essential to convert offer into an agreement.<br />RULES / ESSENTIALS OF VALID PROPOSAL OR OFFER / HALLMARK OF ACCEPTANCE / HOW AN ACCEPTANCE CAN BE MADE?<br />Acceptance must be absolute and unconditional: - An acceptance, in order to be binding, must be absolute and unconditional. It must correspond with all the terms of the offer. Offer must be accepted in toto. Every offer must be accepted as it is. For example; Sunil offers to sell his site to Sridhar for Rs.100000. Sridhar accepts to purchase it for Rs.80000. This acceptance is not valid. It is a counter-offer. <br />Acceptance must be communicated: - Acceptance must be communicated. (Carlill v. Carbolic Smoke Ball Co) Communication need not be in writing or by word of mouth. It may also be implied from the conduct of the acceptor. Mere desire to accept a proposal is not acceptance. Uncommunicated or mental acceptance is not a valid acceptance. The person who has authority to accept should communicate acceptance. <br />Acceptance must be in the mode prescribed: - If the offeror prescribes the mode or manner of acceptance, the acceptance must be made in accordance with the mode prescribed. For example, if the offeror says " acceptance to be sent by email" , the offeree must send an email. If the acceptance is not made in the mode prescribed, the offeror may within a reasonable time after the acceptance is communicated to him, insist that the acceptance must be made in the prescribed mode. But if he does not inform the offeree as to this effect, he is deemed to have accepted the acceptance. If no mode is prescribed by the offeror, the acceptance must be made according to some usual and reasonable mode. <br />Acceptance must be given within a reasonable time: - If the offeror has prescribed a time within which offer must be accepted, it must be accepted within the prescribed time. If no time is prescribed for acceptance, the offer must be accepted within a reasonable time. Otherwise, the proposal will lapse. What is reasonable time depends upon the nature of the subject matter of the offer. <br />Acceptance must be given only by the offeree: - An offer made to a particular person can be accepted by him alone. If any other person accepts it, there is no valid acceptance. An offer made to a class of persons can be accepted by any member of that class. Any offer made to the world at large may be accepted by any person who had the knowledge of such an offer. <br />Acceptance must be after an offer: - There can be no acceptance without an offer. The acceptor must be aware of the proposal at the time of acceptance. Thus, acceptance must succeed the offer. In other words, acceptance should follow the offer and not precede it. <br />Acceptance must be given before the offer lapses or its revocation: -Offer must exist at the time of acceptance. If an offer had already lapsed or been revoked, subsequent acceptance will be of no effect. <br />An offer once rejected cannot be accepted again unless a fresh offer is made. Under English law acceptance is irrevocable. But under Indian law acceptance is revocable. <br />Who can accept?<br />An offer can be accepted only by the person or persons for whom the offer is intended. An offer made to a particular person can only be accepted by him be cause his is the only person intended to accept. An offer made to a class of persons can be accepted by any member of that class. An offer made to the world at large can be accepted by ny person whatsoever. X sold his business to Y without disclosing the fact to his customers. Z sent an order for goods to X by name. Y received it and sent letter of acceptance. Held, there was no contract between Y and Z because Z never made any offer to Y. (Boulton v. Jones)<br />Implied acceptance / acceptance by conduct:<br />Acceptance by conduct means entering into an agreement by performing certain actions rather than by signing an agreement or orally agreeing to be bound. Section 8 of the Indian Contract Act states that Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. Example, A trader receives an order from a customer and executes by sending the goods. Here customer’s order is an offer. Sending the goods is an acceptance.<br />COMMUNIACTION OF OFFER AND ACCEPTANCE<br />According to section 4, the communication of offer is complete when it comes to the knowledge of the person to whom it is made. Example, A proposes, by letter, to sell his house to B at a certain price. the communication of a proposal is complete when B receives the letter.<br />Communication of acceptance is complete as against proposer, when it is put in the course of transmission to him so as to be out of power of the acceptor, as against the acceptor, it is complete when it comes to the knowledge of the proposer (sec 4). Example, B accepts A’s proposal by a letter sent by post. The communication of the acceptance is completed ad against A, when the letter is posted, as against B, when the letter is received by A.<br />Revocation of proposal and acceptance:<br />Revocation means “taking back” or “cancellation” or “recalling” or “withdrawal”.<br />Revocation of Proposal – A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards (sec 5). Therefore, in case of posting of a letter of acceptance the same can be revoked by a telegram reaching earlier than letter.<br />A proposal can be revoked –<br />the communication of notice of revocation by the proposer to the other party before the other party's acceptance has been communicated to the proposer;<br />the lapse of the time prescribed in the proposal for its acceptance or, if no time is prescribed, the lapse of a reasonable time without communication of the acceptance;<br />the failure of the acceptor to fulfill a condition precedent to acceptance; or<br />the death or serious mental illness of the proposer.<br />Revocation of Acceptance – An Acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor, but not afterwards (sec 5).<br />Example, A proposed by a letter sent by post to sell his house to B. B accepts the proposal by letter sent by post. A may revoke his proposal his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterward. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterward.<br />Communication of Revocation – Communication of revocation is complete <br />As against the person who makes it, when it is put in the course of transmission to the person to whom it is made so as to be out of power of the person who makes it ;<br />As against the person to whom it is made when it comes to his knowledge.<br />CONSIDERATION<br />MEANING OF CONSIDERATION: consideration is one of the most important essentials of a valid contract. Subject to a certain exceptions, an agreement made without consideration is a nudum pactum (a nude or a bare agreement) and is void. When a party to an agreement promises to do something. He must get “something” in return for it. This “something” in return for something is known as “consideration”. In other words, consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable. Consideration is the evidence of mutual obligations which the law can enforce. It is the sign and symbol of every bargain.<br />According to Section 2(d), Consideration is defined as: " When at the desire of the promisor, the promisee has done or abstained from doing, or does or abstains from doing, or promises to do or abstain something, such an act or abstinence or promise is called consideration for the promise." <br />Example: Ahmed agrees to sell his house to Omar for $20,000. here, Omer’s promise to pay the sum of $ 20,000 is the consideration for Ahmed’s promise to sell the house, and Ahmed’s promise to sell the house is the consideration for Omer’s promise to pay $20,000.<br />LEGAL RULES AS TO CONSIDERATION / ELEMENTS OF CONSIDERATION / HALLMARKS OF CONSIDERATION:-<br />Consideration must move at the desire of the promisor -The act or forbearance must be done at the desire or request of the promisor. If it is done without his request or at the request of a third party it will not be a valid consideration.<br />Consideration need not be adequate but must be sufficient - It is not necessary that there must be full return for the promise. There must be something rather than nothing. The law has left the quantum of consideration to be decided by the respective parties. Thus, the law will not object to the inadequacy of consideration. The law will not enforce a promise even if it is without consideration.<br />Past consideration is not consideration - Consideration must not be from the past. For instance, in Eastwood v. Kenyon, the guardian of a young girl raised a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was past consideration, because it was completed before the husband promised to repay it.<br />Forbearance to sue may be good consideration - Forbearance to sue or a promise to forbear, where requested will support a promise by another. It is abstinence within the meaning of section 2(d).<br />Illustration: A wife agrees to sue her husband for maintenance allowance when the latter promises to pay her a monthly allowance by the way of maintenance. The contract is valid. The wife’s forbearance to sue constitutes good consideration.<br />Performance of existing duties is no consideration - consideration cannot be valid if one party promises to perform some task that is already implied by the contract. If the person is supposed to perform some kind of a public duty then the promise to accomplish the task under this public duty is not considered to be a valid consideration.<br />Consideration may move from the promisee or any other person - consideration can be given or supplied by the promise or any other person who is not a party to the contract. As long as there is a consideration it is not important who has given it. Therefore, a stranger to consideration can sue on a contract provided he is not a stranger to contract. This is known as the “doctrine of constructive consideration”. <br />Illustration, if A buys a house from B for Rs. 10,00,000 and C owes Rs. 10,00,000 to A, then A can instruct C to pay the amount directly to C. This is a valid consideration<br />Consideration must be real and not illusory – consideration must be real and of some value in the eyes of law although it need not be adequate. Consideration is not real when it is uncertain, illusory or when it is physically or legally impossible to perform. It is sufficient if the consideration is of slight value as long as it is not unreal and illusory.<br />Illustration – If A promises B that he will bring stars from the sky if B repairs his television. Here bringing stars from the sky is illusory. This is not a consideration.<br />Consideration must be lawful - The consideration for an agreement must be lawful. An agreement is valid if it is based on unlawful consideration.<br />Consideration is unlawful:<br />a) if it s forbidden by law, or<br />b) if of such a natural that if permitted it would defeat the provisions of nay law, or<br />c) is fraudulent, or<br />d) involves injury to the person or property of another,<br />e) court regards it as immoral or opposed to public policy<br />Example: I) A promises to maintain B’s child and B promises to A $ 2000 yearly for the purpose. Here, the promise of each party is the consideration for the promise of the other party. These are lawful considerations.<br />II) A promises to obtain for B, an employment in the public services, and B promises to pay $ 800 to A. the agreement is void as the consideration for it is unlawful.<br />Consideration may be an act or abstinence or promise - Consideration may be a promise to do something or not to do something. So it may be either positive or negative. Consideration need not always be doing some act. It can be not doing an act also. <br />Kinds of Consideration:- <br />Past consideration - where the promisor had received the consideration before the date of the promise, the consideration is termed as “past consideration”. It means a past act or forbearance. Examples: <br />A renders some services to B in the month of June. In July, B promises to pay A $100. the consideration of A is past consideration.A<br />A teaches the son of B’s request in the month of January and in February B promises to pay A $200 for his services. The services of A will be past consideration. <br />Present consideration - where the promisor receives consideration along with his promise, the consideration is termed as “present consideration”. in other words, when the consideration and the promise are simultaneous, it is called present consideration. present consideration is also called “ executed consideration”. Example: <br />A agrees to sell his car to B for a sum of $5000. B pays money to A at the time of making of the contract consideration will be taken as “present” for A. <br />A receives $200 in return for which he promises to deliver goods to B. the money A receives is the present consideration for the promise he makes to deliver the goods. <br />Future consideration - this is also called “executory consideration” where the promisor has to receive consideration in future for his promise, the consideration is said to be “Future consideration” it is a promise for the promise. Mutual promises to marry, or promise to work return of promise of payment are examples of future consideration. Example:<br />A promises to deliver car to B after a week. B promises to pay the price after a month. The promise of A is supported by the promise of B. the consideration in this case is future.<br />AGEEMENT WITHOUT CONSIDERATION IS VOID (SECTION 25)<br />Section 25 of the Indian Contract Act states that an agreement without consideration is void unless,<br />it is in writing and registered and the promise has been made due to natural love and affection between the parties standing in near relation to each other. <br />it is a promise to compensate, wholely or in part, a person who has voluntarily done something for the promisor or something that the promisor was legally bound to do. <br />it is a promise to pay for a time barred debt. <br />Illustrations(a) A promises, for no consideration, to give to B Rs. 1,000.This is a void agreement.(b) A, for natural love and affection, promises to give his son,B, Rs. 1,000. A puts his promise to B into writing and registers it. This is a contract.(c) A finds B's purse and gives it to him. B promises to give A Rs. 50. This is a contract.(d) A supports B's infant son. B promises to pay A's expenses in so doing. This is a contract.(e) A owes B Rs. 1,000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 500 on account of the debt. This is a contract.(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely given. The inadequacy of the consideration is a fact which the Court should take into account in considering whether or not A's consent was freely given. <br />Capacity to contract:<br />The Indian Contract Act vide Section 10 stipulates that the parties to a contract must be competent to contract. Section 11 of the Indian Contract Act states that every person is competent to contract who is:<br />of the age of majority according to the law to which he is subject,<br />sound mind and<br />is not disqualified from contracting by any law to which he is subject. <br />Contracts by a Minor - Rules relating to Minors contract<br />Age of majority – According to section 3 of the Indian Majority Act the age majority is 18, except when a guardian of a minor’s person or property has been appointed by the court, in which it is 21. <br />Position of Minor’s agreement <br />An agreement made with minor is altogether void – Contract with or by a minor is altogether void. The Act provides that a person who is a major is competent to contract. An agreement by a minor involves a promise on his part and he is incapable of giving a promise imposing a legal obligation. Therefore, the agreement with the minor is void ab initio.<br />In Mohribibee V Dharmodas Ghose, a minor has mortgaged his house in favour of B to secure a loan of Rs. 20000/- As part of this amount Rs. 10500/- was advanced to A, a minor by B. A, the minor sued for the cancellation of the mortgage on the ground that he was minor when he executed the mortgage. It was held that mortgage was void and was cancelled. Privy Council which decided the case held that the minor’s agreement is void. There is no question of refunding the amount. In this case B who advanced money was aware that A was minor. Court held that if A the minor is directed to refund the amount, then this is tantamount to enforce an agreement which is void.<br />Ratification on attaining majority is not allowed – As a minor’s agreement is void he cannot validate it by ratification on attaining majority. For instance, a minor borrows money and executes a promissory note. On attaining majority, he executes a fresh promissory note in substitution of the one executed as a minor. The second promissory note is void as it is without consideration. <br />Minor can be a beneficiary – Though a minor is not competent to contract. There is nothing, which prevents him from making the other party bound to the minor. Thus minor though incompetent to contract may accept a benefit. A promissory note executed in favour of a minor is not void and can be sued upon by him. In the case Raghavachariah Vs. Srinivas it was held that a mortgage executed in favour of minor and minor can a get a decree for its enforcement.<br />Insolvency - A minor can be never considered as insolvent.<br />Minor can always plead minority - A minor’s agreement is void. Any money advanced to a minor on a promissory note or otherwise, cannot be recovered. Even when a minor procures a loan by falsely representing that he is full age, he can plead his minority in a suit intended to recover the amount from him (minor the suit against him will be dismissed). <br />Contract by guardian are enforceable – Though a minor’s agreement is void. His guardian can, under certain circumstances enter into a valid contract on the minor’s behalf. Where the guardian makes a contract for the minor and which is within his (guardian) competence and which is for the benefit of the minor. Such a contract is valid which minor can enforce.<br />For instance a guardian can make an enforceable contract of marriage for a minor. It is customary among most of communities in India for parents to arrange marriages between minor children and the law has to adapt itself to the habits and customs of the people. Similarly, when the father of the bridegroom contracts with the father of the bride to pay the bride an allowance the bride can sue her father-in-law to recover arrears of the allowance.<br />But all contracts made by guardian on behalf of a minor are not valid. For instance, the guardian of a minor has no power to bind the minor by a contact. In the case of Raj Rani V Prem Adib – The plaintiff is minor who was allotted by the defendant, a film producer the role of an actress in a particular film. The agreement was made with her father. The defendant subsequently allotted that role to another artiste and terminated the contract with the plaintiff’s father. <br />The Bombay High Court held that neither she nor her father could file the suit on the promise. It was a contract with the plaintiff, and she being a minor Therefore, it was a nullity if it was a contract with her father, it was void for being without consideration. The promise of a minor girl to serve being not enforceable against her cannot furnish any consideration for the defendant’s promise to pay her a salary. <br />Exception to the rule that minor’s contract is absolutely void- when can a minor contract?<br />Minor can be Promisee or transferee - Although a contract is considered void if it is entered with a minor, a minor can gain benefit under a contract and be a promisee. The benefits specified for the minor can be derived only by the minor. Example, a promissory note executed in favour of a minor can be enforced by the minor.<br />Liability for necessaries – However, the contract with minor for necessaries is valid and minor’s property is liable. This is illustrated in Section 68 of the act to the effect – If a person incapable of entering into a contract or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. <br />Thus any person would be entitled to reimbursement out of the minor’s estate, for necessaries supplied to him or to his family whom he is bound to support A minor cannot be held personally liable for necessaries but his property is liable. <br />What is necessary? Necessaries as defined by the English Sale of Goods Act, mean goods suitable to the condition in the life of infant as required by him at the time of sale and delivery. It includes not only food and clothing and housing but also includes the education and the instruction needed. Necessaries also include services offered. Articles of mere luxury offered are always excluded though luxurious articles of utility are in some and relevant appropriate cases may be allowed. Even the money advanced to buy the goods and services necessary are also included and covered. <br />As is clear from the above discussion, the term necessary is a relative fact to be determined with reference to the fortune and circumstances of the particular minor. The infant’s need of things may also sometimes depend upon the peculiar circumstances under which they are purchased and the use to which they are put. For instance, articles purchased by an infant for his wedding may be deemed necessary, while under ordinary circumstances the same articles may not be so considered. <br />Example:- A minor who was a student brought 11 fancy coats from N. He was at that time adequately provided with clothes. Held, not a single coat was a necessity. His properties could not therefore, be attached for its payment. It is immaterial whether the other party knows this or not (Nash V. Inman)<br />Agency - A minor can act as a agent. He can bind his principal by his acts, but unlike other agents, he is not liable to his principal for his acts.<br />Partnership – A minor cannot enter into a contract of Partnership as a full-fledged partner though he may be admitted to the benefits of partnership by his guardian with the consent of the other partners.<br />Contracts by a person of unsound mind<br />A person of unsound mind is incapable of entering into a contract. An agreement by a person who is not of sound mind is void. However, such a person can enter into a valid contract during an interval of lucidity. As per section 12 Unsoundness of mind is one who is -<br />(i) Incapable of understanding the contract (ii) and of forming a rational judgement as to its effect upon his interest. <br />Idiots, lunatics and drunken persons are examples of those having an unsound mind. <br />Where a person is usually of sound mind, but occasionally becomes a person of unsound mind cannot enter into agreement when he turns unsound. <br />Similarly, a person who is unsound mind can make a contract when he turns sound mind. For example a patient in a lunatic asylum, who is at intervals of sound mind may contract during such intervals. <br />An illustration is the decision of the Patna High Court in Inder Singh V Parmeshwardhari Singh. A property worth about Rs. 25000/- was agreed to be sold by a person for Rs. 7,000/- only. His mother proved that he was a congenital idiot incapable of understanding the transaction and that he mostly wandered about. A person to all appearances behaves in a normal fashion, but at the same time he may be incapable of forming a judgement of his own. <br />The liability for necessaries of life supplied to persons of unsound mind or to whom he is legally bound to support is the same as of minors. (Section 68) <br />Contracts by DISQUALIFIED PERSONS<br />Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly. Contracts by such person and with such persons are void. If, by any provincial legislation, person is declared ‘disqualified proprietor’, he is not competent <br />An alien enemy during war cannot enter into a contract with an Indian subject. He cannot sue in Indian Courts without a licence from the Central Government Contracts made before the war may either be suspended or disallowed if they are against the public policy or if their performance would benefit the enemy. <br />Similarly, a statutory corporation cannot enter into a contract which is ultra vires its memorandum. Likewise, municipal bodies are disqualified from entering into contracts which are not within their statutory powers. <br />Sovereign States, Ambassadors and Diplomatic Couriers enjoy certain special privileges with the result that they cannot be legally proceeded against in Indian Courts and Indian Citizen has to obtain a prior sanction of the Central Government to enable himself to sue them in our law courts. However, they can, at their will enter into contracts which may be enforceable in Indian Courts. <br />Insolvents - When a debtor is adjudged insolvent, his property vested in the official receiver or the official assignee. As such the insolvent is deprived of his power to deal in that property It is only the official receiver or the official assignee who can enter into contract in respect of that property and can sue and be sued on his behalf. <br />Convict - A convict while undergoing imprisonment is incapable of entering into contract. This incapacity to contract comes to an end when the period of sentence expires or when he is pardoned. <br />CONSENT And free consent:<br />Section 13 defines that two or more people are said to consent when they agree upon the same thing in the same sense. However, many a times, consent may not reflect the true intentions of a party. For example, one party may give consent because of being financially pressured or criminally threatened. Thus, such consent should not make the agreement enforceable.  Section 14 determines what factors can vitiate consent and when consent is considered free of any complication that affects the enforceability of an agreement. It states that a consent that is not obtained through coercion, undue influence, fraud, misrepresentation, or mistake subject to section 20, 21, and 22, is a free consent.<br /><ul><li>Coercion (Sec 15):</li></ul>Coercion is committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawful detaining or threatening to detain the property, to the prejudice of any other person, with an intention to cause that other person to enter into an agreement. It is immaterial whether IPC is or is not in force where coercion is applied. Thus, an act that is unlawful as per IPC but not as per England law and that has been used to induce the consent, will be considered coercion.<br />A clear example would be force someone to consent on gun point or by hurting or threatening to hurt. In Chikham Amiraju vs Chikham Seshamma Madras HC 1912 held that threatening to commit suicide is coercion. In the case of Astley vs Reynolds 1771, the plaintiff had pledged his plate for #20 and when he went to claim it back, the defendant asked for #10 more as interest. To redeem his plate, the plaintiff paid the money but later sued to recover #10. The court allowed it.<br /><ul><li>Undue Influence (Sec 16):</li></ul>Undue influence occurs when because of the nature of the relationship that exists between the parties, one party is able to dominate the will of the other and uses this dominance to obtain unfair advantage over the other. A person is in a dominant position when he holds a real or apparent position of authority for example manager employee, or stands in a fiduciary relationship with the other for example money lender and loanee. A person could also be in a dominant position if the mental capacity of other party is temporarily or permanently effected due or illness, age, or distress.<br />The burden of proof that undue influence has not occurred is on the person who is in the dominant position, if the agreement is unconscionable otherwise it is on the party that alleges undue influence.<br />Examples:<br /><ul><li>Father (A) gives some money to son (B) when B was a minor. Upon majority, A makes B execute a bond for a much larger amount.
  23. 23. A village moneylender (A) lends money to a villager (B), who is already in debt, at a very high interest. It lies on A to prove that he has not used undue influence to induce the contract.
  24. 24. At a time of financial crises, a bank manager gives loan to a person at a substantially higher rate. This is not considered to be undue influence but a simple business transaction.</li></ul>In Mannu singh vs Umadat Pandey Allahbad HC 1890, a guru induced his devotee into giving the entire devotee's property to himself. This was considered undue influence.<br />Contracts with Pardanashin women - A contract with a pardanashin woman is presumed to have been induced by undue influence. However, such a woman must be totally secluded from ordinary society. In the case of Ismail vs Amir Bibi 1902, a lady stood as witness, put tenants, collected rents in respect of her house. She was held not a pardanashin woman.<br /><ul><li>Fraud (Sec 17):</li></ul>When a person intentionally tries to cheat another person, it is called as fraud in a general sense. Section 17 defines fraud precisely as such - Fraud means and includes any of the following activities done by a party or by his connivance or by his agent, with intent to deceive another party or his agent, or as to induce the other party to enter into the contract:<br /><ul><li>the suggestion of a fact, of that which is not true, by the one who does not believe it to be true.
  25. 25. active concealment of a fact by one who knowledge or belief of the fact.
  26. 26. making a promise without an intention to perform.
  27. 27. any act fitted to deceive
  28. 28. any such act or omission that the law declares to be fraudulent. </li></ul>Silence whether fraud? As per section 17 mere silence as to facts likely to affect the willingness of a person to enter into the contract is not fraud unless, according to the circumstances of the case, it is the duty of the person keeping silence to speak or unless his silence itself is considered as speech.<br />Examples:<br />A sells a horse to B by auction without telling B that horse is unsound. This is not fraud.<br />B is A's daughter who has just come off age, then it is A's duty to tell B about the fact. So this is fraud.<br />B says to A, " if you do not deny it, I will assume that horse is sound" . Here, silence is considered as speech so this is fraud.<br />A and B, being traders, enter into a contract. A has private pricing information that will cause B to not enter the contract. A is not bound to inform this to B. This is not fraud.<br />Concealing the disease history while obtaining insurance is fraud because it is the duty of the insured to give this information to the insurer.<br />Derry vs Peek 1889 was not fraud, because the company honestly believed in what they said and there was no intentional misrepresentation, which is the essence of fraud.Sri Krishan vs. Kurukshetra Univ., AIR 1976 SC the student was not found to be fraud. Even though he knew that he was short on attendance, he did not disclose it on examination form. He was let off because 'mere silence' is not fraud.<br />Essential elements of fraud:<br />By a party to a contract - The fraud must have been committed by a party to a contract. E.g. - fraud committed by the stranger does not affect the validity of contract.<br />Upon the other party - He fraud must have been committed upon the other party or his agent. E.g. - if it is committed upon a stranger not related to the contract, it will not amount to fraud.<br />False Representation – A party made a false statement regarding a material fact and he knew or should have known the representation was false.<br />Intention - The act must be committed by a party with the intention to deceive the other party or to induce the other party to enter into contract.<br />Suffered Loss – The other party suffered damages in justifiable reliance on the representation.<br />EFFECTS OF FRAUD:<br />Voidable contract – The contract is voidable at the option of the party whose consent was so caused.<br />Affirm the contract – He may insist that the contract shall be performed and shall be put in the position in which he would have been if the representations made had been true.<br />Withdrawal of contract - He may withdraw the contract within a reasonable time under the Specific Relief Act. 1963.<br />Sue for damages – He has right to sue for damages suffered by him.<br />CONTRACT UBERRIMAE FIDEI (CONTRACTS OF UTMOST GOOD FAITH):<br />Uberrimae fidei is a Latin phrase meaning " utmost good faith" (literally, " most abundant faith" ). Uberrimae fidei contracts are made in utmost good faith. There is no concealment or deception in such contracts. If one of the parties to a contract has a special knowledge, he/she must disclose such knowledge relevant to the contract. Although all contracts are to be made in utmost good faith, insurance contracts are very strict in this regard. Failure to disclose these facts will make the contract voidable.<br />A contract is said to be uberrimae fidei when the promisee is bound to communicate to the promisor every fact and circumstance which may influence him in deciding whether to enter into the conract or not.<br /><ul><li>Misrepresentation (Sec 18):</li></ul>When a person makes an unwarranted statement, however innocently, which the person believes to be true, and which turns out to be false, it is misrepresentation. Any breach of duty, without an intention to deceive, that gains an advantage to the person committing it or to the person claiming under him, by misleading the other person to his prejudice or to person claiming under him, is also misrepresentation. Further, causing a party to an agreement to make a mistake regarding the subject matter of the agreement, however innocently, is also misrepresentation.<br />Examples:A claimed to B that the ship being considered under an agreement was below 2800 tonnage. But in reality it turned out to be more than 3000 tonnage. It was held to be misrepresentation and B was entitled to avoid the contract. (Oceanic Steam Navigation vs Soonderdas Dharmasey, Bom HC 1980)<br />A land was purchased expressly for constructing duplexes. The seller claimed that he saw no permissioning problems. However, later on the permission was denied. This was held to be misrepresentation and even though the claim was innocent, the buyer was allowed to avoid the sale.<br />Where the seller of a car stated the mileage of the car to be 20000, which turned out to be wrong, the buyer of the car was allowed to recover compensation for misrepresentation.<br /><ul><li>Mistake</li></ul>Mistake is the erroneous belief either of law or fact by one or other parties or both.<br />Mistakes is of two kinds – (i) mistake of facts; and (ii) mistake of Law<br />Mistake of fact<br />Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void (Section 20).<br />Illustration: A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain though neither Party was aware of the fact. The agreement is void.<br />Types of mistake of fact:<br /><ul><li>Bilateral or mutual mistake: Bilateral or mutual mistake as to an existing fact essential to the agreement, renders the agreement void. In a bilateral mistake, both parties are under a mistake as to a matter of fact.
  29. 29. Illustration: A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of agreement, but both the parties were ignorant of the fact. The agreement is void.
  30. 30. Unilateral mistake: A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact (sec.22). In Unilateral mistake, only one party is under a mistake as to a matter of fact. The agreement is not rendered void.
  31. 31. Illustration: An example of a unilateral mistake occurs when the seller leads the buyer to believe that the property has no environmental hazards, but is aware that such hazards existed and/or were not properly remedied.</li></ul>Mistake of Law<br />Ignorance of law is no excuse. So when the both the parties to the contract commit mistake with reference to one’s own law the contract is valid. When the both the parties to the contract commit mistake with reference to a foreign law the agreement is void. (Sec 21)<br />Illustration: A and B make a contract on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. The contract is not voidable.<br />REMEDIES<br />Where a contract is void for identical mistake, the court exercising its equitable jurisdiction, can:<br /><ul><li>Refuse specific performance
  32. 32. Rescind any contractual document between the parties
  33. 33. Impose terms between the parties, in order to do justice.</li></ul>LEGALITY OF OBJECT AND VOID AGREEMENT<br />Section 10 states that all agreements are contracts if made for lawful consideration and with lawful object. It means that the consideration as well as the object of the agreement must be lawful, otherwise the agreement is considered as void.<br />Example, A promises to pay B Rs. 500/- if he commits a theft in C’s house Such a promise will not be enforceable by law even if B has committed a theft because the object of consideration of the promise is unlawful.<br />Section 23 also lays down that every agreement of which the object or consideration is unlawful is void.<br />As per Section 23 in the following cases the consideration or object of an agreement is unlawful if– <br /><ul><li>it is forbidden by law
  34. 34. it were permitted, it would defeat the provisions of any law;
  35. 35. it is fraudulent;
  36. 36. it involves or implies injury to the person or property of another; or
  37. 37. the court regards it as ‘opposed to public policy’
  38. 38. If it is forbidden by law</li></ul>An act is forbidden by law when it is punishable under Indian penal code or by some other law. If the consideration or the object of a contract were forbidden by law, it would be unlawful and hence unenforceable.<br />Example-<br /><ul><li>A, B and C enter into a agreement for the division among them of gains acquired, or to be acquired by them by fraud. The agreement is void as its object is unlawful.
  39. 39. A promises to obtain for B an employment in the public service, and B promises to Pay Rs. 1000/- to A. The agreement is void as the consideration for it is unlawful.
  40. 40. If it were permitted, it would defeat the provisions of any law</li></ul>Law may not expressly forbid certain acts, but if they result in defeating any provision of any law they cannot be encouraged. The agreements involving such acts are void.<br />Example-<br /><ul><li>A, a Hindu, Contracts to marry B. A is already married. His marriage with B would be void as the same would contravene provisions of Hindu Marriage Act as a Hindu is authorised to have only one spouse.
  41. 41. An agreement buy the debtor not to rise the plea of limitation, should a suit have to be filed,is void as tending to limit the provisions of the Limitation Act (Rama Murthy vs Gopayya).
  42. 42. If it is fraudulent</li></ul>An agreement, whose object or consideration is to fraud others, is unlawful and hence void. <br />Example, A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful.<br /><ul><li>If it involves or implies injury to the person or property of another -</li></ul>An agreement, the consideration of which is the causing of an injury to a person or property of another, is void. Injury means criminal or wrongful harm.<br />Example, A agrees to pay B, an editor of the local newspaper if he published a defamatory article against C. This agreement involves injury to C and hence void.<br /><ul><li>If the court regard  it as immoral -</li></ul>An agreement, the consideration of which is immoral, is void. The scope of the word immoral here extend to the following:<br /><ul><li>Sexual immorality e.g. illicit cohabitation or concubinage or prostitution.
  43. 43. A agrees to let her daughter to hire to B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code.
  44. 44. A gift deed executed in consideration of illicit has been held void, as its object is immoral. (Ghumma v. Ram Chandra)
  45. 45. Furtherance of sexual immorality.</li></ul>Example, A man who knowing lets out his house for prostitution cannot recover the rent, it being an act for furtherance of sexual immorality (Choga Lal v. Piyasi)  . The landlord may, however, recover if he did not know the purpose.<br /><ul><li>Interference with marital relation       </li></ul>Example, Money advanced to a married woman to enable her to procure and to marry the plaintiff could not be recovered back as the object of the agreement was held immoral (Bai Vijli v. Nansa Nagar).<br /><ul><li>Such acts which are against good public morals.</li></ul>Example –<br /><ul><li>An agreement for future marriage, after death of first wife is against good public morals and hence would be void. (Wilson v. Cornley)
  46. 46. A, who is B’s mukhtar, promises to exercise his influence, as such with B in favor of C and C promises to pay Rs.1000 to A. The agreement is void because it is immoral.
  47. 47. If the court regards it as ‘opposed to public policy’</li></ul>If the court regards the object or consideration of an agreement as opposed to public policy, the agreement is void. Public policy cannot be defined precisely. In Rattan Chand Hira Chand Vs. Askar Navaz Jung it was held that a contract which has a tendency to injure public interest or public welfare is one against public policy.<br />Agreements against public policy are void.<br />The following agreements are considered to be against the public policy:<br /><ul><li>Trading with an alien enemy:</li></ul>All trades with public enemies without a license from the government are unlawful. It is now fully established that trading with an alien enemy (i.e. a citizen of the other country at war with the state) is against public policy in so far as it tends to aid the economy of the enemy country. Such agreement is illegal.<br /><ul><li>Agreements for stifling criminal prosecution:</li></ul>It is well-settled law that if a person has committed a crime, he must be punished. Hence any agreement, which seeks to prevent the prosecution of a guilty party is opposed to public policy and is void, for ‘no one can be allowed to make a trade of felony’. Agreement for stifling prosecution cannot be enforced.<br />Example, X, who knows that Y has committed murder, receives Rs. 10,00,000 from Y in consideration of not exposing Y. This agreement is illegal.<br /><ul><li>Agreement interfering with the course of justice:</li></ul>An agreement for the purpose of using improper influence with judges is void.<br />Example, An agreement not to disclose misconduct to the other interested party or an agreement to influence a judge to induce him to decide the case in a party’s favor, is obviously opposed to the public policy and is void.<br /><ul><li>Champerty and maintenance:</li></ul>Maintenance is an agreement made by a disinterested party for litigation. It is a valid agreement. Champerty is an agreement made by a person to help a party to litigation, provided that the party receiving help promises to share the fruits of the litigation in the event of a favorable decision obtained by him in the suit.<br />Example<br />X promises to Y to pay Rs. 1000 if Y files a suit against Z. This is an maintenance agreement.<br />A contract to assist litigant so as to delay the execution of a decree against him is opposed to public policy and cannot be enforced (Nand Kishor vs Kunz Behari).<br /><ul><li>Traffic in Public Offices:</li></ul>Agreements for sale or transfer of Public Offices or for appointments for Public Offices in consideration of money are illegal, being opposed to public policy. Such agreements, if enforced, would lead to inefficiency and corruption in public life.<br />Example, A Pays money to B who promises to use his influence and to secure A’s son and appointment in the public service. This agreement is against the public policy.<br /><ul><li>Agreements creating an interest opposed to duty:</li></ul>If a person enters into a contract with a public servant, which to knowledge might cast upon the public service obligations inconsistent with the public duty, the agreement is void.<br />Example, An agreement to not to report in newspaper the activities of a public personality is a void agreement. Similarly, if a lawyer wants to create an interest, which will encourage him to perform his duties indifferently, the agreement shall be void. Nevile v. Dominion of Canada News Co(1915)<br /><ul><li>Agreement opposed to parental duty:</li></ul>The authority of a father over children and a guardian of a ward is to be exercised in the interest of the children and the ward respectively. The authority of a father cannot be alienated irrevocably and any agreement purporting to do so is void.<br />Example:<br />Where the adopting father promises money to the natural father in return for adoption of the latter’s son, such promise is void. Sitaram v.Harihur(1915)<br /><ul><li>Marriage brokerage agreement:</li></ul>An agreement to pay brokerage to a person for negotiating a marriage, is void because it is against public policy. The principal underlying this rule is that marriages should take place according to the free choice of parties and such choice should not be interfered with by third parties acting as brokers.<br />Example<br />An agreement to pay money to the parent or guardian of a minor in consideration of his consenting to give the minor in marriage is void as being opposed to the public policy. Dholidas vs Furchand, (1897) 22 Bom. 658.<br />An agreement to pay a penalty in case a minor daughter is not given in marriage to a particular person is void. Devarayan vs Muthuvaman, (1914) 37 Mad. 393.<br /><ul><li>Agreement tending to create monopolies in trade:</li></ul>Agreements having for their object, the creation of monopolies are void as opposed to the public policy. Somu Pillai vs MC Mayaveran, (1905) 28 Mad. 520.<br /><ul><li> Agreement to defraud revenue authority:</li></ul>Agreements to defraud revenue authorities are void and illegal.<br />An agreement by which an employee was to get, in addition to salary, an expense allowance grossly in excess of the expenses actually incurred by him, was held illegal because the provision as to expenses was contrary to public policy being merely a device to defraud the Income Tax authorities.<br /><ul><li>Agreement to give evidence:</li></ul>Agreements whereby money is given to induce persons to give evidences in a civil port are void because everyone is expected to perform his legal duty.<br /><ul><li>Agreement against personal freedom:</li></ul>Agreement which unduly restrict personal freedom have been held to be void and illegal as being against public policy.<br />Example When a debtor promises not to change his residence till repayment of a loan is complete, such promise is void.<br /><ul><li> Agreement opposed to marital duties:</li></ul>Agreement, which interferes with the performance of marital duties, is void as being against public policy.<br />Example<br /><ul><li>An agreement to pay money so that a party to a marriage may be helped in obtaining a divorce shall be against public policy and void. Roshan vs Mohammed (1887)
  48. 48. An agreement that the husband will always stay at the mother in law’s house and that the wife would never leave her parental house is void. Tikyat vs Monohar 28 Cal. 751.</li></ul>OBJECT AND CONSIDERATION UNLAWFUL IN PART<br />If the consideration or object is partially unlawful, the following rules will be applicable in such cases:<br /><ul><li>If any part of a single consideration for one or more objects, or any one or any part of any one or several considerations for a single object, is unlawful, the agreement is void.</li></ul>Example, A promises to superintend, on behalf of B, a legal manufacture of indigo; and an illegal traffic in other articles. B promises to pay A salary of 10000 rupees a year. The agreement is void, the object of A’s promise and the consideration for B’s promise is in part unlawful.<br /><ul><li>Where there reciprocal promise to do things legal and also other things illegal, and the legal part can be separated from the illegal part (i.e. there is a separate consideration for different promises), the legal part is a contract and the illegal part is avoid agreement. (Section 57)</li></ul>Example, A and B agree that A shall sell B a house for Rs.10000 but if B uses it as a gambling house, he shall pay a Rs. 50000 for it. The first part of the agreement is valid and the second part is invalid.<br /><ul><li>In the case of alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. (Section 58)</li></ul>Example, A and B agree that, A shall pay Rs.1000 for which B shall afterwards deliver to A, either rice or smuggled opium. This is a valid contract to deliver rice and a void agreement as to opium.<br />VOID AGREEMENT<br />“An agreement not enforceable by law is said to be void”. [Sec 2(g)]<br />A void agreement has no legal effect. An agreement which does not satisfy the essential elements of contract is void. Void contract confers no rights on any person and creates no obligation.<br />Example: An agreement made by a minor, agreement without consideration, certain agreements against public policy etc.<br />Agreement which become void:<br />An agreement, which was legal and enforceable when it was entered in to, may subsequently become void due to impossibility of performance, change of law or other reason. When it becomes void the agreement ceases to have legal effect.<br />There are certain agreements, which are expressly declared to be void. They are as follows: <br /><ul><li>Agreement by a minor or a person of unsound mind.[Sec 11]
  49. 49. Agreement of which the consideration or object is unlawful[Sec 23]
  50. 50. Agreement made under a bilateral  mistake of fact material to the agreement[Sec 20]
  51. 51. Agreement of which the consideration or object is unlawful in part and the illegal  part cannot be separated from the legal part [Sec 24]
  52. 52. Agreement made. without consideration.[Sec 25]
  53. 53. Agreement in restraint of marriage [Sec 26]
  54. 54. Agreement in restrain of trade [Sec 27]
  55. 55. Agreement  in restrain of legal proceedings[Sec 28]
  56. 56. Agreements the meaning of which is uncertain [Sec 29]
  57. 57. Agreements by way of wager [Sec 30]
  58. 58. Agreements contingent on impossible events [Sec36]
  59. 59. Agreements to do impossible acts [Sec 56]</li></ul>Agreements in Restraint of Marriage -<br />Every individual enjoys the freedom to marry and so according to section 26 of the contract act “every agreement is restraint of the marriage of any person, other than a minor, is void.” The restraint may be general or partial but the agreement is void, and therefore, an agreement agreeing not to marry at all, or a certain person or, a class of persons, or for a fixed period, is void. However, an agreement restraint of the marriage of a minor is valid under the section.<br />It is interesting to note that a promise to marry a particular person does not imply any restraint of marriage and is, therefore, a valid contract.<br />This section enact that agreement in restraint of the marriage of any person, other than a minor is void. In the interest of the society, contracts for marriage are scrutinized with a close and vigilant suspicion of undue influence, fraud or imposition. The law presumes constrictive fraud, on grounds of public policy, in agreements respecting marriages since marriages of a suitable nature are of the deepest importance of the wellbeing of the society, as upon the equality and mutual affection much of their happiness, sound morality, and mutual confidence, hence every temptation of the exercise often undue influence, or a seductive interest in procuring a marriage is suppressed, for there is infinite danger that it may, under the guises of friendship, confidence, flattery or falsehood, accomplish the ruin of person especially females. So the law—<br /><ul><li>prevents improvident, ill-advised, and often fraudulent matches;
  60. 60. Avoid all such contracts as tend to the deceit and injury, or encourage artifices and improper attempts to control the exercise of free judgment;
  61. 61. Discountenances secret contracts made with prevents and guardians, whereby on a marriage, they to receive a benefits
  62. 62. Renders invalid certain agreements in restraint of marriage.</li></ul>Illustrations(a)    A agrees with B for good consideration that she will not marry C. It is a void agreement.<br />(b)    A agrees with B that she will marry him only; it is a valid contract of marriage.<br />Agreement in restrain of legal proceedings –<br />Every agreement, by which any party thereto is restricted absolutely from enforcing his right under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent. Section 28 declares the following two kinds of agreements void:<br /><ul><li>An agreement by which a party is restrained absolutely from taking usual legalProceeding, in respect of any rights arising from a contract.
  63. 63. An agreement which limits the time within which one may enforce his contractRights, without to the time allowed by the limitation act.</li></ul>IllustrationIn a contract of fire insurance, it was provided that if a claim is rejected and a suit is not filed within three months after such rejection, all benefits under the policy shell be forfeited. The provision was held valid and binding and the suit filed after three months was dismissed. (Baroda spinning Ltd. vs. Satyanarayan Marine and Fire Ins. Com. Ltd.)<br />Exception 1: This section shell not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shell be referred to arbitration and that only the amount awarded in such arbitration shell be recoverable in respect of the dispute so referred.<br />Exception 2: Nor shell this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.<br />CONTRACT IN RESTRAINT OF TRADE<br />The constitution of India guarantees that the freedom of trade and commerce to every citizen and therefore section 27 declares “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” Thus no person is at livery to deprive himself of the fruit of his labor, skill or talent, by any contracts that he enters into.<br />It is to be noted that whether restraint is responsible or not, if it is in the nature of restraint of trade, the agreement is void always, subject to certain exceptions provided for statutorily.<br />IllustrationAn agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to pay a certain some of money , is void, being an agreement is restraint of trade, and the amount is not recoverable, if the other party fails to pay the promised some of money. (Mad hub Chander vs.  Raj Kumar).<br />But agreements merely restraining freedom of action necessary for the carrying on of business are not void, for the law does not intend to take away the right of a trade to regulate his business according to his own discretion and choice.<br />AGREEMENT BY WAY OF WAGER<br />Literally the word ‘wager’ means ‘a bet’ something stated to be lost or won on the result of a doubtful issue, and, therefore, wagering agreements are nothing but ordinary betting agreements. <br />Example, A and B mutually agree that if it rains today A will pay B Tk.100 and if it does not rain B will pay A Tk.100 or C and D entered into agreement that on tossing up a coin, if it fall head upwards C will pay D Tk.50 and if falls tail upwards D will pay C Tk.50, there is a wagering agreement.<br />In Tracker vs. Hardy Cotton, L.J., described a ‘wager’ ad follows: “The essence of gaming and wagering is that one party is to win and the other to lose upon a future event which at the time of the contract is of an uncertain nature- that is to say, if the event turns out the other way he will win.” <br />Agreement by way of wager, void - Section 30 lays down that “agreements by way of wager are void; and no suit shell 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,” Thus, where A and B enter into an agreement which provides that if England’s cricket team wins the match, A will pay B Rs. 100, and if it loses B will pay Rs. 100 to A, nothing can be recovered by the winning party under the agreement, it being a wager. Similarly, whether C and D enter into a wagering agreement and each deposits Rs.100 with Z instructing him to pay or give the total sum to the winner, no suit can be brought by the winner for recovering the bet amount from Z, the stake-holder. Further, if Z had paid the sum to the winner, the looser   cannot bring a suit, for recovering his Rs.100, either against the winner or against, the stake-holder, even if Z had paid after the loser’s definite instructions not to pay. Of course the looser can recover back his deposit if he makes the demand before the stake-holder had paid it over to the winner (Ratnakalli vs. Vochalapu). But even such a deposit cannot be recovered by a loser in the States of Maharashtra and Gujarat where such an agreement is void and illegal.<br />Exceptions<br />Horse Race - This section does not render void a subscription or contribution, or an agreement to subscribe or contribute, toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards to the winner or winners of any horse race.<br />Crossword competitions and lottery - The supreme court of India in B.R Enterprises V.  State of  U.P. held that even the state sponsored  lotteries have the same element of chance with no skill involved in it and it comes under wagering contracts as the very nature of agreement has not changed and thus be void. If chance does not play a role and victory is completely dependent on skill, the competition is not a lottery .Otherwise it is. The Madhya Pradesh High Court in Subhash Kumar Manwani v. State of MP has characterized lotteries as wager and the court held that agreement for payment of prize money on a lottery ticket was held to be coming within the category of wagering agreement as contemplated by section 30.<br />The principle and purpose behind Sec. 30 to treat an agreement by way of wager as void is that, the law discourages people to enter into games of chance and make earning of trying luck instead of spending  their time, energy and labour for more fruitful and useful work for themselves, their family and society. <br />CONTINGENT CONTRACT<br />Section 31 of the Act defines Contingent contract as “A contract to do or not to do something if some event, collateral to such contract, does or does not happen”. In simple words, it may define as a conditional contract.<br />Illustrations:<br />‘A’ contracts to pay B Rs 10,000, if B’s house is burnt. This is a contingent contract. Here the liability of A arises, only when a particular event takes place, i.e. burning of B’s house. This is an event, collateral to the main contract.<br />Essentials of contingent contract<br />The performance of a contingent contract is made dependent upon the happening or non-happening of some event.<br />The event on which the performance is made to depend, is an event collateral to the contract, i.e., it does not form part of the reciprocal promises which constitute the contract.<br />Examples<br />A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards, the contract is a conditional contract and not contingent, because the event on which B’s obligation is made to depend is a part of the promise itself and not a collateral event.<br />A promises to pay B Rs. 10,000 if he marries C, it is not a contingent contract.<br />The contingent event should not be the mere will of the promisor.<br />Example: A promises to pay B Rs. 1,000, if he so chooses, it is not a contingent contract.<br />However, where the event is within the promisor’s will but not merely his will, it may be a contingent contract.<br />Example, A promises to pay B Rs. 1,000, if A left Delhi for Bombay, it is a contingent contract, because going to Bombay is an event no doubt within A’s will, but is not merely his will.<br />Rules Regarding Enforcement of Contingent Contracts (Sections 32 to 36)<br />The rules regarding contingent contracts are summarised hereunder:<br />Contracts contingent upon the happening of a future uncertain event, cannot be enforced by law unless and until that event has happened. And if, the event becomes impossible such contract become void (Section 32).<br />Examples<br />A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced by law unless and until C dies in A’s life-time.<br />A makes a contract with B to sell a horse to B at a specified price if C, to whom the horse has been offered, refuses to buy him. The contract cannot he enforced by law unless and until C refuses to buy the horse.<br />A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.<br />Contracts contingent upon the non-happening of an uncertain future event can be enforced when the happening of that event becomes impossible, and not before. (Section 33).<br />Example, A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.<br />If a contract is contingent upon as to how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything, which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies. (Section 34).<br />Example, A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die and C may afterwards marry B.<br />Contracts contingent upon the happening of a specified uncertain event within a fixed time become void if, at the expiration of the time fixed, such event has not happened or if, before the time fixed, such event becomes impossible (Section 35 para 1).<br />Example, A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.<br />Contracts contingent upon the non-happening of a specified event within a fixed time may be enforced by law when the time fixed has expired and such event has not happened, or, before the time fixed expired, if it becomes certain that such event will not happen (Section 35 para II).<br />Example, A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.<br />Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.<br />Examples<br />A agrees to pay B Rs. 1,000 if two parallel straight lines should enclose a space. The agreement is void.<br />A agrees to pay B Rs. 1,000 if B will marry A’s daughter C. C was dead at the time of the agreement. The agreement is void.<br />Difference /Distinguished between Contingent contract and wagering agreement<br /> Contingent contractWagering agreementThe contract need not contain any mutual promisesThe contract is bound by mutual or reciprocal promisesAll contingent contracts are not necessarily wager contractsAll wager contracts are contingent contractsThe uncertain event may be within the power of one of the partiesIn a wager, the uncertain event is beyond the power of both the partiesIn a contingent contract, the parties are interested in the occurrence of the event.The parties are not interested in the occurrence of the event., apart from the money earned or lostThe future event is merely collateral or incidentalThe future event is the sole determining factor of the contractContingent contract is not void unless it is dependent on the occurrence of an impossible eventWagers are void<br />