Law of contracts

LAW OF CONTRACTS
PREPARED BY:
ADITYA KUMAR
L.L.B., CA(Final), B. Com
Student of L.L.M. at UPES

The Indian Contract Act consists of the following two parts:
Sections 1 to 75 of
the Indian Contract
Act. came into force
on September 1,
1872.
GENERAL
PRINCIPALS OF
THE LAW OF
CONTRACT
Sections 124 to 238
of the Indian
Contract Act. These
special contracts
are Indemnity,
Guarantee,
Bailment, pledge
and Agency.
SPECIAL KINDS
OF CONTRACTS
Enacted by Parliament of India
Date enacted 25 April 1872
Date commenced 1 September 1872
Total sections 238
Extent All States of India except
the State of Jammu & Kashmir
INDIAN CONTRACT ACT, 1872

What is Contract?
Sec 2 (h)
“A contract is an agreement enforceable by
law”.
Contract = Agreement + Enforceability by law.

What is Agreement?
Sec 2 (e)
“Every promise or set of promises forming the
consideration for each other”.
Agreement = Promise + Consideration

What is Promise?
Sec 2 (e)
“Every promise or set of promises forming the
consideration for each other”.
Agreement = Promise + Consideration

Limitation on freedom of contract
If the contract does not satisfy the basic essentials of a
valid contract, it deems to limit the freedom of contract.
It simply means absence of any one or more conditions
of a valid contract.

Essentials of a valid Contract
Sec 10
“All agreements are contract if they are made by the free
consent of the parties competent to contract, for a
lawful consideration and with a lawful object and are
not hereby expressly declared to be void”.

Analysis of Section 10
1. There must be an agreement between the parties
2. The parties must have an intention to create legal
relationship
3. The parties must freely consent to enter into the agreement
4. The parties must be competent to contract
5. There must be some consideration
6. The object of the agreement must be lawful
7. The agreement is not hereby expressly declared to be void
8. The legal formalities for entering into such a contract are
completed

What Agreements are Unlawful?
Sec 23
The consideration or object of an agreement is lawful unless:
It is forbidden by law; or
Is of such nature that, permitted, it would defeat the provisions of
any law;
or is fraudulent; or
Involves or implies injury to the person or property of another; or
The court regards it as immoral or opposed to the public policy.

Objects and Consideration
Case Law: Jaffar Ali Meher Vs Budge-Budge Jute Mills Co
(1906)
The words ‘object’ and ‘consideration’ used in Section 23 are not
synonymous. The word ‘object’ here means ‘purpose or design.’
Thus, where a person, while in insolvent circumstances,
transferred his property to one of his creditors with the object of
defrauding his other creditors, it was held that the agreement was
void and the transfer was inoperative .
The court observed that although the consideration of the contract
was lawful but the object was unlawful because the purpose of the
parties was to defeat the provisions of the Insolvency Law.

Analysis of Unlawful Agreement
Forbidden
by Law
Such
nature, if
permitted,
defeat
provision
of law
Fraudulent
Injury to
person or
property
Court
regards it
as
Immoral of
opposed to
the public
policy

If it is forbidden by law
This clause refers to the agreements which are declared illegal by
law. If the consideration or object for a promise is such as is
forbidden by law, the agreement is void.
An act or an undertaking is forbidden by law:
(a) when it is punishable by the criminal law of the country, or
(b) when it is prohibited by special legislation or regulations made
by a competent authority under powers derived from the
legislature.

Illustrations
(a) Agreements for sale or purchase above the standard price fixed
by the relevant law (e.g., Essential Commodities Act. 1955) with
regard to a controlled article are illegal and hence void (Sita Ram
vs Kunj Lal).
(b) An agreement to pay consideration to a tenant to induce him to
vacate premises governed by the Rent Restriction Act is illegal and
cannot be enforced because such an act is forbidden by the said
Act (Mohanchana vs Manindra).

Case Law - Foster Vs Driscoll (1929)
Facts of the case:
Sir Harry Foster, a British politician, entered into contracts with
various parties (including a distiller and a ship broker) to finance
an undertaking for the supply of 500 cases of whiskey into the
United States in breach of prohibition laws. In pursuance of the
undertaking bills of exchange were presented for payment but
dishonoured. Foster then sought rescission of the contract. Three
actions were consolidated and eventually came before the Court of
Appeal.

Case Law - Foster Vs Driscoll (1929)
Decision of the Case:
The judge at first instance, Wright J, held that the purpose of the
enterprise was to smuggle whiskey into the United States for
profit. Although this was not illegal in England, it was clearly in
breach of US laws, and thus he declined to enforce the contracts.
In the Court of Appeal Lawrence LJ held "I am clearly of opinion
that a partnership formed for the main purpose of deriving profit
from the commission of a criminal offence in a foreign and friendly
country is illegal“. Accordingly the court dismissed all of the
claims and counterclaims, without any order as to costs.

If it is of such a nature that, if
permitted, it would defeat the
provisions of any law
This clause refers to cases where the object or consideration of an
agreement is of such a nature that, though not directly forbidden
by law, it would indirectly lend to a violation of law, whether
enacted or otherwise (e.g., Hindu and Mohammedan Laws). Such
an agreement is also void.

Illustrations
(a) A loan granted under a promissory note to the guardian of a minor to
enable him to celebrate the minor’s marriage in contravention of the Child
Marriage Restraint Act was held illegal and could not be recovered back
(Chandra Shrinivisa Rao vs Korrapati Raja Rama Mohana Rao). It will
be seen that the purpose of borrowing in this case is of such a nature that
if permitted it would defeat the provisions of Child Marriage Restraint Act
of 1929, for the money was lent to enable the guardian to celebrate the
marriage contrary to the provisions of the said Act.
(b) An agreement between husband and wife to live separately is invalid as
being opposed to Hindu Law (A.E. Thimmal Naidu vs Rajammal).
If it is of such a nature that, if permitted, it
would defeat the provisions of any law

If it is fraudulent
An agreement whose object or consideration is to defraud others,
is unlawful and hence void.
An agreement made for a “fraudulent” purpose is void. Where the
parties agree to impose a fraud on third person, their agreement is
unlawful.

Illustrations
(a) A, promises to pay Rs 200 to B, if B would commit fraud on C.
B agrees. B’s agreeing to defraud is unlawful consideration for A’s
promise to pay. Hence the agreement is illegal and void.
(b) 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.
If it is fraudulent

If it involves or implies injury to the
person or property of another
An agreement between two persons to injure the person or
property of another is unlawful.
In the same way, if the object of an agreement is such that it
involves or implies injury to the person or property of another is
unlawful and void.
An agreement made for a “fraudulent” purpose is void. Where the
parties agree to impose a fraud on third person, their agreement is
unlawful.

Illustrations
(a) An agreement to commit an assault or to beat a man has been held
unlawful and void (Alien vs Rescous).
(b) An agreement to put certain property to fire is unlawful and void under
this clause.
(c) An agreement involving the publication of a libel (defamatory article
against someone) has been held unlawful and void (Clay vs Yates).
(d) An agreement by which a debtor, who borrowed Rs 100, promised to do
manual labour without pay for the creditor, so long as the debt was not
repaid in full has been held to be void, as it involved injury to the person of
the debtor (Ram Sarup vs Bansi Mandar).
If it involves or implies injury to the
person or property of another

If the court regards it as
immoral
An agreement is unlawful if the court regards that object or
consideration of such an agreement is
Immoral
OR
Opposed to public policy
Example: A, agrees to let her daughter to B for concubinage. The
agreement is void,
because it is immoral, though the letting may not be punishable
under the Indian Penal Code.

When is object or consideration
said to be against public policy?
a. Agreement for trading with enemy
b. Agreement interfering with personal liberty
c. Agreement interfering with parental duties
d. Agreement interfering with marital duties
e. Agreement interfering with course of justice
f. Agreement for improper promotion of litigation
g. Agreement for stifling (suppressing) prosecution
h. Maintenance Agreement
i. Champerty Agreement
j. Agreement to do an act against the duty of a person
k. Marriage brokerage Contract
l. Agreement not to bid
m. Agreement to create monopolies or to eliminate or reduce competition
n. Agreement for sale of public offices and titles

Trading With Enemy
An agreement made with an alien enemy at times of war is illegal.
Contracts entered before outbreak of war are either suspended or
dissolved till the end of hostilities.
The reason behind making such agreements void is-
(i) avoidance of commercial transactions with alien enemy, and
(ii) protecting the interests of the nation lest the enemy has an
immediate or future benefit out of such transaction.

Restraint of Personal Liberty
Agreements which unduly restrict the personal freedom of persons
are void and illegal being against public policy.
X borrowed money from Y, a moneylender, on the promise that he
(X) would not, without Y’s written consent, leave his job, borrow
money, dispose of his property or change his residence. Held,
agreement was void and illegal as it restricted the personal
freedom of X.
Harwood vs Miller’s Timber and Trading Co.

Restraint of Parental Duties
Parents are the natural guardians of their children. This right
cannot be bartered away by any agreement. The authority of a
father cannot be alienated irrevocably and any agreement
purporting to do so is void.
A father having two minor sons, agree to transfer their
guardianship in favour of Mrs Annie Besant and agreed not to
revoke it. Subsequently, he filed a suit for recovery of boys and a
declaration that he was the rightful guardian. Held that he had
the right to revoke his authority and get back the children.
Giddu Narayanish vs Mrs Annie Besant

Agreement in Restraint of
Marital Duties
Agreements which interfere with the performance of marital duties
are opposed to public policy and are hence void.
Example: A promise be a person to marry, during the lifetime or
after death of a spouse, an agreement to lend money to a married
woman in consideration of her getting a divorce and marrying the
lender etc.

Interfering with court of Justice
An agreement for the purpose or to the effect of using improper
influence of any kind with Judges or Officers of Justice is void.
However, an agreement to refer present or future disputes to
arbitration is Valid.

Agreement for stifling
Prosecution
Contracts for compounding or suppression of criminal charges are
illegal and void. But, a compromise of compoundable offences is
valid.
A promise to indemnify a Firm of printers and publishers of a
paper against consequences of publishing a libel cannot be
enforced. Held firm has to pay damages for libel.
W H Smith & Sons vs Clinton

Champerty and Maintenance
Maintenance refers to promotion of litigation in which a person
has no interest of his own. Where a person agrees to maintain a
suit, in which he has no interest, the proceeding is known as
Maintenance. It tends to encourage speculative litigation.
Example: X promises to pay Y Rs 25,000/- for bringing a suit
against Z, X’s sole motive being to sue Z and annoy him.
Champerty is an agreement whereby one party assists another in
recovering money or property and, inturn share in the proceeds of
the action. Example: L agrees to pay M Rs 50,000/- for suing N
and in turn seeking 60% share in the proceeds received by M in
the suit.

Champerty and Maintenance
All agreements of Champerty or Maintenance are not illegal in
India. Where such agreements appear to be made for- (i) gambling
in litigation, and (ii) injuring or oppressing others, by encouraging
unholy litigation, then they will not be enforced.
Champerty and Maintenance are not illegal in India, and Courts
will refuse to enforce such agreement s only when they are found
to be extortionate and unconscionable and not made with the
bonafide object of assisting claims of person unable to carry on
litigation himself.
Raja Venkata Subhadrayamma Guru vs Sree Pasupathi
Venkatapathi Raju

To do an act opposed to duty
If by an agreement, a person is bound to do something which is
against his personal or professional duty, or which intervenes in
another’s personal or professional interest, it is void as being
against public policy.
An agreement by a newspaper proprietor not to comment on the
conduct of a particular person is unlawful as it is against public
policy.
Neville vs Dominion of Canada News Co. Ltd.

Marriage Brokerage Contracts
An agreement in which a person promises, for a monetary
consideration, to procure the marriage of another is void.
So, if the marriage is performed but the money is not paid it
cannot be recovered in a Court of Law.
Also, where the money has been paid and the marriage is not
performed, it cannot be got back.

Marriage Brokerage Contracts
A sum of money was agreed to be paid to the father in
consideration of his giving his daughter in marriage. Held, such a
promise amounts to a marriage brokerage contract and was void.
Venkatakrishna vs Venkatachalam
Where a purohit was promised a certain sum of money in
consideration of procuring a second wife for the defendant, it was
held that the promise was opposed to public policy and thus void.
Vaidyanathan vs Gangaraz

Agreement in restraint of
Marriage
Sec 26
Every agreement in restraint of marriage of any person is void
The fundamental idea behind this provision was to ensure that the
citizens did not lose their right to marry as per their choice, which
is an essential part of a civil society having both personal and
social significance.

Agreement in restraint of
Marriage
1. Every agreement in total restraint of the marriage of any
person, other than a minor, is void.
2. An agreement in partial restraint of the marriage of any person,
other than a minor, is void if the court regards it as
unreasonable in the circumstances of the case.
Illustration: An employee has placed restriction on the employee
that he/she cannot marriage during the period of service. An
agreement of service is not considered a restraint at all as it
gives freedom to marry on leaving the job (Air India Vs
Nergeesh Meerza and others)

Agreement in restraint of Trade
Constitutional Rights:
Freedom of Trade and Commerce is a fundamental right
protected by Article 19(g) of the Constitution of India. The
above right is protected by the Constitution and cannot be
restrained or restricted by agreements between individuals.
Sec 27
Every agreement by which anyone is restrained from exercising
a lawful profession, trade or business of any kind is void to the
extent

Burden of proof
Party supporting the contract – must show that the restraint is
reasonably necessary to protect
his interests
Party challenging the contract – must show that the restraint is
injurious to the public
In Patna, 29 out of 30 manufacturers of combs agreed with R to
supply combs only to him and not to any one else. Under the
agreement R was free to reject the goods if he found no market for
them. Held, the agreement amounted to restraint of trade and
void. Shaikh Kalu vs Ramasaran Bhagat

Exceptions to Sec 27
1. Sale of Goodwill
2. Partnership Agreements
3. Service Agreements
4. Trade Combinations

Sale of Goodwill
Restraint on a seller of goodwill from carrying on
(i) similar business,
(ii) within specified local limits,
(iii) so long as the buyer or his representative deriving title to the
goodwill carriers on a like business, provided
(iv) the restraint is reasonable in point of time and place.

Partnership Agreement
Restriction on existing partner – Partners may enter into an
agreement that a partner will not carry on similar business
while he is a partner.
Restriction on outgoing partner - An outgoing partner may
agree with other partners that he will not carry on any
business similar to that of the firm within a specified time or
local limits.

Partnership Agreement
Restriction on partners upon or in anticipation of dissolution
of the firm - Upon or in anticipation of dissolution a
partnership firm some or all the partners may agree not to
carry on a business similar to that of the firm within a specified
time or local limits.
Restriction in case of sale of goodwill of a firm - A partner may
upon the sale of goodwill of the firm, make an agreement with
the buyer that he will not carry on a business similar to that I
the firm within a specified time or local limits.
1. .

Service Agreement
Agreements of service often contain a clause by which the
employees prohibited from working anywhere else during the term
of the agreement, such agreement is valid.
Illustration
Miss X, a film actress agreed to work exclusively for a period of
two years, for a film production company. However, during the
said period she enters into a a contract to work with another
film producer.
Whether she can do so? Is there any rights available to the
aggrieved film production company.

Service Agreements
Illustration cont…
Restraint on Miss X valid – since an agreement under which an
employee agrees to serve a certain employer for a certain
duration, and that he/she will not serve anybody else during
such period is a valid agreement (Charlesworth Vs Mac
Donald)
Miss X cannot be compelled to work with the film production
company – Since specific performance is generally not allowed
where personal performance is required.
Miss X may be restricted from working for another producer –
Since in case of breach of a negative term of a contract, the
defaulting party is generally restrained from doing what he
promised not to do.

Trade Combinations
An agreement among
members of trade associations or
chambers of commerce etc
to regulate their business
is not void under section 27.

Agreement in restraint of legal
proceeding
Sec 28
An agreement is void:
1. If a person is restricted absolutely from enforcing his rights
under or in respect of any contract, by the usual legal
proceedings in the ordinary tribunals.
2. Limits the time within which the contractual rights may be
enforced, or extinguishes the rights of any party thereto, or
Discharges any party thereto from any liability, under or in
respect of any contract on the expiry of a specified period so as
to restrict any party from enforcing his rights.

proceeding
Also, an agreement between persons to override the jurisdiction of
Courts is contrary to public policy and hence void.
Exceptions:
1. Agreements to submit a dispute for Arbitration are valid.
2. Saving of contract to refer questions that have already arisen.

proceeding
Exceptions 1 – FUTURE DISPUTES
Section 28 shall not render illegal a contract, by which two or
more persons agree that the dispute which may arise between
them in respect of any subject or class of subjects shall be
referred to arbitration, that only the amount awarded in such
arbitration shall be recovered in respect of the dispute so referred

proceeding
Exceptions 2 – PENDING DISPUTES
Section 28 shall not render illegal a contract, by which two or
more persons agree to refer to arbitration, any question between
them which has already arisen, or effect any provision of any law
in force for the time being as to reference to arbitration

Creation of Monopolies
This restrains Freedom of Trade and is hence opposed to public
policy.
A local body granted a monopoly to X to sell vegetables in a
particular locality. Held, the agreement was void.
District Board of Jhelum vs Harichand

Sale of Public Offices and Titles
Trafficking in public offices or for securing titles is against the
public policy. It interferes in the selection of the best qualified
persons for the posts/ titles. Hence they are void.
Example: A promises to pay Rs 50,000/- if B secures him an
employment in the public service or procure the title “Padma
Shri”. The agreement is void.
Where A promises to pay to B in order to induce him to retire so
as o provide room for A’s appointment to the public office held by
B, the agreement if void.
Saminathan vs Muthusami

Defrauding Creditors or
Revenue Authorities
Agreement intended to defraud Creditors or Revenue Authorities is
opposed to public policy and is hence void.
Example:
‘A’ Contract to with a ‘B’ his Accountant to help in avoiding taxes
and in return ‘A’ will provide a percentage of taxes evaded to ‘B’.
Such a contract is void.

Uncertain Agreements
Sec 29
Agreements the meaning of which
a) is not certain, or
b) are not capable of being certain, are Void.
Example
A says to B “I shall sell my house, will you buy?” A says, “Yes, I
shall buy”. Due to uncertainty of price the agreement is void
and unenforceable. There is no binding agreement.

Uncertain Agreements
Areas of Uncertainty
Uncertainty may relate to – Subject Matter or Terms of Contract
The uncertainty may be as regards –
a)Existence b) Quantity
c) Quality d) Price, or
e) Title to the subject matter
Referred Case Law – Kandamath Cine Enterprises Pvt. Ltd. Vs
John Phillipose

Partly Unlawful object and
consideration
Sec 24
An agreement is void if –
a) Any part of a single consideration for one or more objects is
unlawful, or
b) Any one or any part of any one of several consideration for a
single object, is unlawful

consideration
Example
B is a licensed manufacturer of permitted chemicals.
A promises B to supervise B’s business and combine it with the
production of contraband items together with the permitted
items.
B promises to pay A, a salary of Rs, 50,000 p.m.
Agreement is Void, the object of A’s promise and consideration
for B’s promise being partially unlawful.

consideration
Lawful consideration enforceable
Where there are several distinct promises made for one and the
same consideration, and one or more of them are of such
nature that law will not enforce it, only such of the promises as
are unlawful cannot be enforced. Other which are lawful can be
enforced.

consideration
Test of severability
a) If illegal part cannot be severed from a legal part of a covenant,
contract is altogether void.
b) If it is possible to severe them, whether the illegality be due to
statute or common law, bad part alone may be rejected and
good retained.
In case of pre-existing civil liability, the dropping of criminal
proceedings need not necessarily be a consideration for the
agreement to satisfy that liability.
Union Carbide Corpn. Vs UOI

Wagering Agreement
Sec 30
A wagering agreement is an agreement under which money or
money’s worth is payable, by one person to another on the
happening or non-happening of a future uncertain event.
Example:
A and B bet as to whether rain on a particular day or not – A
promising to pay Rs.100 to B if it rained, and B promising an
equal amount to A, if it did not.

Wagering Agreement
Essentials of a wagering agreement
1. Uncertain Event
2. Mutual chances of gain or loss
3. Neither party to have control over event
4. No other interest in the event
5. Money or Money’s worth
Effect of a wagering agreement
1. Agreement Void
2. No action
3. No suit for breach

Wagering Agreement
Where the Government of India had sanctioned a lottery, the court
held that permission granted by the Government will not have
effect of overriding Sec 30 of the Indian Contract Act and
making such a lottery legal.
Its only effect is that the persons responsible for running the
lottery would not be punishable under the Indian Penal Code
Sir Dorabji Tata Vs Edward F. Lance

Law of contracts

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Law of contracts

Similar to Law of contracts (20)

Recently uploaded

Recently uploaded (20)

Law of contracts