Lesson 1 law


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Lesson 1 law

  1. 1. Lesson 11.1 INTRODUCTIONThe Indian Contract Act was passed in the year 1872 and it also came into force onthe 1st day of September, 1872. The Act extends to the whole of India except theState of Jammu and Kashmir. It consists of 238 sections. It has been divided into 10chapters. Chapter VII of the Act is wholly repealed by the India Sale of Goods act,1930 (vide section 65). The Act deals with particular contracts in separate chapters.The provisions of the Act do not apply to contracts made before the Act came intoforce. Broadly speaking, The Indian Contract Act deals with all facets of contractmore particularly the stages of formation of a contract, the elements of a contract, theperformance of the contract, the breach of the contract and also the available remedieswhen there is a breach of contract.A contract in which two or more countries are involved in respect of its performance,questions arise as to the law of which country would govern such a contract. In thefirst instance, the law which would govern such a contract would be the law expressedby the parties themselves in the contract. In the absence of an expressed intention, therule to apply is infer an intention from the terms and nature of the contract and thegeneral circumstances of the case. Such circumstances may be (i) the country inwhich the Contract was entered into or (ii) where the payment was to be made. Insuch a contract, if a payment is to be made, it should be of the legal tender governingthe country in which payment is to be made. [Principle of LexLoci i.e. the law of theland]1.2 MEANING AND DEFINITION OF CONTRACTThe meaning and definition of a contract are discussed below with references to someeminent jurists.1.2.1 MeaningAn agreement enforceable by law is a contract. An agreement is an accepted proposal.Thus it can be said that a contract is an agreement; an agreement is a promise and apromise is an accepted proposal. Every agreement in its ultimate analysis, is the resultof proposal from one side and its acceptance by the other. Hence it is a bilateraltransaction.
  2. 2. Illustration 1: If Prem offers to sell Pummy twenty-five pens for Rs. 20 each to bedelivered on Saturday and Pummy agrees to the deal. It is a valid contract. If oneparty fails to offer something of benefit to the other, there is no contract.1.2.3 DefinitionSection 2 (h) of the Indian contract Act of 1872 defines a contract as an agreementenforceable by law.According to Section 2(h) of the Act there are mainly two aspects of contract -(a) An agreement(b) Agreement enforceable by lawSome eminent jurists have also made an attempt to define the term contract which areuseful for interpretation of the various provisions of the Contract Act. Thesedefinitions are given below:-• Sir John William Salmond: “An agreement creating and defining obligationsbetween the parties”.• Halsbury: “An agreement between two or more persons which is intended to beenforceable at law and is constituted by the acceptance by one party of an offer madeto him by the other party to do or abstain from doing some act.”Thus in law a contract means the following:• Existence of two parties• Existence of an agreement between two or more parties• Existence of a legal obligations between parties who enter into an agreement1.2.4 What is an Agreement?An agreement is defined in section 2 (e) of the Indian Contract Act of 1872. It statesthat every promise and every set of promises forming the consideration for eachotheris an agreement.1.2.5 What is a promise?Section 2 (b) of the Indian Contract Act of 1872 defines a promise as: A proposalwhen accepted becomes a ‘promise’.Under section 2 (c) the person who makes the proposal is called the ‘promisor’. The‘promisee’ is the person that accepts the proposal.Illustration: Rani makes an offer to sell her plot of residential land for Rs. 50 lakhsto Malthi. If Malthi accepts this offer, then after the offer is accepted, the acceptance
  3. 3. becomes a promise. The promise between Rani and Malthi is an agreement.Therefore,agreement consists of offer and acceptance or it can be stated as:Agreement = Offer / Proposal + Acceptance of Offer / ProposalWhen the two parties make an agreement, they have to perform their promise. Ifeither party defaults in carrying out its obligation there will be a breach of contract ifit is enforceable by law.Under section 2 (g) an agreement that is not enforceable by law is void.What is enforceability of agreement?An agreement can be enforceable by law only if there is some legal obligation. The law of contracts does not take into consideration any agreement in which there is no legal obligation. An obligation is to do, or to restrict, a certain act or activity. The Contract Act deals with only those agreements where there is an intention to create a legal obligation. When there is an agreement that involves some business or commercial contracts it creates a legal obligation because the parties to the contract have the intention to create a legal obligation.However, the parties entering into a contract in domestic, social or religious eventsthat do not have the intention to create any legal obligations cannot be called as alegal obligation unless proved otherwise.1.3 CHARACTERISTICS OF A CONTRACTSection 10 of the Indian Contract Act, 1872 enumerates certain essential elements of avalid contract. These are given below:1.3.1 Agreement:An agreement constitutes a contract. It consists of two elements. These are:An offer, or proposal, by a person and acceptance of the offer, by another. Thus acontract must have two parties. One, who proposes or makes an offer, and anotherthat accepts the offer.1.3.2 Legal RelationshipThe intention of the two parties should be to create legal relationship. While decidingif the contract is valid or not, attention should be made to look into the objective andnot subjective nature of the intention to create a legal relationship. It should also takeinto consideration what would be a reasonable intention of the person who enters into
  4. 4. a contract. A domestic, religious or a social agreement where there is no intention tocreate a legal relationship cannot be called a valid contract. It is presumed thatbusiness dealings and commercial agreements are made with the intention to create alegal relationship. However social agreements can be enforceable if legality ofrelationship is intended and established. Similarly business dealings may not establisha legal relationship in an agreement and are therefore not enforceable.Case Law 1Mr Balfour was a civil engineer, and worked for the Government as the Director ofIrrigation in Ceylon (now Sri Lanka). Mrs Balfour was living with him. In 1915, theyboth came back to England during Mr Balfours leave. But Mrs Balfour got rheumaticarthritis. Her doctor advised her to stay, because a jungle climate was not conduciveto her health. As Mr Balfours boat was about to set sail, he promised her £30 a monthuntil he came back to Ceylon. They drifted apart, and Mr Balfour wrote saying it wasbetter that they remain apart. In March 1918, Mrs Balfour sued him to keep up withthe monthly £30 payments. In July she got a decree nisi and in December she obtainedan order for alimony. At first instance, Sargant J held that Mr Balfour was under anobligation to support his wife.JudgmentThere is no such contract here. These two people never intended to make a bargainwhich could be enforced in law. The husband expressed his intention to make thispayment, and he promised to make it, and was bound in honour to continue it so longas he was in a position to do so. The wife on the other hand, so far as I can see, madeno bargain at all. That is in my opinion sufficient to dispose of the case.1.3.3 Free ConsentSection 14 of the Indian Contract Act states there should be free consent between theparties making an agreement. The consent is considered to be free when there is nocoercion, undue influence, mistake, fraud, or misrepresentation in the agreementprepared by the parties. If the consent is not free, the contract is not valid. Amit getshis parents to sell the house to his friend forcibly. This is not a valid contract, as theagreement was not made with free consent. When a contract is made both parties mustunderstand and agree on all the same thing or all material facts of the agreement. It iscalled consensus ad idem when there is a meeting of minds of both the parties. They
  5. 5. should have agreed on all the terms and conditions without any undue influence ormistake in understanding of the product.Illustration: Mr. Rajhans is selling his blue sports model car to his secretary.However his secretary Rita thinks that she is buying the new red sports model car.There is no meeting of minds and hence there is no valid contract.1.3.3 Capacity of PartiesThe parties entering into a contract should be competent to make an agreement.According to section 11 of the Act they should have (i) attained the age of majority,(ii) They should be of sound mind, (iii)They should not have been disqualified toenter into a contract.Illustration 1: Meera is a lunatic and gets attacks of lunacy at intervals. Is shecompetent to contract? Meera can enter into a contract in those periods when she isnot suffering from lunacy. She is competent to contract when she is not under theinfluence of lunacyattack.1.3.4 Status of other EntitiesAny company is competent to enter into a contract according to the legislations underwhich they are governed. In this case the Memorandum of Association and Articles ofAssociation of the company will provide further guidelines in addition to provisionsof Indian Contract Act. Partners are allowed to enter into contracts under PartnershipAct of 1932. Associations of persons are competent to contract subject to theiragreement.1.3.5 Lawful ConsiderationAccording to Section 2(d), 23 and 25 of the Act a valid contract must have aconsideration. The person making a promise must receive something in return for it. Itmay or may not be an adequate return but there has to be some value and it should notbe fraudulent, unlawful, immoral or opposed to public policy. The agreement islegally binding and enforceable when both parties to an agreement give somethingand also get something in return. Consideration may not be in cash only. It can be inkind. It can also be an act or abstinence from doing something. It can be a promise todo or not to do something.Illustration 1: Ali sold 5 fountain pens for Rs. 125 each to Megha with a promiseto receive 12 red roses in return instead of the money in cash. Is this lawful
  6. 6. consideration? This is a lawful consideration as Megha gives roses instead of cash.Some consideration is being given to Ali. The consideration may not be of equalvalue.1.3.6 Object of an AgreementAccording to section 23 of the Indian Contract Act 1872 the object of an agreementshould be within the purview of law. It should not be fraudulent or be forbidden bylaw. The object should be legal, moral and according to public policy. It should nothave any legal flaws otherwise it will not be enforceable by law (Section 23).1.3.7 Formalities of an AgreementThe agreements under the Indian Contract Act may be oral or in writing. Whenever anagreement is a valid contract and it is made in writing it should be complete with alllegal formalities. If the legal formalities are not complete, law cannot enforce it. Thecontract will become void. Some contracts have to be made in writing otherwise theywill not be valid. In the following cases contracts have to be in writing:• Cheques, bills of exchange, promissory notes and other negotiable instruments.1.3.8 Valid Agreement but not Enforceable: In many cases even a validcontracts may not be enforceable by law. If a country declares an agreement void itcannot be enforced. Hence it is important to know the law of the country in which theagreement is made otherwise the legal rights cannot be exercised (Sections 24 to 30and 56).1.4 CLASSIFICATION OF CONTRACTSThe Indian Contract Act classifies contracts into different categories. Contracts can becategorized from the point of view of (i) enforceability/legal validity (ii) according toformation, (iii) according to performance and (iv) according to obligation.1.5 (A) CLASSIFICATION: ACCORDING TOENFORCEABILITYA contract that is enforceable can be classified under different categories. Suchcontracts may be valid contracts, voidable contracts, void agreements, void contracts,agreements discovered to be void, unlawful or illegal agreements and unenforceablecontracts.1. Valid Contract: A valid contract is one, which satisfies the essential elementsdescribed in section 10 of the Indian Contract Act. It must be an agreement in whichan offer is made and accepted. It should have the intention to create legal relations.There should be lawful consideration and the object should be legal. It should have
  7. 7. clear terms with free consent of both the parties. When all the essential elements arecomplete in all respects it is a valid contract and it is enforceable by law.2. Voidable Contract: If one party to the contract has the option of enforcing acontract by law, but not at the option of the other or others, it is a voidable contract. Inthose cases when the consent is not given freely but coercion has been used the partyhas the option to continue with the contract or rescind it. Another example of avoidable contract is when a person has promised to deliver certain goods on a certaindate and he does not deliver it, it is the option of the buyer to continue or to rescindthe contract (section 55).Illustration 1: Ruhi wanted to buy a gold chain for her mother’s birthday. Thegoldsmith promised to deliver it on the 20th of May. On the due date the chain wasnot ready. Ruhi rescinded the contract and decided to buy something else. Thegoldsmithwanted compensation. Is he right? The goldsmith is not correct. If he didnot deliver the goods on time Ruhi has the right to rescind the contract.Thus in a voidable contract the aggrieved party can take benefit of the situation.He/she may decide to go ahead with the contract as well. Thus in a voidable contract aflaw can create a benefit for a party. However if the party decides to continue with thecontract, the terms and agreements will continue to be valid and the contract will alsobe a valid one.3. Void Contract: These contracts are enforceable when the agreement is made butdue to certain lapses they become unenforceable at a later date. The agreementbecomes unenforceable for the following reasons:• According to section 56 if a contract is illegal or impossible to conduct it becomesvoid.• The contract becomes void if it is voidable in nature and the party who couldexercise the option of avoiding it decides to do so.• Any contract, which has a contingency clause and it, becomes impossible to conductit either on the happening or not happening of a particular event is a void contract.This is explained in (section 32).Illustration 1: Anil made an agreement with Suman to sell house no P-21 inSushant Lok in Gurgaon. The terms and conditions were finalized. Before the duedate for the transaction to take place there was an earthquake and the house felldown. Anil could not keep his promise because the house did not exist any more. This
  8. 8. contract is void because the agreement was made on the basis of the house inpossession. Since Anil did not have the house after the natural calamity it was a nearimpossibility to deliver the goods to Suman.4. Void agreement: Section 2(g) describes void agreements as those that areunenforceable from the inception of the agreement. In other words these agreementsare void ab initio. . A mistake between the two parties to an agreement of a materialfact makes the agreement void. Therefore void agreements do not create any legalrights between the parties to the contract. It also does not create any obligations.There is a flaw in the agreement itself. The most common example is that of a minorwho does not have the legal rights to enter into an agreement. If he/she does, theagreement is null and void ab initio.1.5.1 Void Agreement and Void Contract: DistinctionA void agreement is void ab inito from the beginning of the contract. A void contractis valid when it is made but due to certain lapses it becomes unenforceable by lawsubsequently.A void agreement will have the following effects:• It will be unenforceable by law• If both parties know that the agreement is void money will not be recoverableif already paid.• Collateral transaction will be legal unless the agreement itself is illegal.• All legal promises are enforceable if the agreement can be proved to beseverable.1.5.2 Void Agreement and Voidable Contract: DistinctionThe difference between void agreement and void contract can be discussed on thebasis of (i) enforceability (ii) Compensation and restitution and (iii) the effect oncollateral agreement.Enforceable: Void agreements are not enforceable from the time of their formation.They are said to be void ab initio. Void contracts are enforceable when they areformed but they become unenforceable if the party who has the option to rescind thecontract does so. It is a valid contract if it is not repudiated.A void agreement is not enforceable at all but a void contract can be enforced if theparties agree to complete the contract and exercise the option accordingly.
  9. 9. Compensation and restitution: In a void agreement there is no compensationbecause the agreement is not enforceable by law. In a voidable contract the personwho exercises the option of rescinding the contract can get compensation if he hasrightly taken the option of not going ahead with the contract.It follows therefore that restitution is allowed in a voidable contract unless the partiesknew of the illegality of the agreement at the time of formation.Collateral agreement: An agreement that is void due to illegality has an effect oncollateral agreements as well. Such agreements will be correspondingly void becauseof illegality in consideration or object in the agreement.A voidable contract however has no effect on collateral contracts.1.6 B. CONTRACTS: ACCORDING TO MODE OF CREATIONContracts on the basis of mode of creation refer to Express Contracts, ImpliedContracts and Quasi Contracts.1. Express Contract: When an offer is made in words or in writing and anotherperson accepts it an express contract is formed. Promise is considered to be expresswhen it is made in words written or spoken.Illustration 1: Priya writes to Prem offering to sell her car for a price of Rs.1,00,000.Prem accepts the offer by responding through an email. This is an express Contract2. Implied Contract: A contract is said to be implied when it has to be inferred fromthe action, gestures or conduct of the parties. It is not a verbal or a written contract. Ithas to be implied from circumstances of the case. In the agreement some terms maybe implied or the complete agreement is implied.Illustration 1: Janaki attended an informal meeting of a company. The company wasglad to receive her suggestions and accepted her presence and took some of hersuggestions. There is an implied contract that Janaki should be paid for her servicesbecause the company allowed her to attend the meeting and also used her suggestionsfor the benefit of the company.The contracts can be of mixed type as well. They can be express and implied contractsboth. Some part of the combination may be express and parts of it may be implied.Illustration: Ram offers to buy an I pod from Tilak for Rs 10,000. Tilak accepts theoffer by sending the I pod to Ram. Ram’s offer acceptance is implied by his conduct.It is a mixed type of contract. It combines the characteristics of both express andimplied mode of creation.
  10. 10. 3. Quasi Contract: Contracts which are not in actual fact either express or implied butthere is circumstantial evidence to support that they are actually contracts are calledQuasi Contracts or semi contracts. There is actually no contract between the parties asthere is no agreement between the parties but the obligations cited in sections 68 to 72of the Indian Contract Act provide legality to them.13 These are known as “certainrelations resembling those created by contracts”.Illustration: Arti leaves her computer in Monica’s house. Monica treats it as her ownand begins to use it for her official purposes. Arti has no agreement with Monica. Sheshould pay for the use of the computer, which was kept with her for safe- keeping. 1.7CONTRACTS ACCORDING TO PERFORMANCEContracts can be classified according to performance measures. Such contracts arecalled executed contracts, executory contracts, unilateral contracts and bilateralcontracts.1. Executed contract: An executed contract is one where both the parties haveperformed and completed their obligations. The contract is completed and executed.No responsibilities remain from either side of the contract.Illustration: Rajesh goes to Westside store and buys a shirt for himself. He pays Rs1450 and the shirt is packed and delivered to him. He leaves the store as the contractis executed. The obligations of both the parties are complete.2. Executory Contract: In a contract sometimes one party may carry out his/herobligation but the other has still to conduct his/her obligation. This obligation will beperformed in future. This type of a contract, which is not yet complete, is called anexecutory contract. In some executory contracts both parties decide to complete theircontract in future because of certain important reasons.Illustration 1: Minna sells her computer to Zara . Immediately Zara sends thepayment for it. Minna has to still deliver the computer. This is partly executed andpartly an executory contract.3. Unilateral Contract: In some contracts one party has already completedhis/her obligation but now the other party is left to complete his/her part of thecontract. When the other party executes his/her part of the contract that, is stilloutstanding, it is called a unilateral contract. These contracts are also called contractswith executory consideration. When the contract is formed, there is an obligation ofonly one party to perform.
  11. 11. Illustration: Murli’s dog was lost while he was taking a morning walk. He offereda reward of Rs 1,00,000 for bringing back his dog safely. Sashi found the dog andreturned it to the owner. The owner now has a unilateral contract to perform of payingthe reward money as the dog has been found.4. Bilateral Contract: If both parties to a contract have outstanding obligationswhen the contract is formed, it is called a bilateral contract. The contract has beenformed but the obligations will be performed on a future postponed date. The date ofexecution is not material for determining the validity of the contract.Illustration: Puran makes a promise to sell 100 pen-drives to Kamla. Theunderstanding is that the price will be paid only on delivery of the material required.This is a bilateral contract. The contract was settled but both delivery and price paidfor it will be made at a future date. OFFER AND ACCEPTANCE2.1 WHAT IS AN OFFER / PROPOSAL?An agreement consists of two parties where one party makes an offer to the otherparty and the other party either accepts the offer or rejects it. If the offer is acceptedthen only it becomes an agreement otherwise it doesn’t.Section 2(a) of the Indian contract act defines an offer / proposal as follows: “When aperson signifies to another person his or her willingness to do or abstain from doinganything, with a view to obtaining the assent of that other to such act or abstinence, heor she is said to make a proposal.”Illustration: Savita makes an offer to Priya, she says “Priya would you like to buy mygold necklace?” Priya rejects the offer thus there is no agreement. If Priya hadaccepted the offer to buy the necklace then an agreement would have been formed.An offer consists of two parties:1 Offeror- The person who makes an offer or a proposal2 Offeree- The person to whom the offer or proposal has been made.Illustration1: Ram says to Raghu ‘Will you buy my bicycle for Rs 3000?’ In this Ramis an offeror and Raghu is an offeree.2.11 How is an offer made?An offer can be made in two ways:1 Express – Offer is made orally or in written.2 Implied – Offer is made by conduct of the parties or circumstances of the case.
  12. 12. Express Offer can be of two types:1 Oral Offer - Offer is made by words spoken.2 Written Offer - Offer is made in writingOral offer can be made in personOral offer can be made through a telephone and mobile.Written offer can be made through letters, telegrams and emails.Implied offer is not made in words. It is implied from the conduct of the parties orcircumstances of the case. The offeror does not make the offer to the offeree in theusual mode. That is he/she neither makes an oral offer nor a written offer. The offerormakes the offer silently by his/her conduct.Illustration1:A Metro train in Delhi runs on a particular route. There is an implied offer from themetro train to carry passengers on the route who pay the specified fare.2.12 To whom can offer be made?An offer can be made to a definite person or to the public at large. In the former caseit is called specific offer and the latter is called general offer.Specific offer: Offer made to a specific person or a particular person and only thisperson can accept the offer.Illustration: Devendra says to Chaitali ‘will you buy my Laptop for 40 thousandrupees?’ In this case Devendra has made a specific offer and only Chaitali can acceptthe offer.General Offer: Offer is made to the public in general and anyone in the public canaccept the offer.Illustration: Gangadhar had his son Pankaj missing from school. He placed anadvertisement in the Hindustan Times, which said, anyone who finds my son will berewarded with 5 lakh rupees. This is a case of general offer wherein anyone who readsthe paper and finds Gangadhar’s son is entitled to the reward.Case Law 1Carllil vs. Carbolic Smoke Ball Co.In this case A Company by the name of Carbolic Smoke Ball Company prepared amedicine for influenza. The medicine was called ‘The Carbolic Smoke Ball’ and anadvertisement was paced in a newspaper and magazine saying that anyone whocontracted influenza after having used the medicine according to the printed
  13. 13. directions would be offered hundred pounds. A lady Mrs Carllil bought the medicineand used it according to the printed directions but she was attacked by influenza. Shesued for hundred pounds and won the case. She won the case because the offer madeby the company was a general offer and anyone who read the advertisement couldaccept the offer. As the medicine did not fulfill the condition offered by the companytherefore it was bound to compensate Mrs Carlill.2.2 CONDITIONS FOR VALID OFFERThere are various rules for valid offer. These rules are mentioned below:! Offer must give rise to legal relations: The intension of the offeror must be tocreate legal relationship with the offeree. An offer, which does not create legalobligation, does not form a contract. For instance a social invitation even if acceptedwill not result in a contract.Illustration: Sati invited Rati on her birthday party and Rati accepted the invitation.This is not a valid offer because if Rati fails to attend the birthday party sati cannottake any legal action of breach of contract.1 Offer must be definite and certain: The terms of an offer must not be ambiguousand vague.2 Offer is different from a mere declaration of intension: A declarationof intension is a statement made by a person indicating his or her willingness tomake an offer in future.3 Offer is different from invitation to offer: When a person proposes certain termsfor negotiation with the other party and thereby invites the other party to make offeron those terms.4 The offer should not contain a term the non-compliance of which wouldamount to acceptance: The person who makes an offer cannot say to the offered thatif he or she does not communicate acceptance by a certain time the offer will beconsidered as accepted.5 Offer must be communicated: An offer must be communicated to the offereebecause acceptance by the offeree can be given only after he or she has come to knowof the offer.Case Law 8Lalman Shukla vs. Gauri Dutt
  14. 14. A person sent his servant to trace his missing nephew. After the servant left heannounced that anybody who traced his nephew would be entitled to a reward ofrupees five hundred and one. The servant traced the nephew in ignorance of thereward. Subsequently when he came to know of the reward, he claimed it. The Courtheld that there can be no acceptance unless there is knowledge of the offer and sincethe servant did not know about the reward when he found the boy therefore he wasnot entitled for the reward.6 A statement of price is not an offer: A statement of price is just information andnot an offer.Case Law 9Harvey vs. Facey22Harvey sent a telegram to Facey which said ‘will you sell us your Bumper hall Pen?Telegraph lowest cash price.’ To this Facey sent a telegram which said ‘lowest pricefor Bumper Hall Pen Nine hundred pound.’ Harvey again sent a telegram to Facie,which said ‘ We agree to buy Bumper hall Pen for the sum of nine hundred poundasked by you.’ Held there is no contract because the first telegram sent by Harvey toFacie had two questions out of which Facie replied to only one question regarding theprice. He did not reply to the other question, which was for his acceptance to sell.Thus Facie in his telegram only gave information to Harvey regarding the price of theproduct he neither made an offer not accepted the offer made by Harvey.2.3 WHAT IS AN ACCEPTANCE?Section 2 (b) defines acceptance as ‘ When the person to whom the proposal is madesignifies his assent thereto, the proposal is said to be accepted.’ Thus acceptance is theexpression of assent for the offer/ proposal. The proposal when accepted becomes apromise23. 2.31 Who can accept?Only the person to whom the offer has been made has the right to accept. Thus it isonly the offeree who can accept the offer made by the offeror. The person to whomspecific offer is made can only accept the offer on the other hand a general offer madeto the public at large, can be accepted by anyone having knowledge of the offer.Case Law Boulton vs. BoultonA sold his business to B without disclosing this fact to his customers. J a customer ofA was not aware of the sale and in ignorance placed an order for the supply of goods.
  15. 15. B supplied the goods. J refused to pay for the goods and so B sued him. It was held bythe Court that J was not liable since J had made an offer to A and not to B and B knewvery well that the offer is not made to him therefore he was not capable of acceptingthe offer.2.4 CONDITIONS FOR VALID ACCEPTANCEThere are various rules for valid acceptance. These rules are mentioned below:1 Acceptance must be absolute and unqualified: The offeree should accept thewhole of the offer. Accepting few terms of an offer is not a valid acceptance. Theofferee must accept the offer without putting any conditions. Conditional acceptanceis not a valid acceptance. If acceptance is conditional it leads to counter-offer whichmay or may not be accepted by the original offeror.Illustration: Hari offered to sell his car to Ravi for Rs 40,000. Ravi told hari that heis ready to buy the car for rupees 35000. Ravi’s acceptance is not a valid acceptancebecause it is not accepted fully and unconditionally. Instead it is a counter-offer,which he makes to Hari.2 Acceptance must be in the mode prescribed or some usual and reasonablemode: If the offeror prescribes a mode in which the offer has to be accepted and theofferee uses a different mode of acceptance then the offeror can within a reasonabletime insist that the offer be accepted in the prescribed manner and not otherwise. Ifthe offeree still does not follow the prescribed mode of acceptance then in that casethe offeror may choose not to be bound by the acceptance.Illustration: Aruna sends a letter of offer to Awadh Raj asking him to buy her flatin Delhi for rupees 20 lakhs. She also mentions that if the proposal is acceptable tohim he can send his acceptance through post. Awadh Raj after receiving the offer senthis acceptance through an email. Aruna on receiving the email insisted that AwadhRaj send his acceptance only by post and not any other mode. Awadh raj did not sendhis acceptance by post. Hence Aruna was not bound by Awadh raj’s acceptance. Incase the offeree follows a different mode of acceptance from the prescribed mode andthe offeror does not insist then the offeror is deemed to have accepted the deviatedacceptance.3 Silence cannot be a mode of acceptance: The offeror cannot impose on theofferee a condition like: If you do not reply within a reasonable time then Ishall
  16. 16. consider the offer to be accepted. The offeror cannot take the offeree’s silence asacceptance of offer.Illustration: Nisha a seminar coordinator sends an invitation for the seminar toRavi through an email. The email also said that if Ravi does not reply within a weekstime it will assumed that he has accepted the invitation. Ravi does not reply. HenceNisha cannot assume that Ravi has accepted the invitation.4 Acceptance must be given within the time prescribed or areasonable time: Acceptance by the offeree must be given within the periodprescribed by the offeror or if the period is not specified then the acceptance must begiven within a reasonable time.Illustration: Venkat offers to sell his scooter to Rehman and tells him to reply withina weeks time. Rehman does not reply within a week hence the offer lapses.5 Acceptance cannot precede an offer: An offeree can give acceptance onlyafter the offer has been communicated to him / her. A leading case on this pointIllustration: Anita sends a letter of offer to sell her lap top to Geetha for rupees thirtythousand. Geetha writes a letter of acceptance to buy the lap top but by mistakeforgets to post the letter. Hence the agreement has not been formed.2.5 COMMUNICATION OF OFFER AND ACCEPTANCEA contract comes into existence only after the offer has been accepted by the offereethat is when the acceptance of the offer has been communicated by the offeree to theofferor. Communication of offer and acceptance is instantly done when the offerorand the offree are face-to-face. The problem of communication arises when the partiesare separated due to distance. If the parties are at a distance and the offeror makes theoffer through a telephone the contract is concluded as soon as the offror hears theacceptance from the offeree.2.51 Communication of OfferAccording to Section 4 communication of offer or proposal is complete when itcomes to the knowledge of the offeree that is the person to whom the offer is made. Incase the communication is made by post the communication of offer is completewhen the letter containing the offer reaches the offeree.Illustration: Neha in Gwalior offers by a letter on 18th June 2008 to sell her house toAparna in Delhi for rupees ten lakh. The letter reaches aparna on 21st June 2008.The communication of offer is complete on 21st June.
  17. 17. 2.52 Communication of AcceptanceCommunication of acceptance is complete against the offeror and the offeree in twostages, which are as follows:Communication of acceptance is complete against the offeror (proposer) when theletter of acceptance is put in course of transmission by the offeree (acceptor) to theofferor so as to be out of the power of the offeree (acceptor) to withdraw it.Illustration: Aparna after receiving the letter of offer from Neha has readily agreedto accept the offer to buy the house therefore she writes a letter of acceptance to Nehaand posts the letter on 23rd June 2008. The communication of acceptance against theofferor (Neha) is complete on 23rd June.Communication of acceptance is complete against the offeree (acceptor) when theletter of acceptance comes to the knowledge of the offeror.2.6 COMMUNICATION OF REVOCATION / WITHDRAWALCommunication of revocation is complete against the person who makes it and theperson to whom it is made in two different ways, which are as follows:The person making the revocation: The communication of revocation is completeagainst the person making the revocation (withdrawal) when he / she sends the letterof revocation.Illustration: Neha after posting the letter of offer feels that she no longer wants tosell her house to Aparna and decides to withdraw her offer. She writes a letter ofrevocation of offer on 19th June 2008 and posts it to Neha. The communication ofrevocation of offer is complete against Neha on 19th June. 2.7 TERMINATION / LAPSE OF AN OFFERAn offer or proposal can either be accepted, rejected, revoked or it might just lapse.The offer when accepted becomes a valid agreement. If the offeree does not like theoffer he or she may choose to reject the offer. The offeror also has an option to revokeor withdraw the offer.Section 6 of the Indian contract act deals with various circumstances in which theoffer lapses, which are as follows:1 Rejection of offer: The offeree may choose to reject an offer if he or she does notlike the offer. Once the offer is rejected it comes to an end. The offer once rejectedcannot be revived by the offeree. It is only upto the offeror if he or she wishes torenew the offer.
  18. 18. Illustration: Aradhna makes an offer to Sadhna she say “Will you buy my computerfor rupees twenty thousand?” Sadhna refuses to buy Aradhna’s computer. Thus theoffer is rejected2 Counter-offer: This means an offer in response to an offer. Once an offer is madeby the offeror to the offeree it is upto the offeree to accept or reject the offer.Sometimes the offeree neither accepts nor rejects the offer rather he or she makes hisor her own offer to the offeror. By doing this the first offer which was made by theofferor lapses or comes to an end. If later the offeree decides to accept the offer he orshe cannot do so.Illustration: Aradhna offers to sell her computer to Sadhna for rupees twentythousand. Sadhna makes a counter offer by saying that she is willing to buy thecomputer if Aradhna sells it for rupees fifteen thousand. Thus the offer initially madeby Aradhna comes to an end and now it is upto her to accept or reject the counteroffer made by Sadhna.3 Revocation of offer: An offer can be withdrawn anytime by the offeror before thecommunication of acceptance of offer is complete against him. He cannot revoke orwithdraw his or her offer once the offeree has sent his or her acceptance. A generaloffer must be revoked using the same channel and mode in which the original offerwas made.Illustration: Aradhna offers to sell her computer to Sadhna for rupees twentythousand. But before Sadhna could accept the offer Aradhna decided to withdraw heroffer so she sent a notice of revocation of offer to Sadhna.4 Offer not accepted in the prescribed mode: If the offeror has prescribed a modein which the offeree has to accept the offer and the offeree does not give his or heracceptance in the prescribed mode then the offer comes to an end.Illustration: Aradhna makes an offer for selling her computer for rupees twentythousand to Sadhna in writing and mentions in the offer that if the offer is acceptableto her then she should give her acceptance in writing only. Sadhna however conveysher acceptance through telephone. Thus the offer comes to an end.5 Failure of the acceptor / offeree to fulfill a condition precedent to acceptance:Sometimes the offeror may ask the offeree to fulfill certain conditions beforeacceptance. If the offeree does not fulfill these conditions then the offer comes to anend.Illustration: Aradhna makes an offer of selling her computer to Sadhna for rupees
  19. 19. twenty thousand and mentions in the offer that if the offer is acceptable to Sadhnathen she should send an advance cheque of rupees five thousand. Sadhna does notsend the cheque. Thus the offer comes to an end.6 Death or insanity of the Offeror: If the person who makes the offer dies orbecomes insane after making the offer, and the offeree comes to know of it beforeaccepting the offer then the offer automatically comes to an end. If the offeree acceptsthe offer without the knowledge of the death or insanity of the offeror then theacceptance is valid and the promise / offer will be executed by the Offeror’s executor.The act is silent about the effect of death of the offeree. But if the offeree dies orbecomes insane the offer will end because it is only the offeree who has the right toaccept or reject the offer and not the offeree’s executor.Illustration 1: Aradhna makes an offer to sell her computer to Sadhna for rupeestwenty thousand but before Sadhna could give her acceptance she comes to know thatAradhna has turned insane. The offer comes to an end.7 Lapse of time: A proposal may come to an end due to lapse of time. In case theofferor has given duration within which the offeree has to accept the offer and theofferee does not give the acceptance within the given duration then the offer willcome to an end. In case the offeror has not specified the duration for acceptance thenthe offeree can give the acceptance within a reasonable time and if within thereasonable time the offeree does not give the acceptance then the offer will come toan end.Illustration 2: Bata Shoes gave an advertisement in the newspaper in the month ofDecember that they are giving 50% discount on shoes for the New Year. Ram visits aBata showroom in the month of March and demands for a discount of 50%. He is notgiven the discount. This is so because even though the exact duration of the discountoffer is not given but a reasonable period would be till the month of January or maybe the month of February. March is too late to be within the reasonable period toavail the New Year discount. CONSIDERATION3.1 DEFINITION OF CONSIDERATIONSection 2(d) of the Contract Act defines consideration as “when at the desire of thepromisor, promisee of any other person has done or abstained from doing, does or
  20. 20. abstains from doing, or promise to do or abstain from doing, something, such an actor abstinence is called consideration.”Illustration: Manu promised to give Tina money to study. There was noconsideration attached to it. Manu can revoke the offer as it is not binding in law.3.2 ESSENTIAL ELEMENTS OF CONSIDERATIONThere are five essential elements of consideration.1. Act or abstinence : Consideration is a promise to do something or to abstain fromdoing something (according to section 2d).Case LawCurie vs Misa Consideration may be a promise to do something or not to dosomething. It may be positive or negative. It is some right, interest, profit or benefitaccruing to one party corresponding to forbearance suffered or undertaken by theother.2. It is moved at the desire of the promisor.The promisor must move the request for consideration. If it is moved at the desire of athird person it will not form good consideration even if promisor desired it. Thereforethe promisor must first give considerationDurga Prasad Vs Baldeo: On the order of the collector of a town built some shopson his own expense in a market. The shopkeepers who occupied these shops promisedto pay to D commission on their sales. D sued the shopkeepers when he did notreceive the commission. The court held that the promise was not supported by anyconsideration as the shops were built on the collectors order and not at the request ofthe shopkeepers. Therefore there could not be a recovery.3. It may move by the promisee or another personWhen a promisor gives a promise, the promisee or any other person may provide avalid consideration in return.Case LawChinnaya vs Ramaya An old lady, made an agreement with her daughter that shewould gift her some landed property but the condition was that the daughter wouldpay her sister some annual payment regularly as maintenance allowance. Thedaughter promised her aunt (mother’s sister), the maintenance money. However,later
  21. 21. on she did not pay the money to her aunt. The aunt filed a case for recovery of theamount. The decision was in a perfectly genuine consideration. The promisee hadagreed to carry out the instructions of the promisor in return for receiving land.4. Consideration can be past, present or future.On of the important elements of consideration is that it can be past, present or future.Past consideration: When consideration is provided before a person becomes apromisor.it is called past consideration. Such a situation can arise when a person hasdone some work that is desired by another but is compensated later on. He does notreceive the benefit immediately. English Law does not consider past consideration tobe good. However it accepts time barred debts as good past consideration.Illustration: Sonam goes to a friend’s house. She suddenly has a severe stomachache.A doctor in the neighbourhood examined her and administered some medicine. Atthattime there was no talk of compensation for services of the doctor. Later Sonam wentto the doctor’s clinic expressed her thanks to him and also gave him Rs 500 as hisfees for his services. This is past consideration. The doctor received the fees forservices that were rendered by him earlier.Present consideration: When an agreement is made and consideration is paid for it ora promise is made for that work at the time of making the contract it is called presentconsideration. This situation arises when the promisor makes an offer and it isimmediately accepted with consideration at that particular time. This is also calledexecuted consideration.Illustration Reena offers to sell her old computer to her friend Anjali if she pays Rs7500 for her old computer at the time that she accepts the offer. Anjali brings themoney immediately and pays Reena the full money. Now Reena should deliver hercomputer. Acceptance of the offer and consideration are both in the present.Future Consideration: When promise is to be executed on a future date it iscalled executory consideration or future consideration. In this the promisor makes anoffer for a future date and the promisee promises to accept and execute the contractafter that it is future consideration. In this manner both parties move the considerationto a future date. The liability becomes outstanding on both parties on a future date.
  22. 22. Illustration: Ruhi promises to sell and deliver a new wristwatch to Rekha after aweek. Rekha accepts the offer and promises to pay after one month of receiving thewatch. This is executory or future consideration.5. Consideration need not be adequate: Consideration means something in return.This may not be equal to the value of of the promise that is given. As long as there issome consideration courts support it and are not concerned about its adequacy. Theparties to the agreement should have been satisfied with the consideration when theymade the contract. The consideration may not be adequate but it should be lawful.Illustration: Madhu sold her old car to Meera for Rs 25000. The value of the car wasRs 2,00,000. The consideration was lawful and with the free consent of Madhu whoknew that the market value was much higher. Therefore it was a valid agreement eventhough consideration was not adequate.6. Consideration must be real and not illusory or impossible.Real consideration means that the consideration should not be physically or legallyimpossible. Consideration is not real in the following cases because of physical andlegal impossibility or uncertainty7. Consideration must be lawful.Consideration should be lawful otherwise the agreement becomes void. According tosection 23 considerations is not lawful in the following situations:1 When it is fraudulent2 When it is made of an act forbidden by law.3 When it causes injury to a person or property of another person.4 When it is declared as immoral or opposed to public policy.When a part of the agreement is unlawful the whole agreement will become voidexcept in those cases when the unlawful part can be separated from the lawful one.Then the unlawful part will become void and the other part can be carried out.3.3 STRANGER TO CONSIDERATION AND STRANGER TO CONTRACTUnder the English Law, consideration has to move from the promisee and if any otherperson moves it, the promisee becomes a stranger to consideration and cannotenforce the promise. A person becomes a stranger to a contract when he is not a partyto a contract even though it is made for his benefit. He is a stranger to the contract andcannot claim any rights under it.
  23. 23. Stranger to consideration and stranger to contract are called Privity of considerationand Privity of contract. In India Privity of consideration is not applicable becauseSection 2(d) has the provision that provides that the promisee or any other person canmove a contract. Accordingly in India a stranger to consideration can sue and enforcean agreement if he is a party to the contract.3.4 EXCEPTIONS TO THE RULE OF STRANGER TO CONTRACTThere are certain exceptions to the rule that a stranger cannot sue. In the followingcases the court does not prevent a stranger from enforcing a contract that is made forhis benefit but he is not a party to it.a) Trust or a charge: In the case of a trust or a charge created in favour of anotherperson the beneficiary can enforce the rights conferred upon him by the trust eventhough he is not a party to the contract between the settler and the trustee.Illustration: Sunita made a trust for the benefit of her son Sushant and appointed Raja,Mahesh and Arjun to be the trustees. Sushant was not being given the property by thetrustees. Can he claim all the propertyin his favour?He can claim that was given in hisfavour even though he was not a party to the benefits created for him by his mother.b) Marriage settlement partition or other family issues: When an agreement ismade relating to marriage, partition or any other family issues with some provision forthe benefit of any person, the beneficiary can enforce the agreement. This is possibleeven though he is not a party to the agreement.c) Acknowledgement of payment or estoppel: This is an agreement between twoparties that one of them would give a benefit to a third person. If the promiserexpresses or implies by words or actions and acknowledges that he has a liabilitytowards a third person it is sufficient for the third person to recover the benefit as hisright.Illustration: Anu is the subtenant of Prem but she pays the rent directly to Anil. Anustops paying the rent. Anil has the right to recover the amount from Anu as this is anexception to the law of privity of contract.Contract through agents: The principal can enforce Contracts that are entered into byagents on behalf of him if the agent has acted within the scope of his duty and in thename of the principal. The rights of the principal are intact even though he is not partyto the contract.Illustration. Mr. Jaiswal sold television sets on behalf of L.G. company. He sold 35television sets to Reena and she did not pay the money. L.G. company went to court
  24. 24. because they could enforce their rights as Jaiswal had acted as an agent of L.G. eventhough the company was not directly involved in the contract.Agreements relating to land: When a person purchases land and he knows thatcertain rights and obligations bind the seller, the buyer has to honour thecommitments of any covenants by which the seller is bound. The rule of privity ofcontract does not apply in this case. The buyer may not be a party to the contract buthe is bound by the principles relating to immovable property.Case LawSmith and Snipe Hall Farm Ltd vs River Douglas Catchment Board: A boardagreed with landowners near the stream to improve the banks of streams andmaintain them in good condition. Landowners paid proportionate costs formaintenance. Subsequently landowner sold the land to someone who further sold it toanother person. Due to negligence of the board the banks of the stream broke and theland got flooded. The subsequent owners filed a suit against the board for negligence.Though they were not party to the contract they were entitled to sue because theywere bound by the original owners agreement with the board.3.5 “AN AGREEMENT WITHOUT CONSIDERATION IS VOID’-EXCEPTIONS TO THE RULEThe general rule is “no consideration no contract” or “an agreement withoutconsideration is void” but there are exceptions to the rule. According to section 25, inthe following cases the rule does not apply(a) Natural love and affection: A written and registered contract withoutconsideration, based on natural love and affection by two parties related to each otheris a valid contract. [section 25(1)]Note: Closeness of relationship need not necessary mean love and affection.Case LawRajlukhy Vs Bhootnath :A husband agreed to pay a fixed sum and maintenance tohis wife for living in a separate residence due to frequent quarrels between them. Heregistered the written document. Since he did not pay the amount the wife went tocourt .She was unable to get any relief because the agreement was not made withnatural love and affection.This is an enforceable contract even though there is no consideration.
  25. 25. • Voluntary compensation: A promise to compensate a person wholly or partly forservices done voluntarily, or for doing voluntary services that are legally compellableis a valid contract even without consideration.[Section 25 (2)]Illustration: A thief snatched Leela’s gold chain. Meera, an onlooker, rushed tohelp,retrieved the chain and gave it back to Leela. On receiving the chain Leela gaveMeera Rs 2000/-. This is a valid contract even without consideration.Time barred debt: A written and registered document by the debtor signing himself orhis agent with a promise to pay a time barred debt, is a valid contract and does notrequire any fresh consideration. [Section 25(3)]43 The intention should be clearlyexpressed. It may be the full amount or part of the amount of the debt that is to bereturned.Note: An oral promise is not acceptable.Illustration: Sita took a loan of Rs 5000 from Geeta. She could not pay in time and itbecame time barred under the Limitation Act. She made a signed and written promiseto Gita that she would return Rs 3000 on account of the debt. This is a valid contract.No new consideration is required.Agency: No Consideration is required to create an agency between the principal andagent according to section 185. If a person volunteers to work on behalf of anotherperson as his agent without any remuneration, a relationship of agency will be createdeven if there is no consideration. The agent can work on behalf of the principal andbind the principal on any contracts that are taken by the agent on his behalf.Note: Before the execution of the agreement the contract will be void since there is noconsideration.Completed gift: No consideration is required between the donor and the donee of anygifts already made. The person who receives the gift becomes its owner. a gift or adonation already given cannot be undone on the grounds that there was noconsideration. There is no need for natural love and affection between the parties butthere should not be any prior agreement to give a gift.Note A promise to give a gift, on a future date is void if it does not have anyconsideration.Illustration: Vibha has gifted a watch to Nirmalya on his birthday. This is a validcontract even though there is no consideration.
  26. 26. Remission of a promise: A promise by the promisee to the promisor to give aconcession (section 63) in the performance of his obligations is called remission. Thisremission of a promise can be without consideration. CAPACITY OF PARTIESIn India people can make agreements with their friends, neighbors, colleagues but notall agreements can be termed as contract. An agreement becomes a contract onlywhen it fulfills the requirements. One of the very important requirements iscompetency to contract.4.1 WHO IS COMPETENT TO CONTRACT?Section 11 of the Indian contract Act provides that a person is competent to contractif:1 He or she is of the age of majority according to the law he or she is subject to2 He or she is of sound mind3 He or she is not disqualified by the law he or she is subject to.Thus in order to enter into a valid contract one has to have all the three requirementsand if any of these requirements is not fulfilled then he or she is incapable to enterinto a valid contract, a contract to be recognized and enforceable by law.We can now reverse the question and ask-‘Who is not competent to contract?’The people who are not competent to contract are:(a) Minor(b) Person with unsound mind(c) Person disqualified by law4.2 WHO IS A MINOR?Section 11 of the Indian Contract Act provides that to be competent to contract aperson should be a major. However, section 11 does not say that a minor’s contract isvoid. To put it in other words section 11 of the Indian Contract Act is silent about thelegality of minor’s contract. Privy Council in Mohiri Bibi vs. Dharamdas Ghoseclarified this position for the first time4.2.1 WHAT IS THE POSITION OF AGREEMENTS WITH A MINOR?The law is quite protective towards the minors. The position of agreements with aminor are given below:
  27. 27. 1 Void Agreement Agreement with a minor is void. An agreement with a minor is notenforceable by law from the very beginning.An agreement between two people who are both minors is void.Both the parties cannot enforce the agreement in the Court of law.Illustration: Geeta and Priyanka were classmates and Geeta did not have money tobuy her geography textbook so she borrowed rupees two hundred from Priyanka andpromised to return it in a week. After a week when Priyanka asked for her moneyGeeta refused to return it. In this case Priyanka cannot sue Geeta for the breach ofcontract because the agreement they had between them cannot be enforced in theCourt of law.An agreement between two people of which one is a major and the other is a minoris voidIn such cases the minor can be a beneficiary or a promisee. The minor can enforcethe contract and if the minor has benefited from the other party then he or she may beasked to restore (restitute) the benefits he/she has obtained from such agreement to theother party. However restitution is allowed only if the money or property (benefit)could be traced. For instance if the minor has borrowed money from a major and usedit all then he/she cannot be asked to restore it.Illustration1: Ram a seven-year-old boy asked Raghuvansham a cricket coach togive him coaching classes and Raghuvansham agreed to give coaching. Ram paid inadvance the tuition fee. Raghuvansham gave coaching only for a day and thendiscontinued on the pretext that the agreement is void. Ram could enforce theagreement though void for breach of contract. In this case Ram a minor was abeneficiary / promissee and therefore had a right to enforce the agreement in theCourt of law2. Partnership / company Minor cannot enter into a partnership agreement thereforehe / she cannot be made a partner but he / she can be admitted to the benefits ofpartnership with the consent of all the partners. Similarly a minor cannot become ashareholder in a company, as he is incompetent to enter into a contract. In case aminor inherits shares (fully paid) then he can become a shareholder acting through alawful guardian. Here again a minor enjoys only the benefits of shareholding. Hecannot be made liable for payment of call money.Illustration: Devendra run a business with four partners. Devendra died in a roadaccident. A fifteen-year-old son Gajendra survived him. As Gajendra was a minor so
  28. 28. he could not be made a partner in place of his father but with the consent of all thepartners he was admitted to the benefits of the partnership firm. He was entitled to allthe benefits, which accrued to the firm but was not liable for any losses.3 Ratification Ratification means approval or confirmation. If a minor has enteredinto an agreement he or she cannot ratify the same agreement after attaining the age ofmajority. It is because an agreement entered into by a minor is void and a voidagreement cannot be made valid after minor has attained the age of majority. If he orshe wishes to continue then they will have to make a fresh agreement with a freshconsideration.Illustration: Gajendra a fifteen-year-old boy was admitted into the benefits ofpartnership after his father died. After attaining majority Gajendra cannot ratifythesame agreement or continue with the agreement, which he had entered beforeattaining majority. If Gajendra still wants to continue enjoying the benefits ofpartnership then he will have to make a fresh agreement.4 Agency Minor can be appointed as an agent. He is not liable for any of his / her actsrather it is the principal who would be held responsible to the third party for the actsof the minorIllustration: Sylvia a six-year-old girl went with a piece of cloth to the tailor andasked him to stitch a blouse for her mother. The tailor stitched the blouse but Sylvia’smother refused to pay the money on the pretext that the agreement was void. This wasnot a void agreement but a contract of agency where the tailor could enforce theagreement and Sylvia’s mother who was the principal would be liable to pay.5 Negotiable Instrument Minor can draw a negotiable instrument and can enforceinstrument drawn in favour of him/her. He/she cannot be made personally liable thusa minor can be a promisee or a payee and he /she can also become indorsee bytransfer of negotiable instruments.lllustration: Shyam is a sixteen-year-old boy who has been hired by Krishna to cleanhis cars every day in the morning. Krishna pays Shyam by drawing a cheque in hisname for rupees 1000. Shyam deposits the cheque in his bank and the bank dishonorsthe cheque. Shyam can sue Krishna for dishonoring of the cheque and demand a freshone with compensation.6 Necessaries The Person who has supplied necessaries to a minor or to his/herdependents is entitled to be reimbursed from the property of the minor. According tosection 68 the term necessaries include goods and services, which are required to
  29. 29. maintain a person in a condition, state and a station in life in which he/she is. Stationin life means the standard of living the person has. Necessaries include food, clothing,shelter, education and marriage of a female. Minor has to reimburse the supplies ofsuch necessaries and the loans for such necessaries. Claim for payment for necessariescan be made against the minor’s property. Minor cannot be held personally liable forsuch necessaries.Education- A NecessityEducation is considered a necessity and therefore a minor is liable for such necessaryhowever he is not personally liable the payment for such necessaries are made againsthis/her property.Illustration: Priya who lost her parents in an accident studied in a School in Delhi.She failed to pay her tuition fee for two consecutive months. She was liable to pay herfee because education is a necessity. However she is not personally liable. She willpay out of her property.Medicine- A NecessityA minor is also liable for any medicinal service he has procured. It can be the doctor’sconsultation fee or it can be the payment for medicines or the treatment .Illustration: Cindia a fourteen-year-old orphan girl was suffering from appendicitis.She was taken to the hospital and was operated upon. Cindia was liable to pay thehospital charges as it was a necessity. Again she was not personally liable. Either herguardians would pay or it would be paid out of her property.Shelter- A NecessityHome is very essential for any human being and a minor is not an exception. He/sheis liable for the payment for his/her shelter. If he/she has taken house on rent he/she isliable for its rent.Illustration: Srikant a seventeen-year-old native of Hyderabad came to Delhi andtook admission in Delhi University to do his graduation. Srikant had no hostel in hiscollege and did not have any relatives so he took a paying guest accommodation andagreed to pay a monthly rent of Rs. 4000 to his landlady. After staying for threemonths Srikant refused to pay the rent. Srikant cannot plead minority here becausehome is a necessity and he is liable for the necessity.7 Torts Minor is held liable for tort (civil wrong). A minor cannot be held liable undera contract because an agreement with a minor is ab initio void. If a minor has been
  30. 30. negligent in a contract he/she cannot be made liable hence it cannot be treated as atort. Tort means a civil wrong whose formation is not on the basis of a contract.Stealing, abusing and destroying public property is a civil wrong and therefore minoris liable for it.Illustration 1: Neha a sixteen-year-old hired a music system for her birthday partyfrom Ramesh. She promised to use the music system properly and return it to himonce the party was over. Neha used the system negligently and corrupted it. Neha wasnot liable for tort.8 Insolvency Minor can never be declared insolvent because he/she is not capable ofentering into a valid contract. Agreements with a minor are void therefore he/she doesnot incur any liability under any agreement.Illustration: Pradeep a fourteen-year-old boy had taken loan from Satish for payinghis school fees. As this was a necessity therefore he was liable to pay the loan moneyback out of his property. He did not have enough property to pay the full amount sohe paid only partly. In this case Satish could not hold Pradeep personally liable forthe unpaid money and therefore Pradeep could not be declared insolvent.4.3 WHO IS OF UNSOUND MIND?Lets us first answer the question ‘Who is a person with a sound mind?’According to section 12 a person is of sound mind when he / she is capable to(a) Understand the terms of a contract(b) Form a rational judgment about the effects of the terms of contract on his / herinterestIf a person does not satisfy both the above conditions then he or she is of unsoundmindUnsoundness of mind can bePermanentTemporaryPermanent unsoundness of mind is found amongst(1) IdiotsTemporary unsoundness of mind is found amongst(1) Lunatics(2) Drunkards / persons under intoxicationWho is an idiot?
  31. 31. As per the English dictionary an idiot is an utterly foolish or a senseless person. Aperson, who lacks the normal power of thinking and is devoid of a healthy mentaldevelopment. He /she has a mental age below three years and generally is unable tolearn connected speech or guard against common dangers. This problem is generallyby birth and its recovery is almost impossible therefore it is considered to be apermanent unsoundness of mind.Illustration: Ram and Shyam were twin bothers who were mentally challenged. Theywere twenty years old but their minds were that of a three-year-old child. They werelike this right from their birth. Only a miracle could have cured them otherwise innormal circumstances they could never be cured. As a result they were permanentlyincapable to enter into a contract. Any agreement with them would be void.Position of agreements with an IdiotAn idiot is permanently of an unsound mind therefore he / she is incapable of enteringinto any valid contract. Any agreement entered into with an idiot is void.Illustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a fivestar hotel and ordered a lavish dinner for himself. After the dinner he failed to paythebill. Gyaneshwar could not be held liable because he was of unsound mind.Who is a Lunatic?As per the English dictionary a lunatic is a person who is mentally ill, dangerous,foolish or unpredictable. He or she loses the normal power of thinking due to mentalstrain, accident or a tragic incident in life. Lunatics are not born insane. They sufferfrom intervals of sanity and insanity.Illustration: Gayatri was a 54-year-old lady who lost her husband in a car accident.Ever since she lost her husband she went into a depression. Her husband was abusinessman and so during that time she entered into an agreement with one of herhusband’s client. The agreement could be declared void because she signed it whileher mental condition was not normal.Position of agreements with a LunaticA lunatic is incapable of entering into a valid contract. However Lunacy is a curableailment therefore after recovering from insanity he / she can enter into a validcontract. A contract with a person before he / she turned a lunatic is a valid contractand a contract with a person after he / she recovered from lunacy is also a validcontract.
  32. 32. Illustration: Gayatri who had lost her husband in an accident went into depressionbut after few months she recovered and entered into an agreement to sell her house toLakshman. The agreement with Lakshman was valid and was very mush enforceable.Who is a Drunkard / Person under intoxication?A drunkard is a person who is under the influence of alcohol and therefore cannotproperly think and make rational judgments. A person is said to be under intoxicationIllustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a fivestar hotel and ordered a lavish dinner for himself. After the dinner he failed to paythebill. Gyaneshwar could not be held liable because he was of unsound mind.4.4 WHOM DOES LAW DISQUALIFY?There are people who are physically and mentally sound yet they are disqualified bylaw to enter into any valid contract. The people who are disqualified by law are thefollowing:1 Alien enemy: An alien enemy cannot enter into a contract while his / her country isat war with our country. A contract with a foreign national is valid but becomes voidas soon as the war starts. These contracts may again be revived after the war ends ifthe central government is of the opinion that the contract is not against the publicinterest of the country. A new contract can also be entered into with an alien enemyafter the war ends if it is not against public interest.Illustration: Mir Zafar an Afghani businessman had an American business associateby the name of Tom. They both entered into a business contract but before they couldexecute the contract America attacked Afghanistan. As a result their contract becamevoid but after the war ended they could easily revive the old contract or could enterinto a new contract because they were no longer alien enemies.2 Foreign Sovereign and Ambassador: Foreign Sovereigns and their representativesare citizens of foreign countries. They can be tourists, ambassadors and delegates whovisit our country for a specific purpose and duration.Illustration: Suzanne is a Canadian ambassador in India. While she was driving inthe streets of Delhi she happened to hit a motorcyclist. As Suzanne was a foreignnational she could not be tried in the Indian Court.Foreign Sovereigns and Diplomats are free to enter into a valid contract in ourCountry and can enforce those contracts in our Courts but the problem is that we
  33. 33. cannot sue them in our Courts without the sanction of the government unless theywish to submit themselves to the jurisdiction of our Courts. If the foreign national hasentered into a contract through an agent residing in India then in that case the agentcan be held responsible and can be sued in the Court of law.Illustration: John an American tourist came to India and stayed in a five star hotelfor five days but when he was leaving the hotel he did not have money to pay his bills.As John was a tourist so he could not be tried in our Court. He could not be sued forrecovery of the bills.3 Convict: Convict cannot enter into a valid contract while undergoing imprisonment.As soon as the convict’s tenure of imprisonment finishes he / she is no longerdisqualified to enter into a contract.Illustration: Radha was found guilty of crime of theft and was undergoingimprisonment. During the years of imprisonment she was not competent to enter in toany contract but as soon as her term in the prison gets over she will be competenttoenter into a valid contract.4 Insolvent: The Court declares those people insolvent who are unable to dischargetheir liabilities. Their debts exceed their assets therefore they are unable to pay theircreditors. After the Court declares them insolvent their property stands vested with theofficial assignee or an Official receiver.Illustration: Shambhu a businessman was running into huge losses for the past fiveyears. He was unable to pay his creditors and so his creditors sued him. The Courtdeclared Shambhu insolvent and his property was vested with the official assignee.5 Company: The contractual capacity of a company is normally mentioned in theobject clause of the Memorandum of Association. Any act done outside the purviewof the memorandum is ultra vires and any agreement entered into for the execution ofsuch an act is void.Illustration: Ram and Shyam Company was in the business of manufacturing leatherbags. The object clause in the Memorandum of Association provided that thecompany is to manufacture leather bags. One day the director of the company enteredinto an agreement with a buyer for selling them leather shoes. The agreement wasvoid because it was beyond the scope of business. The company as per itsmemorandum was to sell only leather bags and not leather shoes. Therefore theagreement was not valid.
  34. 34. Free Consent5.1 MEANING OF CONSENT AND FREE CONSENTFree Consent is one of the essential elements of a valid contract. The essence of thisrequirement is that a person should enter into an agreement of is own interest with afree as well as an open mind without any fear. If any one has not allowed the otherparty the freedom of expression, the agreement will not be fair. No person under lawis compelled to enter into a contract and be bound by any obligations pertaining to itwithout his / her free consent.CONSENTWhen two or more persons agree upon something it is said that there is a consensusbetween them. According to section 13 this means that the people agree on the samething and in the same sense. It also means that there is consent on the acceptance ofan offer. When there is no consent, there cannot be a contract.Illustration: Braj has two televisions. One is of L.G. make and the other is of Sonymake. His friend Ashu offers to buy the L.G. product. Braj thinks he is selling theSony television. This agreement is void ab initio because there is no consent sinceboth of them have not understood the same thing in the same way. There is noagreement of minds.FREE CONSENTSection 10 of Indian Contract Act, states, that a valid contract should have the freeconsent of both the parties, entering into the contract. This means that in a contractnot only should there be consent but it should also be free consent.‘All agreements are contracts if they are made by the free consent of the parties.’Free consent according to section 14 is when a contract is made without coercion,fraud, undue influence, misrepresentation or mistake. Therefore, if a contract isinfluenced by any of these elements there cannot be free consent. Salmond hasdescribed this as an error in consensus.An agreement, which is made by coercion, fraud, undue influence andmisrepresentation, is voidable at the option of that party whose consent was not free(Section 19).If there is a mistake in an agreement it becomes a void contract. It is not enforceableby law. The reason for this is that a mistake means that there is no consensus betweenthe parties entering into a contract.
  35. 35. When consent is not free it is called error in causa. This makes the contract voidableat the option of that person whose consent in the contract is not free. However, thecontract continues to be a valid contract until it is repudiated by the person who isconsent is not free.According to section 15, coercion means to use force to make another personagree to the terms and conditions while entering into a contract. A contract is causedby coercion in the following cases:1. When any act is done that is forbidden by Indian Penal Code.2. Threatening to commit an act forbidden by Indian Penal Code3. Unlawful detaining of property by using force or physical pressure on anotherperson.4. Threatening another person for detaining the property.Illustration: The gangster made the property owner sign the papers for his ownershipat pistol point. This is coercion it is forbidden by Indian Penal Code. The contract isvoidable at the option of the property dealer as force was used for obtainingproperty.When can coercion be exercised?Coercion can proceed from any person. It can be directed against another personincluding a stranger.Illustration: Manju threatens to kill Muna, who is Rani’s son if Rani does not givetheentire property to her. The consent given by Rani is due to coercion by Manju. Thecoercion is directed against Muna who is a stranger to the contract.Effects of CoercionSection 19 and 72 of the Indian Contract Act, deal with the effects of coercion.According to Section 19 ‘when consent to an agreement is caused by coercion theagreement is a contract voidable at the option of the party whose consent was socaused’.The effects of coercion can be summarized in the following:! The aggrieved party can rescind the contract as it is voidable at his / heroption. (Section 19)! The aggrieved party should be restored the benefits by the person who had usedcoercion.(Section 64)
  36. 36. ! If money has been paid on account of coercion the aggrieved party should bereturned the money by the person who had used coercion for taking it.! The aggrieved party has to prove that coercion had been exercised and the consentwas not freely made by him / her.5.3 UNDUE INFLUENCEUndue influence means using superior power for obtaining the consent of the personwho is weak in position and physical ability.Section 16 (1) of the Contract Act defines undue influence as• The relation between parties where one of the parties is in a dominating positionover the will of the others.• Using the dominating position to take an unfair advantage over the other.Section 16 (2) of the Contract Act defines the position to dominate the will of theother in the following manner.6 Real or apparent authority: Where a person holds some real or apparent authorityover the other. This means that he / she is in some position where he / she has thepower to dominate over the will of another person.Example:6.1 Relationship of Employer and Employee6.2 Relationship of Officer and Peon.7 Fiduciary Relationship: Where a person is in a fiduciary relation to another. Thismeans that there is the relationship of mutual trust and confidence amongst the peoplemaking the agreement.Example:(4) Relationship of doctor with his patient.(5) Relationship of mother and daughter.(6) Relationship of Father and son.(7) Relationship of Trustee and beneficiary.8 Agreement with another, having mental incapacity: Where a person makes acontract with another, whose mental capacity is affected because of his age, illness,mental or body distress temporarily or permanently.Example:! Relationship of normal person with a person temporarily in depression.
  37. 37. ! Relationship of a young man with an old and sick person, who suffers fromdementia.Illustration:! Mr. Balram used his parental influence by making his son a party to dowry taken byhim at his wedding from the wife’s father. This is a case of undue influence exerted bya father because of his fiduciary relationship with his son.The relationships in which undue influence can be exerted over another are thefollowing.! Teacher and student.! Employer and employee.! Doctor and patient.! Mother and daughter.According to law in the following cases there is no presumption of undue influence.Therefore if someone has exerted undue influence it will have to be proved.! Creditor and debtor.! Landlord and Tenant.! Husband and wife (when wife is not parda-nashin).Presumptions of Undue Influence 16 (3)In some cases it is presumed that there is undue influence. These are discussed below:1. Unconscionable transactions: When it can be proved that the dominating partyentered into an unfair contract with a weaker party, it is assumed by law that undueinfluence has been used to exert the contract. Unfair transactions between superiorand weaker party are called unconscionable transactions. An example of suchcontracts is when a person makes an unusually high profit and the other party suffersbecause of these contracts, in such cases when on the face of the agreement it appearsunconscionable it has to be proved that consent was taken by fair means by thesuperior party.2. Contracts with Parda-Nashin Women: Women who wear a burkha or coverthemselves and are in complete seclusion from the rest of the world are a separatecategory in the eyes of the law. If a contract is made with pardanashin women, it ispresumed that undue influence is used. The court grants relief to any unreasonabledemands of the party using undue influence through its discretionary powers.
  38. 38. 3. Money Lending Transactions: Unfair agreements are often made in money lendingtransactions. Sometimes undue advantages are taken from people who have takenloans. A high rate of interest charged shows unfair transaction. Also, when a moneylender executes a property in his favour when the borrower cannot repay is also ortransaction of undue influence.In all the above cases the court presumes that undue influence has been used andusing its discretionary powers it can grant relief to the weaker parties.Effects of Undue InfluenceUnder Section 19A, if a person has given his consent due to undue influence exertedby another person the contract is voidable at the option of that party who had to giveconsent under undue influence. Further, the court may also take the decision that arefund has to be made to a person who is the aggrieved party. The court may also takea decision to allow the aggrieved party to rescind a part of the contract or the wholecontract as the case may be.Burden of proofThe burden of proof of undue influence will be on the person who is aggrieved andwants relief from the court. The court also states that there is a difference betweenpersuasion and undue influence. A person can be persuaded to do a certain activitybut this does not necessarily mean that undue influence has been used. Therefore,aggrieved party will have to prove that the superior party was able to influence himdue to his position to dominate his will.Rebuttal of PresumptionWhen the weaker party makes a plea in the court that it did not use undue influence ithas to prove the following.o That full disclosure was made to the weaker party before getting consent andentering into a contract.o That the price paid in the contract was in accordance with the requirement and itwas adequate.o That the weaker party took advice from a competent person before finalizing thecontract with the so called superior party.5.4 FRAUDFraud is false representation of facts made willfully to deceive another person.Definition of Fraud
  39. 39. Section 17 of the Indian Contract Act states that if any of the following acts arecommitted by any party to a contract or with his agent’s connivance, willfullywithintent to deceive or induce another person or his agent to enter the contract it willresult into fraud.1. It is a suggestion of a fact which is not true by a person who does not believe that itis true.2. It is an active concealment of facts by a person who has knowledge or belief of thefacts.3. It is a promise in which there is no intention of performance of the contract.4. Any other action which has the intent of deceiving the other person.5. Any act or omission which is declared fraudulent by law.Essentials of FraudThe above description of definition of fraud can be explained through the essentials offraud.1. False Suggestions: Fraud must state facts which are false and the person makingthe suggestion knows that he is making a false representation or false statement offacts. The false suggestion is made intentionally to induce or deceive the other partyto enter into a contract. This is supported by the following case law:2. Active Concealment of a Fact: Active concealment is when a person has theknowledge or belief of the fact which he knows is not true. This amounts to fraud.Passive concealment is when a person makes an incorrect statement thinking that thestatement is correct.3. Making a Promise without Intention of fulfilling it: If a person makes a promisebut he does not intend to keep it. It is a clear case of fraud because at the outset theintention was to make a false promise.4. Any other act fitted to deceive: An act used to trick or chit someone by unfairmeans is considered to be fraud. This is an act which is done with the intention ofcommitting a fraud.5. Any other act considered by law to be fraudulent: According to the law it isobligatory that all material facts are disclosed while selling an immovable property.Otherwise it amounts to fraud.6. The Party that is misled by Fraud should have suffered some loss: There cannotbe fraud without any damage. The loss must be in terms of money or money’s worth,or loss of some tangible assets. Fraud without damage does not give rise to any deceit.
  40. 40. 8.1.6 Half Truths: When a person speaks a half truth, it means disclosing someportions of relevant material leaving the other portion undisclosed. According to law ahalf truth is worse than full falsehood as it misleads the other person. Therefore if aperson speaks he must give all the facts and not just half truth. Otherwise silenceamounts to fraud.8.1.7 Change in Situation: Sometimes when a statement is made it is the truth butcircumstances bring a change in situation and when it is actually acted upon, itbecomes false. It becomes the duty of the person to immediately communicate thechange in situation. This is supported by the following case.Remedies of FraudAccording to Section 19, when consent is taken by fraud from another person he hasthe following remedies available to him.o Rescind the Contract: The party whose consent was received by fraud has the rightto avoid the contract because it is voidable at the option of the person defrauded.o Performance of Contract: The person defrauded can ask for completion of thecontract but with restitution which means that he would like to be put in that positionin which he would actually be in if the representations were true.o Compensation: The defrauded party has the right to demand compensation for theloss that is caused to him by fraud. He has the right to claim damages even if he optsto continue with the contract.5.5 MISREPRESENTATIONMisrepresentation is a false or misleading statement that a person honestly believes itto be true. He makes this statement without any intention to cheat or mislead anotherperson. The false statement is serious but not as serious as fraud.According to Section 18 of the contract act misrepresentation the meaning of themisrepresentation is given below:1. It is a positive assertion of information by a person which is not true but the personbelieves it to be true.2. It is a breach of duty without any intention to deceive. However, the person gainsan advantage by misleading another person.3. The statement innocently causes a party to an agreement to make a mistake to thesubject of the agreement.Misrepresentation occurs in the following cases:
  41. 41. 1. Unwarranted Statements: When a party makes a positive assertion that theinformation from which he is making a statement is trustworthy he means that he ismaking a warranted statement. Unwarranted statement means information fromuntrustworthy source. Therefore, when a person believes that the information is truebut it is incorrect. It is misrepresentation. This is supported by the caseCase Law 8In Oceanic Steam Navigation Company V Soonderdas.61 The plaintiff from whom aperson chartered a ship stated that the ship was of 2800 tonnage register. However,the ship was 3000 tonnage register. The plaintiff did not have any basis to believe thefact stated by whom. The contract was the cancelled due to misrepresentation.2. Breach of Duty: When a party does not intend to cheat another person but thecircumstances show that he has not done his duty correctly because of nondisclosureof essential information. He has used the situation to his advantage thus bringing himcertain benefits. This type of situation is called constructive fraud. The party makingsuch statements will be guilty of misrepresentation. This is supported by the followingcase.Case law 9Bannerman v White 1861.62 The plaintiff wanted to sell the defendant hops on theunderstanding that sulphur was not used in their growth. The defendant was clearthat he was not interested in sulfa usage in cultivation of Hops. Although sulfawasused in 5 out of 300 acres the plaintiff had forgotten. The court held that thecontractcould be avoided on the ground of misrepresentation although representationwas no3. Innocent Mistake: If one party leads the other one to make a mistake in the qualityor subject matter it is a case of misrepresentation. This clause includes the caseswhere vital facts are suppressed and a mistake has been made.Essentials of MisrepresentationMisrepresentation as already stated is a false representation of facts which the personmakes without knowing that it is false. He makes the statements believing them to betrue. The following essentials elements represent misrepresentation.I. Material Facts: Misrepresentation must be of those facts which are important in theformation of a contract. Some expressions or passing statements that are not relevantwill not be enough for avoiding a contract.
  42. 42. II. Statement prior to executing the contract: The misrepresentation of facts must bebefore the contract is executed by the parties to the contract.III. Misrepresentation by a party to the contract: Misrepresentation of facts has to bemade by a party or his agent to the contract. A statement made by a stranger to thecontract does not have any effect on the validity of the contract.IV. Objective of misrepresentation: The statements made by misrepresentation offacts should be of the intention to deceive the other party and to induce him to enterthe contract.V. Reaction of other party: As a result of the misrepresentation the other party in thecontract should have acted on the faith of the facts represented.Effect of MisrepresentationAccording to Section 19 of the Indian Contract Act if on the misrepresentation ofstatements a person to the contract has been affected, he can avoid the contractbecause it becomes a voidable contract at his option.! The person whose consent has been taken by misrepresentation has the right torescind to the contract.! He has a right to ask for completion of the performance of the contract and ! He canalso ask for being given the position which he would have if the representation offacts was true at the time of asking for performance of the contract.The right to rescind the contract is in the following three cases.1 Time Period: The contract has to be rescinded within a reasonable time otherwisethe right to rescind the contract will be lost.2 Affirmation: The aggrieved party should not make an affirmation to the contractotherwise he will lose the right to rescind.3 Third Party Rights: The aggrieved party should be careful to find out that thirdparty rights are not acquired while he asks for rescission of the contract.Exceptions to the Right to Rescind the ContractIn the following cases the party whose consent was received by misrepresentationcannot get relief of rescinding the contract.1 Where the affected person had the possibility of finding out the truth with ordinarydiligence.2 Where the affected party is ignorant that he gave his consent due tomisrepresentation of facts.
  43. 43. 3 Where the affected party becomes aware of misrepresentation but still decides toreceive the benefits under the contract.4 Where a third party innocently enters into benefits of the contract before thecontract was rescinded.5 Where it is difficult to restore the rights of the affected party to the original position.5.6 MISTAKEMistake can be defined as an incorrect statement which creates misunderstandingbetween the parties. Such mistakes take place when the parties to the contract are notaware of the terms of the contract in agreement with each other. An agreementbetween two parties according to the Indian Contract Act is valid only when both theparties agree upon the same thing and in the same sense. According to section 20 theagreement becomes void when there is a mistake in agreement. In normalcircumstances law does not give the right to anyone to avoid a contract because hewas mistaken about some fact in the contract. However, some mistakes arefundamental to the contract in such a manner that the very basis of the formation ofthe contract becomes faulty and there is no contract at all. In such cases the agreementis considered to be void due to consensus ad idem.Types of MistakeMistake can be of two types. These are mistake of facts and mistake of law. (1)Mistake of fact can be bilateral or unilateral and (2) Mistake of law can be mistake oflaw in India and mistake as to foreign law.1. Mistake of FactMistake of fact can occur when both the parties to the agreement are under a mistakeor only one of the parties is under a mistake to the essential elements of the contract.When both parties are under a mistake it is called bilateral mistake and when onlyoneparty to the contract is under a mistake it is called a unilateral mistake." Bilateral Mistake: A bilateral mistake is made in the following cases:(i) Mistake of existence of subject matter: The agreement is void if it is agreed upona subject matter which does not exist and the parties to the agreement do not have anyknowledge about it. This is bilateral mistake because both parties did not know thismaterial fact at the time of making an agreement.(ii) Mistake of identity of subject matter: The agreement is void if two parties to thecontract have confusion about the identity of the subject matter. The agreement isvoid due to want of consensus.
  44. 44. (iii) Mistake regarding quality / description of subject matter: When two partiesmake an agreement they should understand that the quality of the product. If bothparties make a mutual mistake about the description of the product, it is bilateralmistake and the agreement is void.1. Mistake regarding title of the product: An agreement of sale is void if there is amistake of mistake over the entitlement of goods.(iv) Mistake regarding substance of subject matter: If both parties to an agreementmake a mutual mistake of facts which is the essential part of the subject matter theagreement is void.(v) Mistake regarding quantity of subject matter: If two parties are mistaken aboutthe quantity of subject matter to be supplied, then the agreement is void. Quantity isan essential fact of an agreement; if it is not correct the agreement to buy / sell can notbe held.(vi) Mistake regarding price of the subject matter: Price is an essential feature in thesale of a product. If there is a genuine mistake regarding price the agreement is void.(vii) Mistake about possibility of performance: If there is a bilateral mistakeregarding the possibility of performance the agreement is void. Impossibility ofperformance can be due to physical reason or legal impossibility.Effect of Bilateral Mistake: When there is a bilateral mistake inunderstanding the essential facts of the agreement, the contract becomes void abinitio. This agreement is void from the beginning, does not have any legalsignificance. It cannot be enforced at the option of any of the parties to the contract." Unilateral Mistake: According to section 22, unilateral mistake occurs whenone party to the agreement makes a mistake. The contract is not voidable because oneof the parties to it are under a mistake. However, there are certain exceptions to therule. These are due to the following reasons:! Mistake of identity of a party: A very fundamental mistake occurs if an agreementis made with a wrong person. When a party desires to deal with a certain person andhe does not do so due to false representation of another person it is an error inconsensus.! Mistake about nature of transaction: If a person makes a transaction withoutunderstanding nature of the transaction, it cannot be executed. This mistake ispossible when a person does not disclose to the other the true nature of the document