Legal Aspects of Contract Law

Legal Aspects of Business Unit 1
Sikkim Manipal University Page No. 1

Unit 1 Law of Contract
Structure:
1.1 Introduction
Objectives
1.2 Law of Contract Indian Contract Act 1872.
1.3 Offer or Proposal
Self Assessment Questions I
1.4 Acceptance
1.5 Contractual Capacity
1.6 Free Consent
1.7 Consideration
1.8 Privity of Contract
1.9 Lawful Object
Self Assessment Questions II
1.10 Summary
1.11 Terminal Questions
1.12 Answers to SAQs and TQs
1.1 Introduction
Some knowledge of law is necessary for all persons since life of each
member of society must proceed to a large extent in conformity with
recognized rules and principles of social conduct. Life in general and
business in particular could not continue without law to regulate the conduct
of people and to protect their property and contract rights.
The law of contracts forms the oldest branch of the law relating to business.
Its object is to introduce definiteness in commercial and other transactions,
and to ensure the realization of reasonable expectations of the parties who
enter into a contract. In India the law of contracts is governed by the Indian
contracts Act, 1872.
Objectives
After studying this unit you will be able to:
Define contract.
Explain the essentials of a valid contract.
State the essentials of offer, proposal, acceptance and consideration.
1.2 Indian Contract Act 1872
Law Its origin
Every human being would like to have his own way to express himself and
act. Such an unrestricted freedom can be enjoyed only in isolation. Being a
social being, man wants to live in harmony with his fellow men. In such a
life, ones interests are bound to clash with that of other members of the
society despite best co-operation. So there is a need for control or
regulations. Law happens to be one of the most effective instruments of
control.
In the words of Holland, law is a general rule of external human action
enforced by a sovereign political authority.
In the words of Salmond, law is the body of principles recognized and
applied by the State in the administration of justice.
Thus, law is a rule of action evolved to regulate social life and to avoid
conflict of interests.
The phrase commercial law, mercantile law or business law is used to
denote those portions of the law which deal with the rights and obligations
arising out of transactions between mercantile persons. It can be regarded
as a part of Civil Law though certain aspects of Criminal Law such as
forgery and fraud often become relevant in business transactions. There is
no statute titled mercantile or business law. It comprises a vast number of
laws governing the relation of businessmen to the society.
The Indian Contract Act-1872
The Indian Contract Act, 1872 lays down the law relating to contracts. It
does not lay down a number of enforceable rights and duties, but lays down
a number of limiting principles subject to which the parties may create rights
and duties for themselves.
Definition:
Contract: Sec. 2 (h) An agreement enforceable by law is a contract. To
make a contract, there must be (I) an agreement and (ii) the agreement
should be enforceable by law.
Agreement: Agreement is defined as every promise and every set of
promises forming consideration for each other . A promise is defined as an
accepted proposal. Thus, every agreement in its ultimate analysis is made
of a proposal from one side and its acceptance by the other.
To become a contract an agreement must be enforceable by law. Sec. 10 of
the Act lays down the condition of enforceability. An agreement becomes
enforceable only when it is coupled with obligation. An obligation is the legal
bond, which binds the parties to a contract. The obligations springing from
agreements should be legal obligations and not moral, social or religious
obligations.
Essentials of a Valid Contract :
All contracts are agreements but all agreements need not be contracts. The
agreements that create legal obligations only are contracts. The validity of
an enforceable agreement depends upon whether the agreement satisfies
the essential requirements laid down in the Act. Section 10 lays down that
all the agreements are contracts if they are made by the free consent of the
parties competent to contract for a lawful object and are not hereby
expressly declared to be void.
The following are the essentials:
a) Agreement : An agreement which is preliminary to every contract is the
outcome of offer and acceptance. An offer to do or not to do a particular
act is made by one party and is accepted by the other to whom the offer
is made. Then we say that there is a meeting of the minds of the parties.
Such a position is known as consensus ad idem.
b) Free consent : The parties should agree upon the same thing in the
same sense and their consent should be free from all sorts of pressure.
In other words it should not be caused by coercion, undue influence,
misrepresentation, fraud or mistake.
c) Contractual capacity: The parties entering into an agreement must
have legal competence. In other words, they must have attained the age
of majority, should be of sound mind and should not be disqualified
under the law of the land. A contract entered into between the parties
having no legal capacity is nullity in the eyes of law.
d) Lawful consideration: There must be consideration supporting every
contract. Consideration means something in return for something. It is
the price for the promise. An agreement not supported by consideration
becomes a nudum pactum i.e., naked agreement. The consideration
should be lawful and adequate. However, there are certain exceptions to
this rule.
e) Lawful object : The object or purpose of an agreement must be lawful.
It should not be forbidden by law, should not be fraudulent, should not
cause injury to the person or property of another, should not be immoral
or against public policy.
f) Not expressly declared void: The statute should not declare an
agreement void. The Act itself has declared certain types of agreements
as void. E.g., agreements in restraint of marriage, trade, legal
proceedings. In such cases, the aggrieved party cant seek any relief
from the court of law.
g) Possibility of performance: The agreement should be capable of
being performed. e.g., Mr. A agrees with Mr. B to discover treasure by
magic. Mr. B cant seek redressal of the grievance if Mr. A fails to
perform the promise.
h) Certainty of terms: The terms of the agreement should be certain. E.g.,
Mr. A. agrees to sell 100 tons of oil. The agreement is vague as it does
not mention the types of oil agreed to be sold.
i) Intention to create legal obligation: Though Sec. 10 is silent about
this, under English law this happens to be an important ingredient.
Therefore, Indian courts also recognise this ingredient. An agreement
creating social obligation cant be enforced.
j) Legal formalities: Indian Contract Act deals with a simple contract
supported by consideration. Agreements made in India may be oral or
written. However, Sec. 10 states that where the statute states that the
contract should be in writing and should be witnessed or should be
registered, the same must be observed. Otherwise, the agreement cant
be enforced e.g., Under Indian Companies Act, the Memorandum of
Association and Articles of Association must be registered.
Classes of Contracts:
On the basis of enforceability, contracts may be classified as follows:
Valid contract: It is a contract which satisfies all the legal requirements
provided for under Sec. 10.
Void contract: An agreement not enforceable by law is said to be void.
Sec. 2 (g). A void agreement is a nullity in the eyes of law creating no legal
rights or obligations. Therefore, it is inappropriate to call it void contract.
However, sometimes it may happen that an agreement which is valid in the
beginning may become void subsequently due to various reasons, such as
impossibility of performance or illegality. Then we do refer to the term void
contract.
An agreement void from the beginning is known as Void ab initio. Then we
cant use the term void contract. E.g., an agreement with a minor.
An agreement which ceases to enforceable by law becomes void when it
ceases to be enforceable. Such a contract, though valid in the beginning
becomes void subsequently.
Voidable contract: An agreement which is enforceable by law at the option
of one or more of the parties thereto but not at the option of the other or
others is a voidable contract. The party entitled to affirm or reject it is the
aggrieved party. This right of revocation has to be exercised within the
reasonable time and before third parties acquire rights under contract. When
the aggrieved party avoids the contract, the other party there to need not
perform any promise and the party avoiding the contract should restore any
benefit he has received under the contract.
Illegal contract: There is nothing like a legal contract or an illegal contract.
It is right to call illegal agreement. An agreement is illegal when it is against
the law of the land. E.g., an agreement to commit fraud, crime or one that is
opposed to good morals. It is to be noted that while all the illegal
agreements are void, all void agreements need not be illegal.
Unenforceable contract: An unenforceable contract is one which is valid
but for certain technical reasons such as want of proof, expiry of period
within which enforceable, absence of writing or registration etc. it becomes
unenforceable. By clearing the technical reasons it can be enforced.
1.3 Offer or Proposal
Sec. 2 (a) defines offer as follows: When one person signifies to another his
willingness to do or to abstain from doing anything with a view to obtaining
the assent of that other person to such act or abstinence, he is said to make
a proposal.
The person making the proposal is called promisor and the person
accepting it is called promisee.
Essentials of a Valid Offer:
a) An offer may be general or specific: According to Sec. 2 (a) an offer
must be made to a specific person. An offer may be made to the world
at large. But the contract is made only with the person who accepts and
fulfills the conditions of the proposal.
In the words of Anson, An offer need not be made to an ascertained
person, but no contract can arise until it has been accepted by an
ascertained person.
In Carlill Vs Carbolic Smoke Ball Co. (1893), a Company offered by
advertisement to pay 100 to any one who contacts the increasing
epidemic influenza, cold or any disease caused by taking cold after
having used the ball as per printed directions. It was added that 1000
is deposited with the Alliance Bank showing our sincerity in the matter.
The plaintiff used the smoke mokeball as per the directions but
subsequently suffered from influenza. She was held entitled to recover
the promised reward.
b) An offer should be made with an intention of creating legal
obligation: This principle of English law though not incorporated
specifically under Section 10, is generally accepted as vital to form a
legal agreement. Social, moral or religious agreements are not legally
enforceable. For example, Mr. A invites Mr. B to dinner. Mr. B fails to
attend. Mr. A cannot sue Mr. B for unconsumed food.
Whether the offeror intended to enter into legal obligations or not could
be known from the nature of the agreement and the surrounding
circumstances. The court has to ascertain the intention of the parties.
The test of contractual intention is objective and not subjective. What is
considered is not what the parties had in mind but what a reasonable
person would think in the circumstances their intentions to be.
c) An offer must be definite and certain: The terms of an offer should not
be uncertain and ambiguous. Anson expressed The law requires the
parties to make their own contract, it will not make a contract for them
out of terms which are indefinite or illusory . This is so because the
courts cannot say what the parties to the contract are to do and whether
there is violation of the contract.
However, all the terms of an offer need not be expressed. If some of the
essential terms of a bargain may not be specified but are capable of
being determined by some method other than by a future agreement
there will be a good contract between the parties.
d) A statement of intention and an invitation to offer are not offers:
Preliminary negotiations are likely to take place before entering into an
agreement. In the course of such negotiations one party may make
some declarations regarding his intention of doing something. Such a
declaration by itself does not become an offer. e.g., A tells B I want to
sell my car. This is not an offer.
An invitation to offer is not an offer. An advertisement for tenders for sale
of goods by auction, an announcement about the stock of goods for
sale, display of goods in shop windows, prospectus of a company,
catalogue, price-lists, loudspeaker announcements etc. are merely
invitations to offer or offers.
e) An offer must be communicated to the offeree: An offer becomes
operative only when it has been communicated to the person to whom
the offer is made. Communication is necessary whether the offer is
specific or general. Under Section 4 the communication of a proposal is
complete when it comes to the knowledge of the person to whom it is
made. However, mere knowledge of a proposal does not amount to
communication unless the offeree acquires it with express or implied
intention of the offeror.
The Act does not indicate the mode of communication. The offeror may
communicate the offer by choosing any available means. However, a
letter containing an offer which is never mailed is not an offer even if the
contents are known by the offeree in some manner.
General offers are communicated to public through notice and advertise-
ments. But as regards reward cases the question arises whether the
person performing the conditions of the offer can claim the reward even
if he is ignorant of the offer. In Lalman Shukla Vs. Gouri Dutt case it was
held that knowledge of the offer is essential. There can be no
acceptance unless there is knowledge of the offer.
When the offer is not communicated silence on the part of the offeree
does not amount to consent since he does not have the opportunity to
reject the offer. E.g., A works for B without the request or knowledge of
B. A cant sue B for remuneration since Bs consent cant be presumed
from his silence.
f) The terms and conditions of offer should also be communicated:
An agreement is a two-sided bargain based on freedom of contract.
However, in modern times the buyer of an article is in an unfavourable
position. Freedom of contract becomes one-sided in the case of
agreements with common carriers, dry cleaners, tailors, insurance
companies, landlords, public utilities etc. It is also difficult to draw up a
separate agreement with each individual. Therefore, printed forms of
agreements known as standard form contracts are used. Such forms
contain large number of terms and conditions very often small in print
absolving the dominant party of all liability. The economically weaker
party has to accept all such terms and conditions irrespective of whether
he likes them or not. The Court too finds it difficult at times to protect the
interest of the weaker party. Therefore the courts have evolved certain
methods. When the offer contains special terms and conditions the
offeror must communicate all the terms and conditions either before or
at the time of contracting in order to bind the acceptor.
On the other hand if the acceptor knew that there was writing and knew
or believed that the writing contained conditions he is then bound by the
conditions even though he did not read them. It is enough if the offeror
has done all that can be considered necessary to give notice to the
acceptor.
g) Two identical offers do not make a contract: An offer made by a
person may cross a similar one made by another person of course in the
course of transit. They are just two identical or cross offers, though there
seems to be identity of mind.
h) An offer should not contain any term the non-compliance of which
amounts to acceptance: There may be any number of terms and
conditions in an offer. The acceptor can accept or reject them. While the
offeror can prescribe mode of acceptance, he cant prescribe the form or
time of refusal so as to fix a contract upon the acceptor. He cant say, for
example, that if the offeree does not communicate before a given time,
he is deemed to have accepted the offer.
Self Assessment Questions I
State whether the following statements are True or False:
1. Agreements made in India are always in written form.
2. An agreement enforceable by law is said to be void.
3. An agreement which is enforceable by law at the option of one or
more of the parties thereto but not at the option of the other or
others is a voidable contract.
4. The person making the proposal is called promisor and the person
1.4 Acceptance
According to Sec. 2 (b) When the person to whom the proposal is made
signifies his willingness thereto the proposal is said to be accepted. A
proposal, when accepted, becomes a promise.
By accepting the offer, the acceptor expresses his willingness to be bound
by the terms and conditions of the offer. Regarding an offer and its
acceptance, Anson has given an analogy of a lighted match stick.
Acceptance is to an offer what a lighted match is to a train of gunpowder. It
produces something which cant be recalled or undone. An acceptance
turns the offer into a binding obligation.
Rules Regarding Acceptance:
a) An offer can be accepted only by the person to whom it is made:
The offeree only has to accept the offer. In case it is accepted by any
other person no agreement is formed. However, in case authority is
given to another person to accept the offer on behalf of the person to
whom it is made, it is a valid acceptance.
b) Acceptance should be unconditional and absolute: Sec. 7 (I) states
that the acceptance should be absolute and unconditional. The acceptor
should accept the offer in toto. If it is qualified or conditional, it ceases to
be valid. In fact, a qualified or conditional acceptance is nothing but a
counter-offer.
c) Acceptance should be communicated: The party accepting the offer
must communicate his acceptance to the offeror. Acceptance is not a
mental resolve but some external manifestation. The acceptance can be
communicated in writing or word of mouth or also by conduct. An
agreement does not result from a mere state of mind.
As regards unilateral contracts (e.g., offer of reward) it is impossible to
the offeree to communicate his acceptance otherwise than by
performing the contract. In the case of bilateral contracts acceptance
must be communicated. The offeror cant force a contract on offeree by
fixing the mode of refusal. Further, acceptance should be communicated
only to the offeror and not to somebody else.
d) Acceptance should be according to the prescribed form: Unless
specified in the offer the acceptance must be in some usual and
reasonable manner. The proposer has the right to prescribe the manner
of acceptance. He may require it to be oral or in writing or to be
communicated to him by phone or telephone etc. He can also waive his
right or may ask the offeree to express acceptance by some gesture.
Once he prescribes the mode of communication later he cant say that it
was insufficient.
If the offeree does not signify his assent to the offeror according to the
mode prescribed it becomes deviated acceptance and strictly speaking
it is no acceptance at all. However, such a regid rule is not followed in
India. In the case of deviated acceptance the proposer may insist for the
acceptance in the prescribed manner. He then has to do this within a
reasonable time after communication of acceptance to him. Otherwise it
will be presumed that the proposer has accepted the deviated
acceptance. Sec. 7 of the Act does not tell that deviated acceptance is
no acceptance.
e) Acceptance must be provoked by offer: The acceptor must be aware
of the offer. Even if he fulfills the conditions mentioned in the offer, if he
is ignorant of the offer itself, he cant give a valid acceptance. [Lalmann
Shukla V, Gouridutt].
f) Acceptance must be given before the offer lapses or is revoked:
Where a time limit has been fixed the acceptor has to accept the offer
within such time. Where no time limit is prescribed the acceptance has
to be within the reasonable time. An offer once dead cant be accepted
unless there is a fresh offer.
g) Provisional acceptance is no acceptance: A provisional acceptance
does not make a binding agreement unless final approval is given. The
offer may be withdrawn before giving final approval. However, whether
an agreement is provisional or final depends upon the intention of the
parties.
Contract by post: No problem arises where there is instantaneous
communication of offer and acceptance which is possible when the parties
are face to face. But how to determine the point of time when the contract is
complete if the parties are at distance by each other ? As regards the point
of time when the contract is complete, there is fundamental difference
between English Law and Indian Law.
Under English Law, the proposer is legally bound by the acceptance
effected through postal medium when the letter is prepared, addressed,
stamped and mailed eventhough it is delayed or lost in transit.
Indian Law (Sec. 4) lays down that the communication of an acceptance is
complete as against the proposer when it is put in a course of transmission
to him so as to be out of the power of the acceptor; as against the acceptor
when it comes to the knowledge of the proposer . The distinction between
English Law and Indian Law lies with regard to the position of the acceptor.
While under English Law, the acceptor is bound by acceptance the moment
the letter is mailed properly, under Indian Law the communication of
acceptance is complete as against, the acceptor only when it comes to the
knowledge of the proposer.
Termination of offer: Following are the circumstances under which an offer
is terminated.
(a) Lapse : An offer lapses because of passage of time, death or insanity of
the proposer. In case time limit for acceptance is prescribed by the
offeror, offer lapses if not accepted within that time. In the absence of
any stipulation of time, it has to be accepted within a reasonable time
depending upon the circumstances of each case.
A proposal is revoked by the death or insanity of the proposer, if the fact
of his death or insanity comes to the knowledge of the acceptor before
acceptance. An acceptance is not effective if it is communicated to the
legal representatives of the proposer. But in case the offeree is ignorant
of the offerors death, it can be accepted.
(b) Failure to fulfill a condition procedent: Sec. 6 (3) provides that an
offer is terminated by the failure of the acceptor to fulfil a condition
precedent to acceptance. e.g., A offers to sell his car to B for Rs.
1,00,000 on the condition that B has to show his driving licence to A. B
has to comply with this condition if he has to accept the offer.
(c) Rejection: By rejecting the offer offeror can terminate an offer. This
rejection may be express or implied. A counter offer has the same effect
as rejection.
(d) Destruction of the subject matter or illegality : If the thing offered is
destroyed or cant be bought and sold due to operation of law, the offer
itself lapses.
(e) Revocation: The withdrawal of an offer by the offeror is known as
revocation. Till the acceptance of the offer, the offeror can revoke it.
Sec. 5 provides that a proposal may be revoked by the proposer at any
time before the communication of its acceptance is complete.
Communication of acceptance as against the proposer is complete
where it is put in the course of transmission to him so as to be out of the
reach of the acceptor.
In England, an acceptance cant be revoked.
1.5 Contractual Capacity
Legal disability of the parties would render the agreement entered into
between them unenforceable in a court of law. In fact, even a desirable
person may enter into an agreement. Law does not infringe his freedom of
making an agreement with anybody he likes. But by declaring certain
classes of persons having no contractual capacity, law seeks to protect their
interests from being exploited by unscrupulous persons.
Definition: Section II lays down that Every person is competent to contract
who is of the age of majority according to the law to which he is subject and
who is of sound mind and is not disqualified from contracting by any law to
which he is subject. This section declares following persons to be
incompetent: (1) Minors (2) persons of unsound mind and (3) persons
disqualified by law to which they are subject.
Minors:
A minor is a person who has not attained the age of majority. According to
Indian Majority Act, 1875 the age of 18 years is a major. However, if a
guardian is appointed by the court or if the minor or his property is under the
supervision of a court of wards, the age of majority is 21 years.
Principles governing minors contracts: The law protects minors
persons, preserves either their rights and estates, excuses their
shortcomings and negligences and assists them in their pleadings, the
judges are their counsellors, the jury are their servants and law is their
guardian.
In pursuing the above objective, the law should not cause unnecessary
hardship to those who deal with minors.
Sec. II of the Act is silent as regards the legal effects of an agreement
entered into by or with a minor. In Mohari Bibi Vs. Dharmo Das Ghosh case
it was held that a minors agreement is void-ab-initio.
Effects of minors agreement: A minors agreement is void-ab-initio.
Where there is no contract, there should be no contractual obligation on
either side. Hence, the effects of a minors agreements are worked out
independently of any contract.
1. No estoppel against minor: A minor who has made an agreement by
misrepresentation of his age may disclose his real age. There is no
estoppel against him.
2. No liability in contract or tort arising out of contract: A minor is, in
law, incapable of giving consent. Hence, there could be no change in the
character or status of the parties. A minor who misrepresents his age to
obtain a contract cannt be sued for deceit. You cannt convert a
contract into a tort to enable you to sue an infant. This principle has
been followed in India.
Where, however, the tort is independent of contract the mere fact that a
contract is also involved will not absolve the minor from liability.
3. Doctrine of restitution: If a minor obtains property or goods by
misrepresentating his age, he can be compelled to restore it but only so
long as the same is traceable in his possession. This is known as the
equitable doctrine of restitution. Suppose the minor has sold the goods
he cant be made to repay the value of the goods because that would
amount to enforcing a void contract.
However, when a minor invites the aid of the court for the cancellation of
his contract the court may grant relief subject to the condition that he
shall restore all benefits obtained by him under the contract or make
suitable compensation to the other party. But the court will not compel
any restitution by a minor even when he is a plaintiff, where the other
party was aware of the infancy so that he was not deceived or where the
other party was unscrupulous in his dealings with the minor.
4. Beneficial contracts: The law that a minors agreement is absolutely
void has been confined to the cases where a minor is charged with
obligations and the other party seeks to enforce them. On the other
hand a minor is allowed to enforce a contract which is of some benefit to
him and under which he is required to bear no obligations. A minor is
capable of purchasing immovable property and he may sue to recover
the possession of the property purchased by tendering the purchase
money.
A minor can be a beneficiary e.g., a payee, an endorsee, or a promisee
under a contract. A promissory note executed in favour of a minor is
valid and can be enforced in a court.
5. Ratification: On attaining majority, a person cant ratify an agreement
made by him when he was a minor. Ratification relates back to the date
of making of the contract. Therefore, a contract which was void originally
cant be made valid by subsequent ratification. If it is necessary, a fresh
contract should be made on attaining majority. A new contract requires a
fresh consideration. The consideration which passed under the earlier
contract cant be implied into the contract into which the minor enters on
attaining majority.
6. Liability for necessaries (Sec. 68): Persons incompetent to contract
are made liable for necessaries supplied to them. Sec. 68 reads If a
person incapable of entering into a contract or any one whom he is
legally bound to support is supplied by another person with necessaries
suited to his conditions in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable
person.
The liability is only for necessaries. But what is necessary is not defined
by the Act. We have to depend upon judicial decisions. Things
necessary are those without which an individual cannt reasonably exist
such as food, raiment, lodging etc. What may be necessary for one
class may be luxury for another. Therefore, the class has to be
ascertained and then whether a thing is a necessity or not has to be
determined. To render an infants estate liable for necessaries, two
conditions must be satisfied: (1) The contract must be for goods
reasonably necessary for his support in his state of life and (2) he must
not have already a sufficient supply of these necessaries. The supplier
has to prove not only that the goods supplied were suitable to the
conditions in life of the minor but that he was not sufficiently supplied
with the goods of that class.
Thus, the liability for supply of necessaries attaches only to the estate of
a minor and he does not incur any personal liability.
Persons of Unsound Mind:
A person is said to be of sound mind for the purpose of making a contract if
at the time when he makes it, he is capable of understanding it and of
forming a rational judgement as to its effects upon his interests. A person
who is usually of sound mind but occasionally of unsound mind may not
make a contract when he is of unsound mind (Sec. 12).
Two tests are laid to determine the soundness of mind while making a
contract. They are (i) the person making a contract should be capable of
understanding it and (ii) should be capable of forming a rational judgement
as to its effects upon his interests.
In English Law, a person of unsound mind is competent to contract. He may
avoid his contract by satisfying the court that he was incapable of
understanding the contract at the time of its formation and the other party
knew it. The contract is voidable at his option.
Under Indian Law, the agreement of a person of unsound mind is absolutely
void. A person of unsound mind, however, may make a contract when he is
of sound mind. Sec. 12 also puts the persons such as drunkard or a person
who is delirious from fever in the same category as a person of unsound
mind.
1.6 Free Consent
One of the essentials of a valid contract is free consent. Sec. 13 of the Act
defines consent as Two or more persons are said to consent where they
agree upon the thing in the same sense. There should be consensus ad
idem or identity of minds.
The validity of a contract depends not only on consent of the parties but
their consent must also be free. According to Sec. 14, consent is said to be
free when it is not caused by (i) coercion as defined under Section 15, or (ii)
undue influence as defined under Section 16, or (iii) fraud as defined under
Section 17, or (iv) mis-representation or defined under Section 18, or (v)
mistake subject to the provisions of Section 21, 21 and 22.
1. Coercion:
(Sec. 15) Coercion is the committing or threatening to commit any act
forbidden by the Indian Penal Code or the unlawful detaining or threatening
to detain any property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement. It is immaterial
whether the Indian Penal Code is or is not in force in the place where the
coercion is employed.
Under English Law, coercion must be applied to ones person only whereas
under Indian Law it can be ones person or property. So also under English
Law, the subject of it must be the contracting party himself or his wife,
parent, child or other near relative. Under Indian Law, the act or threat may
be against any person. It is to be noted that the act need not be committed
in India itself. Unlawful detaining or threatening to detain any property is also
coercion. While threat to sue does not amount to coercion threat to file a
false suit amounts to coercion since such an act is forbidden by Indian
Penal Code.
2. Undue influence:
In the words of Holland, Undue influence refers to the unconscious use of
power over another person, such power being obtained by virtue of a
present or previously existing dominating control arising out of relationship
between the parties.
According Sec. 16 (1) A contract is said to be induced by undue influence
where the relation subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses that position
to obtain an unfair advantage over the other.
A person is deemed to be in a position to dominate the will of other
(a) Where he holds a real or apparent authority over the other or where he
stands in a fiduciary relation to the other; or
(b) Where he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness or mental
or bodily distress;
(c) Where a person who is in a position to dominate the will of another,
enters into a contract with him and the transaction appears to be
unconscionable. The burden of proving that such contract was not
induced by undue influence shall lie upon the person in a position to
dominate the will of the other.
Both coercion and undue influence are closely related. What contributes
coercion or undue influence depends upon the facts of each case.
Sec. 16 (i) provides that two important elements must be present. The first
one is that the relations subsisting between the parties to a contract are
such that one of them is in a position to dominate the will of the other.
Secondly, he uses that position to obtain unfair advantage over the other. In
other words, unlike coercion undue influence must come from a party to the
contract and not a stranger to it. Where the parties are not in equal footing
or there is trust and confidence between the parties, one party may be able
to dominate the will of the other and use that position to obtain an unfair
advantage. However, where there is no relationship shown to exist from
which undue influence is presumed, that influence must be proved.
Presumptions as to undue influence: Sec. 16 (2) mentions certain types
of relationships which give rise to presumptions of undue influence. They
are (i) parent and child (ii) guardian and ward (iii) trustee and beneficiary
(iv) religious advisor and disciple (v) doctor and patient (vi) solicitor and
client (vii) fiance and fiancee.
The presumption about undue influence is rebuttable one by proving that
(a) the person complaining of undue influence had independent advice.
(b) Full disclosure of facts was made to him and he understood the same.
(c) There was no undue influence and adequate consideration was there.
As regards the relationship between debtor and creditor, landlord and
tenants, mother and daughter, husband and wife, grandson and
grand/father there exists no presumption of undue influence. The party
avoiding the contract must prove the existence of undue influence.
Contracts with pardanashin women: A pardanashin woman is one who
according to the customs of her community lives in complete seclusion. The
law presumes undue influence in the case of a contract with a pardanashin
women. Ordinary presumption is that a person who signs a document
understands its contents. But as regards a pardanashin woman this
presumption does not hold good. The burden of proof lies on the other party
to show that there was no undue influence, that the party understood the
contents and the effects of the document upon her interests.
Unconscionable or catching bargains: When a dominant party enters into
contract with a weaker party, he may take undue advantage or that others
ignorance, infirmity or impaired bargaining power. Such contracts are known
as unconscionable contracts.
Sec. 16 (3) lays down that in the case of unconscionable bargain the onus
of proof that the transaction was not induced by undue influence is on the
person who is in a dominating position in relation to the other party to the
contract.
Coercion and undue influence distinguished:
1) In the case of coercion, contract is obtained by committing or treatening
to commit an act punishable under Indian Penal Code. In the case of undue
influence the consent is obtained by dominating the will of the other.
2) Coercion involves physical force. Undue influence involves moral force.
3) Coercion may proceed from a stranger and may be directed against a
stranger. Undue influence must proceed from a party to the contract.
4) There is no presumption as regards coercion. On the other hand law
presumes undue influence in certain circumstances.
5) The offence may be committed in or outside India in order to render it
coercion. Undue influence must be exercised in India.
6) Coercion affects provisions of Indian Penal Code. There is no criminal
liability for undue influence.
7) The party avoiding a contract under coercion has to restore any benefit
he received under the contract to the other party. Under undue influence
the party avoiding the contract may or may not be directed by the court
to do so.
3. Fraud:
A false statement made knowingly or without belief in its truth or recklessly
careless whether it be true or false is called fraud.
Sec. 17 of the Act instead of defining fraud, gives various acts which amount
to fraud.
Sec. 17: Fraud means and includes any of the following acts committed by a
party to a contract or with his connivance or by his agent to induce him to
enter into contract:
1) The suggestion that a fact is true when it is not true by one who does not
believe it to be true. A false statement intentionally made is fraud. An
absence of honest belief in the truth of the statement made is essential
to constitute fraud. The false statement must be made intentionally.
2) The active concealment of a fact by a person who has knowledge or
belief of the fact. Mere non-disclosure is not fraud where there is no duty
to disclose.
3) A promise made without any intention of performing it.
4) Any other act fitted to deceive. The fertility of mans invention in devising
new schemes of fraud is so great that it would be difficult to confine
fraud within the limits of any exhaustive definition.
5) Any such act or omission as the law specially declares to be fraudulent.
Essentials of fraud:
1) Making a false suggestion: There should be a false suggestion by a
party who knows it to be false or the statement must have been made
recklessly without caring to know its truthfulness. The false suggestion
can be made by conduct of the party.
2) The representation must be of a fact. The false suggestion or
representation must be of a fact and not of opinion or intention.
Commendatory explanations as found in advertisements that a soap
washes whiter than white do not constitute representations of fact. It is
usual for a trader to praise his own goods.
3) Active concealment of facts amounts to fraud: Instead of making a false
representation a person may conceal a material fact which according to
him, if stated, would be disadvantageous to him, such concealment of
fact amounts to suppression of truth.
4) A promise made without any intention of performing it: A promise
includes a representation to the effect that the promisor has the intention
of performing it. So if a party makes a promise without having any
intention of performing it, he commits fraud e.g., buying goods with no
intention of paying for the same.
5) Any other act filled to decieve: Sec. 17 (4) brings within the purview of
Sec.17 all such acts which though apparently amount to
misrepresentation of fact, may amount to fraud considering the facts of
the case.
6) Any act of ommission which the law specifically declares to be
fraudulent.
7) Misrepresentation should be addressed to the party misled: The idea
behind making misrepresentation should be that the other person must
act upon it. Once it is shown that the misrepresentation was addressed
to him, it becomes fraud if the person acts upon it though the person
making representation may say that he did not intend that the person to
whom it was addressed, should act upon it.
8) The representation must induce the contract: The person to whom the
representation is made should rely upon the same and should enter into
a contract. A false representation is merely irrelevant if it has not
induced the party to whom it was made to act upon it by entering into a
contract.
9) The party acting on the representation should have been deceived and
suffered damage. The aggrieved party can not set aside the contract if
he has not sustained damage. If one knows that he is going to be
deceived later he cannot complain of being deceived by entering into
contract.
Silence whether fraud ? While active concealment of a material fact is
fraud, silence is not fraud except under two circumstances. There is no
general duty cast upon a party to a contract to disclose to the other party
material facts within his knowledge, but are unknown to the other party. This
principle is known as Caveat Emptor (let the buyer beware) in contracts of
sale of goods. However, under the following two circumstances silence
would amount to fraud:
(a) Circumstances of the case cast a duty upon the person keeping silence
to speak and (b) silence itself is equivalent to speech.
Duty to speak arises when the parties to a contract are in a fiduciary
relationships. Such contracts are known as uberrimae fide contracts, the
most common examples being insurance contracts, contracts of suretyship,
releases or compromises.
When a person is under no duty to speak, he may become guilty of fraud by
non-disclosure, if he voluntarily discloses something and then stops half the
way.
4. Misrepresentation:
Before entering into a contract, the parties will make certain statements
inducing the contract. Such statements are called representation. A
representation is a statement of fact made by one party to the other at the
time of entering into contract with an intention of inducing the other party to
enter into the contract. If the representation is false or misleading, it is
known as misrepresentation. A misrepresentation may be innocent or
intentional. An intentional misrepresentation is called fraud and is covered
under Section 17. Sec. 18 deals with an innocent misrepresentation.
Sec. 18 misrepresentation means and includes (i) the positive assertion in a
manner not warranted by the information of the person making it, of that
which is not true, though he believed it to be true. (ii) any breach of duty
which, without an intent to deceive, gains an advantage to the person
committing it, by misleading another to his prejudice. (iii) by causing
however innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
1) Positive assertion of a fact: A person might have received information
from an untrustworthy source or hear-say. But he may assert positively
that a particular fact concerning the subject matter of the agreement is
true. Then he is said to have misrepresented the fact. A false statement
need not be made direct to the plaintiff. It is sufficient if it is made to a
third party so that the plaintiff becomes aware of it. However, if the
misrepresentation has not been embodied in the contract it creates no
contractual obligation unless it turns out to be fraudulent.
2) Breach of duty: A person may commit breach of duty without any
intention to deceive the other party thus gaining an unfair advantage
over the other. When a party to the contract has a duty to disclose all the
material facts concerning the subject matter of the contract, but does not
do so, he is said to be guilty of misrepresentation. A representation may
be true at the time of making it, but later becomes false. This should also
be disclosed before the contract is entered into.
3) Causing mistake about the subject matter: If a party to an agreement
induces the other to commit mistake as to the nature or quality of the
subject matter of the agreement, he is guilty of misrepresentation.
Distinction between fraud and misrepresentation:
1) In misrepresentation the person making the false statement honestly
believes it to be true. In fraud, the false statement is made by person
who knows that it is false or he does not care to know whether it is true
or false.
2) There is no intention to deceive the other party when there is
misrepresentation of fact. The very purpose of fraud is to deceive the
other party to the contract.
3) Misrepresentation renders the contract voidable at the option of the
party whose consent was obtained by misrepresentation. In the case of
fraud the contract is voidable. It also gives rise to an independent action
in tort for damages.
4) Misrepresentation is not an offence under Indian Penal Code and hence
not punishable. Fraud, in certain cases is a punishable offence under
Indian Penal Code.
5) Generally, silence is not fraud except where there is a duty to speak or
the relation between parties is fiduciary. Under no circumstances can
silence be considered as misrepresentation.
6) The party complaining of misrepresentation cannt avoid the contract if
he had the means to discover the truth with ordinary deligance. But in
the case of fraud, the party making a false statement cannot say that the
other party had the means to discover the truth with ordinary deligance.
5. Mistake:
Usually, mistake refers to mis-understanding or wrong thinking or wrong
belief. But legally, its meaning is restricted and is to mean operative
mistake. Courts recognise only such mistakes which invalidate the contract.
Mistake may be mistake of fact (either unilateral or bilateral) or mistake of
law (either Indian law or foreign law).
Sec. 20 Where both parties to an agreement are under a mistake as to a
matter of fact essential to the agreement, the agreement is void.
Sec. 21 A contract is not voidable because it was caused by a mistake as
to any law in force in India; but a mistake as to a law not inforce in India has
the same effect as a mistake of fact.
Bilateral mistake: Sec. 20 deals with bilateral mistake. Bilateral mistake is
one where there is no real correspondence of offer and acceptance. The
parties are not really in consensus-ad-idem. Therefore there is no
agreement at all.
A bilateral mistake may be regarding the subject matter or the possibility of
performing the contract.
Mistake as to the subject matter: This mistake arises when the parties to the
contract assume at the time of making the contract, that a certain state of
things exists, but in reality it does not exist. Such a mistake may relate to
(i) existance of the subject matter: Two parties may enter into the contract
on the assumption that the subject matter exists at the time contract.
But actually it may have ceased to exist or has never existed at all.
Then the contract becomes void.
(ii) Identity of the subject matter: A mutual mistakes as to the identity of
subject matter renders the contract void.
(iii) A mistake as to the quality of the subject matter will not render the
agreement void owing to the application of the principle of caveat
emptor unless there is misrepresentation or guarantee by the seller.
(iv) Price of the subject matter: An explanation to Sec. 20 provides that an
erraneous opinion as to the value of the thing which forms the subject
matter of the agreement is not to be deemed a mistake as to a matter
of fact. A mistaken notion about the value of a thing bought or sold
may be unilateral or bilateral. If it is unilateral, the buyer or seller has to
presume that he has made a bad bargain.
Where the mistake is mutual and the parties enter into the contract with
false assumption and mistake as to the value of the subject matter is
the basis of their agreement, there cant be an enforceable contract
between them.
(v) Title of the subject matter: If a person agrees to purchase property
which is unknown to himself and the seller is his own already, the
contract may be void. A mistake as to the title does not invalidate a
contract since Sec. 14 of the Sale of Goods Act imposes an implied
condition as to the title of the seller. Where there is no such warrantee
or the buyer purchases his own property the agreement will be void-ab-
initio.
(vi) A false and fundamental assumption: A false and fundamental
assumption going to the root of the contract would render the contract
invalid.
Mistake as to the possibility of performance: There may not be any
possibility of the performance of the contract. This impossibility of
performance may be physical or legal impossibility. However, impossibility
of performance cannot be included under the head bilateral mistake as
there is Sec. 56 which lays down a positive rule of law regarding
responsibility.
Unilateral mistakes: Mistake of one of the parties to a contract as to a
matter of fact is known as unilateral mistake. Sec. 22 provides that a
contract is not voidable merely because it was caused by unilateral mistake.
A person is bound by an agreement to which he has expressed a clear
assent unless the unilateral mistake is caused by misrepresentation or
fraud.
However, where consent to an agreement is given by a party to it under
mistake which prevents the formation of a contract, the unilateral mistake
multifies the consent and the contract becomes void. The following are such
exceptional cases:
(a) Mistake as to identity: It is a rule of law that if a person intends to
contract with A, B cannot give himself any right under it. An offer can be
accepted only by the person to whom it is offered. If it is accepted by
some one else, there arises a unilateral mistake rendering the contract
void.
Mistake as to identity is of two types: (i) where the parties are dating with
each other from a distance (ii) where they are face to face with each
other.
(b) Mistake as to the character of a written document: If a person signs
a document under the mistaken impression that he is signing a
document of a different nature altogether he may escape liability in the
document signed by him, provided he can prove that the nature of the
document is different from what it is supposed to be. One party to a
contract may not disclose to the other the nature of the document and
induce the other to sign the same. The other party may sign it presuming
it to be a document of different nature. In such a case, the contract
becomes wholly void for want of concent.
Mistake of law: A mistake of law may be of law of land or of foreign law.
Mistake as to the law of the land doesnot render the contract voidable as
ignorance of law is no excuse.
1.7 Consideration
Consideration means something in return.It is one of the essentials of valid
contract. Ex Nudo Pacto Non Oritar Actio means out of bare promise no
action arises.
Definition:
Blackstone defined consideration as the recompense given by the party
contracting to the other. In the words of Pollack, Consideration is the price
for which the promise of the other is bought and the promise thus given for
value is enforceable.
Sec. 2 (d) of the Act defines consideration in the following terms: When at
the desire of the promisor the promisee or any other person has done or
abstained from doing, or does or abstains from doing, or promises to do or
abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.
Rules Governing Consideration:
i) Consideration should be furnished at the desire of the promisor. The
consideration should be the outcome of the desire of the promisor. The
desire may be express or implied. The act done at the instance of third
party or gratuitously does not become consideration. e.g. As house
catches fire. B goes and helps in extinguishing it. B later cannot ask for
any payment for his services. Even spiritual promises or mental
satisfaction are not enforceable. The question arises whether a
promise of a subscription to a public or charitable trust becomes legal.
(Kedarnath Vs Gorie Mohammed). A mere promise is not enough. The
promisee must have done some act or incurred expenses on the
strength of the promise. (Abdul Aziz Vs Maznoon Ali).
ii) Consideration may move from the promisee or any other person: Sec.
2 (d) provides that the consideration may be furnished by the promisee
or any other person. At this point Indian law differs from English law
according to which the consideration must move from the promisee
only and not from the third party. However, there is a doctrine known as
constructive consideration under which if the person who was to take a
benefit under the contract was nearly related by blood to the promisee,
a right of action would vest to him. But this doctrine is no more valid.
iii) Consideration may be past, present or future: Past consideration is
something done or not done at the request of the promisor, before the
making of the agreement. Under English Law, past consideration is no
consideration. Nevertheless, past consideration will support a
subsequent promise of the promisor. If services are rendered under
circumstances which raise an implication of a promise to pay for them,
the subsequent promise to pay is merely fixing a reasonable
compensation for the services.
In India past consideration is sufficient to support a promise provided it
is made at the request of the promisor.
Present consideration refers to one furnished at the time of the
promise. Where both the parties to a contract promise to each other of
doing or not doing something the consideration on both sides moves to
a future date and is known as future consideration. Present and future
considerations are also known as executed and executory
consideration respectively.
iv) Consideration need not be adequate: The law does not expect that the
consideration should be adequate. It is the lookout of the promisor. The
parties as between themselves can determine adequate consideration.
The consideration which the contracting parties give to each other need
not be of equal value. However, explanation 2 to Sec. 25 provides that
the agreement to which the consent of the promisor is given is not void
merely because the consideration is inadequate; but the inadequacy of
the consideration may be taken into consideration by the court in
determining whether the consent of the promisor was freely given.
v) Consideration should be valuable: The consideration should not be
unreal or illusory or of the nature of moral obligation. It should be
valuable, though the value of the consideration need not be the same
as the value of the promise which it supports.
vi) The discharging of a pre-existing obligation is not consideration: The
law may compel a person to do an act. Then the mere doing of such
act cant become consideration for anothers promise. However, doing
or agreeing to do more than what a person is legally bound amounts to
good consideration. In the same way performing or promising to
perform an existing obligation imposed by a previous contract will not
form consideration.
vii) Consideration should be certain and lawful: Consideration should not
be illusory or uncertain or impossible. Discovering a treasury by magic,
for example, cannot form consideration.
Exceptions to the rule no consideration, no contract: Sec. 25 of the Act
declares that an agreement made without consideration is void. However,
Sec. 25 also provides for the following statutory exceptions:
1. Agreement made on account of natural l ove and affection: It is valid
provided it is in writing, is registered and is made between the parties
standing in near relation to one another. Nearness of relation implies
blood relationship. However, even mental relationship is equally
nearness of relationship.
2. Promise to compensate voluntary services: Sec. 25 (2) provides that
a promise to compensate wholly or in part a person who has already
voluntarily done something for the promisor is valid and enforceable.
E.g., A finds Bs purse and gives it to him. B promises to give A Rs. 50.
This is a contract.
Sec. 2 (d) also deals with past consideration. But the difference between
Sec. 2 (d) and Sec. 25 (2) is that under Section 2 (d) the services are
rendered at the request of the promisor whereas under Section 25 (2)
the services are voluntary.
However, voluntary act should satisfy following conditions so as to
become an exception:
i) The voluntary act should have been done for the promisor and not
anybody else.
ii) The promisor must have been existing at the time when the act was
done.
iii) The promisor should be competent to contract at the time when the
act was done.
iv) The intention of the promisor should have been to compensate the
promisee.
v) The services rendered should not be immoral.
3. A promise to pay a time-barred debt: The time-barred debt i.e. the
one barred by the law of limitation, cant be recovered. But Sec. 25 (3)
provides that if a promise is made in writing and signed by the person to
be charged therewith or by his agent generally or specially authorised in
that behalf, to pay wholly or in part a debt of which the creditor might
have enforced payment but for the law for the limitation of suits is valid
and enforceable. However, mere oral promise or acknowledgement of
debt is not enforceable.
4. A completed gift: In the case of a gift actually made not being an
agreement to make a gift, no consideration is necessary. The donor and
donee may not be the near relatives.
5. Agency: No consideration is necessary to create an agency.
6. Remission: No consideration is necessary for an agreement to receive
less than what is due. Similarly, an agreement to extend time for
performance of a contract need not be supported by consideration.
7. Contribution to charity: A promise to contribute to charity, though
gratuitous, would be enforceable if on the faith of the promised
subscription, the promisee takes definite steps in furtherance of the
object and undertakes a liability.
1.8 Privity of Contract
The general rule of law is that a person who is not a party to a contract can
not claim any rights under the contract even though the contract is for his
benefit. Such a person is known as a stranger to the contract.
Though Indian Contract Act is silent about the position of a stranger to a
contract, the Privy Council and later the Supreme Court extended the
principle of the English Law to India.
Exceptions:
The rule discussed above has the following exceptions:
1) In the case of a trust or a charge: Where a trust is created by a contract,
the beneficiary can enforce his rights which the trust has conferred upon
him eventhough he is not a party to the contract creating the trust.
2) In the case of acknowledgement or estoppel: Wherein a contract
between two parties, the promisee may be required to make a payment
to a third party. The promisor may acknowledge the payment by conduct
or otherwise to the third party. Then the third party can sue the promisor
though there is no privity of contract between himself and the promisor.
3) In the case of assignment: When rights under a contract are assigned,
the assignee can sue upon the contract for the enforcement of his rights.
4) In the case of family and marriage settlements: When a provision is
made for the maintenance of female members of a Hindu family in a
partition of J oint Hindu property, or for the marriage expenses of a
female member the person for whose benefit such a provision is made is
entitled to enforce the provision in her favour.
5) In the case of agency: A contract entered into by the agent acting within
the scope of his authority can be enforced by the principal.
1.9 Lawful Object
Section 23 of the Act seeks to impose limitations on the freedom of contract
by declaring certain agreements to be void and certain others unlawful and
void.
Sec. 23: The consideration or object of an agreement is lawful unless it is
forbidden by law, or is of such a nature that if permitted it would defeat the
provisions of any law or is fraudulent or involves or implies injury to the
person or property of another or the court regards it as immoral or opposed
to public policy. In each of these cases the consideration or object of an
agreement is said to be unlawful. Every agreement of which the object or
consideration is unlawful is void.
Unlawful consideration and objects: In the following cases consideration or
the object of an agreement is unlawful:
a) Forbidden by law: Sec. 23 provides that if the consideration or object is
forbidden by law it becomes unlawful and the agreement based on it
also becomes unlawful and hence void. Under the English law a contract
that is expressly or implicitly prohibited by statute is termed as illegal
contract. On the other hand Sec. 23 of the Act uses only the term
unlawful. Though both illegal and unlawful agreements are void an
illegal agreement is necessarily unlawful whereas an unlawful
agreement need not be illegal. Nevertheless, the difference between the
two is very thin and quite often they are used interchangeably.
The term law under Sec. 23 means the enactment of the legislature,
subordinate legislation and the Hindu and Mohammadan laws.
b) Defeat the provisions of any law: Sometimes the object may not be
illegal. But it may aim at circumventing the provisions of any law. Then it
becomes void under Section 23.
c) Fraudulent: An agreement entered into between the parties with a
fraudulent purpose or to perpetuate fraud on others is void.
d) Injury to the person or property of another: If the object of an
agreement is to cause injury to the person or property of another, then it
is unlawful.
e) Immoral: Anson states, Although it has sometimes been said that
contracts contrary to good morals are void the only aspect of immorality
with which courts of law have actually dealt is sexual immorality.The
same view was referred to by the Supreme Court. Thus though the word
immoral is very comprehensive, Sec. 23 of the Act regards promises to
pay in consideration of concubinage, contracts of sale or hire of things to
be used in a brothel or by a prostitute for purposes incidental to her
profession, agreement to pay money for future cohabitation, contracts
facilitating divorce as immoral.
A promise to pay for past cohabitation has been held to be enforceable
by the Supreme Court. But a promise to pay for future cohabitation
whether adultery or not is unenforceable. So also a promise to pay for
past cohabitation for securing the continuation of the cohabitation is not
enforceable. Agreements interfering marital relations are also
considered immoral.
f) Opposed to public policy: The Act has not defined the term public
policy. Sec. 23 intends to leave what is opposed to public policy for the
courts to decide considering the circumstances of the case. Lord Truro
defined: Public policy is that principle of law which holds that no subject
can lawfully to that which has a tendency to be injurious to the public or
against the public good.
As the courts can decide whether a particular type of agreement could
be considered to be opposed to public policy the judiciary can invent
new heads of public policy considering the economic and social
conditions prevailing in India. Public Policy is an elastic term and its
connotations may vary with the social structure of the state.
Agreements which are held void on the ground that the consideration or
object is opposed to public policy are as follows:
i) Trading with enemy: An agreement entered into with an enemy
countrys citizen is against public policy. Because such an agreement if
performed would benefit an enemy country or injure the State in its
relations with other States. The term alien enemy means a person
resident in the enemy country or the enemy-occupied territory. Even
temporary residence is sufficient.
ii) Stifling prosecution: An agreement which seeks to absolve an
offender of the criminal liability either by promising not to prosecute him
for his offence or withdraw a criminal case pending against him is known
as an agreement to stifle prosecution. Such an agreement is unlawful as
opposed to public policy. This principle of law was established in 1866.
iii) Maintenance and champerty: Maintenance refers to an agreement
seeking to provide assistance financial or otherwise to bring or defend
a lawsuit. Champerty refers to the agreement for sharing the benefit to
be derived from the lawsuit. The object of maintenance is to encourage
speculative litigation whereas the object of champerty is to share the
proceeds of the litigation. Under English law the agreements of this kind
are illegal and void. However, it is not so in India. In order to be
unlawful, they must be against public policy. Thus an agreement to
render professional service with a bona-fide object of assisting a claim
which is just, although made by way of maintenance is valid. But if it is
made by way of champerty (i.e., making the remuneration dependent to
any extent whatsoever upon the result of the suit) it is void.
iv) Interference with the course of justice: Agreements for using
improper influence of any kind with judges or officials of court, to bribe
witnesses, inducing them to give false evidence etc. are opposed to
public policy. Thus, any agreement intended to obstruct or prevent legal
process or interfere in any manner the course of justice, is void.
v) Trafficking in public offices: These agreements interfere with free
exercise of governmental functions. They include agreements to
influence public officers by promising illegal gratification, to provide
money to the members of parliament for presenting his convictions on a
certain legislation, sale of public offices etc.
vi) Marriage brokerage contracts: Society desires to prevent reckless or
unsuitable marriages. So third parties are not allowed to make money
by bringing about matrimonial unions. Such agreements to pay money
to one who brings marriage connections are void.
vii) Agreements in restraint of trade: Every agreement by which any one
is restrained from exercising a lawful profession, trade or business of
any kind is void. However, an agreement in restraint of trade is valid in
the following cases: sale of goodwill, partners agreements, trade
combinations, negative stipulations in service agreements.
viii) Agreements tending to create an interest against duty: If an
agreement entered into by or with a public servant imposes an
obligation upon such person to do something which is inconsistent with
his duty (official) then it is void as being opposed to public policy.
ix) Agreements intefering with parental duties: Agreements tending to
transfer absolutely the rights of parents over their children as to their
custody, education and religious training are void as being opposed to
public policy. Father being the natural guardian can entrust the custody
of his children to others. But this is revokable.
x) Agreements restraining personal liberty: An agreement which unduly
restrains the liberty of an individual is void.
1.10 Summary
The Indian Contract Act lays down the law relating to contracts.
An agreement enforceable by law is a contract.
To make a contract, there must be (I) an agreement and (ii) the
agreement should be enforceable by law.
All contracts are agreements but all agreements need not be
contracts.
The object or purpose of an agreement must be lawful.
An agreement not enforceable by law is said to be void.
An agreement which is enforceable by law at the option of one or more
of the parties thereto but not at the option of the other or others is a
voidable contract.
A void agreement is a nullity in the eyes of law creating no legal rights
or obligations.
Under Indian Companies Act, the Memorandum of Association and
Articles of Association must be registered.
The person making the proposal is called promisor and the person
A contract is valid only if it is not caused by coercion, undue influence,
misrepresentation, fraud or mistake.
The object or purpose of an agreement must be lawful.
An agreement which is enforceable by law at the option of one or more
of the parties thereto but not at the option of the other or others is a
voidable contract.
An offer should be made with an intention of creating a legal obligation.
An offer must be communicated to the offeree.
An offer should not contain any term the non-compliance of which
amounts to acceptance.
An acceptance turns the offer into a binding obligation.
One of the essentials of a valid contract is free consen.
Two or more persons are said to consent where they agree upon the
thing in the same sense.
Coercion is the committing or threatening to commit any act forbidden
by the Indian Penal Code or the unlawful detaining or threatening to
detain any property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement.
Undue influence refers to the unconscious use of power over another
person, such power being obtained by virtue of a present or previously
existing dominating control arising out of relationship between the
parties.
A false statement made knowingly or without belief in its truth or
recklessly careless whether it be true or false is called fraud.
Before entering into a contract, the parties will make certain statements
inducing the contract. Such statements are called representation.
Blackstone defined consideration as the recompense given by the
party contracting to the other.
Self Assessment Questions II
1. A/An can be accepted only by the person to whom it is
made.
2. An ..must be provoked by offer.
3. An acceptance must be given before .
4. A/An is defined as Every promise and every set of
promises forming consideration for each other.
5. An agreement void from the beginning is known as ..
6. An agreement is illegal when it is.
7. A proposal, when accepted, becomes a..
1.11 Terminal Questions
1. Define contract and explain its essentials.
2. Distinguish between Coercion and Undue influence.
3. No consideration, No contract. Explain.
4. Explain the essentials of offer.
5. Explain the essentials of acceptance.
1.12 Answers to SAQs and TQs
SAQs I
1. False
2. 2- False
3. True
4. True
SAQs II
1. Offer
2. Acceptance
3. The offer lapses or is revoked
4. Agreement
5. Void ab initio
6. Against the law of the land
7. Promise
Answers to TQs:
1. Refer to 1.2
2. Refer to 1.6
3. Refer to 1.7
4. Refer to 1.3
5. Refer to 1.4

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