Law of contracts
Image Source - https://rb.gy/wl2ew1

Table of Contents

Agreement and contract

Contracts have always been an indispensable part of our lives. Knowingly or unknowingly, we enter into a contract hundreds of times in a year. Even when we buy candy, we are entering into an agreement with the shopkeeper. Every time we visit a restaurant or book a cab, we are entering into a contract. Although the law of contract is developing with time, the jurisprudence of contract remains the same. We know what a contract is all about but new situations arise every day and a new question appears in the mind of whether this particular agreement should be regarded as a contract or not!

One of the common perplexities among people is recognizing the difference between a contract and an agreement. They are frequently used interchangeably. For example, when the owner of a house hands over the rent agreement and says, “Please sign the contract”, this creates uncertainty whether the document is an agreement or a contract.

We come across ‘contract killers’ in movies who charge money to kill people. Have you ever thought, ‘Is a contract of killing someone for money, a valid contract?’ or ‘Can the man giving the contract sue the contract killer in the court of law saying that the other party has committed a breach of contract by not doing the job even after the payment of money?’.

An agreement (Section 2(e)) 

An Agreement is a promise between two entities creating mutual obligations by law. Section 2(e) of the Indian Contract Act, 1872 defines an agreement as ‘Every promise and every set of promises, forming the consideration for each other, is an agreement’.

To form an agreement, the following ingredients are required:

  • Parties: There need to be two or more parties to form an agreement.
  • Offer/ Proposal: When a person signifies to another his willingness of doing or omitting to do something with a view to obtain other’s assent. [Section 2(a)]
  • Acceptance: When the person to whom the proposal is made signifies his assent for the same thing in the same sense as proposed by the offeror. [Section 2(b)]
  • Promise: When a proposal is accepted, it becomes a promise. [Section 2(b)]
  • Consideration: It is the price for the promise. It is the return one gets for his act or omission. [Section 2(d)]

An agreement is, therefore, a promise or set of promises forming consideration for all the parties. [Section 2(e)]

Agreement = Promise or set of promises (offer + acceptance) + Consideration (for all the parties)

If a 7-year-old boy is buying an ice-cream from an ice-cream vendor and giving Rs. 10 in return, it becomes an agreement. This is because the boy offers to buy ice-cream and the vendor accepts the offer which makes it a promise. The consideration for both was ice-cream and money respectively.

The agreement should not expressly be declared to be void

There are certain kinds of contracts which are expressly declared by The Indian Contract Act, 1872 to be null and void. The following are some of the agreements which are not enforceable in the eyes of law:

  • Agreements without consideration except it is written and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law.
  • Agreements in restraint of marriage
  • Agreements in restraint of trade
  • Agreements in restraint of legal proceedings
  • Agreements void for uncertainty
  • Agreements by way of wager
  • Agreements contingent on an impossible event
  • Agreements to do impossible act

Those agreements are void which are based on any of the subjects mentioned above. There is no liability for not enforcing the contract and thus, the conditions of the contract are not binding upon any of the parties.

For example, if Devdas asks Paro not to get married for her entire life then he will give her a new dress and shoes in return; it cannot be considered as a valid contract because the agreement is made in restraint of marriage.

Similarly, if the agreement is made to not to work for the entire life in exchange for a new flat, it will not be considered as a valid contract as it is in restraint of trade.

Also, if a father enters into an agreement with his son that the father will get him a new bicycle if the son scores 105% in his board exams. It will be considered a void agreement because it is an agreement to do an impossible act.

The above-mentioned conditions are required to be fulfilled in order to make an agreement legally enforceable. The agreement becomes void if any of the mentioned conditions are left unfulfilled except in the case of free consent where the agreement becomes voidable instead of void and giving the party, whose consent was not free at the time of entering into the contract, the discretion to continue the contract or not.

Contract (Section 2(h))

A contract is a lawful agreement. In other words, an agreement enforceable by law is a contract.

Contract = Agreement + Legal enforceability

                            Or

Contract = Legally enforceable Agreement

A type of agreement which is enforceable by law is a contract (Section 2(h) of the ICA). Enforceable by law means that, if somebody is aggrieved then he may approach the court for remedies. For example: In case of a Fire Insurance Contract where Titu wants to insure his goods in the warehouse, he pays the insurance premium and promises to avoid insurance fraud whereas the insurance company agrees to compensate losses in case of a fire. 

So Mathematically, 

Agreement + Enforceable by Law = Contract

When an offer is made with the intention to create a legal obligation it becomes an offer for entering into a contract. Thus an agreement becomes a contract when there is free consent of the parties, capacity of the parties to contract, lawful consideration and lawful object or subject matter (Section 10 of the ICA).

For an agreement to become a contract it must give rise to a legal obligation and if it is incapable of doing so, it is not a contract. In the case of Balfour v Balfour [1919] 2 KB 571, Mr. Balfour promised to pay his wife £30/month as she stayed in England for medical reasons. When he failed to pay, Mrs. Balfour sued him. Her action failed because there was no intention to create a legally binding agreement between Mr. and Mrs. Balfour. A contract cannot be made without proper indication about the legal rights and obligations of the parties to the contract. So, if this were to be a contract then the wife would have had a right to receive payment and the husband would have had the obligation to pay his wife.

This makes an agreement a wider term than a contract. In a Venn diagram, agreements are a bigger circle than contracts which is a smaller circle and a part of it.

So, an agreement is a contract when:

  1. Free consent of the parties: When there is absence of Coercion (Section 15), Undue Influence (Section 16), Fraud (Section 17), Misrepresentation (Section 18) and Mistake (Section 20, 21, 22), the consent is said to be free.  
  2. Capacity of the parties to contract: Section 11 and 12 lay down that the competent parties are persons who have attained majority {Exception for this was laid down in Mohori Bibee v. Dharmodas Ghose  ILR (1903) 30 Cal 539 (Pc)}, persons who are of sound mind and persons who are not disqualified by law.
  3. Lawful consideration and Lawful object: Section 23 lays down that the consideration and object is lawful unless it is forbidden by law or it defeats provisions of any law or is fraudulent or involves injury to person or property or is violative of public health, morality, peace and order. 

Let us look at some examples where agreements are not contracts: 

  1. Gabbar asked Samba to kill Jay and Veeru and Samba agreed. This is an agreement but the object of the agreement makes it an illegal one. Therefore, it cannot be enforced and so it is not a contract. 
  2. Rajesh promises his wife Chitra that he will bring for her the stars and the moon and Sonam agrees. Here, the object of the agreement is impossible to perform and so it is not enforceable and cannot be termed as a contract.    
  3. A mother promises her crying child that she will buy a Barbie doll for her but she does not buy it. Here, the promise was not made with the intention to fulfil it and so it is not enforceable and cannot be termed as a contract.    
  4. I offer my pen to Neelam and she accepts it, here an agreement is made but such agreement is made out of friendship and has no consideration. An agreement without consideration is not a contract (an exception to this is Section 25 of the ICA which states that near relation and natural love and affection can be said to be consideration).

Types of contract

There are various types of contracts that are formed voluntarily via civil obligations. They are as follows:

(I) Adhesion Contracts – These types of contracts are those which are formed by the stronger party. It is a sort of, “Opt for it or do not” contract. The stronger party or the one that has the bargaining power leaves the other party with a choice whether to accept or reject the contract.

(II) Aleatory Contracts – This type of contract involves a mutual agreement that comes into being after an unexpected occurrence, accident, or a natural calamity. In this type of contract both the parties have an element of risk. Fire or Car insurances are this type of contract.

(III) Bilateral and Unilateral Contracts – Bilateral contracts involve two parties. Both parties are obliged to one another for performing or abstaining to perform any act. It is also called a two-sided contract as it involves two way promises. Meanwhile, unilateral contracts are those in which the promise is made by only one party. They consist of an offeror and offeree. The offeror makes a promise to perform an action and is bound by the law to do so. The offeree is not bound to the court even if he fails to execute the requested action because he does not promise anything at all.

(IV) Express Contracts – These contracts are those wherein the terms of the contracts are expressed clearly whether in written documents or orally.

(V) Implied Contracts – There are no oral or written terms in this type of contract. The contracts are assumed owing to the facts of the parties. If an individual visits a medical professional, he expects to be diagnosed for a disease or illness and be advised a cure. This is an implied contract and a patient is capable of suing a medical practitioner for malpractice.

(VI) Void and Voidable Contracts – Void contracts are illegal from the very beginning and hold no validity under law. They are thereby un-enforceable. Voidable contracts are unlike void contracts in the sense that one party is bound by the contract and the unbound party is capable of terminating the contract as they are unbound to it.

A quasi-contract is unlike a real contract. Salmond defines quasi contracts as “there are certain obligations which are not in truth contractual in the sense of resting on agreement, but which the law treats as if they were”. It is important to remember that even though it is imposed by law, it is not created by the operation of the contract.

What are the key differences between agreements and contracts?

Basis for Comparison

Agreement

Contract

Meaning

An agreement is made when a proposal by one party is accepted by another lawful consideration.

A contract is made when an agreement becomes enforceable by law.

Elements

Offer and Acceptance

Agreement and Enforceability under law

Defined in

Section 2(e)

Section 2(h)

In writing

Not necessarily

Usually written and registered

Legal obligation

There is no legal obligation as long as it is a mere agreement.

Once the agreement becomes a contract, there is a legal obligation by parties involved.

Scope

Wide

Narrow

Offer and acceptance

Offer/proposal (Section 2(a)) 

  • The entire process of entering into a contract begins with the proposal or an offer made by one party to another. The proposal must be accepted to enter into an agreement.
  • According to the Indian Contract Act 1872, proposal is defined in Section 2(a)  as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.”

Features of a valid offer

The person making the offer/proposal is referred to as the “promiser” or the “offeror”. And the person who accepts an offer is referred to as “promisee” or the “acceptor”.

  • The offeror must express his willingness to do or abstain from doing an act. Only willingness is not adequate. Or just an urge to do something or not to do anything will not be an offer.
  • An offer can either be positive or negative. It can be a promise to do some act, and can also be a promise to abstain from doing any act/service. Both are valid offers.

The element of a valid offer

Here are some essentials which make the offer valid:

There must be two parties 

There have to be at least two parties: a person making the proposal and the other person agreeing to it. All the persons are included i.e, Legal persons as well as artificial persons.

Every proposal must be communicated

Communication of the proposal is mandatory. An offer is valid if it is conveyed to the offeree. The communication can either be expressed or implied. It can be communicated by terms such as word of mouth, messenger, telegram, etc. Section 4 of the Indian Contract Act says that the communication of a proposal is complete when it comes to the awareness of the person to whom it is made.

Example

‘A’ proposes to sell a car to ‘B’ at a certain price. Once ‘B’ receives the letter, the proposal communication is complete.

It must create legal relations

An offer must be such that when accepted it will result in a valid contract. A mere social invitation cannot be regarded as an offer, because if such an invitation is accepted it will not give rise to any legal relationship.

Example

‘A’ invited ‘B’ to dinner and ‘B’ accepted the invitation. It is a mere social invitation. And ‘A’ will not be liable if he fails to provide dinner to B.

It must be certain and definite

The terms of the offer must be certain and clear in order to create a valid contract, it must not be ambiguous.

It may be specific or general

 The specific offer is an offer that is accepted by any specific or particular person or by any group to whom it is made. Whereas, The general offers are accepted by any person.

Classification of offer

An offer can be of many types, ranging across the spectrum. There are basically 7 kinds of offers:

  • Express offer  
  • Implied offer 
  • General offer 
  • Specific Offer 
  • Cross Offer 
  • Counter Offer 
  • Standing Offer 

Express offer and implied offer (Section 9)

Section 9 of The ICA defines both of them as: In so far as the proposal or acceptance of any promise is made in words, the promise is said to be expressed. In so far as such a proposal or acceptance is made otherwise than in words, the promise is said to be implied.

Therefore, any offer that is made with words, it may be regarded as express. Any promise that is made otherwise than in words is implied. A bid at an auction is an example of an Implied offer. A case in this regard is Upton-on-Severn RDC v. Powell, wherein the defendant called a fire brigade assuming that those services would be free to him, however it was found that his Farm did not come under that of Upton. The court held that the truth of the matter is that the Defendant wanted the services of Upton, he asked for the services of Upton and in response to that they offered their services and they were rendered on an implied promise to pay for them.

In Ramji Dayawala & Sons (p) Ltd v. Invest Import, a case between an Indian and Yugoslavian party the notice for revocation of an arbitration clause in the contract between the parties was made by the Indian party, to which the other party gave no reply. It was held that this would amount to an implied acceptance i.e.- the arbitration clause was deleted from the contract, and a suit would lie in the court of law.  Similarly entering into an omnibus also amounts to implied acceptance, same as consuming edibles at a self-service restaurant. Therefore in simpler terms a contract that is entered into because of actions on the offerors part, may be referred to as an implied offer, any contract entered into otherwise is an express offer.

General offer

A General Offer is an offer that is made to the world at large. The genesis of a General Offer came about from the Landmark case of Carlill v. Carbolic Smoke Ball Co. A company by the name Carbolic Smoke Ball offered through an Advertisement to pay 100 Pounds to anyone who would contract increasing epidemic Influenza, colds or any disease caused by cold after taking its Medicine according to the prescribed instructions. It was also added that 1000 Pounds have been deposited in Alliance bank showing our sincerity in the matter. One customer Mrs Carlill used the medicine and still contracted Influenza and hence sued the company for the reward. The Defendants gave the argument that the offer was not made with an intention to enter into a legally binding agreement, rather was only to Puff the sales of the company. Moreover, they also contended that an offer needs to be made to a specific person, and here the offer was not to any specific person and hence they are not obliged to the Plaintiff. 

Setting aside the arguments of the Defendant, the bench stated that in cases of such offers i.e- general offers, there is no need for communication of acceptance, anyone who performs the conditions of the contract is said to have communicated his/her acceptance, and moreover, the money deposited by the Defendant in Alliance Bank clearly shows that they intended to create a legally binding relationship. Hence the Plaintiff was awarded with the amount. An Indian authority in this regard is Lalman Shukla v. Gauri Dutt, wherein a servant was sent by his master to trace his missing nephew. In the meanwhile, he also announced a reward for anyone finding his nephew, this in itself is an example of an offer that is made to the world at large and hence a General Offer.

Valid acceptance based on fulfillment of condition

This concept has been given statutory authority under section 8 of the ICA:

Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. 

This section was applied by YEARS CJ of Allahabad high court in the case of Har Bhajan Lal v. Har Charan Lal, wherein the father of a young boy who ran from home issued a pamphlet for a reward for anyone who would find him. The Plaintiff found him at the railway station and sent a Telegram to his father. The Court held that the handbill was an offer that was made to the world at large and anyone who fulfilled the conditions is deemed to have accepted it. In the State of Bihar v. Bengal Chemical and Pharmaceutical Works LTD, the Patna HC held that where the acceptance consists of an act, e.g- dispatching some goods, the rule that there shall be no communication of acceptance will come into play. 

General offer of continuing nature

When a general offer is of continuing nature, like it was in a carbolic smoke ball case, it can be accepted by a number of people till it is retracted. However, when a similar offer requires information regarding a missing thing, it is closed as soon as the first information comes in. 

Specific offer

A Specific offer is an offer that is made to a specific or ascertained person, this type of offer can only be accepted by the person to whom it is made. This concept was seen briefly in the case of Boulton v. Jones, wherein the Plaintiff had taken the business of one Brocklehurst, the defendant used to have business with Brocklehurst and not knowing about the change in ownership of business, sent him an order for certain goods. The Defendant came to know about the change only after receiving an invoice, at which point he had already consumed the goods. The Defendant refused to pay the price, as he had a set off against the original owner, for which the plaintiff sued him.

The Judges gave a unanimous judgement holding the defendant not liable. Pollock CB held that the rule of law is clear, if you intend to contract with A, B cannot substitute himself as A without your consent and to your disadvantage. It was also held that whenever a person makes a contract with a specific personality, a specific party, so to say, for writing a book, for painting a picture or for any personal service or if there is any set off due from any party, no one has the authority to come in and maintain that he is the party contracted with. 

Cross offer

When two parties make an identical offer to each other, in ignorance to each other’s offer, they are said to make cross offers. Cross offers are not valid offers. For example- if A makes an offer to sell his car for 7 lakhs to B and B in ignorance of that makes an offer to buy the same car for 7 Lakhs, they are said to make a cross offer, and there is no acceptance in this case, hence it cannot be a mutual acceptance. 

Basic essentials of a cross offer 

  1. Same offer to one another- When the offeror makes an offer to the offeree and the offeree without prior knowledge makes the same offer to the offeror, then both the object and the party remain the same.
  2. Offer must be made in ignorance of each other- The two parties must make their offer in ignorance of each other.

An important case in this aspect is the English case of Tinn v. Hoffman, the defendant wrote to the complainant an offer to sell him 800 tons of iron at 69s per ton, at the same time the complainant also wrote to the defendant an offer to buy the iron at similar terms. The issue in this case was that, was there any contract between the parties, and would simultaneous offers be a valid acceptance. The court held that these were cross offers that were made simultaneously without knowledge of one another and would not bind the parties. 

Here it is imperative to deduce that for a valid contract to be formed there needs to be an offer and acceptance of the same, whereas in a cross offer there is no acceptance, but only simultaneous offers being and therefore a cross offer will not lead to the formation of a contract. 

Counter offer

When the offeree offers a qualified acceptance of the offer subject to modifications and variations in terms of the original offer, he is said to have made a counter offer. A counter offer is a rejection of the original offer. An example of this would be if A offers B a car for 10 Lakhs, B agrees to buy for 8 Lakhs, this amounts to a counter offer and it would mean a rejection of the original offer. Later on, if B agrees to buy for 10 Lakhs, A may refuse. Sir Jenkins CJ in Haji Mohd Haji Jiva v. Spinner, held that any departure from original offer vitiates acceptance. In other words, an acceptance with a variation is not acceptance, it is simply a counter proposal which must be accepted by the original offeror, for it to formulate into a contract.

The Bombay High court gave this decision based upon the landmark judgement of Hyde v. Wrench, in which an offer to sell a farm for 1000 Pounds was rejected by the Plaintiff, who offered 950 for it. Subsequently the Plaintiff gave an acceptance to the original offer. Holding that the Defendant was not bound by a contract, the court said that the Plaintiff accepted the original offer of buying the farm at the price of 1000 pounds, it would have been a completely valid contract , however he gave a counter proposal to it, thus rejecting the original offer. 

Partial acceptance

Counter offer also includes within its contours Partial acceptance, meaning that a party to the contract cannot agree to those conditions of the agreement that favour him and reject the rest, the acceptance should be of the complete agreement i.e.- all its parts. In Ramanbhai M. Nilkanth v. Ghashiram Ladli Prasad, the plaintiff made an application for certain shares in a company with the underlying condition that he would be made the cashier in its new branch. The Company did not comply with this and hence the suit. The court held that the Petitioners application for shares was condition on him being made the cashier and that he would have never applied for the shares had there been no such condition. 

Acceptance of a counter proposal

In Hargopal v. People’s Bank of Northern India LTD, an application for shares was made on a conditional undertaking by the bank that the applicant would be made the director of the new branch. The shares were allotted to him without fulfilling the condition. The applicant did not say anything and took his dividends, a subsequent suit by him failed as the court held that he through his conduct had waived the condition. When a counter proposal is accepted the contract arises in terms of the counter proposal and not in terms of the original contract.  

Standing offer 

An Offer which remains open for acceptance over a period of time is called a standing offer. Tenders that are invited for supply of goods is a kind of Standing Offer. In Percival Ltd. V. London County Council Asylums and Mental deficiency Committee, the Plaintiff advertised for tenders for supply of goods. The defendant took the tender in which he had to supply to the company various special articles for a period of 12 months. In-between this the Defendant didn’t supply for a particular consignment. The Court held that the Tender was a standing offer that was to be converted into a series of contracts by the subsequent acts of the company and that an order prevented the possibility of revocation, hence the company succeeded in an action for breach of contract. 

Difference between an offer and Invitation to offer 

Although Invitation to Offer is not a type of offer per se, it is imperative to distinguish both to even construe what an actual offer is. An invitation to offer is an offer to negotiate, an offer to receive offers, offers to chauffeur. An offer is a final expression of willingness to get into a contract upon those following terms. The concept of Invitation to offer was explained in the Privy Council case of Harvey v. Facey, the Plaintiffs in this asked two questions from the defendant i.e.- Would you sell me your Bumper Hall pen , telegram me the lowest price? , the Defendant only gave the answer to the latter question , post which he refused to sell. The Court held that the defendant was not to sell as he had only answered the second question and reserved the same for his first question. Thus, this clearly shows the distinction between an offer and invitation to offer.

In Adikanda Biswal v. Bhubaneswar Development Authority, when a development authority made an announcement for allotment of plots on first come first serve basis on payment of full consideration. An application against this with full consideration was only considered to be an offer, as the Development authority only gave an invitation to offer, and the offer can only be formalized into a contract when it is accepted by the development authority. 

Rules regarding display of goods in shops 

In Pharmaceutical Society of Great Britain v. Boots Cash Chemists Southern Ltd., lord GODDARD CJ, said that it would be wrong to say that a shopkeeper intends to sell everything that is displayed in his shop. Meaning that the customer makes an offer, to which the shopkeeper has the discretion to accept or deny. The shopkeeper may say that he doesn’t have enough stock of that good and therefore may not sell. Similarly, a bankers catalogue of charges is also not an offer, the auction held by a person is also only an invitation to offer and he may not be liable for the transportation costs that people may have to pay to come to the place of auction, in case he cancels at the end moment.

Difference between general offer and specific offer

        General Offer

        Specific Offer

General Offer is made to the whole world at large.

A specific Offer is made to some specific person.

A general offer can be considered by any person.

A specific offer can be accepted by only a specific person.

Lapses and revocation of an offer 

  • An offer lapses after a defined or reasonable time.
  • An offer lapse by not being accepted in the specified mode
  • An offer lapses by rejection. 
  • An offer lapses by the offeror or the offeror’s death or insanity until acceptance.
  • An offer lapses by revocation before acceptance.
  • An offer lapses by subsequent illegality or destruction of the subject matter.

When communication is complete

  • Communication of offer (section 4)

The communication of the offer is complete when it comes to the knowledge of the person to whom it is made.

Time of revocation of an offer

  • Revocation of the offer (Section 4)

A proposal can be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterward.

Revocation of the offer by the offeror

The offeror can withdraw his offer before it is accepted “the bidder can withdraw (revoke) his offer at an auction sale before being accepted by any auctioneer using any of the customary methods.

Example

‘A’ agreed to sell the property to ‘B’ by a written document which stated “this offer to be left over until Friday 9 AM”. on Thursday ‘A’ made a contract to sell the property to ‘C’. ‘B’ heard of this from ‘X’ and on Friday 7 AM he delivered to ‘A’ acceptance of his offer. Held ‘B’ could not accept A’s offer after he knew it had been revoked by the sale of the property to C. 

Acceptance (Section 2(b))

The Indian Contract Act 1872 defines acceptance in Section 2 (b) as “When the person to whom the proposal is made signifies his assent thereto, the offer is said to be accepted. Thus the proposal when accepted becomes a promise.” An offer can be revoked before it is accepted.

As specified in the definition, if the offer is accepted unconditionally by the offeree to whom the request is made, it will amount to acceptance. When the offer is accepted it becomes a promise.

Example

‘A’ offer to buy B’s house for rupees 40 lacs and ‘B’ accepts such an offer. Now, it has become a promise.

When an offer is accepted and it becomes a promise it also becomes irrevocable. No legal obligation created by an offer.

Mode of acceptance

Under the Indian Contract Act, acceptance can be by following two ways:

  • Implied acceptance: Acceptance which is not explicitly made by means of speech or writing but, by the conduct of the person to whom an offer is made. The striking of hammer thrice by the auctioneer in order to show his acceptance to the offer made by a bidder is an example of implied acceptance to the offer made by the bidder at an auction to the auctioneer;
  • Express acceptance: Acceptance which is made by means of words, oral or written is known as an express acceptance. For example, A offers B his watch for sale through a mail and A replies in positive to the offer by email.

Acceptance: absolute and unqualified (Section 7)

Acceptance to be legally enforceable must be absolute and unqualified. Section 7(1) of the Indian Contract Act provides that in order to turn an offer into an agreement the acceptance to the offer must be absolute and unqualified. The logic behind the principle that the acceptance to the offer must be absolute and unqualified is that when acceptance is not absolute and is qualified it results into a counter offer which leads to the rejection of the original offer made by the offeror to the offeree. If the offeree makes any variations in the original terms of the contract proposed to him and then accepts the contract, such an acceptance would result in the invalidity of the contract.

For example, if A offers to sell his bike to B for Rupees 10,000. But B persuades A to sell him the bike for 7,000 rupees to which A denies and if B at any later point of time agrees to buy the bike for 10,000 rupees. Then A is under no obligations to sell him the bike as the counteroffer made by B puts an end to the original offer.

It is also important that the acceptance made by the offeree should be in toto, i.e. acceptance should be given to all the terms and conditions of the offer as acceptance of only a part of the offer is not a good acceptance under the law. For example, A makes an offer to B of sale of 30 kg of wheat at Rupees 700 but B agrees to buy only 10 kg of wheat. Here the acceptance made by B is not in toto with respect to the terms of the contract and therefore, the acceptance made by B is no acceptance in the eyes of law and therefore, A is under no obligation to sell him wheat since there is no contract between them.

Legal rules and conditions for acceptance

  • Acceptance must be absolute and unqualified 

The offeree’s approval cannot be conditional. For example, ‘A’ wants to sell her car to ‘B’ for Rs 2 lakh, ‘B’ can’t come back and says that she accepts the offer but will buy the same for Rs. 1 lakh.

  • Acceptance must be told to the offeror

If the acceptor just accepts the offer in his head and he does not mention the same to the offeror, it can not be called an Acceptance, whether in an express manner or an implied manner.

  • Acceptance must be recommended in the following mode

Acceptance is sometimes required in a prescribed/specified communication mode.

  • In a reasonable amount of time, the acceptance is given

It’s very rare that an offer is always to get acceptance at any time and at all times. Therefore, the offer defines a time limit. If it does not, it should not be acknowledged forever.

Mere silence is not acceptance

If the offeree fails to respond to an offer made to him, his silence can not be confused with acceptance. But, there is an exception to this rule. It is stated that, within 3 weeks of the date on which the offer is made, the non-acceptance shall be communicated to the offeror. Otherwise, the silence shall be communicated as acceptance.

When communication is complete

  • Communication of acceptance (Section 4)

Communication of acceptance is complete when it is put in the course of transmission to him as to be out of the power of the acceptor to withdraw the same and when it comes to the knowledge of the proposer.

Time of revocation of acceptance

An acceptance may be revoked at any time, but not afterward, before the communication of the acceptance is complete as against the acceptor.

Acceptance with subsequent condition

In the law of contract, the term “condition” is used in a loose sense and it is used synonymously as “terms”, ‘’condition” or ”clause”. In its proper sense, the term condition means some operative term subsequent to acceptance and prior to acceptance, it is a fact on which the rights and duties of the parties to the contract depend on. The fact can be any act or omission by any of the contracting parties, an act of the third party or happening or not happening of any natural event. Conditions are of three types, which are as follows:

  • Express condition: In an express condition, certain facts can operate as condition as it has been expressly agreed upon by the parties to the contract;
  • Implied condition: When certain facts which operate as a condition are not expressly mentioned by the parties but can be inferred by the conduct of the parties to contract is known as an implied condition;
  • Constructive condition: When the court believes that the parties to a contract must have intended to operate certain conditions because the court believes that the Justice requires the presence of the condition. These conditions are known as constructive conditions.  

A contract comes into force by the acts or conduct of one party to the other party. The acts or conduct of the party can be turned into a promise only by meeting of mind or an agreement between both the parties. An acceptance that carries a subsequent condition may not have the effect of counter-proposal. Thus, where a person ‘A’ accepted the terms of the contract for the sale of a good by accompanying the acceptance with the warning that if money was not delivered to him by a particular date, then the contract will remain repudiated. The acceptance of the offer would not be deemed to be a counter-proposal.

Acceptance of counter proposals

In certain cases, the person whose proposal or offer has not been accepted absolutely or unqualifiedly by the offeree as the offeree attaches a counter-proposal to the original proposal, the offeror becomes bound by the counter-proposal. If, by the conduct of the offeror, he indicates that he has accepted the terms of the counter-proposal laid down by the offeree.

In the case of Hargopal v. People’s Bank of Northern India Ltd., an application for shares was made with a conditional undertaking by the bank that the applicant would be appointed as a permanent director of the local branch. The shares were allotted to the applicant by the Bank without fulfilment of the condition and the applicant was given his shares and the applicant accepted the same without any protest regarding the non-fulfilment of the terms of the contract. When there arose a dispute between the parties in a court of law. The applicant contended that the allotment was void on the ground of non-fulfilment of the conditions which were stipulated in the original contract. The court rejected the contention from the applicant’s side by holding that the same can not be pleaded by him as he has waived the condition by his conduct.

In Bismi Abdullah and sons v. FCI, the court held that where tenders were invited subject to the deposit of money. It was open to the tenderers to waive the requirement and acceptance given to a tender without making the deposit is binding upon the tenderer. 

In D.S. Constructions Ltd v. Rites Ltd, the court held the where the tenderer made variations to the terms of his tender within the permissible period, but the variations were only partly accepted by the other side without the tenderer’s consent lead to repudiation of the contract and so there was no contract at all. Therefore, the earnest money deposited by the party can not be forfeited.

Provisional acceptance

Provisional acceptance is the type of acceptance by the offeree which is made subject to the final approval. A provisional acceptance does not ordinarily bind either party to the contract until the final approval is given to the provisional acceptance made by the offeree. Until the approval is given, the offeror is at liberty to cancel the offer made to the offeree.

In Union of India v. S. Narain Singh, the High Court of Punjab held that where the condition attached to the auction sale of the liquor was that the acceptance of the bid shall be subject to confirmation by the Chief Commissioner. The contract will not be complete till the highest bid is confirmed by the Chief Commissioner and till the confirmation is made the person whose bid is provisionally accepted is at liberty to withdraw the bid.

Similarly, in Mackenzie Lyall And Co. vs. Chamroo Singh And Co., the bid at an auction was of provisional acceptance in nature ad the terms of the contract stated that the bid shall be referred to the owner of the goods for his approval and sanction.the court in this case also, allowed the person to revoke his bid whose bid was provisionally accepted.

In Somasundaram Pillai vs. The Provincial Government Of Madras, the court held that the bidder would be at liberty to withdraw his will prior to the final approval of the provisional acceptance where the terms of the contract expressly mention that a bid which has been provisionally accepted can not be canceled subsequently.

When a provisional acceptance is subsequently ratified or accepted then it is the duty of the offeree to inform the same to the offeror, as it is then when the offeror becomes bound by the terms of the contract. Acceptance is not complete until it is communicated by the offeror.

Acceptance and withdrawal of tenders

A Tender is a legal offer or proposal to do or abstain from doing an act and it binds the party to performance to the party to whom the offer is made. A tender can be made with respect to money or specific articles. If the tender is not an offer then it falls in the same category as a quotation of price. When the tender is accepted it becomes a standing offer. A contract can arise only when an offer is made on the basis of the tender.

In Bengal Coal Co. v. Homee Wadia & Co., the defendant signed an agreement. One of the terms of the contract was that the undersigned from the day of signing the contract has to abide by the condition stipulated by the contract which provides that they shall be required to provide a certain quality of coal to the other party for a period of 12 months. The defendant abided by the terms of the contract for some time but before the expiry of the term of the contract, the defendants refused to comply with the conditions which were stipulated under the contract. The plaintiff subsequently sued the defendant for breach of contract. The court held that there was no contract between the parties and the terms stipulated thereof were just the part of a standing offer and the successive orders given by the plaintiff was an acceptance of the offers of the quantity offered by the defendant and therefore the order given by the plaintiff and the offer of the defendant together constituted a series of contract. The defendants, in this case, are not free to revoke the offers which were actually given by them. But barring those offers aside, the defendants had the complete power of revocation.

In Rajasthan State Electricity Board vs. Dayal Wood Work, the purchase orders were issued in terms of an arrangement of supply. But the purchase offer itself contained the provision that the tenderer can refuse to supply the goods. The court, in this case, held that there was no concluded contract that came into force and therefore, the contractor was at liberty to refund his security deposit.

In a case where the tenderer has on some consideration promised not to withdraw the tender or where there is a statutory provision restraining the withdrawal of the tender, the tender becomes irrevocable. Just as the tenderer has the right to revoke his tender in the same way the acceptor of the tender also has the right to refuse to place any order.

In  Madho Ram vs. The Secretary Of State For India, the military authorities accepted a tender for the supply of certain goods but during the period of tender, no requisition was ever issued. In an action against the military authorities, the court held that the military authority was not bound whatsoever by the acceptance of their offer to purchase any or all the goods specified under the contract without any covenant to that issue. And so the party giving his assent to the offer may at any time declare to the tenderer that they no longer want to place an order for the purchase of goods.

Letter of intent to accept

A letter of intent to accept an offer is sometimes issued prior to the final acceptance of the offer. Letter of intent does not have any binding effect on any of the parties to the contract. In Dibakar Swain v. Cashew Development corp. The letter of acceptance issued by the company only indicated their intention to enter into the tender. The acceptance was not clearly reduced into writing. The court held that there was no binding contract entered into by the parties and no work order can be issued and so the amount which was deposited by the tenderer can not be forfeited.

Liability for failure to consider tender

If a valid tender is opened then it must be duly considered by the inviting authority because if the valid tender is not duly considered it would be unfair on the part of the tenderer. In Vijai Kumar Ajay Kumar v. Steel Authority Of India Limited, the court of appeal observed that in certain circumstances, the invitation to tender can give rise to the binding contractual obligation on the part of the person who invited the tenders who confirmed the conditions of the tender.

In A. K. Construction v. State of Jharkhand, the contract was awarded to a person who was not a qualified tenderer and he was chosen at the cost of a qualified tenderer who brought an action against the decision of granting the tender to the unqualified tenderer. The court, in this case, allowed the awardee of the tenderer to complete his work and also allowed the aggrieved party compensation of one lakh rupees to be recovered from the salary of the guilty officers who were guilty of awarding the tender unreasonably. 

Non-compliance with requirements

In Vijay Fire Protection Systems v. Visakhapatnam Port Trust And Anr., the authorities inviting the tender made it clear to the tenderers that only one brand of pump sets would be accepted. The authorities even gave the last minute opportunity to the tenderers to change the quotations. The tenderer to whom the tender for the supply of goods was given refuted to comply with the terms of the contract. Subsequently, the authorities who invited the tender cancelled the contract between them and the tenderer thereof. The court held that the decision made by the authorities was not arbitrary and they were having the right to do so.

In Kesulal Mehta vs. Rajasthan Tribal Areas, one of the conditions in the tender was that the tenderer should have at least one year of work experience in the work in question. The court, in this case, held that such conditions could be relaxed and any otherwise competent contractor could be given the tender and he could at a later point of time be required to produce the certificate of work.

In KM Pareeth Labha v. Kerala Livestock Development Board, it was held that where a tender invited the quotations for disposal of trees. The tender should mention the approximate value of the trees which could be assessed by the tenderers who can quote their price. 

Tender with concessional rate 

In Kanhaiya Lal Agrawal vs. Union Of India & Ors, in this case, tender offered firm rates, as well as concessional rate, provided the tender gets finalized within a shorter period of time than generally followed. The court held that it did not result in the formation of a conditional offer which hinges on the happening or non-happening of any event and the condition which was put forth was only meant for bringing about more expeditious acceptance.

Certainty of terms

An agreement regarding the sale of immovable property should identify the property with certainty. The agreement should be based on mutuality and should fix the price. In New Golden Bus Service vs. State Of Punjab And Ors., the tender was made inviting the tender for hiring services for the vehicle but it did not stipulate any time period. The lowest tenderer was awarded the tenderer for a period of three years. The court, in this case, held that there was nothing wrong in it as an open-ended tender can not be regarded as void because of the reason for its vagueness. The tender, in this case, specified that the tender can not be issued for a  vehicle that is more than six months old and the tenderer who was awarded the tender complies with the specified conditions specified under the tender. The acceptance of substitute vehicles which were of equal efficiency and cost by the authority inviting the tender was not arbitrary.

Preventing from tendering and blacklisting

In Utpal Mitra vs. The Chief Executive Officer, a bidder was prevented by some elements inside the office from submitting the tender. The authorities carried on the enquiry confirming the allegations. The person who was so ruled out from the tender was later on permitted to submit his tender after two intervening holidays and his tender was later on accepted. The court held that no prejudice was caused to the other tenderers as the work issued to them was not interfered with.

In Merittrac Services Private v. Post Graduate Institute, it was held that the provision of blacklisting a contractor arises only when the contract is awarded and the tenderer fails to perform any conditions stipulated in the contract. For the purpose of seeking permission for making his proposal, some material facts may be required from the bidder about his experience.

The party allocating the contracts has the indispensable power of blacklisting the contractor. But when in cases where the party is the state, the decision to blacklist is open to judicial review to ensure proportionality and principle of natural justice.

Consideration (Section 2(d))

Why do we need consideration

Only the promises that are backed by consideration are enforceable because any promise made without any obligation is usually very rash and without any sort of deliberation. The reason for making consideration an essential part of a contract is because it levies a sort of burden on the parties to fulfil the terms of the contract. For Example, if, A promises to give B a car without B doing or abstaining to do anything for it, makes the promise by an unenforceable. This will be a gift and not a contract per se.

Legal requirements as to consideration

  • Must move at the desire of the promisor- Section 2d of the Indian Contract Act, 1872, clearly mentions that the consideration should be at the desire of the promisor if the consideration is made at the will of the third person or is not according to the promisor then it is not a good consideration.
  • Can move from the promisee or another person- Unlike English law in which the consideration must move at the desire of the promisor, in Indian law as long as there is consideration it is immaterial as to who has furnished it. Moreover, in the case of Chinnaya vs. Rammyya the consideration can also move at the desire of the third party but only in the condition where he is the beneficiary of the contract. 
  • Can be an act, abstinence or even a promise- If the promisee does something or abstains from doing something for the promisor, at his desire, then it will be a good consideration.
  • Can be past, present or future:

PAST- When the consideration is given before the promise was made. For example- A saves B at the latter’s desire. B after a month promises to pay A. the act of A will amount to past consideration for the payment made by B.

PRESENT- When the consideration is given simultaneously to the promise made, then this is present consideration or executed consideration. For example- cash sales.

FUTURE- When the consideration of the promise made is to be passed at a future date then that is called future or executory consideration. For example- A promises to pay B, when the latter will fetch newspaper for him.

  • Consideration need not be adequate- It is not necessary that the consideration is equal or adequate for the promise made. However, it is mandatory that the consideration should be something in which the law attaches some value. It is for the parties to decide the value of the consideration and not a court of law. For example- A sells a table to B and B gives him rs 500. It will be difficult for the court to ascertain the value of the table, so if A is satisfied with the amount given then the consideration is valid.
  • Should be real- although the consideration need not be adequate it should be real and not illusory. The consideration should not be physically impossible, legally not permissible or based on an uncertain event or condition.
  • Should not be something which the promisor is already bound to do- a consideration to do something which the promisor is already required to do is not a good consideration. For example- the public duty done by a public servant.
  • Should not immoral, or against the public policy of the state- under Section 23 of the Indian contract it is given that consideration should not be illegal, immoral or against public policy. The court should decide the legality of the consideration and if found to be illegal then no action on the agreement should be allowed.

Stranger to a contract

It is a general principle that the contract can be enforced only at the behest of the parties to the contract. No third party could enforce it. It arises from the contractual relationship between the two parties. However, Lord Dennings has criticised this rule a number of times as this rule has never benefited the third party whose roots go deeper in the contract. This rule has two consequences-

  • No third party could enforce the contract.
  • The contract between the parties cannot levy an obligation on any person other than those parties to a contract.

Exception

There are three exceptions to this rule:

  • Marriage settlements- When an agreement is made with regards to marriage, family settlement or partition and is made in such a way that it benefits another person who is not a party to the contract then he may sue for the enforcement of the contract.
  • Covenants running with the land- in cases of the contract of property the purchaser will be bound by all the conditions and covenants of the land, even though he was not a party to the original contract. 
  • Acknowledgement of estoppels- in case the terms of the contract require that an agreement has to be made with the third party, then this has to be acknowledged. This acknowledgement could be expressed or implied. This exception covers the areas where the promisor either expressly or by conduct has posed himself to be an agent.

Past consideration

It is the consideration which is made before the agreement. It is something which the promisee has already done at the desire of the promisor. 

For example- A rescues B. B promises to give him Rs. 1000 for the same. Here it is a past consideration as the act of rescuing happened before any agreement. 

In English law past consideration is no consideration. If A saves B and B promises him to pay but later refuses to do so, then under English law, A cannot enforce it in a court of law. B can give him the money, but that would not be considered as a past consideration but it would be by way of gratitude. This, however, causes a lot of inconveniences, as if a person would pay for the past act then he shall have to recognise the past consideration which is not valid under English Law. the report of the law commission of England proposes to remove this rule.

In India however, there is no compulsion to follow the English law and past consideration is regarded to be valid. 

Past act at request good consideration

The past act done for consideration would be a good consideration. In the case of Lampleigh vs. Brathwait, in which the defendant requested the plaintiff to help him get a pardon from the king. The plaintiff put in efforts, travelled up to the king etc.his request was not sanctioned. The defendant promised to pay him for the same. Later he refused to do so. Plaintiff sued him in a court of law. The court held that the defendant must pay the plaintiff because he has himself requested him to help him. Hence the act of the plaintiff, although done in the past, would still be regarded as a valid consideration.

Past voluntary service

If a person renders voluntary services without any request or promise from another and the person receiving the services makes a promise to pay for the services, then such a promise is enforceable in India under Section 25(2) of the Indian Contract Act, 1872 which states: ‘‘An agreement made without consideration is void unless it’s a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless.’’

For Example- Peter finds Noah’s wallet on the road. He returns it to him and Noah promises to pay Peter Rs 500. This is a valid contract under the Indian Contracts Act, 1872.

Past service at request past and executed

An act done before the giving of a promise to make a payment or to confer some other benefit can be a consideration for the promise. The act must have been done at the promisor’s request, the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit, and payment or the conferment of a benefit must have been legally enforceable had it been promised in advance.

Executory consideration

Consideration may be something which is done or in the process of being done. It also consists of an act which is promised to be done in the future. There may be promises which form the consideration for each other. Before the completion of a promise which forms a part of the consideration of the other promise, then such consideration is called executory consideration.

For example- if A promises to pay B when he will sell the goods to him. Until time A does not get the goods, the consideration is executory, when he got the goods and paid for the same, the consideration is executed. If B does not sell the goods then A could also breach for the suit.

Value need not be adequate

Consideration is defined as an act of abstinence from doing something, at the desire of the promisor. The consideration should be of some value in the eyes of law, but the courts have been very liberal in interpreting and anything of value by the parties is regarded as a valid consideration. 

The value need not be adequate for the promise made. The court will not enquire whether the value of the consideration is equivalent to the promise that is made. If the parties agree to the value of the consideration then it is sufficient. This rule is applicable as per Indian and English law.

Inadequacy as evidence of imposition

The inadequacy of consideration is regarded to check whether the consent is freely given. For example- A agrees to sell his property worth Rs 1 crore to B for Rs 10,000. denies that his consent for the sale of the property was not freely given. A party seeking to set aside the transaction based on the inadequacy of the consideration must show that he was unable to understand it or was by way of some imposition. If the court is satisfied that the contract was freely entered into then it would not matter whether the consideration was adequate or not.

Where the consideration is inadequate it could be because of fraud, coercion, mistake etc. the same would be the case when the consideration is so low that it shows some serious inequality of the bargaining power. 

Forbearance to sue 

The most usual form of forbearance is the forbearance to sue within a reasonable time. This promise to forebear can be expressed or implied from the circumstances. Sometimes it is very difficult to construe from the fact whether it was an agreement to forbearance (which is not a good consideration until not backed by the request of the promisor) or actual forbearance. Hence to clarify in the case Bittan Bibi vs. Kuntu Lal, it was held that the promise of forbearance should move at the desire of the promisor.

Forbearance to sue on a claim which is void is not a consideration. Moreover, abstaining to sue could be a valid consideration only when the person who is abstaining, has a valid right to sue. Also, it is not necessary to specify the time for such abstinence. A request for forbearance without specifying the length is understood to be a forbearance for a reasonable time.

Compromise good irrespective of merits

It is an important kind of forbearance which is undertaken by way of a compromise of a doubtful claim. The important element here is to ascertain the limits of which the compromise will function and will still be a good consideration. The difference between forbearance and compromise is that in the latter claim is not admitted and the claimant promises to abandon the claim.

The abandonment of a doubtful or disputed claim is a good consideration even if it later turns out to be unsustainable. The test is to find whether the person thought in good faith and he has a case which he was abandoning. A compromise of a claim arising out of an illegal contract is insufficient as a consideration unless the compromise arises out of a dispute of fact as to whether the contract is illegal.

Performance of existing duties

Performance of legal obligations

The performance of what one is already bound to do, either by general law or by a specific obligation to the other party, is not a good consideration for a promise, because such performance is not a legal boundation of a person. Moreover, on the performance of a legal obligation, a reward from the private organisation is taken then it would be against the public policy. It should be ensured that the legal duty actually exists. But if a man who already has a legal obligation undertakes to do something or to do something in any of the admissible ways i.e. the person has forgotten the choice that the law allows him to take is a good consideration.

Moreover, the actual performance of an existing duty may confer a factual benefit, because on actual performance the promise is saved of pursuing a legal remedy for its breach. 

Performance of contractual obligations

Pre-existing contract with the promisor

Usually, the performance of a duty already owed under the contract to the promisor is not good consideration. Even in terms of public policy, it is necessary to discourage a tendency to use improper pressure or threatening to break one’s contract unless another party complies by paying or promising to do so. The promisee must find it beneficial to perform the promise immediately rather than paying for its breach which may not fully compensate the promisor.

Promise to pay less than the amount due

A promise to pay less than what is due in the contract cannot be regarded as consideration. This rule was given in Pinnel’s case. The court held that a smaller amount cannot in whole satisfy a larger sum. However, a gift of the horse, robe etc can be considered as a good satisfaction because under certain circumstances it is considered to be more beneficial than money, otherwise, the person would not accept it.

This holding was criticised in a way wherein several cases the jurist held that if the party is content to receive any amount be it less than the sum and he is satisfied by the same, then it should be considered to be a valid consideration. However, in spite of all this criticism, the Pinnel’s Case was applied unanimously in various circumstances.

Exceptions to the rule in Pinnel case

Part-payment by the third party

The part payment by the third party may be a good consideration for the whole debt.

Composition 

Payment of a lesser amount would be a good consideration for the larger sum where this is done for some already entered compromise. 

Payment before time 

Payment of a lesser sum before the time or in a different mode, a different place than agreed by the parties or the gift of a horse or robe etc is a valid satisfaction of the goods.

Promissory estoppel

The doctrine of promissory estoppel is considered to be a departure from the doctrine of consideration. A promise that was made in the future is estoppel. If the promise is made with the intention that it would be acted upon and it was in actuality acted on, then the promisor cannot be allowed to back out and it could be enforced in a court of law as well.

Promissory estoppels differ from traditional contract theory. It protects reliance. This doctrine was developed to prevent injustice if the promisee suffers from any injustice due to the reliance on the promise of the promisor, even though it was not required for consideration. However, in English law, the doctrine of promissory estoppel is used only as passive equity and is invoked only in the cases of defence.

Position under the Indian contract act is different than under English Law

Under English Law

It is an established rule under English law that the third party cannot sue a contract made for his own benefit. Apart from special circumstances. A person who is not a part of the contract cannot enforce or rely for protection on its provisions. Such right can be conferred to a property by way of trust but it cannot be on a stranger to a contract as a right to enforce the contract.

Under Indian Law

It is established that the consideration can move from a third party but it cannot sue for its own agreement. However, there was lots of confusion on this point. Although the definition of “consideration” is wider in the Indian than in the English law since common law is applicable, therefore it is generally applied that the third party cannot enforce the contract.

Law Commission of India in one of its reports mentioned that the contract must be enforceable by a third party if it expressly for his benefit but the defences of the party to the contract must also be considered. It is also proposed that the parties cannot alter the terms of the contract once the third party takes over the contract.

Pre-existing contract with the third party

A promise to perform a pre-existing contractual obligation with a third party can be a valid consideration for another contract. The point of conflict in these kinds of arrangements is regarding the presence of consideration for the promisor. This conflict was settled in the case of Shadwell vs. Shadwell, where the plaintiff got engaged and his uncle wrote him a letter promising him to pay 150 pounds throughout his lifetime. 

The jurists in the above case held that there was adequate consideration for the contract as it could be construed from the fact that it was made because of the engagement of his nephew. Moreover, marriage is of great interest to the near relatives. Also, the contract is binding on the uncle as it is possible that the plaintiff has undertaken many liabilities on account of the promise given by the uncle and if the payment is withheld then the plaintiff could face a lot of embarrassment. 

Under these provisions, the person should be safeguarded from any further payment which is not enforceable as per the contract. Like in the case of Syros Shipping vs. Elaghil Trading co. a vessel which was prepaid had to deliver tractors to Yemen. The charters defaulted their payment to the shipowner because of the congestion in the ports. During this period the shipowner asked for extra payment, the consignees agreed to pay but later refused. The court held that since there was no consideration for the promise, moreover no estoppel was created hence the contract is not enforceable.

Consideration and motive

Consideration is not the same thing as motive or a mere desire. The requirement of consideration is vital and the contract could not be satisfied with just a moral obligation. Consideration for a promise is always a motive for the promise, unless it is nominal or invented, while a motive for a promise may not always be a consideration for it. Motive induces a promise to be given. Similar holding was given in the case of Dwarampudi Nagarathnamma vs. Kuruku Ramayya, where the Karta of a Hindu Undivided Family gifted his concubine a portion of the property beyond the cohabitation was a motive and not a consideration, and it should be considered as invalid because it was motivated by the desire to compensate for his past services.

Absence of consideration

If the promissory note is neither genuine nor fraud then it is recoverable under the provision of this code, with interest. The court said that mere denial of the passing of consideration does not make any defence. Something which is probable has to be brought on record.

Exceptions under Section 25, Indian Contract Act

In English law, a contract which is under the seal is enforceable without consideration. In Indian law, there are no such provisions but still, The general rule is the ex nudo pacto non-oritur action, which means that no right of action arises from the contract which is entered into without any consideration. Still, under Section 25 of the Indian Contract Act,1872.it provides certain exceptions under Section 25 of the Indian Contract Act.

Fiduciary relation

In case of a contract entered into between the relatives or on account of natural love and affection is enforceable without consideration. The meaning of love and affection is not judicially construed but parties who are nearly related would have instinctive love and affection. However, this could be overruled with regards to some external circumstances, like between the wife and husband who are compelled to live separately because of quarrelling. But a settlement to be given to a man by the wife by way of maintenance could be enforced without any consideration because it will result in peace and family harmony.

The term “family” (in this context) should be understood as a group of people living together and possessing a right of succession, inheritance etc., but the family could be construed as a people who are bonded by natural love and affection.

Past voluntary services 

A promise to compensate the person who has done something voluntary in the past for the promisor is enforceable. This exception is attracted in the cases when the services are rendered voluntarily. Thus where a service is rendered on behalf of a company which is not in existence, a subsequent promise to pay would not attract this provision. Even where the promisee has done something for the promisor, which he had to do legally, then it will also be covered under this exception.

In case of a Minor

In Karam Chand vs Basant Kaur, the court held that even where the promisor after attaining majority, promises to pay for the goods attained in minority will also fall under this provision. The court said that although the promise made by a minority is void but if the promise is made by a person of full age to the promisee who has done something for him voluntarily when the promisor was a minor, then it will also attract this exception.

Time barred debt

A promise to pay a time-barred debt is enforceable and it should be signed by the person or his agent. It could be to pay for the whole debt or in part. The debt to be enforced could be paid except for the law of limitation. However, the person who is under no obligation to pay to another person is under no obligation under this clause. 

The promise to pay the debt must be expressed, it is not sufficient if the intention to pay could not be gathered from the circumstances. 

Acknowledgement of the debt is different from the promise to pay the debt. The acknowledgement of the person should be done before the period of limitation. Promise to pay a time-barred debt is a new contract. It is not just merely an acknowledgement of the existing liability.

Gift actually made

The provisions of “Consideration” do not affect the gift actually made. Under this Section, gift is defined as: 

  • The gift is of movables then it should be accompanied by its delivery.
  • The gift is of immovables then should be along with registration. 

If the above conditions of gifts are fulfilled then lack of consideration would not affect the validity of these gifts. However, apart from the consideration, they could be questioned otherwise. 

Where the gift of the property was made by a registered deed and is attested by two witnesses, it was not allowed to be questioned on the ground that she was the victim of fraud, moreover, she was not able to establish it.

Inadequacy of consideration

Adequacy of the consideration means that the consideration which is paid is equal in value to the value for which it is paid. Consideration can be terms of money, property etc. inadequate consideration is not void but it renders the contract unenforceable because of the improper bargaining or by itself.

Inadequate consideration must be distinguished from nominal consideration. Nominal consideration is deliberately given to make the contract effective but inadequate consideration is less than the amount promised. Although the act does not make any distinction between the nominal and inadequate consideration but it was made in the case of Midland Bank trust vs Green. 

Valid contract (Section 10)

A contract has been defined as “an agreement enforceable by law.” For an agreement to be enforceable by law, it must contain the essential elements which are important for a valid contract.

Section 10 in The Indian Contract Act, 1872 tells about what agreements can constitute a contract. “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.”

For a contract to be valid both the parties should have given their consent and that consent must be free. Both parties should behave in such a way that they can make an impression on the other party that the other party is ready to make a contract and a legal relation, not a social relation. Thus a person who is casually saying that he/she is accepting an offer usually cannot be considered as a contract. On the other hand, a person who has no intention of making and completing a contract but acts that it makes people believe that he/she really wants to enter into a contract can be termed as a contract. Legally, it is the external appearance which is important in determining whether one is considered to a contract or not. Agreements which are of religious, social nature and moral e.g. a friend’s promise to others to go on a walk or picnic with him does not amount to a contract as both the parties didn’t intend on forming a legal relation and were neither intended to face legal consequences.

A contract comes into existence only when all the terms and conditions are satisfied and fulfilled by the parties to the contract. If any of the conditions is not fulfilled by any of the parties that agreement will be void. We can also say that contracts are self-regulated and no one else other than yourself is forcing you to enter into a contract. It’s upon your discretion that you want to enter into a contract or not and no one in any condition can force you to enter into any contract and if does so that agreement will be void. Later, the duties after entering into an agreement are defined by the state and if not followed be punished but entering into a contract is not forced by anyone else other than yourself. According to the Section 10 of the Indian Contract Act, 1872 there are mainly four conditions which have to be satisfied to form a valid contract, i.e. free consent of parties to the contracts, competent to contract, for a lawful consideration and with a lawful object.

Competent to contract (Section 11)

Sec.11 of the Indian Contract Act, 1872 lists down the qualifications which enable a person in India to enter into contracts-

  • A person should have attained the age of majority as per the law of the country of which he is a citizen.

In India, the age of majority is governed by the Indian Majority Act, 1875. As per Sec. 3 of the Indian Majority Act, 1875, an Indian citizen is said to have attained the age of majority upon completion of eighteen years of age. In the USA (the majority of the states) and the UK, the age of majority is 18 years as well.

However, if a person is below the age of 18 years and a guardian has been appointed for him, he shall attain majority at the age of 21 years.

  • A person should be of sound mind at the time of entering into a contract.

As per Sec. 12 of the Act, a person can be said to be of sound mind when he can assess, understand his actions and realize the consequences of obligations imposed on him at the time of entering into a contract.

  • A person should not be disqualified under any law to which he is subject.

Disqualifications for entering into a contract

As per the Indian Contract Act, 1872 all persons who do not meet the criteria as per Sec. 11 of the act are incompetent to contract. Hence, we can deduce that the following category of persons do not possess the legal capacity to enter into a contract-

Minor

In India, a minor is an Indian citizen who has not completed the age of eighteen years. A minor is incapable of understanding the nature of the liabilities arising out of an agreement. Hence a contract with a minor is void ab initio (void from the beginning) and cannot be enforced in a court of law. The result is that a party cannot compel the minor to perform his part of obligations as enumerated in the agreement (plead specific performance of an agreement/rule against estoppel).

Mohori Bibee vs. Dharmodas Ghose

  1. The respondent, Dharmodas Ghose, a minor, had mortgaged his property in favor of the moneylender, Brahmo Dutt for securing a loan amounting to INR 20,000/-.
  2. Mr. Brahmo Dutt had authorized Kedar Nath to enter into the transaction through a power of attorney. Mr. Kedar Nath was informed of the fact that Dharmodas Ghose was a minor through a letter sent by his mother.
  3. However, the deed of mortgage contained a declaration that Dharmodas Ghose was of the age of majority.
  4. The respondent’s mother brought a suit on the ground that the mortgage executed by his son is void on the ground that her son is a minor.
  5. The relief sought by the respondent was granted and an appeal was preferred by the executors of Brahmo Dutt before the Calcutta high court. The same was dismissed.
  6. An appeal was then made to the Privy council. The Privy council held that-
    1.  A contract with a minor is void-ab-initio.
    2. Sec.7 of the Transfer of Property Act, 1882 states that a person competent to contract is competent to transfer a property.
    3. Hence, the mortgage executed by the respondent is void.

However, if a minor enters into a contract and performs his part of obligations, the other party can be compelled to perform and fulfill its obligations, and, in such instances, the contract becomes legally enforceable.

A.T Raghava Chariar vs. O.A. Srinivasa Raghava Chariar

  1. A minor entered into a contract for mortgage with a person of the age of majority.
  2. The minor extended the monetary amount and performed his part of the obligations.
  3. The other party refused to honor the agreement.
  4. The full bench of the Madras High court had to decide “whether a mortgage executed in favour of a minor who has advanced the whole of the mortgage money is enforceable by him or by any other person on his behalf.”
  5. The court ruled that-
    1. The agreement sought to be enforced is the promise of the mortgagor who is of full age to repay the money advanced to by the mortgagee.
    2. The mortgagee (the minor) has already advanced the money which was the consideration for the promise of the mortgagor and performed his part of the obligations. There is nothing pending from his side.
    3. Hence, the contract is enforceable.

Additionally, a minor cannot enter into a contract and provide his consent when he attains majority. This is because a minor’s agreement is void from the beginning. A void agreement cannot be made legally valid by ratification.

Suraj Narain Dube vs. Sukhu Ahir

  1. Suraj Narain lent money to Sukhu Ahir who was a minor. The minor executed a promissory note against the money borrowed.
  2. After four years, when the minor attained majority, he and his mother executed a second promissory note in favour of Suraj Narain in respect of the original loan plus the interest accumulated over the years.
  3. The court held-
    1. The first agreement entered into by the parties is void as a minor is incompetent to contract. The minor had no liability to pay under this agreement. However, the minor made a promise and provided the promissory note, amounting to consideration.
    2. A minor has no power to ratify the contracts entered into by him upon attaining the age of majority.
    3. In the second agreement executed by the parties, there was no consideration from the Plaintiff. The original advance was no consideration for a second agreement. The second agreement is void due to want of consideration.

In certain instances, a contract entered into by the minor or by the minor’s guardian for his benefit is valid in the eyes of law-

  1. A contract for marriage entered into by a minor/his guardian.
  2. A partnership contract entered into with a minor admitting him to the benefits of a partnership. However, the minor cannot be held personally liable for the losses incurred.
  3. A contract relating to the minor’s property entered into by his guardian if it is for the benefit of the minor.
  4. A contract of apprenticeship with a minor.
  5. A contract supplying the minors with goods and services necessary for life.

Websites such as YouTube expressly mention in their terms and conditions that any minor while using its services represents that he has the permission of his parent/ guardian to do so. Parents and guardians are held liable for the child’s activity on such websites.

Effects of minor’s agreement

Through Mohori Bibee vs. Dharmodas Ghose landmark judgment, the effects can be explained-

  • No liability arising out of either tort/contract: A minor is incapable of giving consent, and the nature of minor’s agreement is a nullity and cannot be enforced
  • The rule of estoppel: Estoppel is a legal rule of evidence which prevents a party from alleging something that contradicts what he previously stated. The court held that the doctrine of estoppel does not apply to the case in which the person knows the real facts, beforehand and here the attorney of the defendant knew that the plaintiff was a minor. Hence this rule does not apply.
  • Restitution of benefit: According to Section 64 of the Indian Contract Act, when a person at whose option a contract is voidable rescinds it, the other party need not perform it. This applies to contracts that are voidable, but a minor’s contract is void, and therefore, he cannot be asked to refund the amount money to the moneylender.

Exception to general rule

For providing protection to a minor, his agreement is void. But there are certain exceptions as well.

  • When a minor has performed his obligation: In a contract, a minor can be a promisee but not a promisor. So if the minor has performed his part of the promise, but the other party hasn’t the minor being in the position of a promisee he can enforce the contract.
  • A contract entered into by a guardian of a minor for his benefit: In that case, a minor can sue the other party when it does not perform its promise. In the case of Great American Insurance v. Madan Lal[1] the guardian on the behalf of her son entered into an insurance contract in respect of fire for the minor’s property. When the property was damaged and the minor asked for the compensation, the insurer denied it by saying that a contract with a minor is a void one. But later the court held that this contract was enforceable, and he is liable to pay compensation.
  • Contract of apprenticeship: Under the Indian Apprentices Act, 1850, a contract of apprentice entered by guardian on his behalf is binding on the minor

Necessities supplied to a minor                                                                        

If a person is incapable of entering into a contract is supplied by another person with necessities of life, the person who has supplied is entitled to get reimbursement from the property of such incompetent person, including a child as well. But if the minor has no property of his own, then he cannot be bound to reimburse the other person.

Can a minor be a partner?

The way of a contract creates a partnership, and the essential of a contract is that the both the parties should be of the age of majority. However, as an exception as per Section 30 of the Partnership Act is that with the due consent of all the partners, the minor can be admitted to the benefit of partnership for the time being. But he will not be liable for any of his acts.

Liability of a minor under the Negotiable Instrument Act

As per Section 26 of the Act, a minor can draw, endorse, and negotiate and he can bind everybody except himself.  Every person who is capable of contracting according to the law to which he is subject may bind himself and be bound by the making, drawing, accepting, delivery and negotiation of a promissory note, cheque or a bill of exchange.

Can a minor be an agent or principal?

A minor can never be a principal because Section 183 of the Indian Contract Act for anybody to become a principal should be of the age of majority and be of sound mind and since a minor is not competent to contract, he also cannot employ an agent. But, a minor can become an agent as per the provisions of section 184 but the principal shall be bound by the acts of the minor and he would not be personally liable in that case.

Person of unsound mind

  • Idiots- An idiot, in medical terms, is a condition of mental retardation where a person has a mental age of less than a 3-year-old child. Hence, idiots are incapable of understanding the nature of the contract and it will be void from the very beginning.
  • Lunatic- A person who is of sound mind for certain duration of time and unsound for the remaining duration is known as a lunatic. When a lunatic enters into a contract while he is of sound mind, i.e. capable of understanding the nature of the contract, it is a valid contract. Otherwise, it is void.

Illustration- A enters into a contract with B for sale of goods when he is of sound mind. A later becomes of unsound mind. The contract is valid.

  • People under the influence of the drug- A contract signed under the influence of alcohol/drug may or may not be valid. If a person is so drunk at the time of entering into a contract that he is not in a position to understand the nature and consequences, the contract is void. However, if he is capable of understanding the nature of the contract, it will be enforceable.

Illustration- A enters into a contract with B under the influence of alcohol. The burden of proof is on A to show that he was incapable of understanding the consequence at the time of entering the contract and B was aware of his condition.

Persons disqualified by law

  • Alien enemy- An alien enemy is the citizen of a country India is at war with. Any contracts made during the war period with an alien enemy are void. An Indian citizen residing in an alien enemy’s territory shall be treated as an alien enemy under the contract law. Contracts made before the war period either get dissolved if they are against public policy or remain suspended and are revived after the war is over, provided they are not barred by limitation.

Illustration- A, of country X, orders goods from B, of country Y. The goods are shipped and before they could reach Y, country X declares a war with country Y. The contract between A and B becomes void.

  • Convicts- A convict cannot enter into a contract while he is serving his sentence. However, he regains his capacity to enter into a contract upon completion of his sentence.

Illustration- A, is serving his sentence in jail. Any contract signed by him during this period is void.

  • Insolvent- An insolvent is a person who is declared bankrupt/ against whom insolvency proceedings have been filed in court/resolution professional takes possession of his assets. Since the person does not have any power over his assets, he cannot enter into contracts concerning the property.

Illustration- A enters into a contract for sale of goods with B. Before the sale takes place, an insolvency suit is filed against A. A sell the goods to B during pendency of insolvency proceedings. The contract is valid.

  • Foreign sovereign- Diplomats and ambassadors of foreign countries enjoy contractual immunity in India. One cannot sue them in Indian courts unless they submit themselves to the jurisdiction of Indian courts. Additionally, sanction from the central government is also required in such cases. However, the foreign sovereign has the authority to enforce contracts against the third person in Indian courts.
  • Body corporate- A company is an artificial person. The capacity of a company to enter into a contract is determined by its memorandum and articles of association.

Competency of parties to enter into an e-contract

A party can enter into an e-contract if it satisfies the legal requirements as per Sec. 11 and Sec. 12 of the Indian Contract Act, 1872.

Competency to contract on behalf of another

As per the Indian Contract Act, 1872 a person can employ another who shall enter into contracts with the third person on his behalf. The person in this instance is known as the principal and the other person so employed is known as the agent.

Any person may be employed as an agent. However, a minor or a person of unsound mind cannot be held liable for their acts to the principal.

An agent’s authority may be either-

  1. express, i.e. by word of mouth or documented in writing as in Power of Attorney  
  2. Implied, i.e. it might be deduced from the facts and circumstances of the case

Companies ensure competency of each other while entering into a contract.

Most companies while entering into contracts with one another want to make sure that the other party is competent enough to enter into a contract. This is required to avoid any legal complications in the future. This is mostly done through the inclusion of a representation clause in a contract stating that the company, as per its memorandum and articles of association, is capable of entering into a contract through its authorized representatives.

A copy of the articles of association may be annexed by both parties to confirm the representations made.

If the memorandum and articles provide otherwise, a condition precedent clause is incorporated into the agreement stating that the company shall pass necessary board resolutions to alter its articles of association. A stipulated date called a long stop date is given to the other party to comply with the conditions precedent failing which the agreement shall stand terminated.

A party might be asked to produce a copy of board resolution so passed/ changes made in the articles of association to the other party to prove its compliance with the condition precedent.

It is expressly mentioned in the agreement that both the parties indemnify each other from any suits, proceedings, or liabilities arising from breach of the representation clause.

Competency of parties to contract is one of the most important requirements to make an agreement valid and enforceable in a court of law. 

A contract made by a person who does not possess the mental capacity to understand the nature and consequences of the contract is void ab initio. On the other hand, contracts with lunatics, people under the influence of the drug may/may not be void depending upon the circumstances surrounding the situation.

A person regains the legal capacity to contract upon removal of any of the disqualifications.

Companies while entering into contracts with one another always try to safeguard their interests. Representation and indemnification are the most commonly used clauses to ensure that both the parties are competent to contract.

Free consent (Section 13 and 14)

Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and Mistake.

Consent is an essential element of a valid contract. In its absence, the contract becomes void or voidable depending on the circumstance. Consent means providing the party with an opportunity to exercise his/her volition with respect to the contract. For a valid acceptance to the proposal, the assent must be voluntary and genuine. As discussed earlier assent is required to form a valid agreement. Assent here refers to the opportunity to exercise one’s volition. Where consent to an agreement is not free i.e. has any of these factors- coercion, undue influence, fraud or misrepresentation, the agreement is a contract voidable if the other party so chooses whose consent was obtained on the basis of vitiating factors. If, for example, a person is induced to sign an agreement by fraud, he may, on discovering the truth, either uphold the contract or reject it.

Where consent is caused by mistake, the agreement is void. A void agreement cannot be affected by the party [Section 2(g)]  An agreement which is void doesn’t give rise to legal consequences and is void ab initio  These agreements are not enforced by the court or we can call this agreement as ‘’ An agreement not enforceable by law’.

Difference between consent and free consent

Section 13 defines consent: 

An agreement where both parties share common intention relating to the terms of the contract is known as true consent or consensus ad idem and is at the root of every contract.

Free consent is defined under the act as consent which is not caused by coercion, undue influence, fraud, misrepresentation and mistake.

 Every free consent is consent but every consent is not a free consent.

Void Agreement and Void Contract

Void agreement is an agreement not enforceable by law. A contract which is not recognised by law. There can be no action instituted in a court of law to claim rights against parties.

Void agreement is void right from the day the agreement is constructed while a void contract becomes void at a later stage. In a void contract, the voidness creeps because of some incident or change in circumstance which is not through the fault of the parties.

Void agreements have been specifically stated in chapter 2 of the act under Sections 11,20, 23 to 30 and 56. No such specific mention has been made for a void contract under any chapter of the Act.

Coercion (Section 15)

It is defined under Section 15. Coercion is using force or creating circumstances wherein the other parties’ consent is not free. It might be through taking some property, doing something which is an offence under IPC, the purpose of these things should be to get the other parties’ consent. 

Techniques of causing coercion

Consent is said to be caused by coercion when it is obtained by some act which compels the other party; 

  1. Threatening or doing something which is a crime under IPC; or
  2. Seizing or confining someone.

An illustration under the First category would be Consent given at the point of a knife, or by threatening to injure someone, or by intimidation or by threatening to destroy a man’s property. 

An example of the second type will be a case where the plaintiff had pledged his plate with the defendant for $20. When he went to redeem it the pledge insisted that an additional $10 interest was also owed. The plaintiff paid this to redeem his plate and then sued to recover it back. The court allowed it and the defendant had taken advantage of the situation and extracted an amount which was not lawful.

Undue influence (Section 16)

This is defined under Section 16.  It is using one’s position to influence the decision of the other person to his prejudice. There is a subtle difference between fraud and undue influence. The party is able to persuade because of the relation they share or he enjoys a certain degree of confidence of the other person.

What amounts to apply undue influence on someone?

Sometimes the parties to an agreement are so related to each other that one of them is able to apply undue influence to the expression of choice, willingness and consent of the other. 

The person who is in commanding position may use his position and the trust that the other person reposes on him to his advantage. By ‘’advantage’’ we mean to cause the other person to express his assent to the proposal. 

It is the nature of the relationship that is a Sine qua non in these types of cases, which enables one party to be at a superior position.

For Example: A spiritual adviser(guru), for example, in a case induced the plaintiff, his devotee, to gift to him the whole of his property to secure benefits to his soul in the next world. Such consent is said to be obtained by undue influence. The test is to examine this from a prudent man’s point of view. Whether in the absence of the nature of the relationship a prudent man would have done the same?

Subtle species of fraud

The court describes this in Mahboob Khan v. Hakim Abdul Rahim. Undue influence is a kind of fraud wherein the parties’ mind is hacked in a pernicious way. It can be through various means such as coercion, fear or other methods which are directed to impair the reasoning of the person. The result is the person thinks he is using his volition but in reality, his free will is affected by other parties’ scheme,

Undue influence and coercion

Coercion (duress) in the execution of a contract or deed involves some kind of physical or bodily threat. The threat is not restricted to the party but to any person, the party is interested in.

When compared to Undue influence, the difference is that undue influence may exist without violence or threats of violence against the victim. Undue influence exists because of the relationship the parties share. It is usually without violence or threats against the victim. The confidence which the other party reposes in the other is used to one’s advantage.

A person is said to be in a position to dominate the will of another in the following cases-

  1. Where he holds a position of dominance or authority or some kind of trust is reposed in him.
  2. Where the victim doesn’t have the mental capacity to understand the consequences of his actions.

Fiduciary relation

Trust and confidence are essential elements of Fiduciary relation. Confidence is involved in many of our interactions in everyday life. This category is, therefore, a very wide one. It includes the relationship of solicitor and client, spiritual adviser and his devotee, doctor and patient, woman and her confidential managing agent, parent or guardian and child, and creditor and debtor.

Presumption of undue influence

In certain cases, the presumption of undue influence is raised. The effect of presumption is once it is prima facie established that the defendant has overpowered the will of the other, it will be assumed he has used his position to influence the outcome. The defendant has to establish the contrary.

The presumption is raised at least in the following cases:

  • Unconscionable bargains, inequality of bargaining power or economic duress

Unconscionableness: Where one of the parties to a contract is in a position to use undue influence on the other and the contract is apparently skewed in one parties’ favour, the law presumes that consent must have been obtained by undue influence. The burden is shifted to the stronger party to prove that he did nothing to dominate the will of the other.

This case illustrates the above point wherein An old and illiterate woman, incapable of any business, conferred on her confidential managing agent, without any valuable consideration, an important pecuniary benefit under the guise of trust. The onus is on the grantee to show conclusively that the transaction is honest, bona fide, well-understood, the subject of independent advice and free from undue influence’’.

Position of dominance necessary for presumption to arise

For this presumption to be successful, one of the parties’ have to be in a superior position or in a dominating position. Where the parties are on equal footing the mere unconscionableness of the bargain does not create a presumption of undue influence. The mere fact that the bargain is a hard one is no guard in itself for granting relief.

In Raghunath Prasad Sahu v. Sarju Prasad Sahu The defendant and his father were equal owners of a vast joint family property over which they had quarrelled. Consequently, the father had instituted criminal proceedings against the son. The defendant, in order to defend himself, mortgaged his properties to the plaintiff and borrowed from him about ten thousand on 24% compound interest. In eleven years this rate of interest had magnified the sum covered by the mortgage more than elevenfold, viz., Rs1,12,885. 

The defendant had contended that the lender had, by exacting a high rate of interest, taken unconscionable advantage of his mental distress and, therefore, there should be a presumption of undue influence.

Their lordships, however, held that there should be no such presumption in the circumstances of the case. 

Sub-Section (3) of Section 16, deals with three matters. There is a particular order which should be followed while determining whether a party has dominated the will of the other.

In the first place, the relation is of a kind where the party can overpower the volition of the other.

Then comes the second stage where it will be examined whether the contract has been induced by undue influence.  

This leads to the third stage, where onus probandi emerges. The burden of proving that plaintiff consent is not vitiated by any of the factors shifts on defendant.

This order should be maintained lest error is avoided Unconscionableness of the bargain cannot be the first thing to be considered. We have to start from the relation that the parties share with respect to each other.

  1. Contracts with Pardanashin woman

A contract with a Pardanashin woman is presumed to have been induced by undue influence. She can avoid the contract unless the other party can show that it was her ‘’intelligent and voluntary act’’. 

According to the Bombay High Court, a woman does not become pardanashin simply because ‘’she lives in some degree of seclusion’’. The concept probably means a woman who is totally ‘’secluded from ordinary social intercourse’’.

Once it is shown that a contract is made with a pardanashin woman, the law presumes undue influence. In Moonshe Buzloor Raheem v. Shumsoonisa Begum, A window remarried. Subsequently, she endorsed and delivered to her new husband certain valuable Government papers. In an action to recover them back from him, she proved that she lived in seclusion and that she had given over the papers to him for collection of interest. He contended that he had given her full consideration for the notes. It was held that the mere fact of endorsement and the allegation of consideration were not sufficient to lift the presumption of undue influence. He should prove that the transaction was bona fide sale and that he gave full consideration for the paper which he received from his wife.

Misrepresentation (Section 18)

A contract the consent to which is caused by misrepresentation is voidable at the option of the deceived party.  Misrepresentation means the action of giving a false or misleading account of the nature of something. This inaccurate information might make the difference with respect to a party deciding to enter into an agreement or not entering the agreement. Misrepresentation means misstatement of a fact material to the contract. Section 18 defines:

This Section includes the following types of misrepresentation:

  • Unwarranted statements: When someone declares a statement which is relevant to the contract and that statement doesn’t have information which justifies those facts even though he believes to be true is misrepresentation.

In a Bombay case, for example, The defendant chartered a ship from the plaintiffs, who stated that the ship was certainly not more than 2800 tonnage register. As a matter of fact, the ship had never been in Bombay and was wholly unknown to the plaintiffs. She turned out to be of the registered tonnage of more than 3000 tonnes.

It was held that the defendants were entitled to avoid the charter party. ’’The reason was that defendants asserted regarding the size of the ship-an assertion not supported/justified by any information the plaintiff had at the time, and which was not true’’

A statement is said to be warranted by the information of the person making it when he receives the information from a reliable source. It should not be mere hearsay.

Where a representation acquires the status of being a term of the contract, and it turns out to be false, the disadvantaged party may, not only avoid the contract but also sue for damages for breach.

Where the seller of a car stated that the car had done only 20,000 miles, the representation being untrue, the buyer was allowed to recover compensation for the misrepresentation.

  • Breach of Duty

Any breach of duty which is beneficial to the person committing it by confusing the party to his harm is a misrepresentation. This clause covers all cases which are called as cases of ‘constructive fraud’, in which there is no intention to deceive, but where the circumstances are such as to make the party who derives a benefit from the transaction equally answerable in effect as if he had been actuated by motives of fraud or deceit’’.

  • Inducing mistake about subject-matter

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 is also misrepresentation (Section 18 (3)). The subject-matter is the core of the agreement. This has to be of the quality or value which the parties expected at the time of constructing the agreement. If one of the parties leads the other, however innocently, to make a mistake as to the nature or quality of the subject-matter, there is a misrepresentation.

Example: The government auctioned certain forest coupes. A part of the land was occupied by tenants. The forest department knew this fact but did not disclose it to the purchaser. The contract was held to be vitiated by misrepresentation. The purchaser was allowed to recover damages for loss. 

Suppression of vital facts

Misrepresentation may also arise from the suppression of vital facts. Cases of concealment or suppression will fall either under sub-Section (2) when it amounts to a breach of duty or under sub-Section(3) when it leads the other party to make a mistake about the subject-matter of the agreement.

In R. v Kylsant, the prospectus of a company stated that the company had regularly paid dividends, which created the impression that the company was making profits, whereas the truth was that the company had been running into losses for the last several years and dividends could only be paid out of wartime accumulated profits. This was held as a Misrepresentation.

Expression of opinion

A mere expression of opinion cannot be regarded as a misrepresentation of facts even if the opinion turns out to be wrong. In some cases, a statement of opinion may also amount to misrepresentation. 

It is a mistake to assume that a statement of opinion cannot involve a statement of fact. When knowledge of the parties is not on the same footing then a statement of opinion by the person who is more knowledgeable, his statement has a material fact for he tacitly claims information which justifies his opinion.

Of material facts

A fact is said to be material if it would affect the judgment of a reasonable person in deciding whether to enter into the contract and, if so, on what terms. Misrepresentation of the age of a car, showing it to be five years younger, was held to be material because it affected the price which a willing purchaser would have liked to pay for it.

Inducement 

 The misrepresentation must be the cause of the consent, in the sense that but for the misrepresentation the consent would not have been given. It must have played a substantial role in the plaintiff’s decision to enter or not to enter into the contract.

The representation must be made with the intention that it shall be acted upon by the other party.

There would be no misrepresentation, even if the advertisement was false if the buyer had inspected the goods before buying them unless he was the victim of some concealed defect which could not be known by external examination.

Means of discovering the truth

A party cannot complain of misrepresentation if ‘’ he had the means of discovering the truth with ordinary diligence’’.

A person who bought a quantity of rice was precluded from alleging misrepresentation about its quality because he lived very near the place where the goods were lying and, therefore, might have discovered the truth with ordinary diligence.

Fraud (Section 17)

According to Merriam-Webster fraud is defined as ‘’An intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right. The distortion of facts intentionally which are directed towards the other party, in order to receive their assent to the proposal. Section 17 defines fraud.

Assertion of facts without belief in the truth

In English law ‘’fraud’’ was defined in the well-known decision of the House of Lords in Derry v Peek. The judges had observed in this case that- ‘’Fraud is proved when it is shown that a false representation has been made,-

  1. Knowingly, or
  2. Without belief in its truth, or
  3. Recklessly careless whether it be true or false’’.

In this case: 

A company’s prospectus contained a representation that the company had been authorised by a special Act of Parliament to run trams by steam or mechanical power. The authority to use steam was, in the Board refused consent and consequently, the company was wound up. The plaintiff, having bought some shares, sued the directors for fraud. They were held not liable because they honestly believed that once the Parliament had authorised the use of steam, the consent of the Board was something that was bound to happen. It follows, therefore, that the person making a false representation is not guilty of fraud if he honestly believes in its truth. Thus, intentional misrepresentation is of the essence of fraud.

Active concealment

‘’Active concealment’’ is different from ‘’passive concealment’’. Passive concealment means mere silence as to material facts. Active concealment of a material fact is a fraud; mere silence, except the few cases noted below, does not amount to fraud. Active concealment involves some kind of action, behaviour or scheme to trick the other party into giving his consent to the proposal. The intention is to commit fraud. For example, a husband persuaded his illiterate wife to sign certain documents telling her that by them he was going to mortgage her two lands to secure his indebtedness and in fact mortgaged four lands belonging to her. This was an act done with the intention of deceiving her. 

Mere silence is no fraud

False impression is ordinarily conveyed by deliberate misstatement of facts. Misstatement of facts is just one of the ways by which fraud can be caused. A false impression may be caused by trick or device or ambiguous language, active concealment of material facts or other methods. Ordinarily, mere silence is no fraud, even if its result is to conceal ‘’facts likely to affect the willingness of a person to enter into a contract’’. 

A contracting party is under no obligation to disclose the whole truth to the other party or to give him the whole information in his possession affecting the subject-matter of the contract. It is under this principle that a trader may keep silent about a change in prices.  A seller who puts forth an unsound horse for sale, but says nothing about its quality, commits no fraud. 

When silence is fraud

  • Duty to speak (contracts uberrima fides):  Duty to speak arises where one contracting party reposes trust and confidence in the other. A father, for example, selling a horse to his son must tell him if the horse is unsound, as the son is likely to rely upon his father.

Duty to disclose the truth will arise in all cases where one party reposes, and the other accepts confidence. 

This duty to speak is also expected from the party when the other party has no means to discover the truth and has to depend on other parties’ judgment or assessment

A perfect example of this would be a contract of insurance wherein an insurance company knows nothing about the life or situation of the insured. It is, therefore, the duty of the assured to put the insurer in possession of all the material facts affecting the risk covered. 

A contract of insurance is, for this reason, called a contract of absolute good faith, uberrima fides.

This case where the plaintiff spent a sum of money to mark the engagement of his son. He then discovered that the girl suffered from epileptic fits and so broke off the engagement. He sued the other party to recover from them compensation for the loss which he had suffered on account of their deliberate suppression of a vital fact which amounted to fraud. 

The court concluded that a mere passive non-disclosure of the truth, however misleading in fact, does not amount to fraud, unless there is a duty to speak. It was observed that the law imposes no general duty on anyone to broadcast the blemishes of his female relations; not even to those who are contemplating matrimony with them. 

There was no fiduciary connection between the parties. The engagement was, however, held to be voidable by reason of the misrepresentation, but the plaintiff was not entitled to recover any compensation under Section 75 of the Contract Act.

  • Where silence is deceptive: Silence is sometimes itself equivalent to speech. A person who keeps silent, knowing that his silence is going to be deceptive, is no less guilty of fraud. Where, for example, the buyer knows more about the value of the property, which is the subject of sale, but prefers to keep the information from the seller, the latter may void the sale.
  • Change of circumstances: Sometimes a change in circumstances might take place in the intervening period, between the representation of facts and when the contract is entered into. When this happens it is the duty of the person who made the representation to communicate the change of circumstances. 

A medical practitioner represented to the plaintiff that ‘his practice was worth $2000 a year’. The representation was true. Five months later when the plaintiff actually bought the practice, it had considerably gone down on account of the defendant’s serious illness. It was held that the change of circumstances ought to have been communicated.

  • Half-truths: Even when a person is under no duty to disclose a fact, he may become guilty of fraud by non-disclosure if he voluntarily discloses something and then stops halfway. A person may be silent, but if he speaks, a duty arises to disclose the whole truth. ‘’ Everybody knows that sometimes half a truth is no better than a downright falsehood’’

Difference between fraud and misrepresentation

  1. Fraud is intentionally wrong, whereas misrepresentation may be quite innocent. 
  2. Fraud in addition to making the contract voidable is a cause of action in tort for damages. Misrepresentation is not a tort but under Section 75 of the Contract Act
  3. . ‘’ A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through non-fulfilment of the contract’’.
  4. A person complaining of misrepresentation can be countered with that he had the opportunity of discovering the truth with ordinary effort’, but excepting, fraud by silence, it does not lie in the mouth of the person committing fraud to say that his victim was too easily deceived or had the means of discovering the truth.

Mistake (Section 20, 21, and 22)

Mistake may operate upon a contract in two ways. It may defeat the consent altogether that the parties are supposed to have given, that is to say, the consent is unreal. Two or more persons are said to consent when they agree upon the same thing in the same sense.

Definition of ‘’Mistake’’

Mistake happens when one of the parties has some misconceptions about the facts stated in the contract. Section 20 defines

Illustration:. Two people contract that one of them will buy their house but none of them is aware that the house was burnt when they were negotiating the contract. The agreement is void.

Section 20 will come into play:

  1. When both the parties to an agreement are mistaken,
  2. Their mistake is as a matter of fact, and
  3. The fact about which they are mistaken is essential to the agreement.

Contract caused by mistake of one party as a matter of fact-  A contract will not become voidable when one of the parties’ is under a mistake relating to some fact involved.

Certain facts are essential to every agreement. They are:

  1. The identity of the parties;
  2. The identity and nature of the subject-matter of the contract;
  3. Nature and content of the promise itself.

Mistake as to identity

Mistake as to identity occurs where one of the parties represents himself to be some person other than he really is. 

We can state the particular case here, Jaggan Nath v Secy of State for India: A person, called S, a brother of the plaintiff, represented himself as plaintiff, and thereby induced a Government agent to contract with him.

The court found that the Government’s agent was deceived by the conduct of the plaintiff and his brother as to the person with whom he was dealing, held that there was no valid contract. The defendant’s agent intended to contract only with S’s brother and not with S and S knew this. Real consent was prevented. It means that an offer which is meant for one person cannot be accepted by another.

Mistake of identity caused by fraud

The following case where the plaintiffs received orders in writing from a fraudulent man, called Blenkarn. The order papers had a printed heading: ‘Blenkarn & Co, 37 Wood street’. There was a well-known and respectable firm, named ‘Blenkiron & Co in the same street. The plaintiffs, believing that the orders had come from this firm, sent a large number of handkerchiefs. Blenkarn received the goods and disposed of them off to the defendants, who acted in good faith. The plaintiffs sued the defendants. It was held that there was no contract between the plaintiffs and Blenkarn and, therefore, he had no right to sell the goods. The plaintiffs intended to contract with Blenkiron & Co and consequently, no contract could have arisen between them and Blenkarn. Hence, the defendants, being in possession without a good title over such goods, were held liable for conversion.

Distinction between identity and attributes

A mistake about the attribute has been held not to avoid the agreement. There can be a mistake of identity only when a person bearing a particular identity exists within the knowledge of the plaintiff, and the plaintiff intends to deal with him only. If the name assumed by the fraudster is fictitious, there will be no mistake of identity.

A man named Wallis adopted the name of ‘Hallam & Co’, a non-existent firm, and by letters placed the order for some goods with the plaintiffs who complied with the order by sending the goods. Wallis sold the goods to the defendants, who acted in good faith. The plaintiffs sued the defendants for the value of the goods. The plaintiffs intended to enter into a contract with the writer of letters. If it could have been shown that there was a separate entity called Hallam & Co and another entity called Wallis then the case might have come within the decision in the previous case discussed above. He had not fraudulently taken on another identity when selling the goods to Edridge. Although the contract was voidable, the possessory title was held to pass from a fraudster to an innocent person, therefore, only voidable for fraud and it could not be disaffirmed after the defendants had acquired the property in good faith.

In Ingram v. Little where three ladies, the joint owners of a car, advertised it for sale. A person who wanted to buy the car offered to pay by cheque. The ladies objected to this as the payment had to be in cash. The buyer in order to convince them impersonated Hutchinson, a leading businessman, and quoted an address and a telephone number. After verification, the ladies accepted the cheque. He resold the car to the defendant and absconded. The cheque proved worthless and the plaintiffs sued the defendant for the car or its value.

The defendant was held liable because the plaintiffs intended to enter into a contract with real Hutchinson and not the impersonator. There was no offer made to him, therefore there was no contract with him.

An important question arose in the light of the above conflicting judgments as to Why should the title of the innocent buyer be made to depend on the state of a contract between third parties? This discourse was taken by the court of appeal in Lewis v. Averay: Lewis, the plaintiff, had a car to sell. A man, described in the judgment as ‘rogue’, came along and introduced himself as Richard Green, a famous film actor. He offered a cheque and the plaintiff asked him to wait until cheque was cleared. The rogue talked the plaintiff into allowing him to take the car before the cheque clearance. He was able to persuade the plaintiff because he produced a special pass of admission to a film studio which showed his photograph and the official stamp when asked for identity proof. The rogue sold the car to an innocent buyer, the defendant.

The court of appeal held that the car was delivered under a contract voidable by reason of the fraud and the contract not having been avoided before the car passed into the hands of an innocent buyer, he acquired a good title. 

When the parties are present face to face, the presumption is that the contract is made with the person actually present, even though there is a fraudulent impersonation by the buyer representing himself as a different man than he is.

Mistake as to the quality of subject-matter as distinguished from substance

A mistake as to the quality of the subject-matter as distinguished from its substance may not render the agreement void. Smith v Hughes is well-known for this distinction between quality and substance.

The defendant wanted to buy old oats for his horses. The plaintiff showed him the sample of the oats he had, but nothing about their age. The defendant kept the sample for twenty- four hours and then placed an order for the oats. After a portion of them was delivered to him, he found that they were new and, therefore, rejected them on the ground that he was mistaken about their quality. 

The court didn’t accept the defendant’s argument. It was observed by the court that the two minds were not ad idem as to the age of oats; they certainly were ad idem as to the sale and purchase of them.

Mistake as to the nature of promise

This principle is well established by authorities that when a deed of one character is executed under the mistaken impression that it is of a different character, then it is wholly void and inoperative. Thus, where a gift deed is signed under the impression that it is only a power of attorney, the deed is inoperative.

Documents mistakenly signed or non est factum

The defence of non est factum enables a person who has signed a contract to say that it is not his document because he signed it under some mistake. It was evolved by the courts to relieve illiterate or blind people from the effect of a contract which they could not read and which was not properly explained to them. 

In a particular case, a person was asked to sign the back of the paper, the face of which was not shown to him, and he was told that it was an ordinary guarantee the like of which he had signed 

before and under which no liability came to him, when, in fact, the paper was a bill of exchange and he was sued by a holder in due course as an indorser.

The court held that ‘’The defendant never intended to sign that contract or any such contract. He never intended to put his name to any instrument that later became negotiable. He was deceived not merely as to the legal effect, but as to the actual contents of the document.

Limitations

Mistake operates to avoid an agreement subject to the following limitations:

  • Mistake of both parties: An agreement is void by reason of mistake under Section 20 when both parties are mistaken as to a matter of fact essential to the agreement. This is further supplemented by the declaration in Section 22 “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact’’. For example, where the government sold by auction the right of fishery and the plaintiff offered the highest bid under the impression that the right was sold for three years, when in fact it was for one year only, he could not avoid the agreement because it was his unilateral mistake.

It should be pointed out that even in cases where there is a mistake of one party but has the effect of nullifying consent as defined under Section 13, no contract will arise. When there is an absence of real consent i.e agreement upon the same thing in the same sense.  For an agreement to be avoided on the basis of unilateral mistake, it must be shown:

  1. That one party erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did not contain;
  2. That the other party was aware of the omission or the inclusion and that it was due to a mistake on the part of one party;
  3. That the party who was aware of the mistake omitted to draw the mistake to the notice of the other party; and
  4. The mistake must be calculated to benefit one party.

The facts of the case in Thomas Bates & Son Ltd v Wyndham (Lingerie) Ltd the court came to the conclusion that where a lease deed contained arbitration clause but the new deed which was prepared by the landlord did not contain that provision without the knowledge of the Landlord and though the lessee was aware of the omission he did not draw it to the attention of the landlord, the landlord was entitled to seek rectification of the document for inserting arbitration clause.

  1. Erroneous opinion about the value of subject matter: In a case where a property which was subject to a subsisting lease was sold. The lessee had the right to receive the value of the improvements, but the agreement of sale was silent about this. The buyer wanted to have the agreement set aside on the ground of mistake about this right.  The court held that there was no mistake and that even if there was a mistake it was not as to the matter of fact essential to the agreement for sale.
  2. Mistake of fact and not of law:  It should be a mistake of fact and not of any law in force in India.

Legality of object and consideration (Section 23)

Another essential feature of a valid contract is that the object and the consideration must be lawful and not against the provisions by law. The object and the consideration of the object need to be lawful otherwise the contract will be declared void. In some cases, the object for which the parties entered into an agreement is lawful but the consideration for the same is defeating the provisions of a lawful consideration and which will lead the agreement to be termed as void and vice versa. So, for an agreement to be a valid one both the object and consideration should be lawful. The court will not enforce any agreement if its object and consideration are not lawful. The term “object of an agreement” is used to define the purpose of design. Section 23 of the Indian Contract Act, 1872 clearly states about what object and consideration are lawful and what are not. These are-

  • If that object or consideration is forbidden by law specifically.
  • Are of that nature which will defeat the very basic purpose of the law.
  • If the object or consideration is fraudulent.
  • If that involves or results in injury to any living person or the property of the person.
  • If the court has regarded any special objects and considerations as immoral.
  • Those objects and considerations which are against the policy of the public and can cause harm to the public.

If a contract shows any of these elements then it is unlawful and void u/s 23.

A contract is forbidden by law if it is either against any law, both substantive and procedural. E.g. An agreement to sell liquor without a licence, despite the law mandating to have a licence. In a particular case, the Plaintiff owner of a bar and having the licence to sell liquor transferred the management of the bar and liquor sale to the defendant who had no such licence. The court held that transferring business and sale of liquor to a person without the license, was prohibited by law and thus cannot be enforced.

If a contract circumvents a provision of any law or defeats the purpose of the law (i.e it makes the provision irrelevant), it shall be deemed to defeat the provision of that law.

If the consideration or object of the contract is to commit fraud, the contract is void. Thus if the object of agreement is to deceive another person, the same is void.

Even if a part of a single consideration is unlawful, the agreement is void

Intention to create legal relationship

Intention to create a legal relationship is one of the most fundamental aspects of the law. It is defined as the intention to enter a legally binding agreement or contract, it implies that the parties acknowledge and accept legal consequence in case of a breach of a contract. Intention to create legal relations consist of readiness of a party to accept the legal consequences of having entered into an agreement.

“Contracts must not be the sports of an idle hour, mere matters of pleasantry and badinage, never intended by the parties to have any serious effect whatsoever”.

Further Mulla writes It is essential to the creation of a contract that both parties should agree to the same thing in the same sense. Thus if two persons enter into an apparent contract concerning a particular person or a ship, and it turns out that each of them, misled by a similarity of name, had a different person or ship in his mind, no contract would exist between them.

Not expressly declared void

Apart from conditions u/s 10, contract act specifically declared a few classes of contract as void. Section 26 to 30 deals with such contracts. There are those contacts which have been expressly declared void by the Contract Act.

Agreements restricting a marriage (section 26)

Section 26[xix] expressly declares that an agreement which in effect prevents, either party to marry, then it is void. Section 26 does not differentiate between partial or absolute restraint, thus any agreement enabling the two is void.

In Abhas Khan v. Nur Khan, the bride married the groom, without the consent of the nearest male relative, in such cases under customary Muhammadan Law, the groom has to pay a certain amount to such relatives, called “rogha”. The Lahore high court held that enforcing such a custom is tantamount to saying that full age women cannot marry unless the groom pays a sum, which could be impossible to do so. It would be a custom in restraint of marriage.

There is only one exception to section 26 i.e. an agreement in restraint of marriage of a minor. This is because marriage with a minor is outrightly against Public policy and against section 10 of the Contract Act.

Agreements restricting trade (section 27)

Section 27 says that every agreement by which a person is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

It must be noted that the contract will be void only to such extent by which a person is restrained. Thus the entire contract will not be declared void.

Eg. If a contract contains a “non-compete clause”, which restricts a person from carrying out a trade, then only the non-compete clause will be void and not the entire contract.

Just like the doctrine of severability in constitutional law, Blue pencil doctrine is used in contract law, to sever the void part from the rest of the agreement.

Further, it is immaterial if the restraint is reasonable or not, under Indian law a contract in restraint of trade or business will be lawful only if the restraint falls within a statutory or judicially created exception. This is in contrast to English law in which a reasonable restraint may be held valid. In the case of Superintendence Company of India v. Krishan Murgai[xx] apex court held that neither the test of reasonableness nor the principle that the restraint is partial or reasonable applies to a case governed by section 27 of the act unless it falls within the exception appended to the said section

Agreements in restraint of proceedings (section 28)

According to Section 28(a) an agreement by which any party to the contract is completely or absolutely restricted in enforcing their rights (i.e. their right to move courts), by usual legal proceedings in the ordinary tribunals, or

which limits their time within which he may enforce his legal rights, is void.

Thus if a clause in a contract prevents a party to initiate a suit against the other party, then that agreement is void. However, an agreement which provides for arbitration when a dispute arises, then that clause is not void[xxi]. Arbitration is a method of dispute resolution recognised by courts all over the world and helps in reducing the burden on courts. It is always advisable to have a comprehensive clause on arbitration, to resolve the dispute as it would be favourable to both parties.

An agreement which provides that a suit should be brought for the breach of any terms of the agreement within a time which is shorter than the period prescribed by the Limitation Act is void to that extent. Limitation act provides for 3 years to initiate a proceeding in case of a breach.

Section 28(b) talks about those contractual terms which although does not limit the period of limitation but extinguishes a person to claim a right or discharges any party from any liability if he does not do so within the time period mentioned in the contract. Such contracts are also void. This is because such a contract restricts a party from enforcing his right.

Eg. If a contract says that in case of a breach the party can ask for compensation only within 3 months from the date of the breach, and if such compensation is not asked within 3 months then the breaching party will not be liable to compensate. In this case, the contract discharges the breaching party from liability.

Such common clauses found in insurance policies provide that the insurer should not be liable for loss or damage after expiration of twelve months from the happening of loss or damage.

Agreements void due to uncertainty (section 29)

According to Section 29, a contract is said to be certain if its terms are capable of being understood, in the sense, in which it has been intended to be understood, by the promisor, and are not ambiguous and vague[xxii]. It should be capable of being reasonably interpreted by the courts. Certainty is achieved, when intentions of the parties, safeguards, expectations, performances, are clear or can be objectively ascertained.

Illustration A: A agreeing to sell B a 100 tons of oil, but without being satisfied about the quality and kind of oil. Such an agreement is uncertain and void.

Illustration B: A entered into a contract with B for construction of the building and it was agreed that A would pay B the consideration within a month after the construction was completed.

 In this case, the deadline for payment is uncertain. It does not specify whether he has to pay before the last date of the month or on the last date of the month. Further, it is also uncertain, when will the said month start- will it start after the construction is complete or when the possession is transferred to A.

How is certainty ensured?

Certainty is ensured when the terms are not vague, ambiguous (capable of two meanings), incomplete and when there is consensus ad-idem along with an intention to create a legal relationship.

To create a binding contract the parties must express their agreement in sufficiently certain terms. What is needed is not absolute certainty but a  “reasonable degree” of certainty. [Scammell v Ouston]

To create a binding contract the parties must express their agreement in sufficiently certain terms. What is needed is not absolute certainty but a  “reasonable degree” of certainty. [Scammell v Ouston]

“To create a binding contract the parties must express their agreement in sufficiently certain terms. What is needed is not absolute certainty but a reasonable degree of certainty”[xxiii]

This largely depends upon how the contract was drafted and the language used within the clauses of the contract. One way to ensure certainty is not to make a clause open-ended which could lead to different interpretations by different people.

The parties must make their own contract. The courts will not construct a contract for the parties when the terms are indefinite or unsettled. The court must first be satisfied that the parties have in fact concluded a contract, before seeking to make certain its terms.

It is not enough to show that the meaning of the contract is uncertain, it should further be shown that it is incapable of being made certain. Mere vagueness or uncertainty which can be removed by proper interpretation, cannot make a contract void[xxiv].

An agreement which provides for the future fixation of price either by the parties themselves or by a third party is capable of being made certain and is not invalid under s 29. Such a contract is not void for uncertainty.[xxv]

Agreement of wager are void (section 30)

According to Section 30, Wagering agreements are void and no suit shall be brought to recover anything that has been won by a wager. Further, no suit can be brought to make a person abide by the result of any game or any other uncertain event if such an event was the subject of a bet.

Meaning

According to Sir William Anson, a wager is “a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event.”

Thus a wagering agreement is one whose outcome is based on a future uncertain event and upon the happening of that uncertain event one party will gain and the other party will lose and the loser shall pay the winner a sum of money or any other stake. Such parties shall not have any other interest other than winning or losing the bet.

It must be noted that an insurance contract is not a wagering contract, an insurance contract falls under contingent contracts.

What is a wagering contract?

When we talk about contracts we come across various types and kinds of contracts such as Quasi-contracts, Implied contracts, Expressed contracts and many more. One such type of contract is known as Wagering Contract. Wagering Contract is one in which there are two necessary parties between which the contract has been made and wherein, the first party promises to pay a certain sum of money to the second party on the happening of a particular event in the future and the second party agrees to pay to the first party on not happening of that particular event. The basic fundamental of a wagering agreement is the presence of two parties who are of sound mind to get profit or loss. A Wager in the common language means Betting or Gambling. The basic meaning of the term wager is betting. Section 30 of the Indian Contract Act specifically talks about agreements by way of wager, as void. The section read as follows:

“Agreements by way of wager are void and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain events on which any wager is made.” (see more)

Carlill vs Carbolic Smoke Ball co.(1893): This is the only case law which has defined a wagering contract in the most expressive and encompassing way. It States as follows:

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

Thus, it can be stated that all wagering agreements are contingent agreements but all contingent agreements are not wagering agreements. Thus in simple language, we can understand that a wagering contract is a futuristic contract which is based upon the happening of a certain event in the future. A wagering contract may or may not be imposed depending upon the circumstances in the future.

History of law related to the concept of wager

Since the primitive times when there were cases in British India, the law that related to the wagers was the common law in England governed it but then in 1848, the Wagers Avoiding Act came into force. Earlier, it was regarded that any action of the wager may be maintained if it was not against the personal feelings of the third person with evidence and that it was in contradiction to public policy. When we discuss the concept of gambling and betting we know that this kind of activities existed in our country from the olden ages which were not adopted in England and were boycotted. These types of activities have not been specifically mentioned under the Indian Contract Act or the Hindu law in general and thus these types of activities are considered as illegal and are not protected under the ambit of our Indian constitution under Article 19 or Article 301.

Also in the case of Chimanlal Purshottamdas Shah vs Nyamatrai Madhavlal(1985), a new dimension was given to the term Wager which follows, ”The essence of Gambling and Wagering is that one party is to win and the other to lose upon a future event which, at the time on track, is of an uncertain nature- that is to say, if the event turns our own way, A will lose; but if it turns out the other way, he will win”. (see more)

Types of wager

I. Moneyline betting

This type of betting is one of the easiest types of betting. Betting through the money line is very simple as it is done only on sports competitions and games and it is totally based upon the outcome/result of the match. This type of betting is illegal and this type of activity has been mostly seen in cricket to the highest in the Indian Premier League.

II. Spread betting

This type of wager/ betting takes place where the person who is placing the bet on the most favored team playing in the match wins the match by a certain margin or on the team which is regarded as the underdog for it to win or even if it loses then with a very close margin.

III. Over betting

This type of betting is done in the game where the better places his bet on the total of number score or total of goals scored by both the teams through a combination of the certain number and which is totally a futuristic event uncertain and nobody has control over it.

IV. Under betting

This type of betting takes place when the better places his bet on the condition that the combination of the total number of goals and points that are scored by both the teams will be less or under a certain limit. This type of wager is also related to the final outcome of the game.

V. Prop betting

This type of betting is very unique and creative in nature as it is not related to the final result of the game. In this case, the better places his bet on something like the first half of the game or like whether there will be a super over in a cricket game etc. thus, this is also known as prop betting.

Essentials of a wagering contract

  • Equal opportunity 

One of the main points in a wagering contract is that there should be an equal chance for both to either win or lose depending upon the outcome of the future event.

  • Uncontrollable

These events are futuristic which may or may not take place and it should be beyond the control of either of the party because if either of the party has control over it then it would not amount to wager.

  • No outside interest

Both the parties should have a single interest as to the profit or loss in the result of the event and there should not be any outside or personal interest attached with the uncertain event as that will not amount to wager as well.

  • Dependency

The wager agreement is fully dependent upon the happening of the futuristic event whether it is contrasted with the past, present or future as to the result of that event.

  • Promise

The wager contract should contain an important clause which should state that the parties promise to pay the money or money’s worth to the other party on the happening of the event and this should be agreed upon by both the parties.

Can a wagering contract be enforced

The Effects and Enforceability of a wagering contract can be understood by the concept that under the Indian Contract Act it has been explicitly declared as a void ab initio and thus even section 65 of the Indian Contract Act does not apply to it as the contract is void but there is nowhere mentioned that these type of contracts have been forbidden by the law, which again implies that except the state of Gujarat and Maharashtra the wagering contracts are void and are legal in the other states. Thus, these agreements by way of wager are void and thus no suit can be brought for recovering anything alleged to be won on any wager or entrusted to any person to abide by the result of any game or any other such uncertain event on which any wager is made. This was also seen in the case of Badridas Kothari v. Meghraj Kothari AIR 1967 the court held that although a promissory note was executed for the payment of the debt caused through wagering transaction, the note was not held enforceable. Thus, the winner cannot recover the money, but before it is paid to him the depositor recovers from the stakeholder. Also, it was also seen in the case of Gherulal Parakh v. MahadeoDas 1959 AIR 781 the honorable supreme court in its judgment said that although a wager is not unlawful under Section 23 of the Indian Contract Act and thus all the proceedings and transactions collateral to the main transaction are as such enforceable.

Exceptions to the wager agreement

As per the Indian Contract Act Section 30 states that there are also certain exceptions in the wagering agreements and thus the section read as follows:

“This section shall not be deemed to render unlawful a subscription or contribution, made or entered into for or towards any plate, prize or sum of money, of the value or amount of five hundred rupees or more, to be awarded to the winner of any horse race. Nothing in this section shall be deemed to legalize any transaction connected with horse- racing, to which the provisions of section 294A of the Indian Penal Code shall apply”. (see more)

Since a wagering contract is a void contract, thus there are certain exemptions to it which are as follows:

1. Showcase of talent is not a wager

Using your talent or skill in front of people in some competition will not amount to wager(such as sports competitions, puzzles etc), but there is a winning prize depending upon mere possibility then it will amount to wager. In the eyes of law prize competitions do not amount to wager but if the amount is not reasonable then it would amount to gambling and it will automatically become void.

2. Share market

The transactions that take place under the share market shall not amount to wager where the shares are bought and sold and mere delivery of shares from one person to another will not be regarded as the wager.

3. Horse race competition

Sometimes, the state government may authorize certain horse race competition if the local laws permit it and if the people contribute with a sum of RS 500 or more towards the prize money which is to be given to the winner of the horse race then it will not consider a wager.

4. Insurance contracts 

The contracts of insurance are not wagering at all because these are contracts of Indemnity. These contracts are entered upon to safeguard and protect the interest of one party from any damage hence it is not a wager.

5. Commercial transactions

The Agreements that are done for sale and purchase of any commodity that is to be used on a commercial base in which there is genuine intention to do legitimate businesses which are valid and if they intend to do so they are required to pay the difference.

Under Section 30 of the Indian Contract Act, the term Wager has not been defined and it does not even define wager agreement it only says that such agreements are void with the proviso of section 294A of the Indian Penal Code. The Indian lawmakers have never made any amendments in this section to define such terms ever since this law came into force and up till now, the section is silent on many things which are necessary to be defined specifically. So, we can only wait for the lawmakers to amend the following section and break the ambiguity on many things which have caused a lot of problems for the judiciary to decide many cases in the past. Thus, it seems a matter of urgent importance to bring the necessary amendments in the act.

Contingent contract

The word contingent means when an event or situation is contingent, i.e. it depends on some other event or fact.

For example, making money is contingent on finding a good-paying job.

According to section 2 (h)[1] of the Indian Contracts Act, 1872, a contract is an agreement in which two individuals enter and it is enforceable by law. In a contract, the party should give their free consent, should be competent to contract and the object and the consideration should be lawful. To form a contract, the agreement shouldn’t be declared as void. Thus, to form a valid contract, there should be two things- an agreement and its enforceability at law.

In regular courses, the phrase contingent means “subject to chance.” In the Indian Contract Act also, the word means conditional. Future events are always uncertain. In the case of a contingent contract, the chances of happening of this uncertain event is ascertained and calculated and also the potentiality to deal with the event if they come to fore at all. The contracting parties may require that some obligation will be performed depending on the contingent event. The parties may agree that any right will be due, or any liability will be imposed on the happening of the contingency. Section 31 to 36 of the Act governs contingent contracts. Section 31 of the Act defines a contingent contract as a contract between parties to do or not do something if some event which is collateral to the contract happens or does not happen. So, a contingent contract is also primarily a contract. But it is not an absolute or unconditional one. A contingent contract is dependent on the happening or non-happening of the event.

Now, the ‘contingent contract’ means enforceability of that contract directly depends upon happening or not happening on an event.

Section 31 of the Indian Contract Act, 1872 defines the term ‘Contingent Contract’ as follows:

‘A contingent contract is a contract to do or not to do something, if some event collateral to such contract does or does not happen’.

In simple words, contingent contracts are the ones where the promisor performs his obligation only when certain conditions are met. The contracts of insurance, indemnity, and guarantee are some examples of contingent contracts.

Illustration- A contract to pay B Rs. 20,000 if B’s house is burnt. This is a contingent.

Case laws

How is it different from wagering agreement?

  1. A wagering agreement is absolutely void (S. 30) while on the other hand contingent contract is a valid contract.
  2. In a contingent contract, the future uncertain event is merely collateral whereas in a wagering agreement the uncertain event is a sole determining factor of the agreement.
  3. In a wager, the parties are not interested in the occurrence of the event except for winning or losing the best amount while in a contingent contract the parties have a real interest in occurrence or non-occurrence of the event.
  4. All wager contracts are contingent contracts, but all contingent contracts are not by way of the wager.

Essential elements of the contingent contract

After examining the definition of the contingent contract given under section 31 of the Act, the essentials of the term contingent contract are as follows:

There must be a valid contract to do or abstain from doing something

Section 32 and 33 of the Act talks about enforcement of the contingent contract on the happening or not happening of the events respectively. The contract will be valid only if it is about performing or not performing an obligation.

Illustration 1: X makes a contract with Y to buy Y’s dog if X survives Z. This contract cannot be enforced by law unless and until Z dies in X’s lifetime.

Illustration 2: X agrees to pay Y a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.

Performance of the contract must be conditional[i]

The condition for which the contract has been entered into must be a future event, and it should be uncertain. If the performance of the contract is dependent on an event, which is although a future event, but certain and sure to happen, then it’ll not be considered as a contingent contract.

The said event must be collateral to such contract

The event on whose happening or non-happening of the event on which the performance of the contract is dependent should not be a part of the consideration of the contract. The happening or non-happening of the event should be collateral to the contract and should exist independently.

Illustration: X enters into a contract with Y and promises to deliver 10 books to him. Y promises to pay Rs. 2000 upon delivery. This is not a contingent contract since Y’s obligation depends on the event which is a part of the contract(delivery of 10 Books) and not a collateral event.

The event should not be at the discretion of the promisor

The event so considered as for contingency should not at all be dependent on the promisor. It should be totally a futuristic and uncertain event.

Illustration: X promises to pay Y, Rs. 10,000 if Y leaves Delhi for London on 31st March 2019. This is a contingent contract. Going to London can be within Y’s will but is not merely his will.    

Enforcement of contingent contract

Provisions related to the enforcement of the contingent contract are given under section 32 to 36 as follows:

Condition 1- enforcement of contract contingent on the happening of an event

The contingent contracts to do or abstain from doing something if an uncertain future event happens. However, the contract cannot be enforced by law unless the event takes place. If the event becomes impossible, such contracts become void. [Section 32]

Illustration: X promises to pay Y, Rs. 100,000 if he marries Z, the prettiest girl in the neighbourhood. This is a contingent contract. Unfortunately, Z dies in a car accident. Since the happening of the event is no longer possible, the contract is void.

Condition 2- enforcement of contract contingent on an event not happening

The contingent contracts to do or abstain from doing something if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible. If the event takes place, then the contingent contract is void. [Section 33]

Illustration: X promises to pay Y a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. On the other hand, if the ship returns, then the contract is void.

Condition 3- when an event on which contract is contingent to be deemed impossible if it is the future conduct of a living person

If a contract contingent upon how a person will act at a future time, the event shall be considered impossible when such person does anything which makes it impossible for the event to happen. [Section 34]

Illustration: X agrees to pay Y, Rs. 100,000 if Y marries Z. However, Z marries A. The marriage of Y to Z must now be considered impossible, although it is possible that A may die and that Z afterward marry Y.

Condition 4- contracts contingent on an event happening within the fixed time

Contingent contracts to do or not to do anything if a future uncertain event happens within a fixed time. Such a contract is void if the event does not happen and the time lapses. It is also void if before the time fixed, the happening of the event becomes impossible. [Section 35(para 1)]

Illustration: X promises to pay Y a sum of money if a certain ship returns before 1st April 2019. The contracts may be enforced if the ship returns within the fixed time. On the other hand, it becomes void if the ship sinks.

Condition 5- contracts contingent on an event not happening within the fixed time

Contingent contract to do or not to do anything if an uncertain event does not happen within a fixed time may be enforced by law when the fixed time has expired, and such event has not happened, or before the time fixed has expired, if it becomes certain that such event will not happen. [Section 35(para 2)]

Illustration: X promises to pay Y a sum of money if a certain ship does not return before 31st March 2019. The contract may be enforced if the ship does not return before 31st March 2019. Also, if the ship burns before the given time, the contract is enforced by law since the return is impossible.

Condition 6- contract contingent of impossible event void

If an agreement to do or not to do is based on the impossible event, then such agreement is void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. [Section 36]

Illustration: X promises to pay Y, Rs 500 if two straight lines should enclose a space. The agreement is void.

Conditions when a contingent contract becomes void

  • Section 32- if the event on the happening of which the contract is contingent becomes impossible, the contract becomes void.

Illustration: Mohan contracts to pay Ram a sum of Money when Ram marries Geeta. Geeta dies without being married to Ram. The contract becomes void.

  • Section 35- contingent contract to do or not to do something, if a specified uncertain event happens within a fixed time, becomes void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.

Illustration: Saurbh promises to pay Sarvesh if a certain ship returns within the year. The contract becomes void if the ship is burnt within the year.

  • Section 34- if the future event on which a contract is a contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies.
  • Section 36- contingent agreement to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.

Illustration: X agrees to pay Y, Rs. 10,000 if Y will marry X’s daughter P. P was dead at the time of the agreement. The agreement is void.

Commercial applications of contingent contracts

  1. Insurance is a contract to do something if the future event occurs that will be contracted by the parties and liability will be taken by the offeror. In all Insurance like Life Insurance, Marine Insurance, Fire Insurance, and other Insurances, the Offeror promises to take the risk of the offeree against the incident to do or not to do something and for that the offeree agrees to pay a certain amount of money.
  2. The contingent contract can be used in the contract of guarantee as well as the contract of warranty. Contingent guarantees generally are used when a supplier does not have a relationship with a counterparty.
  3. We can use a contingent contract in negotiation. Contingent contracts normally occur when negotiating parties fail to reach an agreement.
  4. We can use the contingent contract in mergers and acquisitions (M&A) as well. Depending on the M&A deal, contingent payments such as earn-outs, Seller notes, and Buyer stock may be part of the Seller’s proceeds. After the deal is finalized, these contingent payments will need continuous contact between Buyer and Seller.
  5. It can also be used in the contract of indemnity.

What is described as ‘contingent contract’ in this topic is familiar to English law as ‘conditional contract’. For a contingent contract, there is a certain event which needs to be fulfilled. The terms of these contracts are certain and depend on the occurrence or non-occurrence of a future event. 

Performance of contract (Section 37 to 39)

The term “offer” has been defined under Section 2(a) of the Indian Contract Act, 1872. An offer is an expression of willingness made by a person to do or abstain from doing any act or omission with a view to obtaining the assent of the person to whom such an offer of act or abstinence is made. 

The term performance in its literal sense means the performance of a task or action. In its legal sense “performance” means the fulfilment or the completion of the obligations which they have towards the other party by virtue of the contract entered into by them. For example, ‘A’ and ‘B’ enter into a contract, the terms of the contract state that A has to deliver a book to B on payment of the consideration of five hundred rupees. Here, B pays to A rupees five hundred and as stipulated in the contract, A delivers him the book.

Section 37 of the Contract Act talks about performance. According to the Section, there are two types of performance which are:

  • Actual performance: Actual performance of the contract means the actual discharge of the liability or obligation which a person has undertaken to perform and there remains no other task which he is obliged to discharge under the promise. He is said to have made the actual performance of the promise.
  • Attempted performance: At times when the performance becomes due. The promisor is not able to discharge his obligation or perform his duty because he is prevented by the promisee in doing so. This situation where the promisor actually intended to perform his obligation or discharge his duty but is prevented from doing so by an intervening disability is known as the attempted performance of a promise. 

Attempted performance is also known as Tender. A tender can be of two types:

  • Tender of goods and services: The discharge of the contract to deliver goods and services is completed when the goods are tendered for acceptance in accordance with the terms of contact. If the goods and services so tendered are not accepted they are to be taken back by the offeror and he is discharged from his liability.
  • Tender of money: where the debtor tenders the money which is to be paid to the creditor but the debtor refuses to accept the money. The debtor is not discharged from the lability to pay back the money. Therefore, a tender of money can never result in the discharge of debt. 

Tender of performance

Section 37 to Section 39 specifically deals with the performance of the contract by the parties thereto. According to Section 37 of the Indian Contract Act, 1872 the parties to a contract are under the obligation to either perform or offer to perform the promises which have been agreed upon under the contract. Section 2(b) of the Indian Contract Act defines the meaning of promise as a proposal made by the offeror which has been accepted by the offeree. Thus, each party is under a legal obligation to perform his obligation which has been agreed upon under the terms of the contract. Unless the terms of contract expressly exempts or dispenses the performance of obligation upon the person. 

The promises made by the parties to the contract after their death binds their representatives provided that no contrary intention appears from the terms of the contract. For example, if there is a contract between two persons ‘A’ and ‘B’ in which A promises to deliver to B some goods on the payment of a certain amount of money by B on a particular day. However, if A dies before the completion of contract, in that case, A’s representative will be bound by the promise made by him and therefore they are under the obligation to deliver goods to B and B is also under the obligation to pay the specified amount to A’s representative.

However, in the case where the promise is made with regards to the personal skills and art of the person then his representative will not be bound by the promise made by him. For example, in the case where A promised B to make him painting on a specified day for a certain price. A dies before the performance of the contract. Neither the representatives of A are not bound by the promise made by A nor B can compel the representative for the specific performance of the promise made by A.

The obligation of parties to perform (Section 37)

The obligations in a contract are those duties by which the parties to the contract have to abide by. In a contract, the parties to the contract usually exchange something of value in the eyes of the law. The thing which is decided to exchange can be the product, services, money, etc. An example of contract obligations is with the sale of a product such as an automobile. One party has the obligation to transfer ownership of the car, while the other has the obligation to pay for it. The contract will specify the terms that regulate the obligations, such as the method and amount of payment, and the time or place of delivery.

In the case of M. Kamalakannnan v. M. Manikanndan, there was a contract between the plaintiff and the defendant for the sale of the property. The plaintiff, in this case, retained some part of the money which was stipulated under the terms of the contract in order to compel the defendant for the performance of some of the obligations like vacating the property which was occupied by the tenants and handing over the vacant property to the plaintiff. The contention by the defendant was that non-payment of some part of the consideration resulted in the infringement of the terms of the contract.

In Geo-Group Communications INC v. IOL Broadband Ltd, the parties to the contract signed an agreement and they fully acted on the terms of the agreements so much so that there arose no further need for the documents to be executed any further. The agreement was described as one of the preliminary and tentative drafts made for the purpose of discussion and deliberation only. When the contract was challenged in the court of law, the court held that the agreement was valid and it entitles the claimant for relief. 

Submission of tender tantamounts to a proposal

When in response to an invitation a lender is submitted it is considered to be a proposal to contract and not the contract itself. In M/S Great Eastern Energy vs. M/S Jain Irrigation Systems Ltd, the tender specified the validity period for four months. The court held that after the expiry of the period of tender, no acceptance could be made. The forfeiture of the security deposit amount by acceptance of the tender after the expiry of its validity period and failure of performance by the tenderer was not improper.

Promises bind the representatives of the promisor

The proviso attached to Section 37 of the Act provides that in case of the death of the promisors the representative of such promisors would be bound by the promises made by them unless a contrary intention appears from the terms of the contract. In the case of Basanti Bai vs. Sri Prafulla Kumar Routrai, that in case a person dies without leaving behind any legal representative, then, in that case, the liability to perform the promise on his behalf would fall upon the person who acquires interest over the subject matters of the contract through that deceased party. The Cuttack High Court, however, held that in the present case, the plaintiff was not able to enjoy the above mentioned legal proposition as she was unable to prove the existence of the agreement which was alleged by her.

Clause for renewal

The Clause for renewal is the provision by which the terms of the contract initially agreed upon are renewed or recommenced.

In Hardesh Ores Pvt. Ltd vs. M/S. Hede And Company, the terms of the contract contained a renewal clause. The party which have the authority in accordance with the terms of the contract to renew the same exercised it. However, the other party refused to accept the new terms caused by renewal. The Supreme Court held that in such a case the best course of action for the party who is empowered by the terms of the contract to renew the terms of the contract is to get the renewal declared and enforced by the court of law or to get the declaration of renewal of contract by the court.

Tender of performance (Section 38)

The offeror should offer the performance of an obligation under the contract to the offeree. The offer is called the “tender of performance”. It is the discretion of the promisee to accept the offer. In case the promisee chooses not to accept the offer then neither the offeror could be held liable for the non-performance of the terms of the contract nor he loses his rights under the terms of the contract. Therefore, it is a settled principle that non-acceptance of the tender of performance would result in the exclusion of the promisor from further performance of the terms of the contract and he is also entitled to sue the other party for not performing the terms of the contract. Section 38 of the Contract Act makes it clear that a tender of performance tantamounts to performance. Every tender of performance must fulfil a certain essential condition:

  • Section 38(1): The offer should be unconditional;
  • Section 38(2): The offer must be made at a proper time and place so as to allow the party to have a reasonable time for ascertaining that the person who is making the offer to him is competent to enter into a contract;
  • Section 38(3): If the offer to the offeree is such as to deliver some goods addressed to the offeree then it is the duty of the offeror to provide reasonable time to the offeree in which he can ascertain that the goods offered to him is the same by which the offeror is bound under the terms of the contract.

Tender of performance should be unconditional

Subsection 1 of Section 38 states that a tender to valid must be unconditional which means that it should not be accompanied with any clause, provision or condition precedent or subsequent. In Haji Abdul Rehman Haji Mahomed, the court, in this case, explained the situations in which the tender becomes conditional. According to the court, when a tender does not follow the terms of the contract which were originally drafted and agreed upon by the parties, the tender becomes conditional. The reason for making it a necessity is because of the fact that it is not reasonable to compel a party to accept the modified or altered terms of contract which were not initially agreed upon by the parties. For example, if A offers to pay B a certain sum of money if B agrees to sell certain goods to him. It is a conditional tender and therefore it is invalid. Similarly in a case where A sent a single cheque for two items, only one of which was due at the time, while the other was payable after some time. The cheque being one and indivisible could be accepted as whole or not at all. It was held that the promisee was within his right in rejecting cheque.

The tender of performance must be made at a proper time and place

Section 38(2) of the Act mandates that the tender of performance should necessarily be made at a time and place and under such circumstances so as to afford the person to whom the offer is made a reasonable opportunity to ascertain that the offeror is able and bound to do whatever he has promised under the terms of contract to do.

In P.L.S.A.R.S., Sabapathi Chetty (Deceased) vs. Krishna Aiyar, the court held that generally, the parties to the tender of performance fix the time and place. The tender of performance should mandatorily be made at the time and place stipulated under the contract. If the performance is made within the stipulated time and place then the promisor is under no further obligations.

In Startup v. Macdonald, the defendant purchased ten tons of linseed oil to be delivered to the plaintiff within the last fourteen days of the month of March. The plaintiff tendered the defendant at night on the fourteenth day. The defendant however citing the lateness of the tender rejected the acceptance of the tender. The court, in this case, held that the defendant should be held liable for the breach of the terms of the contract and the contention made by him that the late acceptance of the tender was made could not be entertained because, although the acceptance was made late, still the acceptance was made before midnight.

In Afovos shipping co. v. R Pagnan, an international contract was entered into by the plaintiff and defendant. The term of the contract provided that the payment which formed the consideration of the contract should reach on the 14th day of the month, however, the defendant repudiated the contract before the 14th day of the month. The court held that the defendant should have delayed the repudiation of the contract till 14th of the month.

Section 138(2) of the Act also provides that the tender must be made under such circumstances so as to allow the other party to get reasonable opportunity to ascertain that the person who is making the tender is capable and willing to fulfil all the conditions mentioned under the contract. Section 138(3) of the Act provides that the goods which are subjected to tender must be the same as mentioned under the description of the tender otherwise the tender will be invalid.

In Dixon v. Clark the court held that the fact that payment was tendered and refused in no way discharges the debtor from his liability to make good of the payment of a debt.

In Vidya Vati vs. Devi Das, the principle of old standing which was given in the above-mentioned case was endorsed. The debtor was under the obligation of paying back his loan in order to recover the vacant possession of his premises and his tender was also rejected. However, the court held that the debtor was not released from the obligation to pay prior to his recovery of the possession. 

By whom contracts must be performed (Section 40)

Section 40 of the Contract Act contains provisions regarding the performance of the contract. The Section provides that if by the terms of the contract it appears that the intention of the parties to the contract was such that any promise contained in it must essentially be performed by the promisor himself and no other person on his behalf can perform his promise. In all the other contracts the terms of which do not indicate any similar intention then in the absence of the promisor for the performance of the promise any other competent person can perform the promise on his behalf. For example where A promises to B a certain sum of money. The money could be paid to B by A personally or by any other authorized person authorized by A on his behalf. If in the above case A dies without authorizing the person who can make the payment on his behalf. Then his representative will be bound to make the payment on his behalf or they can appoint any other person to do so.

Effect of accepting performance by the third party (Section 41)

Section 41 of the Contract Act contains provisions regarding the effect of acceptance of performance of promise by the third party. The Section provides that where the promisee agrees to performance of a promise which is made to him by the offeror, by the third party. He can not at a later point of time enforce the contract against the promisor who initially promised to perform the promise.

If the terms of the contract indicate that from the very beginning of entering into the contract the parties to the contract intended specific performance of the promise by the promisor himself. The effect of reflection of such intention would be that the promise should essentially be performed by the promisor himself and the promise can not be enforced against his legal representative nor can his legal representatives can enforce the promise. This type of situation can usually be seen in cases which involve the personal skills of the promisor himself.

Generally, the rules laid down under Section 37 is that the promises of the deceased promisor will bind his representatives. Therefore, the general principle of the law of contract is that unless there appears a contrary intention in the terms of the contract. The representatives of a deceased promisor are bound by the promise of the deceased and the promises of the deceased are enforceable against his representatives.

In the case of Kapur Chand Godha vs. Mir Nawab Himayatalikhan Azamjah, the court declared that the English and the Indian law differs substantially on the point of performance of the contract by the representatives of the deceased promisor, in the British law system, the rule is that the third party or the representatives of the deceased promisor could discharge his obligations only in the cases where it is clearly evident from the promise that it was the intention of the parties while the formation of the promise to bind their representatives in case any of the promisors dies, in Indian law, however, the position with respect to the performance of the promise by the representatives of the deceased on contrary to the English law and the same could be inferred from the words of Section 41 of the Indian Contract Act, which leave no ray of doubt that in cases where the appellants expressly declare the intention of the performance of their promise from the third party, they can not afterwards enforce the promise against the promisor. 

Joint promises (Section 42)

Section 42 of the Indian Contract Act talks about the joint promises. When two or more promisors agree to perform the terms of the promise together they are said to have made a joint promise and the people who jointly agreed to perform the promise are called the joint promisors. The section provides that the promisors are jointly liable to fulfil the promise until the terms of the contract provide anything to the contrary. The Section also provides that in case of death of any one of the joint promisors his legal representatives will be bound by the obligation under which the promisor was in his lifetime.

Performance of joint promises

According to English law, in a case where one of the several joint promisors dies. The surviving joint promisor would be bound by the rights and liabilities of the deceased joint promisors until a single joint promisor is alive the representatives of the promisor will not acquire any rights or liabilities. This rule is sometimes considered to put the creditor in the loss as he has no security of solvency of the creditors. This lacuna of the rule is filled by Section 42 of the Indian Contract Act. 

Devolution of joint liabilities (Section 42)

Section 42 of the Indian Contract Act deals with the devolution of joint liabilities. According to the Section in case, there are several joint promisors involved in a contract by making a promise then during the joint lives of the promisors they must fulfil the promise jointly. In case of death of any of the joint promisor, the representatives of the deceased promisor along with the surviving promisors should strive to fulfil the promise. On the death of the last surviving promisor, the representatives of all the deceased promisors would be jointly liable for fulfilment of the promise. However, this legal proposition is subject to any private arrangement between the parties to the contract.

When two or more persons enter into a joint promise then unless a contrary intention appears by the contract all promisors during their joint lives and after the death of any of them their representatives will be bound jointly along with the surviving promisor or promisors. After the death of all the promisors, the representatives of all the promisors will be bound by the promise jointly entered into by the deceased promisors.

This Section provides security to the promisee by assuring him that the promisors would be bound by the promise made by them during their joint life and after the death of either of the promisor, their representatives will be bound by the promise made by the deceased promisor. 

In Gannmani Anasuya & Ors vs. Parvatini Amarendra Chowdhary, the court held that Section 42 shifts the burden of the fulfilment of the promise on the representatives of the deceased promisors. However, this liability is subject to the express or implied prescription of such provision by the promisors. Such prescription by the promisors could be inferred expressly or impliedly. 

When two or more persons make a joint promise, the promisee may, in the absence of an express agreement to the contrary, compel, any one or more of the joint promisor to perform the whole promise.

Each promisor may compel contribution– Each of the two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise unless a contrary intention appears from the contract.

Sharing of loss by default in contribution– If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. Section 43 entitles the promisee to claim performance from anyone or more promisors to compel contribution from the others, and the sharing of loss in the event of default in contribution. These provisions can be altered by providing to the contrary in the contract.

Types of joint obligations

Several responsibilities arise when two or more persons under a single or different instrument make separate promises to another. Their promises are cumulative, and one’s payment will not discharge the other. Joint liability arises when two or more persons promise to do the same thing together in the same instrument and make separate promises to do the same thing. It gives rise to one joint obligation and as many joint and several promisors as there are. Like joint responsibility, one-time performance discharges everything.

Joint and several liability

The Section makes all joint contracts joint and several. When the debts are jointly incurred, each promisee is liable for the whole amount. A joint contract unenforceable against one of the joint promisors on the ground of lack of his signature or is having agreed at all, can be enforced against the other who has signed. Neither the minority or insolvency of one joint promisor affects the liability of the others.

Death of one joint promisors

As held in Gokhul Bihari Pande v Khiju Rai, if one of the joint promisors dies pending suit, the suit can be brought against the other defendant promisors without recording his legal representatives. But when a lawsuit has been dismissed against a number of joint promisors, the plaintiff can not prosecute an appeal against just a few of them, waiving his claim against the rest.

Suit against joint promisors

Under this Section, the lender may sue all or any of the joint promisors as he may choose, even where one of the promisors has undertaken the liability as a surety. Section 43 read along with O I r 6, CPC, makes the effect of joint liability arising on a contract the same as where the liability is several. But this is limited to the question of joinder of parties liable on the same contract and is a matter of procedure as held in Union of India v. East Bengal Steamer Service Ltd. The Section allows a promisee to sue one or more of several joint promisors to be sued only along with his co-promisors. It is no defense to such a suit that all the promisors must have been made parties. However, this right of the promisee to sue any one or more of the joint promisors is distant from, and does not affect the right of a defendant to apply to the court under O I, r 10, of the CPC 1908, to have his co-contractor added as a party, not on the ground that such co-contractor ought to be joined, but if the “court considers it necessary to do so” as was held in Muhammad Askari v. Radhe Ram Singh.

In Ganeshmull Sahasmull v. Sohanlal Punamchand, where, pending an appeal against a decree obtained against joint promisors, one of the promisors dies and the appeal abates qua him, the appeal can proceed against the other joint promisors. The abatement does not affect the right of the surviving promisors for contribution against the deceased joint promisor’s estate.

Suit against one of the several partners

The Section applies as much to partners as other contractors. In a suit brought upon a contract made by a partnership firm, a plaintiff may select as defendants, those partners of the firm against whom he wishes to proceed, without making all the partners defendants. Where a partner of a registered firm entered into a contract of tenancy on behalf of the firm, a suit against that partner for recovery of rent was maintainable in the absence of the other partners, who were not necessary parties, non-payment of rent being an act of the firm within the meaning of The Indian Partnership Act, s 25.

Where one partner, having himself settled a decree against the partnership, sued another partner for contribution, he could not rely upon s 43 to defeat a plea by the defendant that a suit for one item in the account could not be a subject of claim because the partnership had been dissolved and the suit for accounts of the dissolved partnership was time-barred.

Effect of decree against only some of the joint promisors

There is considerable difference of opinion among the high courts about the operation of this Section, where a judgment has been obtained against some or one of joint promisors. The Calcutta High Court held that a decree obtained against one of several joint makers of a promissory note is a bar to a subsequent suit against others, which was followed initially by the Madras High Court, but it later held that if the decree against some only of the joint contractors was not barred. The Allahabad High Court held in Muhammad Askari v. Radhe Ram Singh that a judgment obtained against some of several mortgagors remaining unsatisfied was no bar to another suit against the other joint mortgagors.

A foreign judgment passed on admission against one joint promisor, who had admitted the claim after the institution of the suit, would not bar the continuation of the suit against other joint promisors in the domestic forum.

Situations of such liability

When a joint venture group contract is concluded, all members are jointly and severally liable, even if only one is capable of rendering the service in question. Each of a number of co-tenants is liable separately to the landlord under s 43 for the entire rent, and a suit is also liable against all the heirs of a deceased co-tenant without making a party to other co-tenants. As the rights of one of the joint mortgagors, who had redeemed the mortgage, are specifically dealt with in s 92 of The Transfer of Property Act 1882, s 43 of this Act has no application. The liability of the members of a company found illegally is joint and several, and a suit can be maintained against only some of them.

Co-heirs

Section 43 refers to two or more persons making a joint promise, and there is no application where parties become jointly interested in the operation of law in a single person contract. The section therefore does not apply to the case of the original debtor’s several heirs, and they must all be joined as parties to the suit. Later, a Calcutta High Court Full Bench decision held that a case of a rented lawsuit against some of the heirs alone could be upheld, since the court had the power to add parties under O I, r 10, CPC.

In the Absence of Express Agreement- Whether a sales deed by a number of sellers makes all sellers jointly liable or makes each seller liable for their own share, is a matter of fact depending on the parties’ intent. The burden of proving that each promoter is not liable separately under the contract lies on that joint promoter who wishes to resist the suit on this ground.

Contribution

The word contribution in s 43 and reimbursement is in s 69 convey two different ideas and are applicable in two different ideas and applicable in two different circumstances. A contribution is between persons equally bound, while reimbursement lies between a person interested in payment and persons bound to pay. Contribution signifies payment by each of the parties interested in his share in any common liability. Mutuality is the test of contribution. Under the English law, joint and several debtors have a right of contribution among themselves based on restitution. Unless a contrary intention appears, the right to claim contribution is an absolute right, and the courts have no option but to give effect to it.

Contribution between judgement-debtors

Persons liable jointly and severally under a decree are in the same position as joint promisors. They will bind a contribution to the extent of their respective shares towards the discharge of the decree. A co-debtor may not be liable to contribute if he shows that the other co-debtor had an amount of joint money sufficient to discharge the decree. A decree-holder can recover his decretal debt from one or more or any of the judgment-debtors and the latter can compel contribution from the other judgment debtors, who have not been compelled to pay. In the absence of a contract to the contrary, the liability to contribute is not affected by the release of any judgment-debtor by the decree-holder.

The question as to whether there is any right of contribution as between persons against whom a joint decree has been passed depends upon the question whether the defendants, in the former suit were wrong-doers in the sense that they knew or ought to have known that they were doing an illegal or wrongful act. In that case, no suit for contribution will lie. If an act is manifestly unlawful, or the doer of it knows it to be unlawful as constituting either a civil wrong or a criminal offense, he cannot maintain an action for contribution or indemnity to him for the commission of such act is also void. Thus, where a decree for costs against two defendants jointly was executed against one of them, who had set up a false defense in the suit in collusion with the other, and the former sue the latter for contribution in Vayangara Vadaka Vittil Manja v. Pariyangot Padingara Kurupath Kadugochen. It was held that the suit would not lie.

Principal debtors and sureties

A surety is not liable to pay contribution to the principal debtor. The liability of the principal debtor and the surety is joint and several, but upon payment to the creditor, the surety is entitled to recover from the principal debtor, the entire sum he has rightfully paid under the guarantee. The liability of co-sureties to contribute is separately provided in s 146 of the Act.

Commencement of liability for contribution

Before the enactment of this Act, it was held in Ram Pershad Singh v Neerbhoy Singh that the mere existence of a decree against one of several joint debtors did not provide ground for a contribution suit against the other debtors. Only after fully satisfying the joint decree can a co-promoter seek contribution from other co-promoters. For contribution, a prima facie case is made by the production of the judgment and the certificate of satisfaction. Mere execution of a mortgage decree for costs does not entitle a defendant to the contribution unless he redeems the mortgage or the mortgaged property is sold in satisfaction of the mortgage. Limitation for contribution begins to run only from the date of payment as held in Shankerlal v. Motilal.

Default in contribution

Joint promisors are liable to contribute equally unless a contrary intention appears from the contract. The last paragraph of the Section does not contemplate cases where one of the joint contributors has not paid and others received the benefits in the original contract in unequal proportions. The fact that one happens to escape from legal liability to the creditor, without consent of his associates, and perhaps even without their knowledge, cannot be allowed to disturb the original obligation between co-debtors or to alter the proportions of liability or contribution, which must be ascertained from the note at the time it was made as held in Ramskill v Edwards. If one liable person is not in a position to pay his share, that amount should be divided equally within the Section between the others, but it was held that the amount could be divided by the proportion of the benefit each received.

Release of one joint promisor (Section 44)

Section 44 of the Contract Act grants the Right to release to the creditor under which he may release either of the joint promisors from liability. The section provides that where the creditor has released either of the joint promisors from the liability. The other joint promisors are not discharged from their liabilities and they are still bound to fulfil the promise which they have made to the person. The release of the promisor from his liability towards the promisee, however, does not result in his release from the liability which he has towards the other joint promisors.

Section 44 of the Indian Contract Act marks a departure from the common law principle in which the release of one of the promisors from liability tantamounts to the release of the other promisors from their liability towards the promisee. Unless the promisee expressly provides for the preservation of rights against them.

Time and place for performance (Section 46-50)

We already know that a contract requires a certain set of basic essentials that must be fulfilled in order to make a contract legally enforceable. But even when the parties to the contract have fulfilled these essentials, its validity can be questioned if the contract is not fulfilled in due time and in the manner prescribed in the contract. In all Commercial contracts for example construction contracts, it is of utmost importance that a contract is completed in due time because a delay in its performance might frustrate the whole objective of the contract making the promise subject to losses. Although it is at the discretion of the parties to decide the time, and place of the contract, once decided it becomes necessary to comply with such terms.

We will now discuss the rules regarding time, place and manner as specified in sections 46-50 of The Indian Contract Act, 1872.

Rules regarding time and place of performance of contract

1) When no application is to be made by the promisee and no time is specified – Section 46

In situations where there is no time period specified for the performance of the contract and the promisor has to perform the contract without any request by the promisee, in such a case the promisor must perform the contract within a “reasonable time”.

Here reasonable time means a fair amount of time that is required to do something conveniently and as soon as the circumstances permit. Hence here time is not important since a specified date for completion is not mentioned but this does not mean that the promisee does not have the right to have the contract performed by the promisor.

Also, the term reasonable time depends on the facts and circumstances of the case and will also depend on the nature of the transaction.

Illustration

Srishti takes a loan of Rs 10,000 from Shivani and says that she will return it to her when she receives her next salary. Here the reasonable time for performance of the contract is after Srishti receives her next salary.

2) When time and place of performance is specified but no application is to be made by the promisee- Section 47

When the terms of the contract say that the promisor has to perform the contract without any request by the promisee, on the place specified by the promisee and on the exact date specified by him.

In case no specific time is mentioned then the promisor should deliver the goods during the usual hours of business.

Illustration

Ankita promised to deliver goods to Ira on an advance payment of Rs 10,000. Ira made the payment and asked Ankita to deliver the goods on 13th of the same month at her office at Tis Hazari. Since the time is not specified, she should deliver it between 10 am and 5 pm, assuming those are the regular court timings.

If Ankita attempts delivery after the business hours, then Ira has the right to not accept the goods and ask Ankita to deliver again during business hours.

3) When Performance is to be made on a proper place and time but an application is to be made by the promisee to the promisor for its performance- Section 48

When the terms of the contract say that a performance of a contract has to be made on a particular day but the promisor will only do so when the promisee makes an application to the promisor on that specific day for performance. Hence, here since it is specifically mentioned in the contract that the promisee has to request the promisor for performance on that specific day, he must do so at the proper place and during the usual business hours as specified by him.

Illustration

Manu agrees to supply Nishant 50 cartons of alcohol on 3rd November at his office. As per terms of the contract, Nishant would have to request Manu for performance. Thus on the due date and within usual business hours, Nishant should request Manu regarding a time and place for the supply of goods.

4) Where no place is fixed and no application has to be made to the promisor by the promisee- Section 49

When the terms of the contract does not specify the place where the goods have to be delivered and that no request has to be made by the promisee for the performance of a contract, in such a situation it is the duty of the promisor to request the promisee of a place reasonable to both where the goods can be delivered and then accordingly perform the contract.

The place for the performance of goods implies both the delivery and payment of goods.

Illustration

Sheela entered into a contract for supplying 100 cartons of Gram Flour to Anu on 5th September at a specific price. On the due date of performance, Sheela must apply or request Anu for determining a reasonable place and also make the payment at the same place.

5) When the performance has to be made in the time and manner as specified by the promisee- Section 50

A contract can also exist in which the promisor agrees to perform the contract in a manner and at a place and time prescribed by the promisee.

Illustration

Prankur’s son is in the hospital and needs money for his son’s operation. Harshil owes money to Prankur and agrees to repay him at any place or time decided by Prankur. In this case, Prankur has the liberty to ask for the performance of the promise in any manner and at any place or time suited to him.

The consequence of failure to perform the contract at a fixed time when the time is essential (Section 55)

Section 55 of the Indian Contract Act,1872 deals with the effect of failure to perform the contract at a fixed time when the time is essential.

  • If an act is not done within the stipulated time, the contract becomes voidable at the option of the promisee provided the Intention of the parties was that time should be of the essence of the contract.

Thus whether time was the essence of the contract depends on the intention of the parties and also on the nature of the contract.

In Bhudra Chand v. Betts(1915) the defendant promised to deliver an elephant to the plaintiff for the capture of a wild elephant as a part of Kheda Operations. The contract provided that the elephant would be delivered on the 1st of October, 1910, but the defendant obtained an extension of the time till 6th Oct and yet did not deliver the elephant till 11th. The plaintiff refused to accept the elephant and sued for damages for the breach. It was held that the plaintiff was entitled to recover damages since it was proved that time was the essence of the contract since the defendant had tried to obtain an extension of time.

  • This section says that if it was not the intention of parties to make time of the essence of the contract, the contract does not become voidable by the failure to perform the contract on or before the specified time but the promisee is entitled to claim compensation for any loss caused by the default
  • Finally, the section goes on to say that if time is intended to be of the essence by the parties but performance is accepted on some other time other than the time agreed, compensation cannot be claimed by the promisee unless he gives such a notice to the promisor.

In the case of State of Kerala v. M.A Mathai(2007), it was held that if there are any delays in the performance of reciprocal obligations by an employer, the contractor gets the right to avoid the contract but if he does not avoid the contract and accepts the belated performance, he cannot claim compensation for any loss sustained to him due to delay in performance, unless he gives a notice of the same to the delaying party.

The intention of the parties

In Indian law, the question of whether the time is of the essence of the contract or not is determined by the intention of the parties.

The intention of the parties can be determined from:

(a) The express words used in the contract

(b) The nature of the contract itself

(c) The nature of the property which forms the subject matter of the contract

(d) The surrounding circumstances

It has been held in the case of China Cotton Exporters v. Beharilal Ramcharan Cotton Mills Ltd (1961) that in commercial contracts time is ordinarily of the essence of the contract.

Thus It is ordinarily presumed that except in commercial contracts, time is not of the essence in other contracts. This presumption can be rebutted by showing the intention of the parties.

For example, Time is presumed not to be of the essence in contracts relating to immovable property, but of the essence in contracts of renewal of leases.

In M/S Citadel Fine Pharmaceuticals vs. M/S Ramaniyam Real Estates Pvt. Ltd. and Ors. (2011), It was held that time was the essence of the contract which was specifically mentioned in clause 10 and the consequences of non-completion are mentioned in clause 9. So, from the express terms of the contract and the commercial nature of the transaction and the surrounding circumstances make it clear that the parties intended time to be of the essence of the contract.

However, merely specifying the time at which the contract has to be performed does not make time the essence of the contract. In order to determine this the terms and conditions of the agreement should be read carefully. If the contract in its terms provides that time is the essence of the contract, but other terms of the agreement show that the parties did not intend time to be of the essence, the court has held that time is not of the essence.

For Example, in the Case of Hind Construction Contractors v. State of Maharashtra (1979) the Appellant entered into a contract with the respondent on July 2, 1955, for some construction work with the condition that the contract should be completed within 12 months from the commencement of the work. The Appellant could not complete the work within the stipulated time and the Respondent canceled the contract with effect from August 16, 1956. The Appellant contended that time was not of the essence and further on account of several difficulties, such as excessive rains, lack of proper road and means of approach to the site, the completion was delayed. The Supreme Court, in deciding that time was not of the essence in relied on two clauses in the contract–

  1. First, there was a power to grant an extension of time on reasonable grounds by the respondent on an application by the appellant. Even though the appellant made an application for extension, the respondent revoked the contract which was wrong.
  2. Second, there was a provision to recover penalty/compensation from the appellant at specified rates during the time the work remains unfinished.

These two provisions, as per the court, exclude the inference that time was intended to be of the essence of the contract.

Time can be made essence by notice

When time is not of the essence in a contract, it can be made so by giving notice to the promisor. The notice must contain clearly that it wants to make time as the essence of the contract and the necessary implications if it is not adhered to. The promisor can also be intimated through the notice that default in the compliance with the terms will lead to the cancellation of the contract. The party serving the notice must himself be bound by it.

Extension of time

Since one party to the contract cannot unilaterally vary the terms of the contract, he also cannot extend the time without the consent of the other party through an agreement, Therefore, time for performance can be extended only by an agreement arrived at between the promisor and promisee. Thus if one party requests the other party for extension of time but the other party does not communicate his acceptance, the time cannot be extended in such a case.

What are reciprocal promises?

Section 2(f) of the Indian Contract Act, 1982 talks about what are reciprocal promises. Reciprocal promises which form are a part of the consideration.

Types of reciprocal promises

Mutual and independent

This concept has evolved through jurisprudence. It states that the two promises of the parties are independent of each other and they do not have to rely on each other for performance. Suppose there is a contract where A will give chocolates to B and B will give Pokemon cards to A.

A can fulfil his promise even if B does not give him the pokemon cards i.e- the absence of Pokemon cards does not make the performance of his promise impossible. The same goes for B. Thus while the acts are binding, they are mutually exclusive and are thus independent of each other.  

However, if the contract states the acts must be done in a certain order then that clause should be upheld. 

In Mrs Saradamani Kandappan vs. Mrs S. Rajalakshmi and Ors, Sadarmani was paying for a piece of land to Rajalakshmi in instalments. Before the payment of the last instalment, Sadarmani wanted to see the title document  Rajalakshmi failed to show it and Saradamani thus did not pay the last instalment.

Thus, Rajalakshmi terminated the contract. Sadarmani moved to the court and argued that failure to show the title document was the reason she could not pay the last instalment. The court ruled that these two promises (the promise to show the title document and the promise to pay for the last document) were exclusive as Sadarmani could pay the last instalment without showing the title document. Thus, Sadarmani should have paid the last instalment. 

Conditional

This is when the performance is dependent upon the prior performance of the other party. If the first party fails to perform his promise, then it will be impossible for the second party to perform his side of the contract. 

Suppose the contract if A promises to give money to B, if B promises to buys Maggi for A. If A defaults, i.e- he fails to pay B, then it will be impossible for B to hold up his side of the contract as he won’t be able to buy the Maggi if A does not pay him. Thus, this type of contract is considered a conditional contract. 

In M/s Shanti Builders vs. CIBA Industrial Workers’ Co-Operative Housing Society Ltd., the defendant, CIBA alleged that they suffered losses as Shanti builders did not do their work on time. On the other hand, Shanti builders contested they were not given plots of land (as per payment for construction).  Since this plot of land was not given to them, they were not able to complete construction.

The court held in favour of Shanti Builders and stated that if the nature of the transaction states that certain promises must be performed first before others, then that order must be followed. They also stated that in regards to conditional promises, the first party can not ask for the performance of the second party without performing their act first. 

Concurrent

Here, parties promise to do acts that have to be performed simultaneously. A  party will be exempted from doing their promise if the other party is not ready or willing to do their promise. Here ‘readiness’ means financial abilities and ‘ willingness’ is perceived through the action of the party. 

For example, P is supplying coats to R. P will only supply the coats if R financially can and is willing to, and R will only pay if P is willing to and has the goods.  

In J.P. Builders vs. A. Ramadas Rao, the court stated the definitions of readiness and willingness.  

Rules regarding performance of reciprocal promises

Section 51– Simultaneous performance

Like we had discussed in concurrent promises, if the other party is not ready or willing to perform their promise, then the other party does not need to perform their side of the promise.

Thus, if Ashok and Navya are in a contract, Ashok need not pay for the goods unless Navya is willing and ready. Similarly, Navya need not give the goods unless Ashok is willing and ready. 

In Pushkarnarayan S. Maheshwari vs. Kubrabai Gulamali, it was held that the burden of proof is on the Plaintiff to prove that he performed or remained ready and willing to perform the contract.

Section 52– A sequence of performance

If the contract calls for an order in which the acts promised should be performed, then the acts should be performed in that order. Otherwise, the sequence of the order is determined by the nature of the promises.

For example, if B cannot build a road he promised to build without providing material, then A’s promised act should be performed first, then B’s.

Section 53– One party preventing the other to perform their promise 

If one party prevents, or makes it impossible for the other party to perform their job, then the affected party has the option of voiding the contract. They also have the option of asking for compensations for the damages.

For example, Ashok is willing to supply coats to Navya, but on the day of delivery, Navya does not show up or locks Ashok in his shop; then Ashok can void the contract or collect compensation.

Section 54– Reciprocal and dependent promises

When the nature of the promise is conditional, the first party (the party who has to perform in order for the other party to perform) can not ask the other party to perform their promise, if they do not perform first.

The second party can also ask for compensation if they face damages due to the non-performance of the first party.

For example, Aaryan is a carpenter and Sara provides wood. They have a contract that Sara will provide wood to Aaryan and then he will make a table for her. If Sara refuses to provide the wood, then she can not expect Aaryan to make the table. If Aaryan faces any loss due to the fact Sara failed to provide wood, then he can ask for compensation. 

Section 55– Failure to perform in stipulated time 

If performing an act in a specific time frame is essential to the contract, and the promisor fails to do so, then the aggrieved party or the promisee can either void the contract and ask for compensation for losses. 

If time is not essential to the contract then the promisee can not void the contract, he can also ask for compensation of losses that were suffered due to the delay.

In M/S Citadel Fine Pharmaceuticals vs. M/S Ramaniyam Real Estates Pvt. Ltd. and Ors. (2011), it was stated that the intentions of the parties expressed in the contract are imperative to signal whether the time is of the essence when the nature of the transaction does not make it very clear. 

Section 56– Impossible or unlawful act 

If the promisor promises to do something which is impossible to do, then the contract is void. This section, thus, deals with the ‘Doctrine of Frustration’.

The conditions that should be satisfied in order to invoke this section are –

  1. The cause should not be a result of a default of the parties.
  2. The cause must be unforeseeable and inevitable.
  3. The cause must render the entire contract impossible to do.

There are two scenarios which are illustrated below-

Initial impossibility

This is when the promisor and promisee enter into a contract to do any act which they both know is impossible to do then the contract is void.

If the promisor promises to do an act that he knows can not be done, then he is liable to pay compensation for the losses suffered by the promisee due to his incapability to perform the act.

Thus, Ashok promises to supply Navya a coat made of bear fur. Navya wishes to wear this coat for a television interview. But, Ashok is aware that it is impossible for him to supply a bear coat to her in this season, but he still promises to sell her one and enters into a contract with her. In this situation, Navya can void the contract and can ask compensation for the losses she suffered. 

Subsequent Impossibility

At the time of making the contract, the act might have been possible and lawful, but later on, it became impossible to do due to some reasons. In this case, the contract becomes void when the act becomes impossible to do. 

Taking from the previous example, at the time that Ashok enters the contract, he will be able to provide a coat made of bear fur to Navya. But after he enters the contract, the Government puts a ban on the supply of products made of bear fur. Now Ashok can not supply Navya with the coat she wanted. Thus, the contract becomes void when the Government passes the law. 

Section 57– Reciprocal promises or legal and illegal acts

The parties may have entered the contract to do legal acts.  But after the contract was established, under specific conditions, they agreed to do illegal acts. In this case, the previous legal acts are valid and the preceding illegal acts are held void. 

For example, Ashok promises to supply coats to Navya. Navya then promises to sell such coats on the black market for more profits. Here Ashok’s promise to supply coats to Navya is valid but Navy’s promise to sell such coats on the black market is invalid. 

Section 58– Alternative promise of legal and illegal acts 

Parties may promise to do legal acts that branch off into illegal acts. 

For example, Preeti promises to pay back her loan to Rohit. But this loan shall be paid with black money. Thus, while Preeti’s promise to pay back the loan is valid, the promise to pay with black money is invalid. 

Appropriation of payments (Section 59-61)

Appropriation means ‘application’ of payments. In case of a creditor and a debtor, Section 59 to 61 of the Indian Contract Act, 1872, lay down certain rules regarding the Appropriation of payments. When a debtor pays an amount to the creditor, the creditor is to take note of these sections before applying the payment to a particular debt, because the creditor would be inclined to appropriate payments to the debt which is not likely to be realized easily. In case both parties do not specify the appropriation then the law would take the responsibility and appropriate accordingly.

A discharge of a contract by agreement, on the other hand, is when the contract is ended because the conditions are not fulfilled. However, the involved parties can also terminate a contract when the primary terms and conditions of the said contract have not been fulfilled. Essentially, the difference between a discharge of a contract and terminating contract is the reason why the contract is coming to an end.

Appropriation by debtor

Under Section 59 of the Indian Contract Act, 1872, it is stated that if the debtor owes several debts to the creditor, and makes a payment to any of them and later requests the creditor to apply the payment to the discharge of a particular debt. If the creditor agrees to this request, he is bound by such appropriation. This section applies to several distinct debts and not to a single debt, or to various heads of one debt. This is not applicable where the debt has merged into a decree. The appropriation may be implied or expressed by the creditor. The basic idea is that “When money is paid, it is to be applied according to express the will of the payer and not the receiver. If the party to whom the money is offered does not agree to apply it according to the will of the party offering it, he must refuse it and stand upon the rights which the law has given him”

Clayton’s case

In England, it has been considered a basic rule since the case of Devaynes vs. Noble, also known as Clayton’s case. In this, it was held that the debtor can request the creditor to appropriate the amount to any of the debt in case he owes to the creditor several and distinct debts, if the creditor agrees to it, then he is bound by it. 

Several and distinct debts

Section 59 applies to the debt which is several and distinct and does not apply in the cases where there is only one debt even if it is to be paid in installments. The test to know whether the debts are distinct is the person can sue for it separately. 

Intimation by the debtor

The debtor must at the time of the payment of the debt, must intimate the creditor that the amount must be paid for the liquidation of a certain debt, and the creditor has to appropriate it accordingly. The creditor has the right to refuse any conditions made by the debtor during the payment of the debt. Once appropriation has been accepted, then the creditor cannot alter the terms of the appropriation, without the consent of the debtor. 

The debtor should communicate his appropriation either expressly or impliedly, through the circumstances indicating such intention.

Proof of intention

Intention about the appropriation of the payment by the debtor must be proved by circumstances. Where the debtor alleges appropriation in a particular manner then he must prove it. Moreover, entries in the book of the creditor could be considered for the proposed appropriation by the debtor.

Contract of guarantee

The right to appropriate is available to the debtor and not the surety. A surety is also bound by the creditor’s appropriation. Also, the surety has no right to insist on the appropriation of any payment to the guaranteed debt, unless the circumstances of the case are such that they show such intention.

Appropriation by creditor 

Under Section 60, the creditor is also competent for appropriation. If the debtor makes any payment without any appropriation then the creditor can use his discretion to wipe out any debt which is due. He may use it for the payment of a time-barred debt or wipe out the debt which is carrying a lower interest rate. The right of appropriation lies with the creditor until the last moment, even when he is examined at the trial or before any act which renders him inequitable for him to exercise this right. The creditor, in this case, has a lot of scope for exercising his right, he can put himself in the most advantageous position. Moreover, he need not express himself in express terms while doing so. As long as notice has not been given in respect of the appropriation of any amount, the creditor can change it and can appropriate some other claim.

Lawful debts

The creditor must establish the existence of a lawful debt actually due. Under this section, the appropriation cannot be made against any unlawful debt. In several cases, it was held by the court that a creditor can even appropriate an unenforceable debt due to some defect.

Time-barred debts

The creditor, in the absence of any appropriation by the debtor, can appropriate the amount of a debt barred by the Limitation Act,1963. This usually happens as the creditor appropriate the amount to a time-barred debt and sue the debtor for the ones not barred. However, the amount cannot be appropriated to a debt barred by a statute after an action has been brought and judgment has been delivered. 

Principal and interest on single debt

There is a lot of conflict amongst the opinion of the court as to whether the provisions of this Section would apply to the principal and interest of the debt or not. In the case of Jia Ram vs Sulakhan Mal (Air 1941 Lahore 386), it was held that the principal and the interest would not be applicable under this. 

As under the common law, the rule that applies is that where the principal and interest has accrued on a debt, sums paid where interest has accrued must be applied first to the interest. This rule is based on “common justice” else it would deprive the creditor of the benefit to which he is entitled under his contract and would be most unreasonable for him.

Appropriation by law 

Section 61 is applied in a situation when neither of the parties makes the appropriation. To settle this deadlock, then the law gets the right to appropriate. In such cases, the debt is settled in accordance with the order of the time they have incurred. In case all the debts are of the same time then the debts would be discharged proportionately. Under this Section not only the express agreement but also the mode of dealing between the parties.

Assignment of contracts 

Assignment of contract means the transfer of the contractual rights or liabilities by a party of the contract to some other person who is not a party to the contract. For Example- A owes B debt and B owes to C. B can ask A to directly pay the amount to C, and if A agrees to this, then this will be an assignment of a contract. 

Assignment of liabilities 

In an assignment of the contract, it is important to note that the liabilities cannot be assigned. The promisor has to insist that the responsibility of the performance of the contract lies on the promisor himself. It becomes more important when the work is of personal nature and demands personalized skills like painting, singing. The promisor, in that case, can object to the performance of the contract which is done by some other person who is not a party to the contract.

The contractual liabilities may be assigned in the following two ways:

By the act of the party

  • Assignment with the consent of the other party and the assignee;

For Example- novation of a contract. 

  • Assignment with the consent of other parties, but without the consent of the assignee. 

For Example- A and B are party to a contract, they both decided to assign the liabilities on C, who is a stranger to a contract.

  • The assignment without the consent of the other party but with the consent of the assignee i.e. a voluntary assignment.

For Example- A and B are party to a contract, B assigns the liabilities of the contract to C, who is a stranger to contract, with his consent but without the permission of A.

By operation of law

The operation of law is another mode of a valid assignment of any contractual liabilities to a stranger. Such assignment is also called an ‘involuntary assignment’ or an ‘automatic assignment’ of contractual burdens or obligations. Such assignment may take place in the following circumstances:

  1. On the death of the promisor.
  2. On the retirement of a partner.
  3. On insolvency of the promisor.
  4. On winding up of a company.

Assignment of rights 

The rights are assignable under a contract unless the contract is personal in nature or the rights are incapable to be assigned either by law or under any contract that is entered by the parties. The intention regarding the assignment of the rights needs to be gathered from the nature of the agreement or from the prevailing circumstances. 

Even when there is no prohibition as to the assignment of the rights, but if the court from the facts of the case determines that there are various personal obligations under the contract, hence the rights under this cannot be assigned. 

One of the leading authorities is the decision of the Supreme Court in the case of Khardah vs. Raymon, in this case, the dispute arose because of a contract for the purchase of mill by a Pakistani jute dealer who failed to supply the goods as agreed. The court held that the contract for the purchase of the foreign jute was not assignable because the goods had to be imported from under the license which was not transferable. The other question which was put up was whether the dealer could assign his rights to that price on the delivery of the goods. The court accepted that there is nothing personal about the sale of goods. Moreover, it is established that the arbitration clause does not take away the right of the party to assign if it is otherwise assignable. In fact, the rights of the seller also do not obstruct the assignability of the contract. In the case, there was no provision in the contract which prohibits the assignment. The court stated that in the law there is a clear distinction between the assignment of the rights under a contract by the party who has performed the contract and his obligations, and the assignment of a claim for compensation which one party has against the other party for the breach of contract. The latter is just a claim of damages that can not be assigned in law, the former is the benefit under the agreement, which is capable of assignment.

Personal nature of the contract

The contract of personal nature involved the personal creditworthiness of the buyer even in the case of the mode of payment, which was not capable of being assigned. This was held in the case of SAIL vs. State of MP in which the central government assigned a piece of land to its own corporate undertaking with rights, liberties and privileges, one of which was the exemption from tax. The court rules that the assignee became entitled to the exemption as the successor.

Unilateral cancellation of the sale deed

It is not possible for the vendor to make a deed of cancellation of the sale deed made, even if the ground is full of consideration was not received by the vendor. Such a deed would result in the revocation of the contract and would require the order of the court. Moreover, a deed of cancellation of a sale unilaterally executed by the transferor does not create, assign, limit or extinguish any right, title or interest in the property and is of no effect. Hence such a deed could not be accepted for registration.

Effect and formalities of assignment

Consideration 

The assignment requires some form of consideration from the assignor to the assignee. In the absence of any consideration between them, the assignment will be revocable. But when an assignment is made by way of gift, by following all the essential conditions of a gift, then it can not be revoked. In order to make a voluntary settlement valid, the settlor must do everything, which according to the nature of the property was necessary to do in order to transfer the property.

Subject to equities 

The title of the assignee is subject to all the equities that exist or arise up to the time when the notice of assignment is given to the debtor. (for instance, A is the assignor, B is the assignee and C is the debtor).The assignee would not be affected by the equity of personal nature between the assignor and the assignee. For example, the right to claim damages for the fraud committed by the assignor cannot be used to defeat the right of the assignee. 

Notice of assignment 

Notice of assignment should be given to the debtor. This is very useful as it binds the debtor. If the notice is not given then the debtor could make the payment of the assignor himself and will get discharged. Moreover, if notice is given then the assignment would not be affected by any equity that may arise. Moreover, if the notice is paid to the assignor who has many assignments then, in that case, the notice is given to him at that point of time, then that assignment will have priority over others even if it was received later.

Discharge by agreement

Discharge of a contract means to end a contract. Discharge of the contract can take place through:

  • By Performance;
  • By agreement or by consent;
  • By promise failing to offer facilities for performance;
  • By breach of contract;
  • By impossibility of performance;
  • By death;
  • By refusing tender of performance;
  • By unauthorized material alteration of the contract;
  • Discharge by lapse of time;
  • By operation of law.

The parties to a contract are free to alter or rescind the entire term of the contract. Novation or modification can happen in the same manner as that of the conclusion of the contract. If one party proposes a novation and the other party accepts it but in a qualified manner, then it will not amount to novation. A mutual abandonment, cancellation, or rescission must be clearly expressed. Novation or modification is affected only when all the parties agree to it. The substituted contract needs to be enforceable just like the original contract. In case the new contract is not enforceable then the original contract would be operative. In such cases, the consideration would be the release of the existing contract for a promise to undertake a new contract. 

Contract which need not to be performed 

The word ‘novation’ literally means to replace with a new contract and the same obligations are performed by different parties. Under novation, the liabilities under the existing contract are extinguished. The doctrine of novations is recognized under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation can be effective only when there is a new contract and not a new agreement. Hence, mere agreement to substitute the existing contract will not be binding unless it has been accepted and executed mutually by all the parties. A new contractual obligation arises when parties novate a contract. 

What is the novation of a contract?

Novation of contract means creating a new contract while the old one is terminated and need not be performed. It is an act substituting a new obligation or party in a contract for the old one. Further, the newly substituted agreement should be valid, enforceable, have consideration and should be by the mutual consent of the parties. Basically, it should fulfil the requirements of a valid contract.

When a contract is novated, the original contract ceases to exist and the parties have to follow the new contract. Section 62 of the Indian Contract Act states that “if the parties to the contract agree to substitute a new contract for it or to rescind it or alter it, the original contract need not to be performed.”

Essentials of Section 62 of the Indian Contract Act

  • Consensus ad idem between the parties to a contract.
  • There should be a previous contract entered into between the parties.
  • Substitution, recession or alteration of a contract giving rise to a valid new contract.
  • Termination of the original contract.

The basic requirement of Section 62 was discussed by the Supreme Court in the case of Lata Construction & Ors v. Dr. Rameshchandra Ramniklal Shah, novation requires a complete substitution of a new contract in place of the old one and only in that condition the original contract does not have to be performed. The new substituted contract should rescind or completely alter the terms of the original contract. In Ramdayal v. Maji Devdiji, the court observed that novation takes place by introducing new terms in the contract or by introducing new parties. A contract of novation requires a party to agree to extinguish or discharge his obligation or debt. Unless this has been accomplished there can be no novation. Therefore the test is to know whether the parties intended to enter into a new contract between them or not.

For novation to take effect, modification to the contract must go to the root of the original contract and change its essential character as held by the Calcutta High Court in the case of Juggilal Kamlapat v. NV Internationale.

Examples:

  1. In a partnership firm, the liabilities of an old firm are taken over by the new firm.
  2. A lease agreement, where the tenant gives the lease to another party and makes him responsible for the obligations and responsibility arising from the lease agreement. 
  3. John owes 2 lakh rupees to Ram under a contract, Ram owes David 2 lakh rupees. Ram asked John to pay 2 lakh rupees to David in his place, but David does not agree and neither gives her consent to the agreement. Therefore, Ram still owes David 2 lakh hence, there is no new contract to enter.

Kinds of novation of contract

Novation is of two kinds: 

  • Where the obligation under a contract is replaced with a new one, and
  • Where a party is replaced by another party.

Change in terms of the contract

The parties to a contract have the freedom to enter into a contract and alter its terms by mutual consent. When both the parties mutually agree to change the term of the contract which they have previously entered into, then the new agreement becomes binding on them. However, in case there is a clause in the contract stating that the terms of the contract can be altered by one party (unilaterally) such changes in the terms will be considered as valid. Hence, a party cannot by unilateral terms impose conditions which were not a part of the original contract. 

In the case of RS Amarnath Mehra v. Union of India, the court observed that calling of fresh rates at a lower price will not amount to a new contract. If a contract consists of a number of terms and conditions then it does not mean that each term or condition is a separate contract. 

Similarly, in the case of Ramji Dayawala & Sons (P) Ltd v. Invest Import, the Apex Court held that a contract having a number of parts should have been assented by the contracting parties in the same manner and in the same sense, that is, it should have consensus ad idem. 

Change in the parties to the contract

Under a novation agreement, it is possible that the terms of the contract provide for the replacement of one party to the contract by another party. This creates an obligation for one party in place of another party. Under this kind of contract, the new party assumes all the obligations under that contract and the party who has assigned his obligations to another party under such a contract will not be held liable for any future damages. 

For instance: if A and B are parties to a contract, and A agrees to replace C in B’s place, then the existing contract between A & B will cease to exist. 

In the case of Godan Namboothiripad v. Kerala Financial Corporation, the respondent (Kerala Financial Corporation) sanctioned loan to one Gopinath for purchasing a transport vehicle which was to be paid in instalments. He defaulted in making the payments and as a result of that, the respondent seized the vehicle. After that, the appellants executed an equitable mortgage confirmed to repay the balance amount. The court held that it was a novation of contract because the appellants took the liability to pay the dues and the original debtor (Gopinath Menon) ceased to be the debtor.

Difference between novation and assignment

The difference between novation and assignment is minimal but important and is discussed in the table below:

Sr. no

Novation

Assignment

1

Under novation, the rights and obligations arising under the new contract.

Under assignment, only some rights are transferred to the third party.

2

The original contract is discharged. The new contract becomes binding on the parties.

The original agreement is not extinguished and the parties will remain bound by the obligations under that contract.

Novation of contract in an illegal agreement

The Court in Ratanlal son of Pannalalji v. Firm Mangilal Mathuralal observed that “if there is a direct connection between a fresh contract after novation and the earlier illegal contract or the earlier collateral contract, the novated contract would still continue to be illegal or immoral and the Court would refuse to enforce the same”.

When is it ‘No Novation’?

When the requisite conditions of novation are not satisfied then it will be considered as no novation. The Kerala High Court held in the case of Godan Namboothiripad v. Kerala Financial, that the essential features of a novation are the replacement or relinquishment of a right under the original contract by a new one and when these essential features are missing then, there will be no novation.

A unilateral act of one party

As discussed already, a party cannot on its own change the terms of the contract unilaterally. The Supreme Court in the case of Citi Bank N A v. Standard Chartered Bank held that novation, recission, and alteration under Section 62 requires that both the parties should agree to substitute, rescind or alter the existing contract with a new one. Such substitution, rescission or alteration has to be done bilaterally. In the case of Polymat India P. Ltd. & Anr vs National Insurance Co. Ltd. & Ors, it was held that the terms of a contract cannot be varied without the mutual agreement of the parties.

Intention of parties

All the parties to the contract have to agree to the new terms of the substituted contract. A novation contract will be ineffective when there is an absence of intention between the parties to alter, rescind or substitute a contract. In T.S. Duraiswami Aiyar And Ors. vs Krishnier, the court observed that substitution of one contract with another clearly depends upon the intention of the parties. Similar observations were made in the case of Calcutta Insurance, Madras vs Thirumalai Animal And Ors. and National Insurance Co. Ltd. v. Thirumalai Ammal And Ors

Alteration of contract

Alteration of contract means the modification of the terms of the contract with the consent of both the parties.  The elements of the alteration are:

  1. The alteration must be done deliberately.
  2. The alteration must have been material.

When the instrument which has been altered does not itself contain the obligations of the parties but is to be relied upon by them for the purpose of carrying out the contract, the alteration does not necessarily operate to discharge the parties from their underlying obligations. The effect of alteration of contract is that the new contract is formed and both the parties have to follow the rules of the new contract. It is essential to have assent of both the parties when the contract is altered. Also, in alteration of contract parties do not change. If parties decide to alter or modify the terms of the contract, then it is necessary that the alteration of the contract should be done either by express agreement or by necessary implication which would negate the application of the doctrine of acceptance sub silentio. In the case of Satya Pal Anand v. State of Madhya Pradesh and Ors., it was stated that any novation, rescission and alteration of contract, can be made only through bilaterally and with the amicable consent of both the parties. The terms and conditions of a contract may be altered but cannot be done unilaterally unless there exists any provision in the contract, or in any law, or there is an implied acceptance through silence. In the case of Suresh Kumar Wadhwa v. State of Madhya Pradesh, it was stated that the party to the contract has no right to unilaterally alter the  terms and conditions of the contract and nor they have the right to add any additional terms and conditions unless both the parties agree to alter such terms in the contract. In the alteration of contract, the liability of the parties in the original agreement is extinguished and the parties become bound by the new altered agreement.

Effect of alteration of contract through the consent of the parties

The contract is only altered when there is consent by both the parties. If there is no consent between the parties to alter the contract, then the contract is said to be void.

Effect of alteration of contract with the consent of parties

Material alteration

An alteration is material which affects the substance of the contract expressed in the document or which alters the legal effect of the document, which affects the document itself, at all events where identification may be important in the ordinary course of business. The alteration is not material if they merely express what was already implied in the document or add particulars consistent with the document as it stands. In the Pigot’s case, it was stated that the material alteration of a document by a party to it after its execution without the consent of the other parties renders it void and the alteration is not material. Material alteration must depend upon the nature of the instrument as also upon the changes. If the alteration causes the contract to operate it differently from the original, then it is said to be material alteration. An instrument is not discharged by an immaterial alteration. The alteration is said to be immaterial when it does not alter the legal effect of the instrument or impose a greater liability on the promisor. Immaterial alteration does not affect the rights and liabilities under a writing, irrespective of the person by whom the alteration was made or his purpose in making it. Also, alteration made by adding or changing a statement of the consideration does not ordinarily change the legal effect of an obligation is considered as immaterial.  In the Pigot’s case, it was held by Coke that when any deed is altered by any stranger then the deed is said to be void. The alteration is said to be immaterial if the alteration in a deed is signed by the parties before its execution so far as those who have signed have not affected their interests. 

Burden of proof

The burden of proof lies on the promisor that the promise has made the alteration in the contract without the consent of the promisor. But if it is proved that the contract is altered then the burden shifts to the promisee and the promisee has to show that the alteration made is not improper. 

Effect of alteration of contract without the consent of parties

If one of the parties alters the contract without the consent of the other party, then the contract is said to be void. The effect of alteration of contract without the consent of the parties is not given in the Indian Contract Act but India practice allows the authorities of the Common Law. If there is unauthorized alteration of documents or terms and conditions of the contract then the contract is said to be void. There is no provision given in The Indian Contract Act about the unauthorized alteration of documents of the contract. The Indian Courts follow the English rule for the same. Blue Pencil Doctrine is a doctrine which is used by the courts to make some portions of the contract void or unenforceable and other portions of the contract enforceable. In Blue Pencil Doctrine, the words which are not binding in nature or invalid are declared as void and makes other parts of the contract enforceable. It is also called the doctrine of severability. Sometimes, there is alteration of contract in which some parts of the contract are altered which is unauthorized and illegal but with the help of the blue pencil doctrine this alteration can be declared as unenforceable as it invalid and not binding in nature.

Effect of alteration of contract in business

In business, the businessmen make contracts with other businessmen in which it includes many sections, terms and conditions which talks about the procedure, how the business will work, compensation, damages, steps to be taken if some part of the business has to be changed. If a business wants to change a part of the business, then the head of the business has to make changes in the contract through alteration of contract as well. Alteration of contract can only take place if there is any clause in the original contract and with the consent of both the parties. The contract made by both the parties in the business can be altered before and after signing the contract. If the contract has to be altered after signing the contract, then there should be consent of both the parties. There is a right to transfer the responsibilities of one party to another party when there is alteration of contract. If there is a clause to sell to the vendees in the original agreement and two independent persons are presented as marginal witnesses, then it is not said to be material alteration and such agreement is said to be void ab initio. Also, in the case of life insurance policy, the insured can alter some terms of the policy such as number of years, mode of payments, etc. with the consent of both the parties.

In business, the parties to a contract can alter some parts of the contract as well as the whole contract with the consent of both the parties. If two companies or business entities merge, then a new contract is formed and if the merged companies want to bring some change in the business then they have to make changes in the clauses of the contract through alteration. If there are more than two parties in an agreement, then every party has to pass information to another party independently. In English law, the employers are allowed to alter the contract which is signed by the employee when he joins the firm.

In India, the Indian Contract Act does not allow the employers to alter the employment contract. It is stated in the case of LIC and Ors. v. Sunil Kumar Mukherjee an Ors that the employee of an insurer whose controlled business has been transferees and vested in the Corporation and who is employed by the insure wholly or mainly shall continue to work unless his employment in the Corporation is terminated or until his remuneration, terms and conditions are duly altered by the Corporation. On March 26, 2013 M.P Power Management Company had filed a petition to review the tariff orders and amend the power purchase agreement (PPA). As the PPA was between the petitioners and the generators and it was noted that the review was not empowered by the generators. It was stated that the PPA will be altered only through the mutual consent of both the parties. Now-a-days, many industries are getting into the Blockchain system so that there is transparency between the parties in the industry such as manufacturing, logistics, transportation, retailers, and customers. But if these parties come together on a blockchain then they are considered to be a part of the same transaction. Any change in the delivery and supply contracts cannot be made without the entire chain of business agreeing to alter agreements.

Rescission

Section 62 of the Indian Contract Act also permits the parties to rescind their contract. The Supreme Court allowed the parties to rescind under this section a contract for sale of forest coupes because of substantial variance between the particulars of quantity and quality of timber held out at the time of the auction and the timber actually available. The contractor was allowed to refund his deposit. But no compensation was allowed to him for his loss because the contract contained a clause against compensation in such circumstances. This was decided in the famous case law, namely Syed Isar Masood v State of MP.

When an old contract is rescinded and is replaced by a new one, the old one will not revive only for the reason that there has been a failure to keep the new promise. The parties may, however, by mutual consent, restore the original and then the original will revive and become binding on the parties.

What are the different modes of recession?

  • Recession by notice

No form is required by Section 19 of the Indian Contract Act, 1872 for recession. It is sufficient under Section 66 that the communication is communicated in the same manner and is subject to the same rule as if it were a proposal. Notice of recession to an agent is notice to the principal. A declaration of recession before commencing any proceedings is not necessary as a matter of law, though, generally speaking, the prudent course is to repudiate as soon as possible after knowing the facts and rights to rescind else, the contract remains valid, and may expose such party to damage for breach of contract.

  • Setting aside by the contract

The process of recession is essentially the act of the party rescinding, and not of the court, although, it is common to speak of a court ‘setting aside’ or rescinding a contract. A decree of recession brings a suit to set aside the contract. A decree of a recession may become essential where a property has been transferred on the execution of a deed. The Specific Relief Act, 1963 provides Section 27 to Section 30 for a recession by the court.

  • Recession as a defence

The will to rescind may also be declared by way of defence to an action brought on the contract. If a suit is brought by a party to enforce a contract, the defrauded party can pray for avoiding the contract in his written statement being well within the period of limitation, and it is not necessary for him to bring the suit to avoid the contract. His defence cannot be defeated by the lapse of time. The innocent party may raise the defence of entitling him to recession in a suit for specific performance, which is enabled by Section 9 of the Specific Relief Act.

Who can rescind the contract?

The option of avoiding a contract is mentioned under Section 19 and Section 19A of the Indian Contract Act, 1872. Once affirmed by the person entitled to rescind the contract, it cannot be questioned by a third party.

Guilty party

If only one party acts fraudulently, he cannot be allowed, as plaintiff or defendant,to plead, or adduce evidence in support of his fraud. Where one party forms an agreement erroneously, and the other party, knowing of the error, acts fraudulently, the latter cannot be allowed to take advantage of the error and enforce it. Where both the parties have acted fraudulently, the courts will refuse to enforce the fraudulent transaction. Here, the plaintiff’s suit will be dismissed; and the defendant who suppresses the fraud, cannot plead and prove it to defeat the plaintiff’s claim.

Recession of part of the contract

A  person entitled to rescind a contract cannot rescind a part only. When he decides to repudiate it all together. Section 26(2)(d) of the Specific Relief Act 1963 gives the power to the court to rescind the contract if only a part is sought to be rescinded, and such part is not severable from the rest of the contract. This appears to suggest that the recession of a part of the contract can be severed from the rest of the contract. This would be a power with the court, and not the right of a party. The High Court of Australia has also decided that equity permits a court to order partial rescission of a contract induced by fraudulent misrepresentation.

In contrast, under the UNIDROIT principles, where the ground of avoidance affects only individual terms of the contract, the effect of avoidance can be limited to individual terms of the contract, unless it would, in the circumstances, be reasonable to uphold the remaining contract. The test is not just of severability but also of reasonableness.

What are the grounds for rescission of contract?

The recession may take place only after the contract has been fully established and thus no legal agreement has been entered into if a party is not aware of or intended, and recession is, therefore, neither necessary nor possible. Recession is a complete cancellation of the contract, which means all provisions will be terminated. Contracts are cancelled on a variety of grounds. Common withdrawal reasons include:

  • Mutual Consent

If the parties agree to rescind the contract, a separate written document should indicate their intent and consent. In cases where only one party wishes to withdraw from the contract, it must give the appropriate written notification of the legal ground on which the withdrawal will be requested and a court may have to determine if the withdrawal can be done.

What is the process for rescinding a contract?

First, it must be determined whether the contract can be rescinded. This can be done by reviewing the contract and its clauses to see if it contains rescission instructions. If there is no such clause in the contract, the person seeking recession should contact an attorney or check the statutes in their state.

If the contract cannot be rescinded under state or federal law, the person may attempt to negotiate a rescission with the other party. Any contract may be rescinded by mutual agreement, even if it is not allowed by the contract itself.

The rescinding party must determine whether there are legal grounds for rescission, such as error, fraud, or coercion. Finally, a written rescission notice must be given to the other party, after which the parties may negotiate a mutual rescission, or either party may file a civil lawsuit.

What are the problems faced in contract formation?

.All agreements shall be concluded by legal means and under legal conditions. No consent may be obtained by force or intimidation. All parties must understand clearly what they have entered. Problems with contract formation may include issues such as:

  • Mistake

If a party has entered into the agreement on the grounds of reliance on or belief in an erroneous fact or a mistake of law, a contract may be rescinded. Rescission based on the error of fact may be permitted if the effect of the error causes a change in the intent of the contractor, making the enforcement of the contract unconscionable.

Rescission from an error of law may be granted if a party is aware of the true facts of the contract, but is mistaken as to the legal ramifications of those facts. There is an error of law only if

  1. all parties believe that they know the law as it relates to the contract but are mistaken, or
  2. one party misunderstood the law at the time it was entered into the contract and the other party fails to correct the other party’s misunderstanding.
  • Fraud

Some types of fraud support a recession and the fraud can be real or constructed. Real fraud occurs where one party misrepresents something to mislead the other party. Constructive fraud occurs when one party engages in misleading behavior without attempting to defraud the other party. When fraud of either type occurs, the innocent party may terminate the contract as it enters into the contract on the basis of facts that were not true.

  • Duress, Coercion, or Undue Influence

An individual can not be forced under threat of harm, coercion, or other hostile influence to enter into a contract. When considering whether to grant a rescission on the basis of force, coercion or undue influence, the adequacy of the consideration granted to the rescinding party shall be taken into account.

A contract is valid until avoided

Rescission may take place if one of the contracting parties lacks the ability to legally enter into a contract. For instance, when a party is under 18 years of age, intoxicated, mentally incompetent, or ill, a party cannot enter into a contract.

The judgment of the Madras High Court, on the contrary, held in SNR Sundara Rao v. Income Tax Commissioner[1] that the invalid contract, when avoided in the case of the party affected by it, took effect from the date of the transaction and not when it was avoided, was not in the case of a contract involving third party rights. The question under the Income Tax Act 1961 was whether tax was payable from the date on which the father’s trust deeds as a Karta of joint properties were declared void by a court decree or from the date on which the transaction took place. It was held that from the later stage it was so. An alienation that is perfect until it is set aside.

What is the effect of the recession of the contract?

The election of the party rescinding relieves the other party from any further obligation under the contract and enables both the parties to make arrangements for the future on the footing that the contract has been once for all broken and is at an end.

There is a substitution by implication of law for the primary obligation of the party in default, which remains unperformed, where there is a secondary obligation to pay monetary compensation to the other party for the loss sustained by him in consequence of non-performance in the future. The unperformed primary obligation of the other party is discharged.

Under the Contract Act, a voidable contract, when avoided, has been held to become void. When a voidable contract is rescinded, the other party need not perform his outstanding obligation under the contract. The party rescinding the contract must restore the benefit received under the contract to the other party. Any party receiving anything under the contract is liable to restore it or make compensation for it to the other person from whom it has been received.

Damages and rescission

Under the English law, a person induced to enter into a contract by a fraudulent misrepresentation is entitled to rescind the contract or claim damages, or both; and the measure of damages is applicable under the law of torts. Under The Misrepresentation Act 1967, in force there, damages can also be claimed in a similar manner for negligent misrepresentation.

Under this Act, the party is entitled to avoid, but insisting on performance, can be awarded damages, in lieu of performance or enforcement and is entitled to restitution under Section 65, if he elects to rescind it. It does not expressly provide for damages on a recession unless the provisions of Section 75 are interpreted to extend the contracts voidable under Section 19 and 19A, but damages have been awarded under the law of torts.

When is rescission not available?

There are situations where rescission as a remedy is not available and the decision is at the court’s discretion as an equitable remedy. A judge may deny rescission on the basis of certain facts, including:

  • One party has substantially fulfilled its part of the contract.
  • A third party has already received some benefit from the contract.
  • The requesting party has committed some mistake in relation to the contract (referred to as “unclean hands”).
  • The requesting party has unnecessarily delayed the request for rescission, resulting in some prejudice to the other party.
  • The requesting party has already requested damages.
  • After requesting a monetary award, a contract withdrawal cannot be obtained.

Difference between rescission and novation

Sr. no

Rescission

Novation 

1

Rescission happens when the parties agree to cancel or terminate the contract.

Novation occurs when the parties substitute the old contract with a new one.

Waiver

Waiver signifies “Surrendering” the rights. At the point when involved with the agreement relinquishes or postpones his rights, the agreement is released. Here, both the gatherings commonly concur that they will never again be bound by the agreement. It adds up to an arrival of gatherings from their legally binding commitments.

What is a waiver?

Waiver implies an individual surrendering a few or the majority of their legitimate rights under an agreement. There is more than one path by which a privilege might be postponed, and a waiver can happen either deliberately or unexpectedly.

  • Waiver by contract or deed:

This happens where a gathering explicitly consents to surrender their lawful rights. Such an understanding will tie given the ordinary prerequisites of an agreement have been met. Instances of this sort of waiver incorporate settlement or bargain understandings, varieties to a current contract, or another agreement supplanting a more seasoned one.

  • Waiver by the decision:

This applies where a rupture of the agreement has happened and the “honest party” has a decision between two elective rights or cures. Waiver by race, as a rule, happens where the agreement contains an express right or alternative to end or repeal it in specific circumstances, or where one gathering submits a genuine rupture which gives the “blameless” party the privilege to end the agreement right away. In such cases, the “honest” party may pick either to end the agreement promptly or to forgo the rupture and proceed with the agreement.

Merger

An agreement additionally stands released through a merger that happens when a substandard right accumulating to party in an argument amalgamates into the better right resulting than a similar gathering. For example, contracts an industrial facility premises from B for assembling movement for a year, yet 3 months in front of the expiry of rent buys that very premises. Presently since A has turned into the proprietor of the structure, his rights related with the rent (substandard rights) in this manner converge into the privileges of possession (unrivaled rights). The past rental contract stops. In certain circumstances, it is conceivable that substandard and predominant right corresponds in a similar individual. In such cases, both the rights join prompting a release of the agreement administering the sub-par rights.

Of certain relations resembling those created by contract

If, while riding on a train, a shoe shiner comes, and without us saying anything, starts to polish our shoes and when they’re done, they ask for some money. Are we obliged to pay them that amount? Or can we tell them “I did not ask you to polish my shoe anyway!”. Imagine another situation, where someone else’s Amazon package, with its payment already done, is left at your door. Do you become all excited and say “YAY! Free Gifts!” or do you make an effort to find the owner or return the package? This blog post will give you answers to similar questions.

There are certain obligations, specified in the Indian Contract Act, that are not actually contracts because they miss one or the other elements of a contract, but are still enforceable in a court of law. Such obligations are called Quasi-contractual obligations. Each of them has been talked about separately in Sections 68 to 72 (Chapter V) of the Indian Contract Act, 1872. Let us first look where these obligations arise from, and then discuss each of them separately.

Background

It is first important to note that a contract before it becomes so, is an agreement. Therefore, where there is no agreement, there is no contract. Yet, there are some obligations that do not have their origin in an agreement. The obligation not to harm another person or his property (Torts), for instance, the judgments or orders of courts, quasi-contractual obligations, etc. These obligations are not ‘contracts’ by definition, but they are enforceable in a court of law.

Quasi-contract

The obligation arising out of a quasi-contract was first recognized by the English law. The Indian Contract Act, 1872 also follows the same elements which are followed by the English Contract Act. There is no definition given for quasi-contract in the Indian Contract Act. But the Act states that in the case of a quasi-contract, certain relations are created which are very similar to contracts. But quasi-contract can be defined as a set of rights and liabilities between the parties even when there is no formal contract. The law creates this obligation to maintain justice and fairness between the parties. The law does not allow one person to enrich himself at the expense of the other. If the rights and obligations are not created (quasi-contract) one party would be unjustly enriched. Going by this, it can be said that a quasi-contract is kind of a remedy instead of being a pure contract. Formation of a quasi-contract allows the aggrieved party to recover the benefit which the enriched party has taken at his expense. Since a quasi-contract is a law made by law, there is no statement of consent between the parties. The obligation and rights which are placed on the shoulder of the parties are rather by law than by assent. 

Many times, a situation may arise where a legal obligation is placed on a person to uphold justice, even though the person has not committed any tortious activity or has broken any contract.

 For instance, X forgets some goods at Y’s place. Y’s is under a legal obligation to restore the goods to Y. this goes on to show that Y cannot enrich himself at the expense of X. such kinds of obligations are described as Quasi-contractual Obligation. They are not actual contracts in which the parties agree to enter, but are fictional agreements which are created between the parties by law so as to ensure equity.

In quasi-contracts the liability imposed is based on the doctrine of unjust enrichment. Quasi-contract is applied with regards to payment of services rendered or goods delivered or used. In such situations, the main question which arises is the liability of the person who got enriched. Since the basic concept of a quasi-contract is to prevent unjust enrichment, the liability of the enriched party is limited to the value of services rendered or cost of the goods used or delivered. Thus, the liability is limited to the amount of benefit only.

The Principle of unjust enrichment

Quasi-contracts are based on the principle of  “Nemo debet locupletari ex aliena jactura”, which means ‘No man should grow rich out of another person’s loss’. Therefore, liability in the case of quasi-contractual obligations is based on the principle of ‘unjust enrichment’. It essentially means that no man should get unjustly enriched at the cost of another person’s loss. That means no person should gain anything unjustly, when his gaining such a thing may mean a loss for another person.

Features of a quasi-contract

  • Implied-in-fact contract and quasi-contract

One of the main features of a quasi-contract is that there is no mutual consent between the parties. Quasi-contracts are often confused with implied-in-fact (or implied contract). The difference between a quasi-contract and an implied contract is that in the case of an implied contract even if there is no written statement of the fact that the parties want to enter into a contract, their actions and conduct imply that they have mutually agreed to enter into a contract.

For example, P goes to a restaurant for dinner. The owner of the restaurant expects that P will pay for his food. P also knows that he’ll have to pay for the food which will be provided to him. Thus, the actions of the parties signify that they’ve mutually agreed to enter into an agreement, even though the agreement is not a written one. 

  • Their origin does not lie in the offer and its acceptance, that is, in an agreement between the parties.
  • They are rather based on justice, equity, and a good conscience and on the principles of natural justice.

Section 68 (Claim for necessaries supplied to person incapable of contracting, or on his account)

If the “necessaries” for a person, who is incapable of contracting (for example, a minor or a mentally disabled person) or of the dependants of such a person are taken care of by someone, he has the right to be reimbursed from the property of such incapable person. Although the word “necessaries” has not specifically been defined in the Act, it is implicitly clear that it means the necessaries to sustain life, basic things like food, clothing, education, etc. These are things without which a person cannot reasonably exist. In simple terms, if a person A supplies another person B (who is incapable of entering into a contract) or his family or anybody else who is dependant on him, with necessaries for life, he is entitled to take his due return from the property of person B. He is entitled only to such a reasonable amount as the value of the goods or services he may have supplied hold.

Section 69 (Reimbursement of person paying money due by another, in payment of which he is interested)

If a person A pays something in someone’s (a person B’s) place, that which person B is himself ‘bound by law’ to pay, A will be reimbursed by B. Please note that the person A should be ‘interested’ in this payment. It is a case of implied indemnity.

For instance, Joe is a Zamindar. Annie holds one of his lands on lease in Punjab. The revenue of Joe’s land is payable to the government in arrears. So, the land ends up being advertised for sale by the government. According to the Revenue Law, if the land is sold, it will end Annie’s lease. To prevent this sale, Annie pays Joe’s dues to the government. Joe is bound to pay back to Annie.

The aforementioned illustration satisfies the following conditions-

  1. The party paying the other party’s dues is interested in the payment.
  2. The party whose payment is due was in fact bound by law to pay.

Section 70 (Obligation of person enjoying the benefit of the non-gratuitous act)

When a person lawfully does something for another person (for example, delivers a good or a service) without intending to do so ‘gratuitously’, and the other person enjoys the benefit of the delivery of that good or service, the latter is bound to pay back to the former.

A gratuitous act is one that is done for a person by another without the expectation of a return. For example, giving someone a gift is a gratuitous act. Here comes your Amazon package delivered to the wrong address. A pack of chocolate chip cookies that you ate as soon as they arrived. You are liable to compensate the actual owner of the package. The illustration of a shoe-shiner unsolicitedly polishing one’s shoes or that of the coolie picking up one’s goods will lie under Section 70. Such acts and services are not done gratuitously and therefore a liability to pay back arises on the part of the person on the receiving end.

Section 71 (Responsibility of finder of goods)

Simply, a person who finds goods that belong to another person shall be treated as a bailee. A bailee is essentially a safe keeper of the goods, who is supposed to return the goods to the actual owner or dispose them in the manner in which the actual owner may want them to. The bailee has certain duties and rights as the ‘possessor’ or ‘custodian’ of the goods for the time being. For example, Sarah finds a diamond lying on the floor in a shop. She picks it up and keeps it in her safe possession. Sarah makes all reasonable efforts to find the true owner of the diamond. The diamond actually belonged to Nadia. Sarah has the right to hold the possession of the diamond against all the world except Nadia, and is supposed to make reasonable efforts to find her, and return it to her. In this case, Nadia will have to pay the compensation for all the loss suffered by Sarah in finding her.

Duties of the finder of goods

  1. The finder has a duty to take reasonable care.
  2. He/she has a duty not to use the goods for his personal purposes.
  3. He/she has a duty not to mix the found goods with his own goods.
  4. He/she has a duty to make reasonable efforts to find the actual owner of the goods.

Rights of the finder of goods

  1. Right to Lien– The right to retain the goods found until he receives compensation for all the expenses suffered in finding the owner.
  2. Right to Sue– If the owner has announced a reward for whoever finds the good, the finder has the right to sue the owner for such reward or retain the goods until he is compensated.
  3. Right to Sell– The finder of goods has the right to sell the goods in certain specific circumstances, for example:
  1. i) If the owner could not be found even after reasonable efforts.
  2. ii) If the owner is found but refuses to pay compensation or the lawful charges of the finder.

iii) If the goods are in immediate danger of perishing if not used.iv) If the lawful charges of the finder amount to two-thirds of the value of goods.

Section 72 (Liability of person to whom money is paid or thing delivered by mistake or under coercion)

As the heading suggests, if something is delivered to a person by ‘mistake’ or under ‘coercion’, he is liable to pay it back. For instance, Aristotle and Dante share a flat and contribute in half for the rent to be paid.  Aristotle, without knowing that Dante has already paid the due rent to the landlord in whole, pays again to the landlord. The landlord, in this case, is liable to give back the money delivered to him by mistake. The term mistake here can mean both mistake of fact or mistake of law.

The section also uses the term ‘coercion’. Here is an example of something delivered under coercion-  A railway company refuses to deliver goods to a certain consignee except upon the payment of a certain illegal sum of money. The consignee pays the sum to obtain his goods. The company is liable to return the sum of money illegally charged.

Distinction between a contact and a quasi-contract

A quasi-contract can be considered as a constructive contract or an implication of law. It is just a fictitious contract, aimed towards providing a remedy to the aggrieved party, which is not the case in an express contract. In the case of quasi-contracts, the intention of the parties is not considered, but in the case of an express contract, the intention of the parties is very crucial as, without the intention to enter into an agreement, there would be no contract at all. In the case of an express contract, the duty of the parties defines the contract, which forms the terms of the contract. But on the other hand, in the case of quasi-contract, the duties are defined due the formation of a contract.

In words of Keener, A quasi-contract is one which has been implied by the law, and it denotes the nature of evidence through which the aggrieved party can claim restitution. Though the party who has been enriched would not set out to assume any obligation, the law will impose it. In an express contract, both the parties have equal interests, but in the case of a quasi-contract, the contract comes into being because the interest of one party is affected.

Breach of contract

A contract is breached or broken when any of the parties fails or refuses to perform its promise under the contract.Breach of contract is a legal cause of action in which a binding agreement is not honored by one or more parties by non-performance of its promise by him renders impossible.

Section 37 of the Indian Contract Act,1872 provides that the parties to the contract are under obligation to perform or offer to perform their respective promises under the contract, unless such performance is dispensed with or excused under the provisions of the Indian Contract Act or of any other law.

According to Section 39, where the party has refused to perform or disabled himself from performing his promise in its entirety, the other party may put an end to the contract, , unless that other party has expressly or impliedly signified its consent for the continuance of contract. If the other party chooses to put an end to the contract, the contract is said to be broken and amounts to breach of contract by the party not performing or refusing to perform its promise under the contract. This is called repudiation. Thus repudiation can occur when either party refuses to perform his part or makes it impossible for him to perform his part of contract in each of the cases in such a manner as to show an intention not to fulfil his part of the contract.

Breach of the terms of the contract

Strictly speaking, a breach of contract occurs if any of the terms are broken. Not all terms are literally adopted, however, an order for a complaint to be brought to a standing, an infringed contract has to in fact be regarded as “substantial infringement” and detract from the value of the contract. Alternatively, the contract infringement has to change the result of the contract so fundamentally that the aggravated Party has the right to terminate the contract (a ‘substantial infringement’).

Actual damages or loss

To be successful in breaching a contract lawsuit, the grieved party must show that they have suffered some type of loss or damage as a result of the breach. Current damages or loss may take the form of loss of money, time loss, loss of chance or many more losses.

What happens after a breach of contract?

If an infringement or allegation occurs, one or both of the parties may wish to see that the contract is implemented under their terms or try to recover for any harm caused by the alleged infringement.

If a dispute arises over a contract and informal attempts at resolution fail, the next most common step is a lawsuit. The parties may be able to resolve the issue in the Court of Small Claims if the amount concerned is below a specific rupees figure.

Not only are courts and formal lawsuits the option for people and enterprises involved in contract disputes, but the parties may also agree to review the contractual argument by a mediator or may agree to resolve a contractual dispute through arbitration. These are two “alternative dispute settlement” options.

Types of breach of contract

A breach of contract occurs when the terms of a contract are broken. At least one party to the agreement does not keep its part of the deal. There are various types of contraventions:

Minor or partial contraventions

A partial breach occurs when some but not all of the contract terms have been fulfilled. The injured party may only sue for damages in this case.

Material violations

If a Party does not do what it says in the contract, this leads to its destruction and makes that Party liable for violating the contractual damages. You may have the right to sue it, but only for “actual damages.” In the context of the Contract Restatement, the following must be shown to determine if a material breach happened:

  • How badly the injured party is affected by the breach.
  • How much the injured party can be paid according to the terms of the contract.
  • How badly the other party broke the terms of the contract.
  • How likely the other party will be able to perform the failed terms depending on his or her circumstances.
  • How the other party acts in good faith and fair dealing standards.

Fundamental breach

One party can sue the other party for breaking the terms and possibly terminate the contract.

Actual breach

If a party fails, by the due date, to do what the terms say it will be an actual breach of a contract.

Anticipatory breach

If one party ceases to fulfil its portion of the contract, which suggests that the agreement remains incomplete. For example, refusal of payment, lack of a product ordered, or the fact that one or more parties can not or will not fulfil their part of the deal. The violator may be sued and the other party may conclude the contract.

Both actual and anticipatory breaches can waste time and money.

Difference between a material and minor breach of contract

Contract breach may be material or minor. The obligations and solutions of the parties depend on the type of violation.

An infringement is a matter if something substantially different from that set out in the agreement is received by the other party because the violator does not fulfil a certain aspect of the contract. For instance, when a tennis ball box is sold in the contract and a football box is given to the buyer, the violation will be material. When an infringement is material, the non-infringement party is no longer required under the contract and immediately entitled to any remedies for the entire contract being infringed.

Case laws

The company Revelations Perfume and Cosmetics sued the famous musician “Prince” and his music label in 2008, seeking $100,000 in damages for reneging on an agreement to help market their perfumes. In his 2006 album “3121,” the flamboyant pop star promised personal promotion of a new fragrance named by the company, and to allow the packaging of its name and likeness, Prince of the Nation.

Revelations asked the court to award more than $3 million in lost profits as well as punitive damages in its breach of contract complaint. However, the judge did not find any evidence that the pop star was acting with malicious intent and ordered him to pay almost $4 million in out of pockets for the cosmetics company. Revelations’ petition has been denied for damages to punitive and loss of profit.

  • Macy’s v. Martha Stewart Living

Macy’s department stores filed a breach of contract complaint against Martha Stewart Living Omnimedia for signing an agreement with J.C. Penney was set up in February 2013 to create Martha Stewart retail stores in their retail stores. J.C. before the deal for $38.5 million, Penney bought a minority stake in Steward’s company. Martha Stewart’s retailers were to carry home goods, but Macy’s argued that it had been accorded exclusive rights to manufacture and sell certain Martha Stewart Living products in a 2006 agreement.

Macy’s asked the court to grant a preliminary injunction to stop Steward from breaching the contract while the court considered the matter. J.C. was ruled by a New York judge in June 2014 twelve years later. In fact, Penney had passed Macy’s domestic diva contract in an attempt to sell products with her name. During the J.C. The contract was invalidated by Penney, and no immediate financial breach of contractual damage was reached and the legal fee and the cost of the proceedings may be limited, as the judge ruled that the case had no cause for punitive harm.

Types of damages under Section 73

Section 73 provides compensation for loss or damage caused by the breach of contract. When a contract has been broken, the party that suffers from such infringement is entitled to receive compensation for any loss or damage resulting from such infringement. Such compensation shall not be given for any remote and indirect loss or damage sustained as a result of the breach.

Compensation for failure to discharge obligations similar to those created by the contract.

If an obligation similar to what was created in the contract has not been discharged, any person who fails to discharge is entitled to receive the same compensation from the party in default as if that person had contracted to discharge it and had broken his contract.

Explanation

In estimating the loss or damage resulting from the breach of a contract, consideration must be given to the means that existed to remedy the inconvenience caused by the non-performance of the contract.

Illustration

‘A’ contract to repair B’s house in a certain way and receive the money in advance. ‘A’ repairs the house, but not according to the contract. ‘B’ is entitled to recover the cost of making the repairs conform to the contract from ‘A’.

‘X’, the owner of a boat, contracts with ‘Y’ to take a cargo of jute to Mirzapur for sale at that place, starting on a given day. The boat does not start at the appointed time because of some unavoidable cause, whereby the arrival of the cargo at Mirzapur is delayed beyond the time it would have arrived if the boat had sailed under the contract. After that date, the price of jute falls and before the cargo arrives. The measure of the compensation payable to ‘Y’ by ‘X’ is the difference between the price ‘B’ could have obtained for the Mirzapur cargo at the time it was delivered in due course and its market price at the time it actually arrived.

What are the different types of damages?

General and special damages

Difference between general and special damages are:

General Damages

Special Damages

General damages refer to those damages which arose naturally during the normal course of the events.

Special damages are those that do not, of course, arise from the breach of the defendant and can only be recovered if they were in the reasonable consideration of the parties at the time they made the contract.

In relation to the pleadings, the complained of is presumed to be a natural and probable consequence with the result that the

It refers to those losses that must be specifically pleaded and proven.

In relation to proof, it refers to those losses, usually but not exclusively non-pecuniary, which in monetary terms are not capable of precise quantification.

It refers to those losses that can be calculated financially. It represents the exact amount of pecuniary loss that the claimant proves to have suffered from the set of pleaded facts.

Nominal damages

If the defendant is found liable for breach of contract, the plaintiff is entitled to nominal damages even if no actual damage is proven. Nominal damages are awarded if there is an infringement of a legal right and if it does not give the rise to any real damages, it gives the right to a verdict because of the infringement.

In the following circumstances, nominal damages are awarded to the plaintiff:

  • The defendant committed a technical breach and the plaintiff himself did not intend to execute the contract;
  • The complainant fails to prove the loss he may have suffered as a result of the contract breach;
  • He has suffered actual damage, not because of the defendant’s wrongful act, but because of the complainants’ own conduct or from an outside event;
  • The complainant may seek to establish the infringement of his legal rights without being concerned about the actual loss. Where there is no basis for determining the amount. The view that nominal damage does not connote a trifling amount is erroneous; nominal damage means a small sum of money. Nominal damages have been defined as a sum of money that can be spoken of, but which does not exist in terms of quantity.

Where the loss is small and quantifiable, the damages awarded, although small, are not nominal damages.

If the market rate on the date of the breach is not proven, the plaintiff shall be entitled to nominal damages. However, the fact that the buyer does not sustain any actual loss as a result of the seller’s failure to deliver the goods is no reason to award the buyer nominal damage.

Substantial damages

In cases where an offense is proven, many authorities may claim substantial damages even if it is not only difficult but also impossible to calculate the damages with certainty or accuracy. In all these cases, however, the extent of the breach has been established. There was a complete failure to perform the contract on one side. However, where the breach is partial and the extent of the failure is determined, only nominal damage is awarded. The plaintiff who can not show that after the breach he would have had the contract performed, he is in a worse financial position, usually, recovering only nominal damages for breach of contract.

Where a defendant refuses to accept goods sold or manufactured for him, the plaintiff sells them to a third party on the same terms as the defendant agreed and makes a similar profit, the plaintiff shall be entitled to nominal damages if the demand exceeds the supply of similar goods; but if the supply exceeds the demand, the plaintiff shall be entitled to recover his loss of profit on the defendant’s contract.

Aggravated and exemplary damages

In certain circumstances, by taking into account the motives or behavior of the defendant, the court may award more than the normal measure of damages. Such damage may be:

Aggravated Damages

Exemplary Damages

Aggravated damages, that compensate a victim for mental distress or injured sensations in circumstances where the injury was caused or increased by the manner in which the defendant committed the wrong or the defendant’s behavior following the wrong.

Exemplary damages are intended to give the punishment to the defendant an example they are punitive and not intended to compensate the defendant for loss, but rather to punish the defendant.

It is compensatory in nature.

It is punitive in nature.

 Where the motives, conduct or manner of inflicting the injury on the defendant may have aggravated the damage to the plaintiff by injuring his proper feelings of dignity and pride, the damages awarded to compensate the plaintiff would be aggravated. These are awarded in tort, but not in a contract because the motives and conduct of the defendant are not to be taken into account when assessing damages and it is not to be awarded in respect of feelings of disappointment or injury; they are too remote. Thus, if an employee is wrongly dismissed from his job, the damages payable to him will not include compensation for the manner in which he is dismissed, for his injured feelings, or for the loss that he may suffer from the fact that the dismissal of himself makes it more difficult for him to obtain fresh employment.

Liquidated and unliquidated damages

Damages are said to be liquidated once agreed and fixed by the parties. It is the sum agreed by the parties by contract as payable on the default of one of them, Section 74 applies to such damages. In all other cases, the court quantifies or assesses the damage or loss; such damages are unliquidated. The parties may only fix an amount as liquidated damages for specific types of a breach, then the party suffering from another type breach may sue for unliquidated damages resulting from such breach.

Where, under the terms of the contract, the purchaser was entitled to claim damages at the agreed rate if the goods were not delivered before the fixed date and if they were not delivered within seven days of the fixed date, the purchaser was entitled to cancel the contract and pay guarantee amount to the bank, but the goods were delivered within the extended period. It was held that the buyer was only entitled to claim damages at the agreed rate and that the banking guarantee confiscation clause could not be invoked as the contract was not cancelled.

What does loss or damage mean?

The word loss or damage means:

  • Harm to persons through physical injury, disabilities, loss of enjoyment, loss of comfort, inconvenience or disappointment, injured feelings, vexation, mental distress, loss of reputation.
  • Harm to property, viz. damage or destruction of property; and
  • Injury to an economic position which is the amount by which the plaintiff is worse off than he would have been performed, and would include loss of profits, expenses incurred, costs, damages paid to third parties, etc.  

Consequential damage and incidental loss

Consequential damage or loss usually refers to pecuniary loss resulting from physical damage, such as loss of profit sustained due to fire damage in a factory. When used in the exemption clause in a contract, consequential damages refer to damages that can only be recovered under the second head in Hadley v Baxendale, i.e. the second branch of the section, and may also include recovery of profit and losses under the first branch.

Another term incidental loss refers to the loss incurred by the complainant after he became aware of the breach and made to avoid the loss, i.e. the cost of buying or hitting a replacement or returning defective goods.

How to measure the damage caused?

The measure of damage or measure of damages is concerned with the legal principles governing recoverability; the principle of the remoteness of damage confines the recoverability of damages. Questions of quantum of damages are only concerned with the amount of damages to be awarded and are, therefore, different from the measure of damages; the latter involves consideration of the law.

What does the remoteness of damages mean?

The term remoteness of damages refers to the legal test used to determine which type of loss caused by contract breach can be compensated by awarding damages. It has been distinguished from the term measure of damages or quantification which refers to the method of assessing the money compensation for a particular consequence or loss which has been held to be not too remote.

How to test the remoteness?

In deciding whether the claimed damages are too remote, the test is whether the damage is such that it must have been considered by the parties as a possible result of the breach. If it is, then it can not be considered too remote. The damage shall be assessed on the basis of the natural and probable consequences of the breach. Actual knowledge must be demonstrated that mere impudence and carelessness is not knowledge.

The defendant is only liable for reasonably foreseeable losses- those who would have reason to foresee the likelihood of future infringement if a normally prudent person in his place had this information when contracting.

The remoteness of damage is a matter of fact, and the only guidance that the law can give is to lay down general principles.

The principle governing the remoteness of damages was elaborated in the landmark case of Hadley v. Baxendale. The rules stated in this case were that a party injured by a breach of contract could recover only those damages which were either to be considered “reasonably as arising naturally, i.e., according to the usual course of things” from the breach, or could reasonably have been considered by both parties at the time they entered into the contract as the likely result of the breach. This is the basis for understanding special damages. In this case, the Court acknowledged that the defendant’s failure to send the crankshaft for repair was the only cause for the plaintiffs’ mill to stop, resulting in loss of profits.

Consequences of breach of contract (Section 73-75)

Chapter VI (Section 73 to 75) of the Indian Contract Act,1872 deals with the consequences of breach of the contract.

Section 73 – deals with compensation for loss or damage caused by breach of contract

When  a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him ,which naturally arose in the natural course of things from such breach, or  which the parties knew, when they made the contract, to be likely to result from the breach of it.

No compensation shall be given to any remote and indirect loss or damage sustained by reason of breach.

Compensation in regard to failure to discharge obligation  which resembles those created by the contract

An obligation resembling those created by contract has been incurred and has not been discharged, any person affected by the failure to discharge it is entitled to receive the same compensation from the party in default as if such person had contracted to discharge it and had broken his contract.

Compensation for loss or damage which naturally arose in the usual course of things from such breach

Compensations to be recovered for loss or damage which the parties knew or which would have naturally arisen in the usual course, to be likely to result from the breach of it.

An uncommonly known fact is that Section 73 is based on a case law, i.e. Hadley v. Baxendale (1854) 9 Ex. 354

The well-known rule in this case was stated by the Court as follows:

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be either such as may reasonably and fairly be considered as arising naturally, i.e. according to usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.”

Section 73 deals with remote and indirect loss or damage

It states that no compensation is payable for remote and indirect loss or damage arising out on account of breach of contract. The indirect loss cannot be said to arise on usual course of things. The aggrieved party can claim compensation for indirect loss or loss of profit, only where it is expressly made known to the other party or contemplated by contract that breach of non-performance of the contract would result in some indirect loss or loss of profit to the paparty.e term remoteness of damage refers to the legal test used for deciding which type of loss caused by the breach of contract may be compensated by the award of damage.

In Madras Railway Company v. Govinda (1898) 21 Mad. 172, the Plaintiff, who was a tailor, delivered a sewing machine and some clothes to the defendant railway company, to be sent to a place where he expected to carry on his business in an upcoming festival. Due to mistakes made by the company’s employees, the goods were delayed and were not delivered until some days after the festival was over. The plaintiff had not given any notice to the railway company that the goods were required to be delivered within a fixed time for any special purpose. On a suit by the plaintiff to recover a sum of his estimated profits, the Court held that the damages claimed were too remote.

Section 73 deals with breach of resembling contract

It confers a statutory right upon a party to get compensation from a party who has incurred a statutory obligation to pay compensation in case default even though there may be no contract to pay compensation .The party in default is under obligation to pay compensation to the injured party as if there was a contract and has broken such contract.

Section 73 deals with: mitigation of losses

It explains that the means which existed of remedying the inconvenience caused by the non performance of the contract must be considered while calculating the damage or loss for breach of the contract. [M.Lachia Setty & Sons Ltd v. Coffee Board Bangalore, AIR 1981 SC 162, 168]

Section 74 – penalties in regard to breach of contract

The party to the contract may agree at the time of contracting that , in the occurrence of breach,the party in default has to pay a stipulated sum of money to the other, or may agree that in the event of breach by one party any amount paid by him shall be forfeited. If this sum is genuine pre-estimate of damage likely to flow from the breach is called ‘liquidated damages’ .If it is not genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be called ‘penalty’.

Section 74 provides for the measure of damages in two classes: (a) where the contract names a sum to be paid in case of breach; and (b) where the contract contains any other stipulation by way of penalty(Fateh Chand v. Balkrishna Das,[1964] 1 SCR 515).

Essence of penalty and liquidated damage

Penalty is a payment of money to a non –defaulting party, which puts the other party in fear and enforces the other party to perform its promise under the contract .The penalty is deterrent in nature .

A liquidated damage is a genuine and reasonable pre-estimate of damage. Liquidated damages means it shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage.

Section 75 – compensation to the party rightfully rescinding the contract

A person who rightfully resides the contract is entitled to compensation for any damage which he has sustained through non fulfillment of the contract .A party to a contract is entitled to rescind the contract in circumstances given in Section 39, 53, 55, 64 and 65 of the Contract Act .The claim for compensation under Section 75 is maintainable when the right of repudiation of the contract has been exercised either of the Section 39, 53, 54 and 55 of the Contract Act.( Mirza Javed Murtaza v. UP Financial Corpn), Kanpur, AIR 1983 Alld. 235.)

Damage can be claimed by:

Only those parties can claim damages for breach of contract who have performed or is willing to perform his part of the obligations arising under the contract. Section 73 and 74 are for the benefit of a party willing to perform the contract and not for defaulting party .Loss which is caused by the party’s failure to fulfill his duty is not recoverable from the other party. A party to a Contract cannot be in a better position by reason of his own default, than if he had fulfilled his obligations .A person, who is not a party to the contract, cannot claim damages.

Can damage or loss suffered by a third party be claimed?

A party claiming the damage need not necessarily suffer any loss from breach of contract. When it is contemplated by the contract. When it is contemplated by the contract that breach by any of the parties to the contract is likely to cause loss to an identified or identifiable stranger to the contract, rather than to the contracting party, a party not in default can claim damages for the loss caused to an identified or identifiable stranger to the contract. Thus the party may recover substantial damages even though it does not personally bear the cost of correcting the defects or personally suffers the diminution in the value ;provided this was intended or was within the contemplation of the parties ;and if such intention or contemplation is shown it is immaterial that the true prayer or suffered is stranger to the contract. (Alfred McAlpine Constn Ltd v. Panatown Ltd., (2001) AII ER (D)41 (Apr)).

Can interest be claimed as damage?

Interest would be refused if the party fails to show that interest is being claimed under a contract or on account of usage or customs. The Supreme Court in Mahavir Prasad Rungta v. Durga Dutta,1961 AIR 990 has ruled that interest can be claimed only if it is payable by custom or there is express or implied provision in the agreement for payment of interest or under provisions of substantive law plaintiff is entitled to recover the interest.

Nature of remedy of damage

The principle behind awarding damage for breach of contract to the party, who has suffered the loss, is to place that party in the same position in which it would have been had that contract not been broken. The damages must commensurate with the loss suffered .Where the contract is broken by one party, contract is discharged, and the obligations under the contract come to end; a new obligation arises for the payment of damages.

A contract is the fountainhead of a correlative set of rights and obligations of the parties and would be of no value if there is no statutory provision for compensation for damage or loss caused to the aggrieved party. Chapter VI of the Indian Contract Act ,1872 provides for the remedy to the non-defaulting party to contract by way of compensation for damage or loss caused due to breach of contract by the other party. Section 73 provides for compensation for actual damage or loss from the party in breach of the contract Reasonable liquidated damages are payable without proof of loss . Section 74 provides that contracting parties in the event of breach, may agree that the defaulted party shall pay a stipulated amount to the other ,or may agree that in the event of breach by one party any amount paid to him shall be forfeited. If it is not genuine pre-estimate of the loss ,but an amount intended to secure performance of the contract ,it may be called ‘penalty’. However mere stipulation does not give right for compensation by way of penalty. Prove has to be established for loss or damages caused by breach of contract.

A decree for specific performance 

According to Section 10 of the Specific Relief Act, 1963, there are seven cases when specific performance of a contract may be allowed by the Court. They are: 

When there is no standard for ascertaining actual damage

When it is impossible to quantify the actual damage caused by the non-performance of the act agreed to be done, the Court may, in its discretion, grant a decree of Specific Performance of that act.

Duke of Somerset v. Cookson, 1935, 3 P Wins. 390

Art, paintings, old furniture, antiques, etc. have a special value to the contracting party, although such articles may not have much monetary value. For example, an idol which has been passed down from generation to generation of a family has immense value to that family, even if it means nothing to someone else. No amount of damages can compensate for the loss to the members of the family, even if the Court makes an attempt to assess the damages payable instead of the idol. Therefore, an order will be passed for specific delivery of that idol, not for damages.

In Vijaya Minerals v. Bikash AIR 1996 Cal. 67, the Hon’ble Calcutta High Court has observed that since manganese and iron ore are not ordinary items of commerce, if a contract for sale of iron and manganese ore from a mine has been made, specific performance of such an act would be allowed.

When monetary compensation would not afford adequate relief

When the act agreed to be done is such that compensation offered in money for its non-performance would not afford adequate relief. However, until the contrary is proved, it is to be presumed that:

  • The breach of a contract to transfer immovable property cannot be adequately compensated by payment of money.
  • The breach of a contract to transfer movable property can be so compensated, except in the following cases:
    1. Where the property is not an ordinary article of commerce or is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market;
    2. Where the property is held by the defendant as the agent or trustee of the plaintiff.

Usually, the Courts are entitled to presume that in case of breach of contract to transfer of immovable property, mere compensation is not adequate relief, whereas specific performance is adequate relief, whereas in the case of movable property, compensation is the ordinary relief and specific performance is exceptional. However, it must be noted that these presumptions are rebuttable.

In Bank of India v. Chinoy, AIR 1949 PC 90, it was held that if shares are freely available in the market, then specific performance would not be granted. If shares of a particular company, for instance a private company are not readily available in the market, specific performance would be granted.

Suits for enforcement of a contract to execute a mortgage

In a suit for the enforcement of a contract to execute a mortgage or furnish any other security for the repayment of any loan which the borrower is not willing to pay at once, specific performance may be allowed. However, where only part of the loan has been advanced by the lender, he must be willing to advance the full amount of the loan.

  1. Contracts for the purchase of any debentures of a company.
  2. Suits for the execution of a formal deed of partnership.
  3. Suits for the purchase of partner’s share.
  4. Suits for the enforcement of a building construction contract or any other work on land, provided the following 3 conditions are fulfilled:
    • The building or other work has been described in the contract in a reasonably precise manner, so as to enable to Court to decide the exact nature of building or work;
    • The plaintiff has substantial interest in the performance of the contract, and the interest is such that financial compensation for non-performance of the contract would not be adequate relief; and
    • After the contract, the defendant has obtained possession of the whole or any part of the land in question.

It is important to remember that specific performance is an equitable remedy, and is therefore left to the discretion of the Court, rather than to the right of a person by law.

An injunction

Under Section 36 of Specific Relief Act 1963, an injunction is defined as an order of a competent court, which: 

  1. Forbids the commission of a threatened wrong,
  2. Forbids the continuation of a wrong already begun, or
  3. Commands the restoration of the status quo (the former course of things).

Clauses i and ii deal with preventive relief, whereas clause iii deals with an injunction called mandatory injunction, which aims at rectifying, rather than preventing the defendant’s misconduct.

Under Sections 36 & 37 of the Specific Relief Act 1963, there are two types of injunctions – temporary and perpetual, whereas Section 39 governs mandatory injunctions.

Temporary or interim injunctions are governed by Order 39 of Civil Procedure Code 1908 and are those injunctions that remain in force until a specified period of time, e.g. 15 days, or till the date of the next hearing. Such injunctions can be granted at any stage of the suit. 

Permanent or perpetual injunctions, as under Sections 38 to 42 of the Specific Relief Act, 1963 are contained in the decree passed by the Court after fully hearing the merits of the case. Such an injunction permanently prohibits the defendant from committing an act which would be contrary to the plaintiff’s rights. 

When are perpetual injunctions granted?

A: Under Section 38 of the Specific Relief Act 1963, whenever the defendant invades, or even threatens to invade the plaintiff’s right to enjoyment of property or right to property itself, the Court may grant to the plaintiff a perpetual or permanent injunction in the four cases as follows:

  1. Where there is no standard for quantifying the actual damages caused, or likely to be caused, to the plaintiff, by the invasion of his rights;
  2. Where invasion of the plaintiff’s rights is such that any compensation in money would be inadequate relief; 
  3. Where the defendant is a trustee of the property for the plaintiff;
  4. Where the injunction is necessary to prevent multiplicity of judicial proceedings.

Mandatory injunctions are granted in cases where in order to prevent the non-performance of an obligation, it is necessary to compel the performance of certain acts which the Courts are capable of enforcing. Thus, the Court may at its discretion grant an injunction to prevent such non-performance and also to compel performance of the required acts. This injunction is applicable to the breach of any obligation. It may be permanent or temporary, although temporary-mandatory injunctions are rare.

Damages instead of, or in addition to injunction:

Section 40 of the Specific Relief Act 1963 states that a plaintiff may claim damages either in addition to or in substitution for suing for perpetual or mandatory injunction, and if the Court deems fit, it may even grant such damages.

It is worth emphasizing that damages and injunction are not alternate remedies. Both may be allowed at the discretion of the Court.

However, damages cannot be granted unless the plaintiff has claimed damages in the plaint. In the event that the plaintiff has not claimed damages in the plaintiff itself, he should be allowed to amend the plaintiff, at any stage of the proceedings, on such terms as may be just in the circumstances of the case. 

To conclude, it is thus evident that there are several remedies available in case of breach of a contract, none of which are very simple. One would have to overcome an abundance of challenges and rebuttals to prove a case of breach of contract.


LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

LEAVE A REPLY