Law Of Contract A.k. Jain.pdf

CONTENTS CHAPTER 1. INTRODUCTION Essentials of a Valid Contract 2 Importance of Written Contract 4 Intention to Create a Legal Obligation 4 Kinds of Contracts 7 Standard Form Contract 9 Contractual Liability of the State 11 CHAPTER 2. FORMATION OF AN AGREEMENT (OFFER AND ACCEPTANCE) Essential Conditions of a Valid Offer (Proposal) 14 Express or Implied Offer 15 Communication of offer 15 General offers 17 Cross-offers 20 Offer and Invitation to treat (offer) 20 Essential Requirements of a Valid Acceptance 23 Communication of Acceptance 24, 50 Acceptance by Post, etc. 26 Acceptance by telephone/telex 29 Absolute and Unqualified Acceptance 32 Counter proposal 33 Provisional acceptance (Revocation of bid) 24, 55 Tenders 34 Revocation 39 Revocation of proposal 39 Revocation of acceptance 43 CHAPTER 3. CONSIDERATION Definition 60 At the Desire of the Promisor 61 Promisee or any other Person 64 Has Done or Abstained from doing 66

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Past Consideration 66 Executed Consideration 67 Executory Consideration 67 Such Act, Abstinence or Promise is called Consideration 67 Consideration must be real and not illusory 67 Consideration need not be adequate 68 Abstinence, etc. 69 Exceptions to Consideration 70 Privity of Contract 76 Performance of Existing Duties 81 English Law vs Indian Law on Consideration 83 Consideration and Motive 84 CHAPTER 4. CAPACITY TO CONTRACT Nature and Effects of Minor's Agreement 87 No estoppel against minor 88 No liability in Contract, tort, etc. 89 Doctrine of restitution 89 Beneficial Contracts 95 Ratification of the Minor's Agreement 99 Persons of Unsound Mind 100 Disqualified Persons

101

CHAPTERS. FREE CONSENT Consent and Free Consent 106 Coercion 107 Undue Influence 109 Relations which Involve domination 110 Presumption of undue influence (Unconscionable bargains) 111 Distinction between Coercion and Undue Influence 119 Fraud 120 Silence (Mere silence is no fraud) 121 Distinction between Fraud, Coercion and Undue Influence 123 Misrepresentation 123 Distinction between Fraud and Misrepresentation 125 Right of Rescission of Contract 125 Mistake 127 Mistake as to identity 128 Mistake as to subject-matter 130 Mistake as to nature of promise 131 Limitations: Mistake 133 Distinction between Void and Voidable Contracts 135

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CHAPTER 6. LIMITATIONS ON FREEDOM OF CONTRACT (ILLEGAL VOID AND CONTINGENT CONTRACTS) Unlawful Agreements 138 Forbidden by law 138 Defeats the provisions of any law 139 Fraudulent purpose 140 Injurious to person or property 140 Immoral 141 Opposed to public policy 142 (Consideration and Object Unlawful in Part (Sec.24) 147 Void Agreements 147 Restraint of marriage (Sec.26) 148 Restraint of trade (Sec. 27) 148 Restraint of legal proceedings (Sec.28) 153 Uncertain Agreements (Sec.29) 155 Wagering Agreements (Sec.30) 156 Distinction Between Illegal and Void Agreements 159 (Consequences of Illegal Agreements) Contingent Contracts 160 CHAPTER 7. DISCHARGE OF CONTRACT (PERFORMANCE, AGREEMENT AND NOVATION) Performance of Contract 163 Performance of joint promises (Ss.42-45) 165 Time and place for performance (Ss.46-50) 166 Effect of failure to perform the contract in time (Sec. 55) 167 Performance of reciprocal promises (Ss.51-52, 57, 58) 169 Appropriation of payments (Ss.59-61) 170 Breach of Contract 171 Anticipatory breach of contract (Sec.39) 172 Minor breach not a repudiation of contract 173 Discharge by Agreement and Novation 174 Contracts which need not be performed (Sec.62) 174 Novation 174 Alteration and rescission of contract 175 Remission of performance (Sec.63) 176 Waiver of contractual rights 177 Effect of neglect of promisee on performance of contract 177 Restoring benefits received under void/ voidable contracts (Ss.64-65) Discharge by Operation of Law 180 Assignment of Contract 180

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CHAPTER 8. DISCHARGE OF CONTRACT (DOCTRINE OF FRUSTRATION) Sec. 56, Contract Act 181 Frustration 182 Effects of frustration 184 Specific Grounds of Frustration 185 Destruction of-the subject-matter 185 Change of circumstances 186 Commercial hardship 187 Non-occurrence of. a contemplated event 191 Death or incapacity of a party 192 Government or Legislative intervention 193 Intervention of war 199, 201 Cases Not Covered by Doctrine of Frustration 199 Force majeure Clause in a Contract 205 CHAPTER 9. REMEDIES FOR BREACH OF CONTRACT Remedies for Breach of Contract 207 Rescission and Damages 207 Specific performance and Injunction 208 Quantum Meruit 208 Damages for Breach 209 Remotness of Damage 209 Section 73, Contract Act 212 Measure of Damages 217 Damages are compensatory, not penal 218 Mental pain and suffering 219 Nominal damages 221 Exemplary or vindictive damages 221 Duty to mitigate 222 Liquidated Damages 225 Section 74, Contract Act 226 Forfeiture of earnest money or deposit 228 CHAPTER 10. QUASI-CONTRACTS Supply of Necessaries (Sec.68) 234, 243 Payment by an Interested Person (Sec.69) 234 Liability to Pay for Non-Gratuitous Act (Sec.70) 235, 240 Finder of Goods (Sec.71) 237 Mistake or Coercion (Sec.72) 237 Quantum Meruit 245

Page vii TABLE OF CASES A A.A. Singh v Union of India 133 A.F. Ferguson & Co v Lalit Mohan Ghose 202 A.T. Brij Paul Singh & Bros, v State of Gujara 218 Abdul Aziz v Masum Ali 63 Abdul Jabbar v Abdul Muthaliff 139 Abdulla Khan v Purshottam 72 Adams v Lindsell 27, 51 Addis v Gramophone Co. Ltd 219 Afovos Shipping Co. v R. Paganan 164 Afsar Sheikh v Soleman Bibi 118 Ahmedabad Jubilee S. & Co. v Chhotalal 72 Ajudhia Prasad v Chandan Lal 93, 94 Alfred Schonlank v M Chetti 41 Amir Chand v Chuni Lal 200 Anant Rai v Bhagwan Rai 100 Andhra Sugars Ltd v State of A.P. 110 Anglia Television Ltd. v Reed 218 Anglo-Auto Finance Ltd. v James 226 Aries Advertising Bureau v C.T. Devaraj 77 Askari Mirza v Bibi Jai Kishori 108 Avery v Bowden 173 B Babasaheo v Rajaram 156 Bai Vijli v Nansa Nagar 141 Bala Devi v Shanti Mazumdar 131 Balasundara Mudaliar v Mahomed Usman 145 Baldev Das v Mohamuya 147 Balfour v Balfour 5 Banarsi Dass v Shakuntala 139 Bank Line Ltd. v Arthur Copel & Co. 186 Bank Line Ltd. v Capel Co. Ltd. 198 Bank of India v O. P. Swarankar 21 Banwari Lal v Sukhdarshan Dayal 4 Basanti Bastralaya v River Steam Navg, Co. Ltd 202 Bashir Ahmed v Govt. of A.P. 161 Bengal Coal Co. v Homee Wadia & Co 36 Beswick v Beswick 76, 78 BHAGWAN DAS KEDIA v GIRDHARI LAL & CO. 2, 30, 52 Bhagwan Datt Shastri v Raja Ram 145 Bhim Mandal v Mange Ram 94 Bhiwa v Shivaram 71 Bigos v Bowstead 159 Bihar State Electricity Board v Green Rubber Industries 132 Bimia Devi v Shankar Lal 123 Bismillaah v Janeshwar Pd. 133 Bismillah Begam v Rahamolullah Khan 168

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BOOTHALINGA AGENCIES v V.T.C. PORIASWAMI 193 Boulton v Jones 128 Brahamputra Tea Co. v E. Scarth 152 Brinki Bon Ltd. v Stahag Stahi 29 British & American Telegraph Co. v Colson 52 British Columbia Saw Mills v Nettleship 211 British Movietonews Ltd. v London & District Cinemas Ltd. 183, 195, 206 Brogden v Marriott 156 Brogden v Metropolitan Railway Co. 24 Bull v Pitney Bowers Ltd. 152 Burnard v Haggis 89 Byomkesh v Nani Gopal 22, 52 Byrne v Van Tienhoven & Co. 40, 51 c C Satyanarayna v K.L. Narasimham 153 Caltex (India) Ltd. v Bhagwan Devi Marodia 168 CARLILL v CARBOLIC SMOKE BALL CO 18, 19, 156, 157 Central Inland Water Transport Copn. Ltd. v Brojo Nath 10, 143 Chappel v Cooper 243, 244 Charlesworth v MacDonald 152 Chathirbhuj Vithalets v Moreshwar Parashran 33 Chidambara v P.S. Renga 68 Chikham Amiraju v Chikham Seshamma 108 China Cotton Exporters v Biharilal Ramchandra Cotton Mills Ltd. 167 Chinnamma v Devenga Sangha 111 Chinnaya v Ramaya 78, 84 Chiranjit Singh v Har Swarup 230 Chunni Kaur v Rup Singh 113 Coffee Board v Commr. of Commercial Taxes 13 Collard v South Eastern Rly 217 Collins v Godefroy 81 Cooke v Oxlay 42 Countess of Dunmore v Alexander 43 Cox v Philips Industries Ltd. 220 Craven-Ellis v Conons Ltd 246 Cundy v Lindsay 129 Currie v Misa 61 CWT v Abdul Hussain Mohd. Ali 6 D D Nagaratnamba v Kunuku Ramayya 141 D.T.C. v D.T.C. Mazdoor Congress 143 Damodara Mudaliar v Secy, of State, India 237 Daropti v Jaspat Rai 79 Davies v Collins 10 Davis Contractors Ltd. v Fareham Urban District Council 190 De Bemardy v Harding 245 De La Bere v Pearson 69 Derry v Peek 120 Devaraja Urs v Ram Krishniah 79 Devji Shivji v Karsandas Ramji 69 Dhanrajmal Gobindram v Shamji Kalidas & Co. 155, 205

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Dhurandhar Prasad Singh v Jai Prakash University 136 Diamond v Campbell-Jones 211 Dickinson v Dodds 40 Diesen v Samson 219 Diggle v Hige 156 Dominion of India v All India Reporter Ltd. 213 DORASWAMI IYER v ARUNACHALAAYYAR 62 Dunlop Pneumatic Tyre Co. Ltd. v New Garage & Motor Co. Ltd. 76, 225, 226 Durga Prasad v Baldeo 61 Dutton v Poole 65 Dwarka Das v State of M.P. 214, 231 E EASUN ENGG CO. LTD. v FERTILIZERS & CHEMICALS TRAVANCORE LTD. 190,206 Entores Ltd. v Miles Far East Corpn. 30 ESSO Petroleum Co, Ltd. v Commrs. of Customs & Excise 48 F Faqir Chand Seth v Dambarudhar Bania 178 Farman & Co. Ltd. v The Liddesdale 246 Fateh Chand v Balkishan Das 228, 230 Fazal Illahi v East Indian Railway Co. 213 Fazaladdin v Panchanam Das 61 Felthouse v Bindley 24, 49 Fender v St. John Mildmay 141 Fibrosa S.Akeyjna v Fairbain L.C.Barbour Ltd 179, 233 Fitch v Dewes 152 Ford Motor Co. v Armstrong 226 Foster v Mackinnon 132 Freeth v Burr 174 Frost v Knight 173 G Gadigeppa v Balagowda 89 Gallie v Lee 132 Gambhirmalv Indian Bank Ltd. 199 Ganga Saran v Ram Charan Gopal 187 Gangamma v Kupammal 141 General Assurance Society Ltd. v LIC 33 GHAZIABAD DEVELOPMENT AUTHORITY v UNION OF INDIA 21, 220 Gherulal v Mahadeo 142, 156, 158 Glassbrook Brothers Ltd. v Galmorgan County Council 81 Gobind Ram v Piram Dutta 99 Gokeda v Bhimayya 94 Gomathinayagam Pillai v Paliniswami Mindaw 168 Gopal Co. Ltd. v Hazarilal Co. 82, 85 Gopal Paper Mills Ltd v Surender K. Ganesh Das 152 Govindram Gordhandas v State 235 Grainger & Sons v Gough 21 Gujarat Bottling Co. Ltd. v Coca-Cola 149 Gurdashan Singh v Bishen Singh 200 Gurumukh Singh v Amar Singh 144 Guthing v Lynn 155

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H Habil Ali v Rafik-ud-Din 229 Hackney Borough Council v Dore 205 HADLEY v BAXENDALE 209, 210, 212 Hairoon Bibi v United India Life insurance 32 Haji Abdul Rehman v The Bombay & Persia Steam Navigation Co. 133 Haji Mohd. Ishaq v Mohd. Iqbal 15 Hakam Singh v Gammon (India) Ltd. 153 Hamer v Sidway 70 Har Bilas v Mahadeo Pd. 151 Harbhajan Lal v Harcharan Lal 19 Hari Chand Madan Gopal v State of Punjab 176 HARIDWAR SINGH v BAGUM SAMBRUI 55 Harnandarai Fulchand v Pragdas 188 Harris v Nickerson 20, 57 Harshad Chiman Lal Modi v D.L.F. Universal Ltd. 154 Harvey v Facey 21 Hayes v Dodd 219 Hazi Mohd Hazi Jiva v E. Spinner 33 Henderson v Stevenson 9 Henthorn v Fraser 40, 51 Her Highness Maharani Shantidevi P. Gaikwad v Savjibhai Haribhai Patel 143 Hermann v Charlesworth 146 Heme Bay Steam Boat Co. v Hutton 192, 199 Heron II, Koufos v Czarnikow Ltd. 210 Hindustan Co-operative Insurance Society v Shyam Sunder 24, 53 Hirji Mulji v Cheong Yue S.S.Co.Ltd. 183, 195, 206 Hobbs v London & South-Western Rly. Co. 218 Hochster v De La Tour 172, 173 Horstall v Thomas 121 Hotson & Hotson v Payne 219 Household Fire & Accident Ins. Co. v Grant 27, 51, 52 Howell v Coupland 186 Huda v (Dr.) Babeswar Kanhar 198 Hudson Re 63 Hulton v Hulton 178 Hyde v Wrench 33 i II.T.C Ltd. v George Joseph Fernandes 128 In re Irvine 42 Inder Singh v Parmeshwardhari Singh 100 Indermal v Ram Prasad 83 INDIANAIRLINES v MADHURI CHOWDHURY 11 Indu Mehta v State of U.P 236 Ingram v Little 129 Iswaram Pillai v Sonivaveru 77 J Jaggan Nath v Secy, of State for India 128 Jai Ram v Kahna Ram 140 JAMAL v MOOLA DAWOOD SONS & CO.223 Jamila Khatoon v Abdul Rashid 139 Jamna Bai v Vasanta Rao 97

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Jamna Das v Ram Avtar 76 Jarvis v Swan Tours Ltd 220 Jennings v Rundall 89 Joesph Constantine Steamship Line Ltd. v Imperial Smelting Corpn. Ltd. 206 Jones v Padavatton 6 Joseph Steamline Ltd. v Imperial Smelting Corp. 187 K K. J. Coal Co. Ltd. v Mercantile Bank 201 K. Mungall v Mahadavan 95 K.G. Hiranandani v Bharat Barrel & Drum Mfg. Co. 222 K.R. Lakshman v State of T.N. 158 K.S. Vaidyanathan v Vaira Van 168 Kamal Kant v Prakash Devi 126 KANHAIYA LAL AGGARWAL v UOI 35 Kanta Prasad Singh v Sheo Gopal 95 Kapur Chand Godha v Mir Nawab Himayatali Khan 176 Karam Chand v Basant Kaur 72 KARSANDAS H. THACKER v SARAN ENGINEERING CO.215 Karuna Ram Medhi v Kamakhya Prasad Baruah 200 Kastoori Devi v Chiranji Lal 69 KEDAR NATH v GORIE MOHD. 62 KHAN GUL v LAKHA SINGH 92 Kharbuja Kuer v Jang Bahadur 112 Khimji Kuverji v Lalji 96 Khubchand v Beram 142 Khwaja Muhammad Khan v Hussaini Begum 78 Kilbum Engg. Ltd. v ONGC Ltd. 32 King v Hoare 165 Kiran Bala v B.P. Srivastava 122 Klaus Mittelbachert v East India Hotels Ltd. 77 Kolliapara Sriramula v T. Awastha Narayana 155 Kores Mfg. Co. v Koloh Mfg. Co. 152 Kothi Jairam v Vishvanath 146 Koufos v C. Czarmilkow Ltd. 217 Kovuru Devara v Kumara Krishna Mitter 155 Krell v Henry 184,192 Krishna Lai v Promila Bala 77 Kulasekaraperumal v Pathakutty 68 I Ladli Prasad Jaiswal v Karnal Distillery Co. 112, 117 Lake v Simmons 128 Lakhanlal v State of Orissa 33 Lakshmana Swami Mundaliar v LIC 69 LAKSHMI AMMA v TALENGAL NARAYANA BHATTA 118 Laliteshwar Prasad v Baleshwar Prasad 12 LAL MANSHUKLA v GAURIDUTT 16, 45 Lampleigh v Brathwait Hob 66 Leaf v International Galleries 126 Lee & Sons v Railway Executive 10 Leslie (R) Ltd. v Sheill 89, 95 Lewis v Averay 130 Lloyd Bank v Bundy 118

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London Assurance Co. v Mensal 122 Long v Lloyd 126 Lowe v Peers 148 M M. Lachia Setty & Sons Ltd. v Coffee Board, Bangalore 222 M. Siddalingappa v T. Nataraj 13 M.C. Chacko v State Bank of Travancore 78 M.C. Chacko v State Bank of Travancore 77 M.V. Shankar Bhat v Claude Pinto (Deceased) by LRs 77 M/s Venkateswara Minerals v Jugalkishore 177 M/S. ALOPI PARSHAD & SONS LTD. v UNION OF INDIA189.191 M/S. J.K. ENTERPRISES v STATE OF M.P. 27 M/s. Murlidhar Chiranjilal v M/s. Harishchandra Dwarkadas 224 M/S. PROGRESSIVE CONSTRUCTIONS Ltd. v BHARAT HYDRO POWER CORPN LTD. 28 Ma Pwa We v Maung Hmat Gyi 96 Madhu Chander v Raj Coomar 149 Madras Railway Co. v Govinda Rau 213 Mafatlal Industries Ltd. v Union of India 239 Mahabir Kishore v State of M.P. 234 Mahabir Prasad v Durga Datta 227 Manni Ram v Purshottam Lal 140 Mannu Singh v Umadat Pandey 110 Maritime National Fish Ltd. v Ocean Trawlers Ltd. 184 MAULA BUX v UNION OF INDIA 226, 229 MCGREGOR v McGREGOR 5 McMohan v Fields 218 McPherson vAppana 21, 45, 47 Md. Said v Bishamber Nath 95 Meghraj v Bayabai 171 Mithoo Lal Nayak v LIC of India 122 Mohd. Salimuddin v Misri Lal 179 MOHORIBIBI v DHARMODAS GHOSE 91, 95, 97 Moody v Cox 111 Morrison Knudsen & Co. v B.C. Hydro & Power Authority 246 Morrison Steamship Co. v The Crown 64 Moses v Macfertan 234,237 Mulam Chand v State of M.P. 12 Muthia v Karrupan 108 N N. Sesharatnam v Sub Collector Land Acquisition, Vijayawada 40 NAIHATI JUTE MILLS LTD. v KHYALIRAM JAGANNATH 197 Naraini v Pyare Mohan 141 Narasimha Raju v Gurumurthy Raju 145 Narayana Ayyangar v K.V. Ambalam 158 Nash v Inman 244 Nathulal v Phoolchand 169 Niko Devi v Kirpa 113 Ningawwa v Byrappa Hirekurabar 132 Niranjan Shanker Golikari v Century Spinning & Mftg. Co. Ltd. 152 Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co. Ltd. 150

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O OIL & NATURAL GAS CORPN. LTD v SAW PIPES LTD.231 Olley v Marlborough Court, Ltd. 10 ONGC v Modern Construction Co. 27 Oriental Banking Corporation v John Fleming 124 Ouseph Poule v Catholic Union Bank 145 P P. Govinda Nair v P. Achutan Nair 73 P. Shivaram v T.A. John 145 P.C. Wadhwa v State of Punjab 236 Papaiah v State of Karnataka 144 Paradine v Jane 182, 205 Parshotam Das v Batala Municipal Committee 191 Partridge v Crittenden 48 Percival v Wright 122 Pestanji M. Modo v Bai Meharbai 73 Peters v Fleming 244 PHARMACEUTICAL SOCIETY OF GREAT BRITAIN VBOOTS CASH CHEMISTS (SOUTHERN) LTD. 22, 45 Philip Luka v Franciscan Assn. 113 Phillips v Brooks 129 Pillo Dhunjishaw v Municipal Corpn., Poona 242 Pinnel's case, 81 Planche v Colburn 246 Powell v Lee 25, 49 Pratap v Puniya 132 Prithvi Nath Mall v Union of India 154 Promoda Nath v Kinoo Mollali 119 PUNJ SONS (PVT.) LTD. v UNION OF INDIA 198 Punnakotiah v Kallapalli Kolikamba 140 Puran Lal v State of U P. 245 Purshotamdas Tribhovandas v Purshotamdas Mangaldas 189 R R. Lingaraj v Parvathi 101 R. Suresh Chandra & Co. v Vadnese Chemical Works 73 R. v Clarke 17 R.N. Kumar v R.K. Soral 175 Raffles v Wichelhaus 131 Raghava Chariar v Srinivisa 95, 96 RAGHUNATH PRASAD v SARJU PRASAD 114 Raj Kishore v Binod 220 RAJ RANI v PREM ADIB 98 Raja Dhruv Dev v Raja Harmohinder Singh 199,200 Rajasthan Rajya Sahkari Kraya Vikrya Sangh Ltd., Jaipur 217 Rajat Kumar Rath v Government of India 160 RAJENDRAKUMAR VERMA v STATE OF M.P. 36 Rajinder Kaur v Mangal Singh 101 Rajlucky Dabee v Bhootnath Mookerjee 71 Ram Coomar Coondoo v Chunder Canto Mookerjee 146 Ram Sarup v Bansi Mandar 140 Ram Sewak v Ram Charan 139 Rama Shankar Singh v Shyamlata Devi 165

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Ramalingam v Natesa 141 Ramchandra v Kalu Raju 81 Ramdas Chakrabarti v Cotton Ginning Co. Ltd. 52 Ramji Dayawala & Sons v Invest Import 15 Rana Uma Nath Bakhsh Singh v Jang Bahadur 78 Ranee Annapurni v Swaminatha 111,134 Ranganayakamma v Alwar Setti 108 Rash Behary Saha v N.Gopal Nundy 174 Ratan Chand v Askar 143 Rehana Khatun v Iqtidar Uddin 111 Rex v Kylsant 121 Roberts v Gray 98 Robinson v Davison 192 Robinson v Harman 218 Rolyanpur Time Works v State of Bihar 134 Roop Kumar v Mohan Thedani 4, 13 Rose & Frank Co. v Crompton & Bros. Ltd., 6 Rose v Joseph 79 Ryder v Wombell 244 S S. Ketrabarsappa v Indian Bank 239 S. Subrahmanyam v K.S. Rao 88 S.S. Shetty v Bharat Nidhi Ltd 225 S.V.R. Mudaliar v Rajababu 7 Sachindra Nath v Gopal Chandra 187 Sadiq Ali Khan v Jai Kishore 88 Sales Tax Officer v Kanhaiya Lal Saraf 238 Samuel Fitz & Co. v Standard Cotton Co. 188 Samuel v Ananthanatha 65 Sandhya Chatterjee v Salil Chandra Chatterjee 145 SATYABRATAGHOSE v MUGNEERAM BANGUR & CO.2, 183, 194 Scarf v Jardine 175 Schroeder Music Publishing Co. v Macauly 119 Scotson v Pegg 82 Secretary of State v Fernandes 235 Secy., Jaipur Dev. Authority v Daulat Ram Jain 144 Sethan v Bhana 112 Shadwell v Shadwell 82 Shaikh Kalu v Ram Saran Bhagat 151 Sham Singh v State of Mysore 177 Shanker Lal DamodharvAmbalalAjaipal 175 Sharad Trading Co. v State of M.P. 35 Sharfath Ali v Noor Md. 96 Shearson Lehman Hutton Inc. v Maclaine Watson & Co. 216 Shivagangawa Madiwalappa Vulvari v Basangouda 116 Shoshi Mohum Pal Choudhary v N.K. Poddar 127 SHRI HANUMAN COTTON MILLS v TATAAIRCRAFT LTD.232 Shri Krishna v Kurukshetra University 123 Shri Shiba Prasad Singh v Maharaja S.C. Nandi 238 SHRIMATI v SUDHAKAR R. BHATKAR 115 Shuppu Ammal v Subramaniyam 79 Siddalingappa v T. Nataraj 10

Simpkins v Pays 6

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Simpson v London & North Western Railway Co. 211 Sir Chunnilal Mehta & Sons v Century Spinning & Mfg. Co. 228 Smith v Hughes 131 Smt. Feroz'e v Makhan Singh 116 Smt Jakri Devi v Smt Rama Dogra 116 Smt. Takri Devi v Smt. Rama Dogra 113 Smt.Rajlukhy Dabee v Bhootnath Mookerjee 71 Somasundaram Pillai v Govt. of Madras 55 Sooltan Chand v Schillar 172,174 Sotiros Shipping Inc v Someret Solholt 224 Sova Ray v Gostha Gopal Day 226 Special Secy., Govt. of Rajasthan v V.V. Seshaiyar 10 Spencer v Herding 57 Sri Durga Saw Mill v State of Orissa 55 Startup v MacDonald 164 State Aided Bank of Travancore v Dhirt Ram 48 State of Bihar v Karan Chand Thaper12 State of M.P. v Recondo Ltd. 221 State of Orissa v M/s Durga Enterprises 12 State of Rajasthan v Associated Stone Industries 246 State of U.P. v Murari Lal 12 State of U.P. v Vijay Bahadur Singh 57 STATE OF WEST BENGAL v B.K. MONDAL & SONS 12, 237, 240 Stilk v Myrick 81 Subbu Chetti v Arunachalam Chettiar 77 SUBHAS CHANDRA DAS MUSHIB v GANGA PRASAD DAS MUSHIB 117 Subhash Kumar Manwani v State 156 Subramanyam v Subha Rao 96 Suisse Atlantique case 13 Sukhav Ninni 139 Sundaraja Aiyangar v Lakshmi Ammal 79 Superintendence Co. of India v Krishna Murgai 152 Suraj Besan & Rice Mills v Food Corpn. India 35 Suraj Narain v Sukhu Aheer 99 Suraj Narain v Suraj Ahir 72 Suraj Singh v Nathi Bai 168 Surasaibalini Debi v P.M.Majumdar 160 Surendra Nath v Kedar Nath 26 Sushila Devi v Hari Singh 200 Syed Issar Masood v State of M.P. 175 I Tarsem Singh v Sukhminder Singh 131, 229 Tate v Williamson 110 Taylor v Caldwell 182, 184, 195, 206 Thawadas Pherumal v Union of India 4 The Brimmes 40 The Oceanic Steam Navigation Co. v S. Dharamsey 124 Thomas v Thomas 84 Tinn v Hoffman & Co. 20 Trilok Chand Moti Chand v Commr. of Sales Tax 238 Tsakiorglou & Co Ltd. v Noblee & Throl GmbH 202 Tulk v Moxhay 79

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Tweddle v Atkinson 65, 76 Twentsche Overseas Trading Co. Ltd. v Uganda Sugar Factory Ltd. 183, 203 U U.P. Rajkiya Nirman Nigam Ltd. v Indure Pvt. Ltd. 33 Union Carbide Corporation v Union of India 84.145 Union of India v C. Damani & Co. 194 Union of India v Kishori Lal Gupta & Bros. 175 UNION OF INDIA v MADDALATHATTIAH 37 Union of India v S. Narain Singh 34, 55 Union of India v Steel Stock Holder's Syndicate, Poona 214 Union of India v Tribhuwan Das Lalji Patel 221 Upton Rural District Council v Powell 15 v V.L Narasu v P.S.V. Iyer 186 Vancouver Malt & Salt Brewing Co. v Vancouver Breweries Ltd. 150 VENKATA CHINNAYA RAU v VENKATA RAMAYA GARU 64 Venkataswamy v Rangaswami 72 Victoria Laundry Ltd. v Newman Industries Ltd. 210 Viswesardas Gokuldas v B K. Narayan Singh 25 W Wajid Khan v Raja Ewaz Ali Khan 113 Ward v Byham 86 Wasoo Enterprises v J. J. Oil Mills 167 Wertheim v Chicoutimi Pulp Co. 217 Westesen v Olathe State Bank 219 White v Bluett 68 White v John Warwick & Co. 10 Williams v Bayley 110 Williams v Carwardine 16 Williams v Williams 86 With v O'Flangan 123, 124

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1 Introduction

The law of contract lays down the legal rules relating to promises: their formation, their performance, and their enforceability. Explaining the object of the law of contract, Sir William Anson observes: "The law of contract is intended to ensure that what a man has led to expect shall come to pass; that what has been promised to him shall be performed." Anson also said: "The law of contract does not lay down a number of rights and duties which the law will enforce; it consists of rather a number of limiting principles subject to which the parties may create rights and duties for themselves which the law will uphold." Thus, the law shall not lay down absolute rights and liabilities of the contracting parties; rather it shall lay down only the essentials of a valid contract. "The parties to a contract, in a sense, make the law for themselves" (Anson). Parties have the freedom to settle all the terms of their contract, subject only to the overall control of law that there is no imposition (viz. undue influence, force, etc.), that the terms are reasonable and that they are not opposed to public policy. For example, the parties may settle any consideration and the court cannot interfere only because the consideration is inadequate or too small. "To consummate a contract there must be mutuality as well as a meeting of the minds of parties." 'Mutuality' means equality of rights between the parties. Either party should've equal right to enforce the contract. For example, where one of the parties to a contract is a minor, there is no mutuality. Further, in a contract there is a consensus ad idem i.e. 'meeting of minds'. 'Meeting of minds' means that the parties have by the exchange of offer and acceptance know each other's consent. "A contract, like a tort, is not unilateral." In a tort, a wrong is committed by one person against the other (e.g. injuring another by rash and negligent driving).

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Law of Contract

The law of contract in India is contained in the Indian Contract Act, 1872, which extends to the whole of India except the State of Jammu and Kashmir. This Act is based mainly on English Common law consisting of judicial precedents. The Act is not exhaustive as it does not deal with all the branches of the law of contract. There are separate Acts which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc. Before, 1930, the Act also contained provisions relating to contracts of sale of goods and partnership. To the extent that the Indian Contract Act deals with a particular subject it is exhaustive upon the same and it is not permissible to import the principles of English law dehorns the statutory provisions. The decisions of the English courts possess only a persuasive value [Satyabrata Ghose v Mugneeram Bangur & Co. AIR 1954 SC 44]. Where no statutory provision to the contrary is in existence in the Indian Contract Act, the courts in India have generally been guided by the Common Law of England. Although English Common Law permeates the Indian Contract Act, every new development of the Common Law may not necessarily fit into the scheme and words of our statute then it will be the duty of the courts in India to read the statute naturally and to follow it [Bhagwandas v Girdharilal AIR 1966 SC 543]. The Act does not affect the provision of any Statute, Act or Regulation not expressly repealed by it, nor any usage or custom of trade, nor any incident of any contract not inconsistent with the provisions of the Act (Sec. 1). A minor amendment in Sec. 28 of the Act was made by the Indian Contract (Amendment) Act, 1996. The general principles of the law of contract applicable to all contracts are laid down under Sees. 175 of the Act. Sees. 124-238 deals with specific or special kind of contracts e.g. indemnity and guarantee, bailment and pledge, and, agency. Essentials of a Valid Contract1 Section 2(h) of the Indian Contract Act, 1872, defines the term "contract" as 'an agreement enforceable by law.' As per Sec. 2(e), 'every promise and every set of promises forming consideration for each other' is called an "agreement". An 'agreement' is a promise and a 'promise' is an accepted proposal. Thus, every agreement is made up of a proposal or offer from one _____________________ 1. Write a short note on 'Essentials of a valid contract'. [C.L.C. -95/97] What is an 'agreement' and when is an agreement a 'contract' under the Indian Contract Act, 1872? [L.C. I-2000] "All contracts are agreements but all agreements are not contracts." Comment on this statement with reference to essentials of a valid contract. [D.U.-2008] [C.L.C-2000/2003, L.C.I-95] [I.A.S.-2005]

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Introduction

side and its acceptance by the other (thus there must be two or more persons; one person cannot enter into an agreement with himself). An agreement is a wider term than a contract. Every contract is an agreement, but every agreement is not a contract. An agreement becomes a contract when the following conditions mentioned in Sec. 2(h), Sec. 10 and other sections of the Contract Act are satisfied: (1) Offer and acceptance i.e. offer from one party and its acceptance by the other. (2) Intention to create legal obligations - discussed below. (3) There is some consideration for it i.e. the price for which the promise of the other is bought. (4) The parties are competent to contract (a minor or persons disqualified by law e.g. alien enemy or convicts, are incompetent to contract). (5) Their consent is free i.e. not caused by coercion, undue influence, fraud, misrepresentation or mistake. (6) Their object is lawful i.e. not forbidden by law, or opposed to public policy, or fraudulent, etc. (7) The agreement mustn't be expressly declared to be void e.g. an agreement in restraint of trade/ marriage, agreement by way of wager, etc. (8) The terms of the agreement must not be vague or uncertain (Sec. 29). (9) The agreement must be capable of performance (Sec. 56) - An agreement to do an impossible act is void. (10) Legal formalities - A contract may be oral or in writing. But in certain special cases the Act lays down that the agreement, to be valid, must be in writing or/ and registered, viz. an agreement to make a gift must be in writing and registered (Sec. 25). Any other law may also require a contract to be in writing or to be made in the presence of witnesses, or to be registered. Salmond has rightly observed: "The law of contracts is not the whole law of agreements, nor is it the whole law of obligations. It is the law of those agreements which create obligations, and those obligations, which have their source in agreements." Thus, only those agreements are contracts which give rise to legal obligations. The law of contract deals only with the agreement's which become contracts and not with all agreements. However, all legal obligations are not contracts; only those legal obligations that arise out of agreements constitute contracts. The following

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Law of Contract

legal obligations are not contracts as they do not arise out of agreement: (1) Civil liability for torts, breaches of trust, etc. (2) Quasi-contract, (3) Judgments of courts (contracts of record), (4) Recognizance (an arrested person may be released on his promise to appear in the court and/or to pay a sum of money in the event of non-appearance), (5) Status obligations (husband and wife). Importance of Written Contract In Roop Kumar v Mohan Thedani (AIR 2003 SC 2418), the Supreme Court outlined the significance and consequences of reducing a contract into writing. It observed: "The integration of the act consists in embodying it in a single utterance or memorial- commonly, of course, a written one. This process of integration may be required by law, or it may be adopted voluntarily by the actors either wholly or partially. Thus, the question in its usual form is whether the particular document was intended by the parties to cover certain subjects of transaction between them and, therefore, to deprive of legal effect all other (oral) utterances". "The practical consequence of integration is that its scattered parts, in their former and inchoate shape, have no longer any jural effect; they are replaced by a single embodiment of the act. This rule is based upon an assumed intention on the part of the contracting parties, evidenced by the existence of the written contract, to place themselves above the uncertainties of oral evidence and on a disinclination of the courts to defeat this object. Written contracts presume deliberation on the part of the contracting parties and it is natural they should be treated with careful consideration by the courts and with a disinclination to disturb the conditions of matters as embodied in them by the act of the parties." Intention to Create a Legal Obligation2 There is no provision in the Indian Contract Act requiring that an offer or its acceptance should be made with the 'intention of creating a legal relationship' while under English law it is so. However, an intention to create legal relations is essential, in order to create a contract [Banwari Lal v Sukhdarshan Dayal (1973) 1 SCC 294]. An intent to create legal relations may be inferred, where a person who is asked to accept an offer, intimates that he would accept, after the agreement is reduced to writing (Thawadas Pherumal v Union of India AIR 1955 SC 468). It may be, however, noted that neither an offer nor an acceptance is required to be express (Sec. 9, Contract Act). ____________ 2. "Under the law of contract the intention of the parties must be manifested dearly so that their obligations may be demarcated with certainty." Examine. [I.A.S.-97]

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Introduction

The intention of the parties is to be ascertained from the terms of the agreement and the surrounding circumstances. In 'social’ /’family' agreements (viz. agreements between husband and wife, an agreement to entertain a person with a dinner, or to go to movie, etc.) it is usual that the parties do not intend legal consequences3, while in 'business' agreements it is usual that the parties intend legal consequences to follow. However, the parties could intend legal consequences in family agreements and likewise do not intend so in business agreements (i.e. rely on each other's good faith and honour). LEADING CASE: MCGREGOR V MCGREGOR (1888) 21 QBD 424 In this case, a husband and a wife withdrew their complaints under an agreement by which the husband promised to pay her an allowance and she to refrain from pledging his credit. Held that there is a binding contract. However, in Balfour v Balfour (1919) 2 K.B. 571, a couple went to England on leave. For health reasons the wife was unable to accompany the husband again to Ceylon (Husband's place of work). The husband promised to pay 30 pounds per month to his wife as maintenance, but he failed to pay. The husband was held not liable, as there was no intention to create legal relationship. The court observed that arrangements between husband and wife usually do not result in contracts, even though there may be what would constitute consideration for the agreement. The reason being the parties did not intend that they should be attended by legal consequences.4 Atkin, L.J., in the aforesaid case, reasoned that arrangements such as these are outside the realm of contracts altogether, otherwise ___________ 3. A invited B to a dinner at his house on Sunday. B hires a taxi and reaches As house at the appointed time, but A failed to perform his promise. B felt insulted and filed a suit for recovery of the amount of Rs. 100 which he had spent on hiring taxi. Decide. [L.C.11-93; C.L.C-2003] A promises to host a 'grand dinner', on the occasion of the new millennium, to all the members of Lok Sabha belonging to his party in case they elect him as their leader. A is elected as the leader but did not perform his promise. Decide. [C.L.C-99] 4. L, a civil servant, employed in India, went to England with his wife, M. She could not return with him and had to stay in England for some treatment. L promised to send her some money to meet her expenses and the cost of treatment. He did not send the money for some time and stopped it after some time. Differences arose and the amount fall into arrears. M sued her husband. Can she succeed? Give reasons. [C.L.C-92]

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Law of Contract

it will result in multiplicity of litigation. Not only could she sue him for the failure in any month to supply the allowance, but he could sue her for non-performance of the obligations, express or implied, which she has undertaken upon her part. The reason that such arrangements are not sued upon is not because the parties are reluctant to enforce their legal rights when the arrangement is broken, but they are not sued upon because the parties in the inception of the arrangement never intended that they should be sued upon.] In Jones v Padavatton (1969) 2 All ER 616, the daughter acting on her mother's promise left her service and gone to another country for education. The mother undertook to foot the expenses. For five long years the daughter could not complete her education. Differences arose between them and the mother stopped the payments. Held, the engagement did result in a contract, but only for a period reasonably sufficient for the daughter to complete the education and the period of five years was more than sufficient for the purpose. Test of contractual intention5 - The test is objective, not subjective. What matters is not what the parties had in mind, but what a reasonable man would think, in the circumstances, their intention to be. Merely because the promisor contends that there, was no intention to create legal obligations would not exempt him from liability (See Carlill v Carbolic Smoke Ball Co. Case). Where a mother and her daughter, and a paying guest together made entries in a crossword puzzle in the name of mother, the expenses being met by one or other without any rules. The mother refused to share the prize, on winning one day. Held that she was bound to do so, for any reasonable man looking at their contract would at once concluded that they must have intended to share the prize [Simpkins v Pays (1955) 3 All ER 10]. However, where the agreement clearly provides that it was not a legal agreement, the same would be unenforceable (Rose & Frank Co. v Crompton & Bros. Ltd., 1925 AC 445). In this case, the agreement provided that: "This arrangement is not entered into.... as a formal or legal agreement and shall not be subject to legal jurisdiction in the Law Courts... that it will be carried through by the parties with mutual loyalty and friendly co-operation." One of the parties had made a breach of this agreement. In CWT v Abdul Hussain Mohd Alt (1988)3 SCC 562. one partner has lent a large sum of money to the other to be utilized as capital in the partnership venture. The transaction is in the context of a commercial nature. The presumption is that legal obligations are intended. The court, however, noted that the element of intention, though accepted in English law, has not passed unchallenged; it is useful only in systems which lack the test of consideration to enable them to determine the boundaries of contract. Thus, ____________ 5. "The test of contractual intention is objective, not subjective." Discuss. [I.A.S.-2001]

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Introduction

it is still an open question whether the requirement of contractual intention would be applicable within the framework of the Indian Act. In S.V.R. Mudaliar v Rajababu (AIR 1995 SC 1607), it was held that even if an agreement is described as "gentleman's understanding", yet if there is a clear agreement that the property which is being conveyed will be re-conveyed to the vendor, the agreement is binding and there is no need to prove that there was intention to create legal relationship, because that is presumed in such a case. Kinds of Contracts Contracts may be classified on the basis of enforceability, or on the basis of mode of creation, or on the basis of the extent of execution or on the basis of the form of the contract. Kinds of Contracts (A) From the point of view of Enforceability (i) Valid contract- It is an agreement enforceable by law [Sec. 2(h)]. (ii) Voidable contract- It is an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others [Sec. 2(i)]. Until it is avoided or rescinded by the party entitled to do so by exercising his option in that behalf, it is a valid contract; after it is repudiated, it becomes a void contract. (iii) Void contract- A contract which ceases to be enforceable by law becomes void [Sec. 2(f)]. Such a contract is a nullity, as for there has been no contract at all. 'An agreement not enforceable by law is said to be void' [Sec. 2(g)]. Thus a void agreement is void ab initio i.e. no agreement at all from its very inception (e.g. an agreement with a minor or an agreement without consideration). A 'void agreement' never amounts to a contract; a 'void contract' is valid when it is entered into, but subsequent to its formation something happens which makes it unenforceable by law. A contract cannot be void ab initio. A valid contract becomes void because of supervening impossibility or illegality (Sec. 56) or repudiation of a voidable contract, or when the event in a contingent contract becomes impossible (Sec. 32).6 (iv) Unenforceable contract- It is one which is valid in itself, but is not capable of being enforced in a court of law because of some technical defect such as absence of writing, registration, etc., or time barred by the law of limitation. __________ 6. Explain the difference between void agreement and void contract and give two examples of each. [D. U. 2007/2009]

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Law of Contract

(v) Illegal or Unlawful contract- The term ‘illegal contract' is inappropriate as it would mean an agreement enforceable by law and contrary to law. The term 'illegal agreement' is appropriate. An illegal agreement is narrower in scope than a void agreement. 'All illegal agreements are void but all void agreements are not necessarily illegal.' For example, an agreement with a minor is void as against him but not illegal. (B) From the point of view of Mode of Creation (i) Express contract- Where both the offer and acceptance constituting an agreement are made in words spoken or written, it is an express contract. (ii) Implied /inferred contract- Where the offer and acceptance are made otherwise than in words i.e. by acts and conduct of the parties (e.g. eating at a restaurant), it is an implied contract. Sometimes, an offer is expressed in words and the acceptance is implied from acts and circumstances. Such contracts may be called as contracts of mixed character. (iii) Constructive or quasi-contract- Such a contract does not arise by virtue of any agreement between the parties but the law infers or recognizes a contract under certain special circumstances. The Contract Act has named such contracts as "certain relations resembling those created by contract" (Sees. 68-72). An example- liability of a person to whom money is paid under mistake to repay it back. (C) From the point of view of Extent of Execution . (i) Executed contract- A contract is said to be executed when both the parties to contract have completely performed their share of obligation and nothing remains to be done by either party under the contract. For example, when a bookseller sells a book on cash payment. However, where only one of the parties to a contract has performed his share of obligation at the time of its formation and the other party is still to perform his share of obligation, then also the contract is called 'executed'. Such contracts are called Unilateral contracts. For example, a public advertisement offering a reward to anyone who finds a missing thing/ person. (ii) Executory contract- A contract is said to be executory when either both the parties to a contract have still to perform their share of obligation in toto or there remains something to be done under the contract on both sides. Such contracts are called Bilateral contracts or Future contracts. In such cases,

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Introduction

each party is a promisor and a promisee. For example, A agrees to coach B, a pre-medical student, from first day of the next month and B promises to pay A Rs. 500 per month. [Note: According to some writers, if one party has performed his part of the obligation and the other is still to perform his part, the contract is executed on one side and executory on the other]. (D) From the point of view of Form of Contract (i) Ordinary contract- A contract between two or more persons, with terms drafted as per the mutual agreement between the parties. Thus, there is equality of rights between the parties. Further, such contracts vary from party to party. (ii) Standard form contract7- When a large number of contracts have got to be entered into by a person, from a practical point of view and for the sake of convenience, a standard form for the numerous contracts may be used. The contract with standard terms may be drafted by one party and on the same terms contracts may be made with numerous persons. An insurance policy, shares or a railway ticket are few examples of such standardized contracts. The "special terms and conditions" become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of contract. In standard form contracts, generally the terms of the contract are pre-drafted by one of the parties and the other is supposed to sign on the dotted line, without having any time or opportunity to get the terms changed. In view of the unequal bargaining power of the two parties, the courts and the legislature have evolved certain rules to protect the interest of the weaker party: (1) Reasonable notice - If the attention of a party to the contract has been drawn to the terms of the contract by a sufficient notice, for example, by printing on a ticket, "For conditions see back", or obtaining his signatures on the document containing terms, or otherwise explaining the terms to him, there arises a binding contract as regards such terms. In Henderson v Stevenson (1875) 32 LT 709, held that where an adequate notice _________________ 7. Write a short note on Standard Form Contract/ Government Contracts. [C.L.C-92/94/95/2001] In a 'standard form contract', it is likely that the party having stronger bargaining power may insert such exemption clauses in the contract that his duty to perform the main contractual obligation is thereby negatived." Explain, and discuss the various rules which have been evolved to protect the weaker party. [I.A.S.- 2004]

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Law of Contract

is not given the offeree is not bound by the terms. In Special Secy., Govt. of Rajasthan v V.V. Seshaiyar (AIR 1984 A.P.5) held that the plaintiff was not bound by the terms printed on the reverse of the ticket. The terms on the ticket were in small print and they were not brought to the notice of the plaintiff either before or at the time of purchase of the ticket. (2) Notice should be contemporaneous with the contract - If a party to the contract want to have exemption from liability he must give a notice about the exemption while the contract is being entered into and not thereafter [Olley v Marlborough Court, Ltd. (1949) 1 K.B. 532]. (3) Terms of contract should be reasonable - If the terms of the contract are unreasonable and opposed to public policy, they will not be enforced. Thus, in Central Inland Water Transport Corpn. v Broje Nath (AIR 1986 SC 1571), the court struck down clause in a service agreement whereby the service of a permanent employee could be terminated by giving him a 3 month's notice or 3 month's salary. In Siddalingappa v T. Nataraj (AIR 1970 Mys. 154), the court held that any term in the contract, which tries to negative a duty imposed by law, is unreasonable and cannot be enforced. (4) Fundamental breach of contract - The main obligation under the contract is not allowed to be negatived by any term of the contract. No exemption clause is allowed to permit the non-compliance of the basic contractual obligation i.e. obligation which is fundamental or 'core' of the contract. Thus, a dry cleaner has to be answerable, even if the contract contains all sorts of exemption clauses, if the cloth is altogether lost [Davies v Collins (1945) 1 All ER 247]. (5) Nun-contractual liability - In case more than one kind of liability arises, exclusion of contractual liability may not negative any other kind of liability e.g. tortious liability especially for death or personal injury [White v John Warwick & Co. (1953) 1 WLR 1285]. (6) Strict construction - A strict construction shall be applied to exemption clause, and any ambiguity is to be resolved in favour of the weaker party [Lee & Sons v Railway Executive (1949) 2 All ER 581]. (7) Statutory protection - The English Unfair Contract Terms Act, 1977 severely limits the right of the contracting parties to exclude or limit their liability through exemption clauses in the agreement. India lacks such an Act.

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Introduction

LEADING CASE: INDIAN AIRLINES v MADHURI CHOWDHURY (AIR 1965 Cal 252) This case highlights the inadequacy of the Indian Contract Act in providing relief to the weaker party against the exemption clauses. In this case, the plaintiff's husband was killed in a plane crash. The plaintiff claimed compensation from the defendants i.e. Indian Airlines. The question was regarding the validity of an exemption clause contained in the Air ticket exempting the defendants from liability for negligence, viz. "for death, injury or delay to the passengers or loss, damage, detention, etc. of personal property arising out of the carriage or any other service or operations of the carrier." Held that the liability of a common carrier was not governed by the provisions of Indian Contract Act. The defendants were thus not liable. Holding the exemption clause valid, the High Court said: "Any contract which contains conditions enlarging, diminishing or excluding a carrier's common law duty of care to his passengers cannot in the absence of a statutory restriction on the imposition of such conditions, be pronounced unreasonable by a court with a view to one party getting more than the contract allows him, but the conditions which are wholly unreasonable are not binding upon a passenger even if steps otherwise reasonable have been taken to give him notice of them. This exemption of liability may be prevented by a statute. But in India no Act applies to internal carriage by air. The Warsaw Convention does not apply; nor is there any statute which prevents or limits the scope or content of such an exemption clause."] (iii) Government contracts: Government contracts include tenders, auctions and standard form contracts. Tenders and Auctions are discussed in the next chapter. Contractual Liability of the State8 The contractual liability of the State under Indian Constitution is the same as that of an individual under ordinary law of contracts. A Government contract is like any other contract between private parties and only those remedies are available for its breach as in other cases. Remedy by way of writ is not available for enforcing Government contract. ____________ 8. Discuss the provisions of Art. 299 of the Constitution of India and the consequences of its noncompliance. [C.L.C.-98]

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Law of Contract

Art. 298 of the Constitution of India authorizes the Government of India to enter into contract for any purpose subject to the mode and manner provided for it in Art. 299. Art. 299(1) lays down that a contract to bind the Government must satisfy the following requirements: (i) The contract must be expressed to be made by the President or by the Governor of the State, as the case may be; (ii) The contract must be executed on behalf of the President or the Governor, as the case may be; (iii) The contract must be executed by such person and in such manner as the President or the Governor may direct or authorize. It has been held that "in order to bind a Government there should be a specific procedure enabling the agents of the Government to make contracts. The public funds cannot be placed in jeopardy by contracts made by unspecific public servants without express sanction of the law" [State of W.B. v B.K. Mondat AIR 1962 SC 779]. The provisions of Art. 299 are therefore, based on the ground of public policy, on the ground of protection of the general public [Mulam Chand State of M.P. AIR 1968 SC 1218]. Art. 299(1) does not prescribe any particular mode in which authority must be conferred on a person to execute a contract on behalf of the President or Governor. Normally, such conferment is done by notification in the Official Gazette. It can also be conferred ad hoc on any person [State of Bihar v Karan Chand Thaper AIR 1962 SC 110]. Effect of non-compliance - The provisions of Art. 299(1) are mandatory in character and their contravention nullifies the contracts and make them void [State of U.P v Murari Lal AIR 1971 SC 2210]. It follows that a contravention of this constitutional requirement cannot be waived and the waiver of either party cannot confer any validity upon the invalid agreement. There is, therefore, no question of estoppel or ratification in such a case [State of Orissa v M/s Durga Enterprises AIR 1995 Ori 207]. Where a contract is void by reason of its non-compliance with the provisions of Art. 299(1), the rights of the parties are determined under Sec. 70 of the Contract Act [Laliteshwar Prasad v Baleshwar Prasad AIR 1966 SC 580]. If the services rendered or goods supplied to the Government are under a purported contract, which does not materialize because of non-fulfilment of the formalities prescribed in Art. 299, the Government can still be made liable to compensate for the same under Sec. 70, Contract Act, if it has enjoyed the benefit of what has been done under the purported act.

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Introduction

FURTHER QUESTIONS Q.1. A promises to his two children that he will purchase for them a 'Matiz' car and an 'Indica' car in case they stand first in the ensuing examinations. Both the children stood first in their respective classes. A, however, refuses to purchase the cars as promised by him. Can children sue A in the court of law for breach of contract? [C.L.C.-98] A.l. The children cannot sue A in the court of law for the breach of contract, as there is not an agreement enforceable by law. An intention of creating legal relation is clearly lacking in the present case. Q.2. Is it essential that a contract should be in writing? [L.C.I-97] A.2. No. An offer and acceptance need not always be formal, nor does the law of contract or of sale of goods require that consent to a contract must be in writing. Offer and acceptance can be spelt out from the conduct of the parties which covers not only their acts but also omissions [Coffee Board v Commr. of Commercial Taxes AIR 1988 SC 1487]. In Roop Kumar v Mohan Thedani (AIR 2003 SC 2418), the Supreme Court, however, outlined the significance and consequences of reducing a contract into writing (see the text). Q.3. A gave a brand new woolen suit costing Rs. 4,000 to a dry cleaner for dry cleaning. The suit is lost by mistake of the dry cleaner. On As claiming the full value, the dry cleaner contends that as per the terms of the contract printed on the reverse of the 'receipt' which was also signed by A, he is liable to pay only the ten times the amount of dry cleaning charges, the charges being only seventy rupees. Is the dry cleaner liable to pay Rs. 4,000 or only Rs. 700 as contended by him? A.3. It is a case relating to Standard form contract. Unreasonable terms are excluded from such contract. "The parties cannot, in a contract, have contemplated that a clause shall have so wide an ambit as in effect to deprive one party's stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent" [Suisse Atlantique case (1967) 1 AC 361]. The freedom of contract cannot be allowed to be abused. The (English) Unfair Contract Terms Act, 1977 provides that in respect of any loss caused by the breach of contract, any restricting or excluding clause shall be void unless it satisfies the requirement of reasonableness. In M. Siddalingappa v T. Nataraj (AIR 1970 Mys. 154) where a condition that only eight per cent of the cost of a garment would be payable in case of loss was held to be unreasonable.

Page 14 2 Formation of an Agreement (Offer and Acceptance) The first essential for creating a contract is a valid offer or proposal (the term 'offer' has been used in English law and the term 'proposal' under the Indian law). Sec. 2(a) defines "proposal" as follows: "When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal." The person making the proposal is called the "promisor" (offeror) and the person accepting the proposal is called the "promisee" (offeree). Essential Conditions of a Valid Offer (Proposal) (1) Expression of Willingness to do/ Abstain from doing to obtain other's Assent As per Sec. 2 (a), an offer or proposal has the following ingredients: (i) one person signifies to another, (ii) his willingness to do or to abstain from doing anything, (iii) with a view to obtaining the assent of that other. A person may signify' his willingness to sell certain goods for a certain price; a person may signify his willingness not to sue when he has a genuine case to sue. An offer must be made to obtain the assent of the other. A casual inquiry is not a proposal. When a person says he may buy a particular thing for a certain amount, it is not an offer. (2) Intention to Contract There is no provision in Indian Contract Act, nor has there been any reported decision in India, requiring that an offer or its acceptance should

Page 15 Formation of an Agreement (Offer & Acceptance) be made with the intention of creating legal relation, while under English law it is so. However, the courts generally presume intention to enter into legal relation, unless the offer itself appears to be too trivial or too fantastic. (3) Express or Implied Offer Sec. 9 provides that a valid proposal may be made by words (written or spoken) i.e. express offer, or by conduct i.e. implied offer. Thus stepping into a taxi and consuming eatables at a restaurant, both create implied promise to pay for the benefits enjoyed. Similarly, a bid at an auction. In Upton Rural District Council v Powell (1942) 1 All ER 220, a fire broke out in the defendant's farm. Believing that he was entitled to the free service of Upton Fire Brigade, he summoned it. The defendant's farm was not within the free service zone of the Upton. Upton claimed compensation for its services. The court observed that the defendant asked for the services of Upton and Upton provides them. Hence the services were rendered on an implied promise to pay for them. In order to ascertain whether an agreement has arisen, regard must be had to the totality of circumstances in which the parties contracted and not merely to the formalities of offer and acceptance. In Ramji Dayawala & Sons v Invest Import (1981) 1 SCC 80, a contract was signed between an Indian and a Yugoslavian party. One of the terms provided for arbitration. Immediately thereafter the Indian party cabled and objected about the arbitration clause. The other party made no reply to it, but permitted the work to go on. A dispute having arisen, it was held that the arbitration clause had become deleted from the contract by an implied agreement. Likewise, non-repudiation of certain terms may be regarded as acceptance thereof [Haji Mohd. Jshaq v Mohd. Iqbal (1978) 2 SCC 493]. (4) Certainty of Offer The terms of the offer must be certain and not vague (Sec. 29). A agrees to sell to B "my white horse for Rs. 500 or Rs. 1000". There is nothing to show which of the two prices was to be given, thus it is not a valid offer. Similarly, an agreement to agree in future is not a contract. A vague statement "I will buy one of your horses if I can afford it" cannot be said to be a valid offer. (5) Communication of Offer According lo Sec. 3, to 'signify' means that the proposal must be communicated to the other party. According to Sec. 4, "the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made." Illustration: A proposes by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter.

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Law of Contract

If an offer has not yet been communicated, even if somebody acts according to the terms of the offer, he cannot be deemed to be acceptor of that offer. Acting in ignorance of an offer does not amount to the acceptance of that offer. Thus, knowledge of an offer is must before the offer can be accepted. How can there be consent or assent to that of which the party has never heard? Communication is necessary whether the offer is specific or general. General offers are communicated through mass media viz. T.V., Newspapers, etc. LEADING CASE: LALMAN SHUKLA V GAURI DUTT1 (1913) 11 All L.J. 489 In this case, the defendant's nephew absconded from home. The plaintiff, who was defendant's servant, was sent to search the missing boy. After the plaintiff had left in search of the boy, the defendant issued handbills announcing a reward of Rs. 501 to anyone who might find out the boy. The plaintiff came to know of this offer only when he had already traced, and informed defendant about the boy. The plaintiff brought an action to claim his reward. Held that since the plaintiff was ignorant of the offer of reward, his act of bringing the lost boy did not amount to the acceptance of the offer, and, therefore, he was not entitled to claim the reward. The court observed: A suit like the present one can only be founded on a contract. In order to constitute a contract, there must be an acceptance of an offer and there can be no acceptance unless there is knowledge of the offer. The contention of the plaintiff was that a privity of contract was unnecessary and neither motive nor knowledge was essential for acceptance of an offer. The court observed that the motive is not essential, but knowledge and intention are. In Williams v Carwardine (1833) 2 LJKB 101, where information was given about the murderers of her husband by a woman, not so much for reward, but to assuage her feehngs, she was allowed to recover. Where an offer has been accepted with knowledge of the reward, the fact that the informer was influenced by motives other than the reward will be immaterial. _____________ 1. A's nephew was missing. A sent his servants in search of the boy. When the servants had left, A by handbill offered to pay Rs. 501 to anybody discovering the boy. One of his servants B discovered the boy and claimed the reward. A refused to give the reward. Decide: (i) If B came to know of the offer of reward only when he had already discovered the missing boy; (ii) If B had knowledge of the reward at the time he discovered the boy but did not claim assuming it was not meant for servants of A who had been sent to discover the boy. [C.L.C-2000; L.C.II-2001]

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Formation of an Agreement (Offer & Acceptance)

The court further observed that in the case of public advertisements offering a reward, the 'performance of the act' raises an inference of acceptance (Sec. 8). But, in the present case, the plaintiff was already under an obligation to do what he did (acting under the servant's duty) and, therefore, the performance of act cannot be regarded as a consideration for the defendant's promise.] In an Australian case, R. v Clarke (1927) 40 CLR 227, it was held that even if the acceptor had once known of the offer but had completely forgotten about it at the time of acceptance, he would be in no better position than a person who had not heard of the offer at all. In that case, the government offered a reward for giving information about some murderers. The offer further added that if an accomplice, not being himself the murderer, gave the information he would also be entitled to a free pardon. The plaintiff, being an accomplice, saw the offer and having been so much excited by the hope of pardon, that he gave the information to save himself, completely forgetting the reward. Held that he could not recover the reward. (6) General Offers2 There are two kinds of offers - general and specific. The specific offer is made to specific or an ascertained person, while the general offer is made to the public or world at large. However, in case of general offers, the contract is made only with that person who comes forward and performs the conditions of the proposal as such performance amounts to acceptance of performance (Sec. 8). The communication of acceptance is not necessary in such cases. As stated by Anson, "An offer need not be made to an ascertained person, but no contract can arise until it has been accepted by an ascertained person". According to Sec. 8 of the Indian Contract Act, "Performance of the conditions of a proposal.... is an acceptance of the proposal". _________ 2. Write a short note on Genera! Offer. [L.C. II-93] A professor of law announced in his class a reward of Rs. 6,000/- to any student securing the highest marks in a particular subject. S, a student, worked very hard and got the highest marks, and, claimed the reward. The professor, however, refuses to give the reward on the ground that he is not legally bound to give the reward. Discuss. [C.L.C-2001] "An offer need not to be made to an ascertained person, but no contract can arise until it has been accepted by an ascertained person". Discuss the above statement, with reference to Carlill v Carbolic Smoke Ball Co. case. [L.C.I-94/2002]

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LEADING CASE: CARLILL v CARBOLIC SMOKE BALL CO.3 (1893) 1 QB 256 This case is an illustration of a contract arising out of general offer. A company offered by advertisement to pay £100 to anyone "who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having used the ball according to printed directions." It was added that "£1,000 is deposited with the Alliance Bank showing our sincerity in the matter." The plaintiff used the smoke balls according to the directions but she nevertheless subsequently suffered from influenza. She was held entitled to recover the promised reward. It was contended by the defendants that it was an offer the terms of which were too vague to be treated as a definite offer in as much as there was no limit of time fixed for catching of the influenza; there was no intention to enter into legal relations as it was simply a puffing advertisement; that the offer was not made to anyone person in particular and the plaintiff had not communicated her intention to accept; and, that there was no consideration for the promise. The court rejected all these contentions in the following manner: (i) The offer was definite. The protection from influenza was to endure during the time the smoke ball was being used (the disease here was contracted during the use of the carbolic smoke ball). (ii) The advertisement says that ... £1,000 is lodged at the bank for the purpose. Therefore, it can't be said that the statement that £100 would be paid was intended to be a mere puff. The advertisement was intended to be understood by the public as an offer which was to be acted upon. Regarding the contention that it would be an insensate thing to promise £100 to a person who used the smoke ball unless you could check or superintend his manner of using it, the court said that if a person chooses to make extravagant promises of this kind he probably does so because it pays him to make them, and if he _____________ 3. What were the answers given by the court to the following contentions in the case of Carlill v Carbolic Smoke Ball Co.? (i) That the advertisement in question was a mere puff and not a proposal to any specific person, and (ii) That the acceptance, if any, was as valid as it was not communicated. [L.C.I-93/95; L.C. II-94]

Page 19 Formation of an Agreement (Offer & Acceptance) has made them, the extravagance of the promises is no reason in law why he could not be bound by them. (iii) The court exposed the fallacy of the argument that an offer could not be made to world at large. Why should not an offer be made to the entire world which is to ripen into a contract with anybody who comes forward and performs the condition? Although the offer is made to the world, the contract is made with that limited portion of the public who come forward and performs the condition on the faith of the advertisement. (iv) In cases like this the communication of acceptance is not necessary, though it is a general proposition that when an offer is made, one must have it not only accepted, but also notified acceptance. But if the person making the offer, expressly or impliedly, intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of these conditions is a sufficient acceptance without notification. In advertisement cases, the performance of condition is a sufficient acceptance without notification. If one advertise about his missing dog and rewards for finding it, will all the people first write a note to him saying that they have accepted his proposal?4 The court also observed that where a general offer is of continuing nature, as in the present case, it will be open for acceptance to any number of persons until it is retracted. But where an offer requires some information as to a missing thing, it is closed as soon as the first information comes in. (v) The court also noted that, in this case as the transaction was advantageous to the company (for increasing sales), this is enough to constitute consideration for the promise (a requirement of a valid contract)]. In Harbhajan Lal v Harcharan Lal (AIR 1925 All 539), held that where the terms of a general offer were substantially though not literally complied with, _____________ 4. Acceptance by conduct may in some cases be treated as sufficient to create a contract. Comment in the light of Carlill v Carbolic Smoke Ball Co. [L.C.I-2001] [Note: Also see Sec. 8, Indian Contract Act, 1872.] Performance of the conditions of an offer amounts to acceptance of the offer even in the absence of intimation of acceptance. Comment in the light of decision in Carlill v Carbolic Smoke Ball Co. [D. U. 2007]

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then it is an acceptance of the proposal. In this case, the general offer was: "Anybody who finds trace of the boy and brings him home, will get Rs. 500". The plaintiff was at a railway station, there he saw a boy, overheard part of conversation, realized that the boy was the missing boy and promptly took him to the Railway Police Station. Held that the handbill was an offer open to the whole world and that the plaintiff substantially performed the condition and was entitled to the amount offered. (7) Cross-offers When two parties make identical offers to each other, in ignorance of each other's offer, the offers are 'cross-offers'. Such offers do not constitute acceptance of one's offer by the other and as such there is no completed agreement [Tinn v Hoffman & Co.(1873) 29 LT 271]. For example, A wrote to B offering to sell him certain goods. On the same day, B wrote to A offering to buy the same goods. The letters crossed in the post. There is no concluded contract between A and B. (8) Offer and Invitation to Treat (Offer)5 An 'offer' is the final expression of willingness by the offeror to be bound by his offer. Sometimes a person may not offer to sell his goods, but make some statement or give some information with a view to inviting others to make offers on that basis. Where a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does not make an offer but merely 'invites' the other party to make an offer on those terms. For example, a book-seller sends catalogue of books indicating price of various books to many persons. This is an 'invitation to treat'. The interested party may make an offer and the book-seller may accept or reject the offer. Similarly, advertisements for bids/ tenders are only 'invitation to offer'; the bid/tender constitutes the offer which can be accepted or rejected. An auctioneer is not bound to accept even the highest bid (offer). Where an auctioned sale was cancelled, the plaintiff cannot recover travel expenses, as there was no contract. An offer can be withdrawn before it is accepted [Harris v Nickerson (1873) L.R. 8 QB 226]. Likewise, an inducement of special discount by a shopkeeper is a "commercial puff” or an invitation to treat and not an offer. A banker's catalogue of charges or a prospectus of a company inviting applications for ____________ 5. Write a short note on 'offer and invitation to offer’. [C.L.C.-95/99, L.C.I-95/2001] Explain the difference between offer and invitation to offer. [D.U. 2007/2009] Explain an 'offer' and a 'quotation' and difference between the two. [I. A.S. -94/2006]

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job is also not an offer. A quotation of prices is not an offer. In Grainger & Sons v Gough (1896) AC 325 (HL), it was held that, "The transmission of a price list does not amount to an offer to supply an unlimited quantity of the wine described at the price named." In Bank of India v O. P. Swarankar (AIR 2003 SC 858), it has been held that a contract of employment is governed by the Contract Act. Announcement of Voluntary Retirement Scheme by a nationalized bank is not an offer. The employee offering to retire makes an offer and the same becomes effective when the written request of retirement is accepted. An employee who has offered to retire under the scheme can withdraw before his request is accepted. In Ghaziabad Dew Authority v UOI (AIR 2000 SC 2003), the court observed that when a development authority announces a scheme for allotment of plots, the brochure issued by it for public information is an invitation to offer. Several members of public may make applications for availing benefit of the scheme. Such applications are offers. Some of the offers having been accepted subject to the rules of priority/ preference laid down by the authority result into a contract between the applicant and the authority. In McPherson v Appana6 (AIR 1951 SC 184), it was held that mere statement of the lowest price at which the offeror would sell contains no implied contract to sell at that price to the person making the inquiry. The plaintiff offered to purchase the lodge owned by the defendant for Rs. 6,000. He wrote the defendant's agent asking whether his offer had been accepted and saying that he was prepared to accept any higher price if found reasonable. The agent replied: "Won't accept less than Rs. 10,000." The plaintiff accepted this and brought a suit for specific performance. Held that the defendant did not make any offer or counter offer but was merely inviting offers. There was no assent to the plaintiff's offer to buy at Rs. 10,000 and, therefore, no concluded contract. The Supreme Court relied on the principle enunciated in Harvey v Facey (1893) AC 552. In that case the plaintiffs telegraphed to the defendants, writing: "Will you sell us Bumper Hall Pen? Telegraph lowest cash price". The defendants replied, also by a telegram: "Lowest price for Pen, £ 900". The plaintiffs immediately sent their last telegram stating: "We agree ____________ 6. A question based on the facts of this case. [D. U. 2007] A offered to purchase a house owned by B for Rs. 60,000. He wrote to B asking whether his offer of Rs. 60,000 was accepted and further saying that he was prepared to pay a higher price if found reasonable. B replies: "Won't accept less that Rs. 80,000". A accepted this and brought a suit for specific performance of the contract. B raised the defence that there was no concluded contract. Decide. [C.L.C-94]

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to buy Pen for £ 900 asked by you". The defendants, however, refused to sell the plot of land at that price. The court observed that the defendants gave only the lowest price and did not expressed their willingness to sell. Thus they had made no offer. The plaintiffs' last telegram was an offer to buy, but that was never accepted by the defendants. Where a proposer, in response to a proposal to purchase his land, asked for a higher price and also some advance with acceptance, it was held that the proposer accepting the same along with an advance payment amounted to a contract, although the letter of acceptance came back being refused [Byomkesh v Nani Gopal AIR 1987 Cal 92)]. LEADING CASE: PHARMACEUTICAL SOCIETY OF GREAT BRITAIN v BOOTS CASH CHEMISTS (SOUTHERN) LTD.7 (1953) 1 All ER 482 In this case, the defendant carried on business in a self-service shop. The plaintiff picked up a bottle of medicine from the shelves of the defendant's shop with the intention of buying it, but the defendant refused to sell it. The plaintiff contended that the display of goods in a shop with price chits attached is an offer to sell, so picking of goods amounts to an acceptance of this offer. The defendant (shopkeeper) on the other hand argued that the display of goods amounted only to an invitation to offer, so that the customer who picks up an article makes an offer to buy which may or may not be accepted. It was held that the display of goods in a shop with price chits attached is not an offer even if there is a "self-service" system in the shop. The court observed: A shopkeeper's catalogue of prices is not an offer, it is only an invitation to the intending customers to offer to buy at the indicated prices. Similarly the display of goods in a shop with price chits attached is not an offer. It would be wrong to say that the shopkeeper is making an offer to sell every article in the shop to any person who might come in and that person can insist on buying any article by saying ‘I accept ___________ 7. Give critical comments. "Display of goods with price tags in a self-service shop is not a proposal" [L.C.I-2000/2002] M.L. Tailors and Cloth Merchants announced a reduction sale on woolen items and displayed the goods in show windows with the price tagged on them. X, a university student, entered into the shop and selected a woolen shawl marked Rs. 150 and went to the counter for making the payment, but the shopkeeper refused to accept the amount and make over the shawl to X. Can X compel the shopkeeper to sell the shawl to her? [L.C. I-93/94/95; C.L.C.-95/2001] Novelty Computers exhibited in their showroom a computer with latest configuration and attached to it a price tag of Rs. 33,999 (inclusive of all taxes). A visits the showroom and tenders a cash amount of Rs. 33,999 for its purchase. The company, however, refuses to sell the computer saying that it has only one piece and that too has already been sold to someone else. Discuss whether A can compel the company to sell him the computer. [D. U. -2008]

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offer'.... There might be various reasons for the refusal by the shopkeeper, for example, limited stock of particular goods. In most bookshops customers are invited to go in and pick up books and look at them even if they do not actually buy them. There is no contract by the shopkeeper to sell until the customer has taken the book to the shopkeeper and said ‘I want to buy this book' and the shopkeeper says 'yes'. However, a shopkeeper on seeing the book picked up could say 'I am sorry, I cannot let you have that book; it is the only copy I have got and I have already promised it to another customer.' In the present case, the mere fact that the customer picks up a bottle of medicine from the shelves does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy, and there is no sale effected until the buyer's offer to buy is accepted by the acceptance of the price. Ordinary principles of common sense and of commerce must be applied in this matter, and to hold that in the case of self-service shops the exposure of an article is an offer to sell, and that a person can accept the offer by picking up the article, would be contrary to those principles and might entail serious results. One of such results has been discussed above viz. a shopkeeper necessarily has a limited stock of goods. The other such result would be that if a customer had picked up an article, he would never be able to change his mind and put it back; the shopkeeper could say, 'oh no, the property has passed and you must pay the price.'] ACCEPTANCE A proposal when accepted, results in an agreement. It is only after the acceptance of the proposal that a contract between the two parties can arise. Sec. 2(b) defines 'acceptance' as follows: "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise." Thus, acceptance is the assent given to a proposal. Essential Requirements of a Valid Acceptance There are two essential requirements of a valid acceptance: firstly, acceptance should be communicated by the offeree to the offeror. Secondly, acceptance should be absolute and unqualified.

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(I) Communication of Acceptance (1) Acceptance express or implied - The offeree must signify his assent, or communicate the acceptance. Acceptance may be in the form of express words (written or spoken) or may be signified through conduct (implied or tacit viz. cashing of a cheque). In every case, there should be some external manifestation or overt act of acceptance (e.g. fall of hammer in auction sale). A mere mental determination (or intent or resolve) to accept, without any intimation to the other party, is not enough. In Brogden v Metropolitan Railway Co. (1877) 2 AC 666, the conduct of the company's agent in keeping the agreement in his drawer was an evidence of the fact that he mentally accepted it. It was, however, a private act which does not complete a contract. But the subsequent conduct of the parties in supplying and accepting goods on the basis of proposed agreement was a conduct that evidenced or manifested their intention. The contract then becomes completed. (2) When communication not necessary - In all cases of general offers (unilateral contracts), the acceptance is usually by conduct, as envisaged by Sec. 8 ('performance of the conditions of a proposal is an acceptance of the proposal'). In Hindustan Co-operative Insurance Society v Shyam Sunder (AIR 1952 Cal 691), cashing of a cheque by the Insurance Company was held to be acceptance of the proposal without there being any formal acceptance. In Carlill v Carbolic Smoke Ball Co. Case, held that in cases of general offers, the other party has only to perform act and not to give a promise in return, the requirement of notification or communication of acceptance is not necessary. (3) Communication to offeror himself- Acceptance must be communicated to the offeror himself. A communication to any other person is no communication in the eyes of law. In Felthouse v Bindley (1863) 7LT 835, the plaintiff offered by means of a letter to purchase his nephew's horse. The letter said: "If I hear no more about the horse, I consider the horse mine at £33-15s." To this letter no reply was sent by nephew but he told the defendant, his auctioneer, net to sell the horse as it was already sold to his uncle. The auctioneer by mistake put up the horse for auction and sold it. The plaintiff sued the auctioneer on the ground that under the contract the horse had become his property.8 _____________ 8. Ramesh wants to purchase Vasant's residential house situated in Indira Vikas Colony, Lalitpur for Rs. 5 Lacs. He writes to Vasant that he would assume his offer has been accepted unless he hears to the contrary from him (Vasant) within a month. Vasant does not reply but directs his agent M/s Fairdeals, a property dealer, not to sell the above-said property to anybody else because he (Vasant) wants to sell it to Ramesh. However M/s Fairdeals sell the said property to Kanti. Discuss and decide whether Ramesh can file a suit seeking enforcement of contract against Vasant, M/s Fairdeals or Kanti. [L.C.II-94/95]

Page 25 Formation of an Agreement (Offer & Acceptance) The court said that the nephew intended the uncle to have the horse, but he had not communicated his intention to the uncle. The court laid down the following two propositions: (i) Acceptance of an offer should be communicated to the offeror himself or his authorized agent. A communication to a stranger, like the auctioneer in this case, will not do. (ii) An offeror can't impose upon the offeree the 'burden of refusal' or 'duty to reply.' The offeror cannot say that if no answer is received within a certain time, the same shall be deemed to have been accepted. An offeror cannot say that failure to reply will be deemed to be the acceptance of offer. The offeree has a right to make the offer lapse by not being accepted within the prescribed time or the reasonable time. Mere silence or mental assent cannot be regarded as acceptance of the offer.9 As acceptance must be communicated to the person who made the offer, it has been held that the mere filing of a suit does not constitute a formal acceptance [Viswesardas Gokuldas v B.K. Narayan Singh (1969) 1 SCC 547]. (4) Communication by acceptor himself- The communication of acceptance should be from a person who has the authority to accept. Information received from an unauthorized person is ineffective. In Powell v Lee (1908) 24 TLR 606, the plaintiff was an applicant for the headmastership of a school. The managers passed a resolution appointing him, but the decision was not communicated to him. A communication was, however, made to another applicant that he had not been selected. One of the members in his individual capacity informed the plaintiff about his appointment. The managers cancelled their resolution and the plaintiff sued for breach of contract. The court held that no contract had come into existence, as information from an unauthorized person is as insufficient as over-hearing from behind the door. The court said: "Where six persons having the power of appointment to post, vote on the question and resolve to appoint someone, they do not make a concluded contract then and there." There must be something more. There must be a communication made by the body of persons to the selected candidate. (5) Mode of communication10 - Acceptance has to be made in the manner prescribed or indicated by the offeror. But a departure from that manner does not of itself invalidate the acceptance. A duty is cast on the offeror to reject such acceptance within reasonable time and if he fails to do so, the contract ______________ 9. "An agreement does not result from a mere state of mind; intent to accept a proposal or even a mental resolve to accept a proposal does not give rise to a contract. Furthermore, mere silence cannot be a mode of acceptance of a proposal." Explain. [L.C.I-2002] A writes a letter to B offering to buy his car for Rs. 2 lacs saying therein "unless I hear from you, I shall take the car to be mine for Rs. 2 lacs." B gives no reply but sells the car to C. A files a suit against B for damages on account of breach of contract. Will he succeed? [D.U.-2008] 10. Discuss the essential requirements of a valid acceptance as contained in Sec. 7 of the Contract Act. [C.L.C.-2003] What is the rule if the proposer prescribes the manner in which it is to be accepted, but it is accepted in a different manner? [L.C. I-2000]

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is concluded. Where no mode of acceptance is prescribed, acceptance must be expressed in some usual and reasonable manner (Sec. 7). Acceptance should be made before an offer lapses or is revoked. Where an offeror requires that the acceptance should be sent to a particular person in writing, and the offeree instead of writing to the particular person, sent his agent in person to communicate the acceptance, it was held that Sec. 7 was not violated (Surendra Nath v Kedar Nath AIR 1936 Cal 87). By giving his acceptance in the prescribed mode, the acceptor has done all that the offeror required him to do and he is entitled to the contract, even if the acceptance does not reach the offeror. (6) When contract concluded - When the parties are in the presence of each other, the contract is concluded when acceptance is communicated to the proposer. This is the ordinary rule. However, an exception has been engrafted upon this rule by Sec. 4. When the parties are at distance and are contracting through post or by messengers or by telephone the question arises when is the contract concluded?11 (a) Acceptance by Post, etc. Sec. 4 lays down that the communication of acceptance is complete as against the proposer, when it is put in the course of transmission to him so as to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. Illustration: B accepts A's proposal by a letter sent by post. The communication of acceptance is complete as against A, when the letter is posted, and as against B, when the letter is received by A. Thus, when the parties are at a distance and are contracting through post or by messengers, the proposer become bound as soon as the acceptance is put in the course of transmission to him (e.g. when letter of acceptance is posted by acceptor). But the acceptor will become bound only when the communication of acceptance is received by the proposer i.e. 'comes to the knowledge of the proposer'. The rule is based on commercial expediency. The proposer or offeror becomes bound immediately on the posting of the letter (correctly addressed) to him and it makes no difference that the letter is delayed in transit or it is even lost in the post and offeror never receives it. This is the position under the Indian as well as English law. The position is advantageous to an acceptor because he is not bound by the letter of acceptance ______________ 11. What is the law regarding time and place of the making of the contract through post and on long distance telephone? [C.L.C-2000; L.C.I-2000]

Page 27 Formation of an Agreement (Offer & Acceptance) till it reaches the offeror. Thus if the letter is delayed or lost in transit, he is at an advantage [For a detailed discussion, see under the Q.A. section]. In Adams v Lindsell12 (1818) 106 ER 250, on Sept. 2, the defendants sent a letter offering to sell goods to the plaintiff. The letter added, "receiving your answer in course of post." The letter reached the plaintiffs on 5th Sept. On the same day, the plaintiffs posted their letter of acceptance which reached defendants on 9th Sept. The defendants had sold the goods on Sept. 8th. Held that a complete contract arises on the date when the letter of acceptance is posted in due course (i.e. on Sept. 5th). Thus there is a binding contract between the parties. In Household Fire Insurance Co. v Grant (1879) LR 4 Ex. D 216, the defendant made an application for 100 shares in the plaintiff's company paying 1s per share and agreeing to pay a further sum of 19s per share within twelve months of the date of allotment in favour of the defendant in Swansea. The letter never arrived. The defendant's name was entered on the register of shareholders. The company then went into liquidation and the liquidator sued for the balance due upon 100 shares. It was held that the contract was actually made when the letter of acceptance was posted. In ONGC v Modern Construction Co. (AIR 1998 Guj 46), held that if there is acceptance of tender by a telegram, the contract becomes concluded where the telegram is despatched, and therefore, the place of the contract is where the acceptance telegram starts its journey. LEADING CASE: M/S. J.K. ENTERPRISES v STATE OF M.P. (AIR 1997 M.P. 68) In this case, a tender for purchase of Tendu leaves was submitted by the petitioner on 11-1-93. The respondents sent letter of acceptance of tender by registered post at the address given by the petitioner, on 12-2-93. The letter, however, did not reach the petitioner (because of incomplete petitioner's address) and, he purported to withdraw his offer by a fax message on 3-3-93. The alleged fax message was sent on incorrect fax number and it was not received by the respondents. The petitioner contended that he had withdrawn the offer even before the acceptance, thus the action of the respondents in forfeiting the earnest money was illegal. Held that a valid contract had come into existence on 12-2-93, as the despatch of letter of acceptance had amounted to acceptance and completion of the contract. There could be no revocation of offer by a fax message sent thereafter. It does not matter that the acceptance letter does not reach the offeror because ___________ 12 A question based on the same facts.

[L.C.I.-94]

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communication of acceptance at the address given by the offeror amounts to acceptance. The communication was put in transit in an address given by the petitioner himself, and in that view of the matter, offer of the petitioner shall be deemed to have been accepted. In cases of acceptance by post or telegram, the contract is complete when the acceptance is put into a course of transmission to the offeror by posting a letter or despatching a telegram. But even in such a case, where intimation of acceptance does not reach the offeror it has to be shown that the letter or telegram of acceptance was correctly addressed to the offeror, otherwise (although posted or despatched) it cannot be said to have been put in a course of transmission to him. In the present case, the address was given by the petitioner himself, thus it does not matter that the acceptance letter was not delivered to the petitioner. LEADING CASE: M/S. PROGRESSIVE CONSTRUCTIONS LTD. v BHARAT HYDRO POWER CORPN. LTD. (AIR 1996 Del 92) In this case, it was held that when the parties enter into contract by correspondence by post, the contract would be deemed to be complete where the offer was received and the acceptance was posted. The place of delivery of letter of acceptance is irrelevant and, therefore, the cause of action does not arise where the letter is actually delivered. If the proposal and acceptance thereof are made in different places, the place of acceptance will be the place where the contract is made. Receipt of acceptance at the place of the offeror does not give rise to a cause of action at that place. In the present case, the letter of acceptance of tender was posted by the offeree in Calcutta. The said letter was delivered at Delhi i.e. received by the offeror. Held that it does not provide accrual of cause of action or part thereof in Delhi, so the Delhi Court lacked jurisdiction in the suit for damages for breach of contract. It is only in the case of contracts made by conversation on telephone, the contract is complete when the acceptance of the offer reaches the offeror (See Bhagwan Das Kedia case, below). The court, in the present case, also held that a binding contract may come into existence with the issuance of a 'letter of intent.' It does not matter that a formal contract had remained to be signed because there were minor discrepancies or variations in the terms which were being negotiated between the parties. The finalisation of the details would not adversely affect the conclusion

Page 29 Formation of an Agreement (Offer & Acceptance) of the contract which had stood arrived at with the acceptance of tender and award of work via a letter of intent.] Difference between English and Indian Law13- In England, when a letter of acceptance is posted, both the offeror and acceptor become irrevocably bound. In India, the offeror becomes bound but the acceptor does not become bound by merely posting his acceptance. He becomes bound only when his acceptance "comes to the knowledge of the proposer." The gap of time between the posting and the delivery of acceptance can be utilized by the acceptor for revoking his acceptance by a speedier communication which will overtake the acceptance. The Indian rule is peculiar as a contract means an agreement which binds both the parties to it. Under both English and Indian Laws, a contract is made at a place where the letter of acceptance is posted. (b) Acceptance by Telephone/Telex (Direct/Instantaneous Communication) Section 4 of the Contract Act supposes to deal with communication by post only. Where, however, the parties are in each other's presence or, though separated in space, they are in direct or instantaneous communication, as, for example by telephone, the contract is complete only when the acceptance is received (clearly heard and understood) by the offeror. A contract is deemed to be made at the time and the place where acceptance is received or heard (offeror hears the acceptance at his end, rather than when the acceptor speaks words of acceptance) [Brinki Bon Ltd. v Stahag Stahi (1982)1 ALL ER 293 (HL)]. A offer B (Ahmedabad) on phone (Delhi)

B accepted A the offer (receives/ heard the acceptance) LEADING CASE: BHAGWANDAS G. KEDIA V GIRDHARILAL & CO.14 (AIR 1966 SC 543) In this case, the plaintiffs made an offer (on phone) from Ahmedabad to the defendants at Khamgaon to purchase certain goods and the 13. Discuss the rules regarding communication of offer and acceptance in the English and Indian law with special reference to Bhagwan Das Kedia v Girdhari Lal & Co. [C.L.C.-94] 14. Discuss the law laid down by the Supreme Court in Bhagwan Das Kedia v Girdhari Lal & Co. relating to communication of acceptance by telephone. [L.C. I-94/95/2001; L.C.II-93/94/2002]

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defendants accepted the offer. The question was whether the conversation resulted in a contract at Khamgaon or at Ahmedabad. The question was relevant to decide the jurisdiction of the Ahmedabad Court. The issue then is whether the ordinary rule, which regards a contract as complete only when the acceptance is intimated to the proposer, should apply or whether the exception engrafted upon the rule in case of offers and acceptance by post and telegrams, is to be accepted. It was held that the contract was made at Ahmedabad where the acceptance was communicated. The contract, in case of acceptance by phone, is deemed to be complete when the offeror hears the acceptance at his end rather than when the acceptor speaks the words of acceptance. This is unlike acceptance by letter where the contract is concluded when the letter of acceptance is posted. The Supreme Court endorsed the principle of Entores case. It observed: "Where no statutory provision to the contrary is in existence in the Indian Contract Act, the courts in India have generally been guided by the Common Law of England." In Entores Ltd. v Miles Far East Corpn. (1955) 2 All ER 493, an offer was made from London by Telex to a party in Holland and it was duly accepted through the Telex, the only question being as to whether the contract was made in Holland or in England. Held that Telex is a method of instantaneous communication (it enables a message to be despatched by the teleprinter operated like a typewriter in one country and almost instantaneously received and typed in another) and the rule about such communications is different from the rule about the post. Denning, L.J. observed: "Where the parties are in the presence of each other, say, two persons across a river... one shouts an offer, but do not hear another's reply because of aircraft noise. There is no contract at that moment ... to be a contract, acceptance has to be _____________ (Footnote 14 Contd.) In the light of the dissenting judgment, critically examine the rule of law laid down by the Supreme Court in Bhagwan Das Kedia v Girdhari Lal & Co. [D.U.-2008] When and where a contract stands concluded if acceptance is sent by telephone? [D.U. 2007] Abdul Hamid telephones from Bombay to Birbal in Delhi offering to buy 1200 kg. of ferro-alloy at the rate of Rs. 65/kg. Birbal accepts the offer. Later on, Birbal fails to make the requisite supply. Abdul Hamid files a civil suit against Birbal for damages at Bombay. Birbal contends that the Bombay Court has no jurisdiction to try the case. Argue the case on behalf of Abdul Hamid or Birbal. As a judge, how will you dispose of the matter? [D. U. -2009] [L.C. II-95/2003]

Page 31 Formation of an Agreement (Offer & Acceptance) shouted again and heard by the other. Similarly, in case of a telephonic conversation, if the line goes 'dead' so that one does not hear other's words of acceptance, there is no contract at that moment. Likewise, in case of a telex, suppose a clerk in London office tap out on the teleprinter an offer which is immediately recorded on a teleprinter in Holland office, and a clerk at that end types out an acceptance the teleprinter motor stops. There is then obviously no contract. The clerk at Holland must get through again and send his complete sentence." The majority and the minority views in the instant case were: Majority view - A majority of the judges preferred to follow the English rule as laid down in Entores case and saw no reason for extending the post office rule to telephonic communications. Shah J. felt that "Section 4 does not imply that the contract is made qua the proposer at one place and qua the acceptor at another place. The contract becomes complete... when the acceptance of offer is intimated to the offeror." But, he continued to say, that the draftsman of the Indian Contract Act could not have envisaged use of telephone because it had not yet been invented and, therefore, the words of the section should be confined to communications by post. Parties holding conversation on the telephone are unable to see each other; they are also physically separated in space, but they are in the hearing of each other by the aid of mechanical contrivance which makes the voice of one heard by the other instantaneously and communication does not depend upon the external agency. In the case of correspondence by post or telegraphic communication, a third agency effectively intervenes. Invention of electrical impulse which results into the instantaneous communication of messages from a distance does not alter the nature of conversation so as to make it analogous to that of an offer and acceptance through post or by telegraph. The court held: If regard be had to essential nature of conversation by telephone, it would be reasonable to hold that the parties being in a sense in the presence of each other, and negotiations are concluded by instantaneous communication of speech, communication of acceptance is a necessary part of the formation of contract, and the expediency in case of contracts made through post, is inapplicable. Minority view - Hidaytullah J. said, "Though the law was framed at a time when telephones, wireless, Telstar and Early Bird were not contemplated, the language of Section 4 is flexible enough to cover telephonic communications. When the words of acceptance are spoken into the telephone, they are put into the course of

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transmission to the offeror so as to be beyond the power of the acceptor. The acceptor cannot recall them. The communication being instantaneous the contract immediately arises. Comments - It is the majority opinion that is the law in India. The Supreme Court, in the instant case, observed that the rule about communication by post' makes the position of the offeror miserable. Thus, where a premium due on a Life Insurance Policy was sent by money order, it was held that the policy had revived from the date of the money order and not from the date of its receipt by the company. The assured having died in the meantime, his widow recovered the proceeds (Hairoon Bibi v United India Life Insurance Co. AIR 1947 Mad 122). The current feeling, therefore, is that even in reference to postal communications the principle of consensus or "meeting of minds" should be adhered to and there should be no contract till the acceptance is received. Generally an acceptance must be notified to the offeror to make a binding contract.] (II) Absolute and Unqualified Acceptance15 Section 7 provides that in order to convert a proposal into a promise, the acceptance must be absolute and unqualified i.e. without any qualification or condition. For a valid acceptance, there must be an ad idem "concurrence of mind" i.e. agreeing on the same thing in the same course/ sense and at the same time. There should be an offer by one party, express and implied, and acceptance of that offer by the other party in the same sense in which it was made by the other. But the rule relating to 'acceptance through post' is an exception to this because in such cases acceptance becomes complete when posted, whether it is known to the offeror or not. In Kilburn Engg. Ltd. v ONGC Ltd. (AIR 2000 Bom 405), it was held that the offer and acceptance of an offer must be absolute without giving any room of doubt. It is well settled that the offer and acceptance must be based or founded on three components - Certainty, Commitment and Communication. If any one of the three components is lacking either in the offer or in the acceptance there cannot be a valid contract. ______________ 15. What are the difficulties that arise in the application of the rule that "acceptance must be absolute, and must correspond with the terms of the offer"? [I.A.S.-93] "Acceptance must always be absolute and unqualified." Critically discuss the concept of valid acceptance making a special reference to the above statement. [L.C.I-2002; C.L.C-2001]

Page 33 Formation of an Agreement (Offer & Acceptance) . Thus, acceptance must be total. No contract arises, if only a part of the offer is accepted (General Assurance Society Ltd. v LIC AIR 1964 SC 692). Acceptance should be unequivocal and not provisional [Lakhanlal v State of Orissa (1976) 4 SCC 660]. There can be a series of contracts between the parties. At each stage, there is a distinct offer and a distinct acceptance (Chathirbhuj Vithalets v Moreshwar Parashran AIR 1954 SC 236). (1) Counter Proposals16 An acceptance with a variation (e.g. introduction of new terms) is no acceptance: it is simply a counter proposal, which must be accepted by the original promisor before a contract is made. A counter offer implies that the stage of negotiation has not yet passed. A counter offer puts an end to the original offer and it cannot be revived by subsequent acceptance by the acceptor unless it is renewed. Thus in Hazi Mohd. Hazi Jiva v E. Spinner (1900) 2 Bom 510, before accepting an offer the plaintiff introduced certain terms like 'Free Bombay Harbour and interest', which were not there in the original offer. This, the defendant refused to accept. Subsequently the plaintiff communicated his acceptance of the original offer, but the defendant did not assent to this. Plaintiff's action for breach of contract was dismissed. The court observed that the plaintiff's first acceptance with new terms was in fact a counter offer which implied the rejection of the original offer. In U.P Rajkiya Nirman Nigam Ltd. v Indure Pvt. Ltd. (AIR 1996 SC 1373), there was an offer in the form of tender by A to B. B accepted the offer with material alterations in the offer. However, there was no further communication thereafter from A to B. The question arose as to whether silence by A amounted to acceptance of the counter-offer by conduct. It was held that when there was a counter-offer it meant that there was no consensus ad idem as to material terms of the contract. No concluded contract had, therefore, come into existence between A and B. Again, in Hyde v Wrench17 (1840) 3 Beav 334, an offer to sell a farm for £1,000 was rejected by the plaintiff, who offered £950 for it. This was turned down by the offeror and then the plaintiff agreed to pay £1,000. But, the defendant again refused to sell. Held that the plaintiff's offer was a counter proposal and it put an end to the offer previously made by the defendant, thus there was no contract. It was not competent for the plaintiff to revive the defendant's offer, by giving an acceptance of it. ____________ 16. Write a short note on counter offer. [L.C.II-2001] 17. A question based on the similar facts. [L.C.I-95]

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It is important to note that if after rejecting the counter offer, the offeror repeats his original offer which then is accepted by the offeree, a contract is deemed to have arisen. Further, when a counter offer is accepted, a contract arises in terms of the counter offer, and not in terms of original offer. Still further, acceptance should be of the whole of the offer. A partial acceptance (accepting favourable terms only) is another kind of counter proposal. A mere inquiry into the terms of a proposal is not the same thing as a counter-proposal. To seek an explanation of the terms is something different from introducing new terms. Further, if an acceptance carries a condition subsequent, it may not have the effect of a counter offer. Thus, where an acceptance said: "Terms accepted, remit cash down Rs. 25,000 by Feb. 5, otherwise acceptance subject to withdrawal." This was not a counter offer, but an acceptance with a warning that if the money was not sent in time the contract would be deemed to have been broken. (2) Provisional Acceptance An acceptance made subject to final approval is called provisional acceptance. It does not ordinarily bind either party until the final approval is given. Meanwhile, the offeror is at liberty to cancel his offer unless there is a contrary condition supported by consideration (Union of India v S. Narain Singh AIR 1953 Punj 274). In the above case, the conditions of auction sale of liquor shop expressly provided that the acceptance of the bid shall be subject to the confirmation of the chief commissioner and the person whose bid has been provisionally accepted is entitled to withdraw his bid. When a provisional acceptance is subsequently confirmed, the fact should be notified to the offeror, for it is only then he becomes finally bound. (3) Tenders18 A tender is in the same category as a quotation of prices. It is not an offer but an invitation to offer. When a tender is approved it is converted into a 'standing offer' (an offer which is allowed to remain open for acceptance over a period of time is known as standing, open or continuing offer). A contract arises only when an order is placed on the basis of tender. A standing offer thus can be revoked or withdrawn before the order has been placed unless the tenderer has for some consideration promised not to withdraw or where there is a statutory prohibition against withdrawal. Just as the tenderer has the right to revoke his tender as to future orders, so also the acceptor of the tender has a right to refuse to place any order whatsoever. ______________ 18. Write a short note on standing offer. [D.U.-2008/2009] [L.C.II-2001/2003]

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LEADING CASE: RAJENDRA KUMAR VERMA v STATE OF M.P. (AIR 1972 M.P. 131) In this case, it was held that any offer, including a standing offer, may be revoked before the same has been accepted. Any restriction on the right to revoke an offer is void. In this case, the respondent State invited tenders for the sale of tendu leaves. The petitioner submitted his tender and also deposited some security. Before the date of opening of tender, he made an application withdrawing his tender and requested that on the stipulated date the tender be not opened. But the tender was opened, and that being the only tender the same was also accepted. The petitioner refused to execute the agreement to purchase the leaves. The Government sold the leaves to someone else and then sued the petitioner to recover damages; it relied upon a clause in the tender notice according to which the petitioner having submitted his tender was not entitled to withdraw the same. One of the conditions in the tender notice was that a tenderer may withdraw his tender before the tenders are opened provided that there should be at least one other valid tender when the tenders are opened. Held that inspite of such a clause, the tender or an offer could be withdrawn, and since the offer had been withdrawn, no contract had arisen between the parties and the petitioner could not be made liable. "A person who makes an offer is entitled to withdraw his offer or tender before its acceptance is intimated to him." When the tenders were opened, there was really no offer by the petitioner and, therefore, there could be no contract impliedly or explicitly between the parties.] The Delhi High Court similarly held in Suraj Besan & Rice Mills v Food Corpn., India (AIR 1988 Del 224). Although a mere clause restricting withdrawal of tender is inoperative, yet a valid agreement, supported by consideration wherein both the parties agree that the offer will not be withdrawn is binding [Sharad Trading Co. v State of M.P. AIR 1980 M.P. 91]. LEADING CASE: KANHAIYA LAL AGGARWAL V UOI (AIR 2002 SC 2766) In this case, it was held that no violation of or illegality committed if the tenderer offers concessional rates or rebate for early finalization of a tender. In this case, the appellant made his offer of concessional rates along with the tender (5% if tender finalized in 45 days; 3% within 60 days and 2% within 75 days) while the respondent made such offer after opening of the tenders. The respondent filed a writ

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petition claiming that his tender should have been accepted, as the rates (subject to rebate offered after the opening of the tender) were the lowest. The respondent in his offer (after five days of the opening of the tender) offered to reduce rates by 1.25% if accepted in 30 days and 1% if accepted in 45 days. The Supreme Court held that what the appellant offered was part of the tender itself while the respondent made such offer separately and much later. The High Court erred in holding that offering rebate amounted to impermissible alteration of tender document. The apex court noted that bureaucratic delay is a notorious fact and delay in finalizing tenders will cause hardship to the tenderer. In such circumstances, if a hardened businessman makes an attractive offer of concessional rates if tender is finalized within a shorter period, it cannot be said that the rates offered are subject to conditions. The rates offered are clear and the time within which they are to be accepted is also clear. As long as such offer does not militate against the terms and conditions of inviting tender it cannot be said that such offer is riot within its scope.] Types of Tenders According to Cheshire and Fifoot, Law of Contract (5th Ed.), there are two types of tenders. If a tender is invited for a definite quantity of certain goods the acceptance of the tender is an acceptance in legal sense and creates a legal obligation. This is the first type of tender. On the other hand, an offer through a tender to supply goods over a period of time of a certain article up to a certain quantity if and when demanded is a standing and continuing offer which may be accepted from time to time by placing an order for the required quantity upon the terms of the tender. The 'acceptance' of the tender in such a case is not acceptance in the legal sense until an order is placed. This is the second type of tender. In Bengal Coal Co. v Homee Wadia & Co. ILR (1899) 24 Bom 97, the defendants agreed to supply coal to the plaintiffs up to a certain quantity at an agreed price for a period of 12 months as may be required by the plaintiffs from time to time. Certain orders were placed and were complied with by the defendants. But before the expiry of 12 months they withdrew their offer and refused to comply with further orders. They were sued for the breach of contract. It was held that there was no contract between the parties, but simply a continuing offer to sell coal. They were bound to supply coal only as regards orders which had already been placed, but were free to revoke their offer for supply of coal thereafter. The offer of the defendants and each successive order of the plaintiffs together constituted a series of contracts.

Page 37 Formation of an Agreement (Offer & Acceptance) LEADING CASE: UNION OF INDIA v MADDALA THATTIAH19 (AIR 1966 SC 543) In this case, the Railway authorities invited tenders for "the supply of 14,000 maunds of cane jaggery ... for the months of Dec. 1947 and Jan. 1948 and should be delivered in equal lots of 17,500 imperial maunds each commencing from 10th Dec. 1947 and completed on 31st Jan. 1948." One of the conditions stipulated in the tender form was that the "Administration reserves the right to cancel the contract at any stage during the tenure of the contract." The Administration cancelled the further supply of jaggery by a letter and thus closed the contract. The respondent sued for a breach of contract. The court observed that although the dates by which the supplies were to be made had been mentioned, yet orders for the supply had to be made from time to time. It was held that the stipulation whereby the appellant (Administration) could cancel the agreement (revoke the offer) as regards the supplies of jaggery about which no formal order has been placed is a valid one, and the appellants are bound only for the supply of such quantities for which specific orders have already been placed. The court noted that a clause in tender authorizing the party inviting tenders to terminate the contract at any time for the future supplies does not, destroy the very basis of contract and the clause is valid. The acceptance of a tender may result into different types of agreements depending upon the terms of the tender notice. According to Cheshire, there are at least two possible cases. First, ____________ 19. Union of India invites tenders for supply of cement during the year 1996, stating further that their requirements will be 100 tons to be supplied in four quarterly instalments, according to order placed after approval offender. The tender of M is approved and an order is placed asking him to supply 100 tons of cement in four quarterly instalments. Can Union of India revoke its acceptance after placing the order? Can M revoke his tender in this case? [C.L.C-95/2003] (Note: Neither the Union of India nor M can revoke after the order has been placed. They can revoke only as to future orders.) Can a proposer whose bid at an auction has been provisionally accepted subject to approval by competent authority revoke his bid prior to approval by the competent authority? [D.U. 2007] Whether acceptance of A's tender for supply of coal up to 1000 tons during next calendar year creates contractual obligations? [D. U. 2007] "The acceptance of a tender may result into different types of agreements depending upon the terms of the tender notice". Explain this statement and state the law laid down in the case of Union of India v Maddala Thattiah. [L.C.I-95]

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the Corporation may have stated that it will definitely require a specific quantity of goods, no more and no less, as for instance, where, it advertises for 1,000 tons of coal to be supplied during the period Jan. 1 to Dec. 31. Here the 'acceptance' of the tender is an acceptance in the legal sense, and it creates an obligation. The trader is bound to deliver, the corporation is bound to accept, 1,000 tons and the fact that the delivery is to be by instalments as and when demanded does not disturb the existence of the obligation. Secondly, the corporation advertises that it may require articles of a specific description up to a maximum amount, as for instance, it invites tenders for the supply during the coming year of coal not exceeding 1,000 tons altogether, deliveries to be made if and when demanded, the effect of so-called 'acceptance' is very different. The trader has made what is called a standing offer because of the provisions of the tender requiring a deposit of security and placing of the formal order. Until revocation he stands ready and willing to deliver coal up to 1,000 tons when the corporation from time to time demands a precise quantity. The 'acceptance' of the tender, however, does not convert the offer into a binding contract. Acceptance in the legal sense is complete as soon as a requisition for a definite quantity of goods is made. Each requisition by the offeree is an individual act of acceptance which creates a separate contract. The court observed that the acceptance of tender is not equivalent to placing of an order for any definite quantity of goods. It does not, therefore, amount to contract where the terms of tender requires the placing of a formal order. Where the formal order has got to be placed there must be actually an order placed for a definite quantity of the thing concerned. If this is not done there is no binding obligation created merely by the acceptance of the tender. In the present case, the acceptance of the tender did not amount to the placing of the order for any definite quantity of jaggery on a definite date. However, the Railway Authority had definitely placed an order for the supply of the entire quantity for which a tender had been called. But the Authorities made a distinction between the order and the contract. The letter cancelling the contract states that the balance quantity of jaggery outstanding on date against the above tender i.e. order dated... is treated as cancelled and the contract closed.]

Page 39 Formation of an Agreement (Offer & Acceptance) REVOCATION20 The Contract Act gives both proposer and acceptor the option of revoking their communication, before a completed contract comes into existence. Thus, revocation is an option given to the parties to stop the contract from coming into existence. (I) Revocation of Proposal Sec. 6 lays down the circumstances when an offer lapses i.e. modes of revocation. A proposal is revoked: (1) by the communication of notice of revocation by the proposer to the other party, (2) by the lapse of time prescribed in such proposal for its acceptance, or, if no time is so prescribed by the lapse of a reasonable time, without communication of the acceptance, (3) by the failure of the acceptor to fulfil a condition precedent to acceptance, or (4) by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. (1) Notice of Revocation Sec. 5 provides that "a proposal may be revoked at any time before the communication of its acceptance is complete as against proposer, but not afterwards". As against the proposer, the communication of acceptance is complete "when it is put in a course of transmission to him, so as to be out of the power of acceptor" (Sec. 4). Thus, for the communication of revocation to be effective, it must reach the acceptor before he mails his acceptance and makes it out of his power. A revocation is effective only when it is brought to the mind of the person to whom the offer is made. ______________ 20. What are the different modes of revocation of a proposal? Illustrate your answer. [L.C.I-93/2000/2001] How and when can an offer be revoked? When is communication of revocation of offer and acceptance completed? Discuss the statutory provisions under Indian law. [L.C.I-94/95] Till what time a proposal or an acceptance can be revoked. Does a proposal stands revoked automatically on the happening of certain events mentioned in Sec. 6 of Contract Act? Describe those events. [L. C.I2000/2002] 'An offer cannot be accepted after it has been terminated or negatived'. Explain when on offer ceases to be capable of acceptance [I.A.S-92]

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Illustration: A proposes by letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. It may be noted that when the parties negotiate a contract over telephone, no question of revocation can possibly arise, for in such instantaneous communication, a definite offer is made and accepted at one and the same time. A person whose land is to be acquired, shows his willingness to accept the acquisition but withdraws the offer before it is accepted by the Acquisition Officer, then he can challenge the acquisition proceedings, if an (adverse) award is made, after such withdrawal [N. Sesharatnam v Sub Collector Land Acquisition, Vijayawada AIR 1992 SC 13]. In Henthorn v Fraser (1892) 2 Ch 27, an offer to sell a property gave acceptor the right to accept within 14 days. The next day at about 3.50 p.m. the acceptor sent by post his letter of acceptance, which was received by offeror's office at 8.30 p.m. (when the office got closed and the letter was opened in the next morning). But before that at about 1 p.m. the offeror had posted a letter revoking his offer. The revocation and the acceptance crossed in the course of post. The acceptor received the letter of revocation at 5.30 p.m. The revocation was held to be ineffective. The court observed that a person who has made an offer must be considered as continuously making it until he has brought to the knowledge of the person to whom it was made that it is withdrawn. In Byrne v Van Tienhoven & Co. (1880) 5 C.P.D. 344, the defendants wrote a letter on 1st October, 1879 to the plaintiffs offering to sell a certain quantity of tin plate. The plaintiffs received the letter on 11th October. They accepted the offer by a telegram and confirmed it by a letter dated 15th October. Meanwhile, on 8th October, the defendants had written to the plaintiffs withdrawing their offer and this letter was received by the plaintiffs on 20th October. The plaintiffs sued for damages for non-delivery of the goods. It was held that revocation of offer was too late and the contract had come into existence. Notice of revocation shall be deemed to have been served when it reaches the acceptor's address. In The Brimmes (1974) 3 All ER 88, a notice of revocation was sent by telex and was received by the plaintiffs telex machine during normal business hours, but the plaintiff read the message the next day. He was, however, held bound by the notice when his machine received it. Under the Indian law, it is necessary that the communication of revocation should be from the offeror or from his duly authorized agent. However, under the English law, it is enough if the acceptor knows reliably that the offer has been withdrawn. Thus, in Dickinson v Dodds (1876) 2 Ch D 463, the plaintiff was informed by a third person that the property (about which an offer was made) had already been sold to another. Held that a sale to a third person, which came to the knowledge of the person to whom the offer made was an effectual withdrawal of the offer.

Page 41 Formation of an Agreement (Offer & Acceptance) Revocation of General Offers Where an offer of a general nature is published through newspapers, it can be withdrawn by the same media and the revocation will be effective even if a particular person, subsequently to the withdrawal, happened to perform its terms in ignorance of revocation. Thus, such person could not recover. Revocation of Tenders A tenderer can withdraw his tender before its final acceptance by a work or supply order even if there is a clause in the tender restricting his right to withdraw. But once an order is placed that will have to be complied with. However, a tender will be irrevocable where the tenderer has, on some consideration promised not to withdraw it or where there is a statutory prohibition against withdrawal. Just as the tenderer has the right to revoke his tender as to future orders, so also the acceptor of the tender has the right to refuse to place any orders whatsoever. Revocation of Bid In an auction, the assent is signified on the part of the seller by knocking down the hammer. A bidding at an auction is a mere offer which may be retracted before the hammer is down i.e. before it was accepted by the property being knocked down to him by the auctioneer. This principle has been extended to cases where a bid has been provisionally accepted and is subject to confirmation by higher officers. In such cases the bidder will have the right to withdraw his bid, until the final approval is given to him. (2) Lapse of time An offer lapses on the expiry of the time, if any, fixed for acceptance. However it is enough if the acceptor has 'posted the acceptance before the stipulated time', even if it reaches the offeror after the stipulated date. Where no time for acceptance is prescribed, the offer has to be accepted within a reasonable time. What is 'reasonable time' will depend upon the facts and circumstances of each case. Where the subject matter of the contract is an article, like gold, the price of which rapidly fluctuates in the market, very short period will be regarded as reasonable, but not so in reference to land. Where an offeror gives the offeree (acceptor) an option to accept within a fixed period, he may withdraw it even before the expiry of that period. In Alfred Schonlank v M. Chetti (1892) 2 Mad LJ 57, the defendant left an offer to sell certain goods at the plaintiff's office allowing him 8 days' time to give his answer. On the 4th day, however, the defendant revoked his proposal. The plaintiff accepted it on the 5th day. The court held that acceptance is useless as in the absence of consideration for the promise to keep the offer open for a time the promise is mere nudum pactum. Thus,

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where the agreement to keep the offer open for a certain period of time is for some consideration (even one pound), the offeror cannot cancel it before the expiry of that period. Likewise, in Cooke v Oxlay (1790) 3 T.R. 653, a tobacco merchant offered to sell a quantity of tobacco to the plaintiff. The plaintiff asked the tobacco merchant for time in which to decide whether he should buy the goods or not. The time for consideration was granted, but before it expired the merchant sold the goods to a third party. Because of lack of consideration, the plaintiff's action for damages was not allowed. (3) By failure to fulfill a condition precedent Where the offer is subject to a condition precedent, it lapses if it is accepted without fulfilling the condition. For example, if the offer requires the deposit of some earnest money, or the execution of some document, etc., these conditions must be fulfilled. Similarly, tenders may be invited subject to the condition that tenders must be accompanied by security deposit. (4) By death or insanity of offeror An offer lapses on the death or insanity of the offeror, provided that the fact comes to the knowledge of the offeree before he makes his acceptance. It means that if such fact has not come to his knowledge while he accepts the offer, it is valid acceptance giving rise to contractual obligations. Thus, death or insanity of the offeror does not automatically make the offer to lapse.21 There is no provision in the Act about the effect of the death of an offeree. But as an offer can be accepted only by an offeree and not by any other person, it should not be capable of being accepted by the offeree's executor also. Where an offeree has written his acceptance but he dies before posting, the offer lapses and the posting of the letter after his death will not create a contract [In re Irvine (1928) 3 DLR 268]. _______________ 21. A makes an offer to B A dies on 15-11-99. The offer is accepted by B on 20-11-99. The news of A’s death was conveyed to B on 19-11-99. Will your answer be same if at the time of acceptance of the offer B was not aware of As death. [C.L.C-99]

Page 43 Formation of an Agreement (Offer & Acceptance) (II) Revocation of Acceptance22 Under the English law, an acceptance once made is irrevocable. This rule, however, is confined to postal acceptance. According to Anson, in other cases an acceptance can be revoked at any time before acceptance is complete, provided that the revocation is communicated before the acceptance arrives. In India, on the other hand, acceptance is generally revocable. Sec. 5 provides that 'an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards'. As against the acceptor, the communication is complete when the acceptance comes to the knowledge of offeror i.e. when the letter of acceptance reaches the offeror (Sec. 4). Thus, an acceptor may cancel his acceptance by a speedier mode of communication, which will reach earlier than the acceptance itself. Illustration: A proposes, by letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards. Thus, if the letter of acceptance and the letter of revocation reach together, then also the acceptance will be deemed to have been revoked, as both cancel each other and thus no binding contract could come into existence. In Countess of Dunmore v Alexander (1830) 9 Shaw 190, the court said that "the admission that the two letters were received together puts an end to the case". In the illustration (above), the expression used is 'before or at the moment'. Thus a person who has accepted a proposal may revoke his acceptance at any time before or at the moment when the letter of acceptance is received by the offeror. However, some authors are of the view that in such a case, the formation of contract will depend on the fact that which of the two letters is opened first; if letter of acceptance is opened first, the revocation is not possible, and, if letter of revocation is opened first, revocation is valid. Thus such contracts are called 'accidental form of contracts'. ____________ 22. What is the position of revocation of acceptance under the Contract Act? [L.C.I-95] A offered to sell his flat to B for Thirty lakhs and B accepted the offer by post. Same day B sent a telegram revoking the acceptance which reached A before the letter of acceptance. Is the revocation valid? Discuss. [L.C.II-2002]

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Q.1. (a) (b) Discuss the essential conditions of a valid offer. [C.L.C.-98/99/2000/2001; L.C. 11-2001] The figure correction company issues the following advertisement in a newspaper: "Any person who uses our latest invention -'Fatloss', in accordance with the prescribed directions shall lose weight up to 20 kg in one month. The company shall pay an amount of Rs. 10,000/- to anyone who does not lose weight, as stated above, after using the 'Fatloss' for one month as required above." The 'Fatloss' is purchased and used by ten persons, according to the prescribed directions, and all of them find that it is absolutely ineffective. Discuss whether these persons can claim the promised reward from the company. [D.U.-2009] [C.L.C-93, L.C. II-2001/2003] (c) A reputed company gave an advertisement in a leading newspaper: "On the eve of Diwali, we have pleasure in announcing a gift scheme. Anyone who purchases 'Washing machine' of the company, from the specified showrooms in Delhi, shall be given a Microwave Oven as a free gift. The scheme is operative for 15 days only." When A purchases a washing machine from the specified showroom and claimed his gift, he was denied it on the ground that the advertisement was mere puffing to attract customers only. Decide. [L.C. II-2002] A.l. (a) Essential Conditions of a Valid Offer (1) As per Sec. 2 (a), Contract Act, an offer or proposal has the following ingredients: (i) one person signifies to another, (ii) his willingness to do or abstain from doing anything, (iii) with a view to obtaining the assent of that other. (2) According to Sec. 3, to 'signify' means that the proposal must be communicated to the other party. Sec. 9 provides that a valid proposal may be made by words (written or spoken) or by conduct. Thus stepping into a taxi and consuming eatables at a restaurant, both create implied promise to pay for the benefits enjoyed. (3) Certainty of offer - The terms of the offer must be certain and not vague (Sec. 29). A agrees to sell to B "my white horse for Rs. 500 or Rs. 1000". There is nothing to show which of the two prices was to be given, thus it is not a valid offer. (4) Communication of offer - According to Sec. 4, the communication of a proposal is complete when it comes to the

Page 45 Formation of an Agreement (Offer & Acceptance) knowledge of the person to whom it is made. Acting in ignorance of an offer does not amount to the acceptance of that offer. Thus, knowledge of an offer is must before the offer can be accepted. In Lalman Shukla v Gauri Dutt (1913) 11 All LJ 489, the defendants by handbills offered to pay Rs. 501 to anyone discovering the lost boy. The servant of defendant came to know of this offer only when he had already traced the missing child and had informed the defendant. His action to recover the reward failed. (5) General offers - There are two kinds of offers - general and specific. The specific offer is made to specific person, while the general offer is made to the public or world at large. However, in case of general offers, the contract is made only with that person who comes forward and performs the conditions of the proposal as such performance amounts to acceptance of performance (Sec. 8). The communication of acceptance is not necessary in such cases. Thus, in Carlill v Carbolic Smoke Ball Co. (1893) 1 QB 256, the company offered £100 reward to anyone who caught influenza after using their smoke ball according to printed directions. The plaintiff, who used the smoke ball, caught influenza. She was held entitled to recover the promised reward. (6) Offer and invitation to treat (offer) - An 'offer' is the final expression of willingness by the offeror to be bound by his offer.-Where a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does not make an offer but merely 'invites' the other party to make an offer on those terms. For example, a bookseller sends catalogue of books indicating price of various books to many persons. This is an 'invitation to treat'. The interested party may make an offer and the bookseller may accept or reject the offer. In McPherson v Appana (AIR 1951 SC 184), it was held that mere statement of the lowest price at which the offeror would sell contains no implied contract to sell at that price. In Pharmaceutical Society of G.B. v Boots Cash Chemists Ltd. (1953) 1 All ER 482, it was held that the display of goods in a shop with price tags attached is not an offer even if there is a "self-service" system in the shop. The customer by picking up makes an offer to buy, which is subject to acceptance by the shopkeeper. (7) Intention to contract - There is no provision in Indian Contract Act, nor has there been any reported decision in India, requiring that an offer or its acceptance should be made with the intention of creating legal relation, while under English law it is so.

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However, the courts generally presume intention to enter into legal relation, unless the offer itself appears to be too trivial or too fantastic. (b) The question in the present problem is whether there is a valid contract between ten persons (who used the company's product) and the company. For a valid contract, following requirements are necessary: (i) intention to enter into legal relations, (ii) existence of a valid offer, (iii) existence of a valid acceptance, and (iv) a consideration for the promise. (i) Intention to contract - The advertisement states that the company shall pay an amount of Rs. 10,000 to anyone who does not lose weight. Test of contractual intention is objective, not subjective. What matters is not what the parties had in mind, but a reasonable man would think, in the circumstances, their intention to be. ft can be presumed from the advertisement that the company intended to enter into legal relations (i.e. pay the said amount). (ii) Existence of valid offer - An offer can be made to the public at large which ripen into a contract with anybody who comes forward and performs the condition. Such offers are called 'general offers' and are valid offers. (iii) Existence of valid acceptance - It is a general proposition that when an offer is made, one must have it not only accepted but also notified acceptance. But in cases of general offers, the communication of acceptance is not necessary and the performance of condition is a sufficient acceptance without notification (Sec. 8). Thus, there is a valid acceptance in the present case as ten persons performed the conditions of offer by using the product according to prescribed directions (iv) Consideration for the promise - In this case, as the transaction was advantageous to the company (for increasing sales), this is enough to constitute consideration. Thus, in the present case, there is a valid contract between the Figure Correction Company and ten persons who have bought and used their product 'Fatloss'. These ten persons, thus, can claim the promised reward of Rs. 10,000 from the company (See Carlill v Carbolic Smoke Ball Co. Case). (c) It is a case of general offer. In view of the law discussed above, there is a valid contract between A and the Company. A can claim his gift.

Page 47 Formation of an Agreement (Offer & Acceptance) Q.2. (a) The dog of X was missing. He distributed handbills whereby he announced a reward of Rs. 1,001 to any person who traced his dog. Y who had not seen the handbills, traced the dog of X. Had Y validly accepted the offer of X? Would the position be different if Y had seen the handbills? [C.L.C.-94] (b) X, the owner of a dog, announces a reward to anyone who will bring back his lost dog. Y, a friend of X, gives the information which leads to recovery of the lost dog from Z. After that Y comes to know about the announcement of the reward by X. Y, while giving the information was certain that he is doing his duty as a friend. Y and Z both claim the amounts of reward from X. How will you decide? Give reasons. [C.L.C-92] A.2. (a) The present problem is based on the case - Lalman Shukla v Gauri Dutt (see the text). Y had not validly accepted the offer of X, as Y had no knowledge of the offer. However, if Y had seen the handbills then he could have claimed the reward as then he had the knowledge of the offer and by performing the condition of the proposal, he had gave acceptance to the 'general offer' made by X. (b) In the present case, Y is not entitled to the reward, because he acted in ignorance of the offer. Unless he has the knowledge of the offer he cannot give acceptance to it so as to make a binding contract (Sec. 4). Z is also not entitled to reward because he has not brought back the dog, rather the dog was recovered from him. Q.3. X writes to Y and says: "I hear that you are thinking of selling your T.V. If it is in good order and if the price is right, I would like to buy it. Please advise by return post." Y wrote back saying: "The T.V. is in good working order and is cheap at Rs. 8,000." To this X replied saying: "I accept your offer and will buy the T.V. for Rs. 8,000." Shortly after receiving this letter from X. Y received an offer of Rs. 10,000 from his friend. As a result Y now wishes to sell the T.V. to his friend. (a) Advise Y (b) Would you answer be different if Y had said in his letter to X: "The T.V. is in good working order and cheap at Rs. 8,000, Please advise by return post whether you wish to have the TV"? [C.L.C.-95] A.3. (a) The present problem is based on the case - McPherson v Appana (see the text). An offer is the final expression of willingness by the offeror to be bound by his offer should the other party chooses to accept it. Where a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does not make an offer but merely invites the other party to make an offer on those terms.

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Law of Contract

The mere statement of the lowest price at which the vendor would sell contains no implied contract to sell at that price to the person making the inquiry. Thus, Y has not made an offer but only an invitation to offer. X should make an offer to Y after this invitation which must be accepted by Y to give rise to a valid contract. Thus, as there is no contract between X and Y, Y is at liberty to sell T.V. at a higher price to his friend. (b) Now, Y has made a clear offer which if accepted by X would give rise to a binding contract between X and Y. In that case, Y could not accept his friend's offer. Q.4. M/s Chinky Trading Company had displayed certain banners on his shop which stated that special offseason discount will be given on a certain variety of ceiling fans. A, a customer approaches the shopkeeper and insisted on the special discount as provided in the banner. The shopkeeper refuses on the ground that the inducement of special discount is in reality, a commercial puff or an invitation to treat and not an offer. Do you agree? Discuss. [L.C.II-97; L.C.I-97] A.4. It is not an offer but only invitation to the intending customers to buy at the discounted prices. Likewise, a classified advertisement to the effect: "cocks and hens 25s. each" has been held to be not an offer to sell [Partridge v Crittenden (1968) 2 All ER 421], A banker's catalogue of charges is also not an offer[State Aided Bank of Travancore v Dhirt Ram AIR 1942 PC 6]. Where in pursuance of a scheme adopted by ESSO, the petrol station proprietors announced that they would give "the World Cup coins", one for each buyer of four gallons of petrol, it was held that the distribution of the coin was not a contract of sale so as to attract the provisions of Purchase Tax Act, but was only a gift [ESSO Petroleum Co. Ltd. v Commrs. of Customs & Excise (1967) 1 WLR 1]. Q.5. Define acceptance. [L.C. 1-2002] When is a 'proposal' converted into a 'promise'? Discuss the law relating to valid acceptance of an offer. [C.L C.-93/98/99/2000; L. C. I-2000/2001] "Acceptance to an offer is what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone." Briefly comment on the above statement and state what conditions are necessary for converting a proposal into a promise. [L.C. I-93/95] A.5. Essential Requirements of a Valid Acceptance A proposal when accepted, results in an agreement. It is only after the acceptance of the proposal that a contract between the two parties can arise. When the person to whom the proposal is made, signifies his assent thereto the proposal is said to be accepted [Sec. 2(b)]. Thus, acceptance is the assent given to a proposal.

Page 49 Formation of an Agreement (Offer & Acceptance) There are two essential requirements of a valid acceptance: firstly, acceptance should be communicated by the offeree to the offeror. Secondly, acceptance should be absolute and unqualified. (A) Communication of Acceptance (1) Acceptance express or implied - Acceptance may be in the form of express words (written or spoken) or may be signified through conduct. In every case, there should be some external manifestation or overt act of acceptance (e.g. fall of hammer in auction sale). A mere mental determination (or intent) to accept is not enough (e.g. keeping agreement in a drawer). (2) When communication not necessary - In all cases of general offers (unilateral contracts), the acceptance is usually by conduct. Sec. 8 provides that performance of the condition of a proposal is an acceptance of proposal (Carlill v Carbolic Smoke Ball Co.). In such cases, communication of acceptance is not necessary. (3) Communication to offeror himself- A communication to any other person is no communication in the eyes of law [See Felthouse v Bindley (1863) 7 LT 835]. (4) Communication by acceptor himself - Information received from an unauthorized person is ineffective as it is like overhearing from behind the door [Powell v Lee (1908) 24 TLR 606]. (5) Mode of communication - Sec. 7 provides that acceptance has to be made in the manner prescribed by the proposer (if not prescribed, then in some usual and reasonable manner). Further, a duty is cast on the offeror to reject such acceptance within reasonable time and if he fails to do so, the contract is concluded. (6) When communication of acceptance complete - When the parties are in the presence of each other, the contract is concluded when acceptance is communicated to the proposer. When the parties are at a distance and are contracting through post or by messengers, the proposer become bound as soon as the acceptance is put in the course of transmission to him (e.g. when letter of acceptance posted by acceptor). But the acceptor will become bound only when the communication of acceptance is received by the proposer (Sec. 4). When the acceptance is by telephone or telex (i.e. direct communication), the contract is complete only when the acceptance is received by the offeror (Bhagwandas Kedia v Girdharilal & Co.).

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(B) Absolute and Unqualified Acceptance Sec. 7 provides that in order to convert a proposal into a promise, the acceptance must be absolute and unqualified i.e. without any qualification or condition. For a valid acceptance, there must be an ad idem "concurrence of mind" i.e. agreeing on the same thing in the same course/ sense and at the same time. (1) Counter proposals - An acceptance with a variation (e.g. introduction of new terms) is no acceptance: it is simply a counter proposal, which must be accepted by the original promisor before a contract is made. A counter offer implies that the stage of negotiation has not yet passed. A counter offer puts an end to the original offer and it cannot be revived by subsequent acceptance by the acceptor. (2) Provisional acceptance - An acceptance made subject to final approval is called provisional acceptance. It does not ordinarily bind either party until the final approval is given. Meanwhile, the offeror is at liberty to cancel his offer unless there is a contrary condition supported by consideration. Second part of the question Just as when the lighted match comes into contact with gunpowder, there would be an explosion and then back to the original position, similarly, after the offer is accepted it creates a contract whereby both the party become bound and none of them can go back (Anson). But the powder may have laid until it has become damp, or the man who laid the train may remove it before the match is applied. Acceptance to be made before offer lapses or is revoked: An offer may lapse for want of acceptance or be revoked before acceptance. Also the offeree may decide to reject the offer. Until an offer is accepted, it creates no legal rights, and it may be terminated at any time. Once the offer lapses or revoked it is incapable of being converted into a contract by being accepted. Thus, the acceptance of the offer, while the same is still alive, would result in a contract creating obligations for both the parties. [Note: Also see next question] Q.6. A in Delhi offers to purchase a bar of gold from B at Bombay. B accepts by latter, but the letter is lost in transit. B sends the bar to A by value paid post. When the parcel reaches A the price of gold has fallen. Is A bound to accept the parcel? Give reasons. [C.L.C-93/95; L.C.I-93] A.6. Communication of Acceptance Sec. 4 of the Contract Act lays down that the communication of acceptance is complete as against the proposer, when it is put in the course of

Page 51 Formation of an Agreement (Offer & Acceptance) transmission to him so as to be out of the power of the acceptor. The proposer or offeror becomes bound immediately on the posting of the letter (correctly addressed) to him and it makes no difference that the letter is delayed in transit or it is even lost in the post and offeror never receives it. This is the position under the Indian as well as English law. The following decisions make the point clear, however in some of these a contrary view has been expressed: (1) In Adams v Lindsell (1818) 106 ER 250, it was contended that till the acceptance is actually received by the offeror, there can be no binding contract. But the court said: If that were so, no contract could ever be completed by post. For if the defendants were not bound by their offer when accepted by the plaintiffs till the answer was received, then the plaintiffs ought not to be bound till after they had received the communication that the defendants had received their answer and assented to it. And so it might go on endlessly. (2) In Household Fire & Accident Ins. Co. v Grant (1879) LR 4 Ex Div 26, the letter of acceptance never reached the defendant, but he was held bound by the acceptance. Thesiger L.J. stated the rule thus: "An acceptance which only remains in the breast of the acceptor without being actually and by legal implication communicated to the offeror, is no binding acceptance... But if the post be treated as agent of both parties, then as soon as the letter of acceptance is delivered to the post office, the contract is made as complete and final as if the acceptor had put his letter into the hands of a- messenger sent by the offeror himself as his agent to deliver the offer and to receive the acceptance... The acceptor, in posting the letter has put it out of his control and done an extraneous act which clinches the matter, and shows beyond all doubt that each side is bound. How, then, can a casualty in the post office, whether resulting in delay, which in commercial transactions is often as bad as no delivery, or in non-delivery, unbind the parties or unmake the contract." (3). In Byrne v Van Tienhoven (1880) 5 CPD 344, held that where an offer is made and accepted by letters sent through the post, the contract is completed the moment the letter of acceptance is posted, even though it never reaches its destination. In Henthom v Fraser (1892) 2 Ch 27, held that where the circumstances are such that it must have been within the contemplation of the parties that, according to the ordinary usage of mankind, the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted.

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(4) In Household Fire & Accident Ins. Co. v Grant, Bramwell L.J. gave a strong dissenting judgment. According to him if the communication of acceptance is complete at the time of posting, the same should be true of all communications sent through post. Suppose a man has paid a tailor by cheque, and posts a letter containing a cheque to his tailor, which never reaches, is the tailor paid? The question then is, posting a letter which is never received, a communication to the person addressed? It is not a communication. In British & American Telegraph Co. v Colson (1871) LR6 Ex 108, the defendant was held not to be bound by a letter of acceptance which was lost in the course of post. The court observed that if a man proposed marriage and the woman was to consult her friends and let him know, would it be enough if she wrote and posted a letter which never reached him? (5) The position under Indian law as regards to communication of acceptance when complete as against the proposer, is similar to English law. In Ramdas Chakrabarti v Cotton Ginning Co. Ltd. (1887) 9 All 366, held that the offeror becomes bound when a properly addressed and adequately stamped letter of acceptance is posted. In this case, a letter of allotment of shares was claimed to have been posted by a company, but the applicant denied to have received it. The court observed that whether or not the applicant receives the letter is absolutely immaterial, the moment the letter of allotment despatched there is a complete contract. In Byomkesh v Nani Gopal (AIR 1987 Cal 93), a letter of acceptance duly posted by the acceptor was held effective though the other party refused to receive it and it came back undelivered. However, in Bhagwan Das Kedia v Girdhari Lal & Co. (AIR 1966 SC 543), the Supreme Court observed that the rule about 'communication by post' makes the position of the offeror miserable. The current feeling is that even in reference to postal communications the principle of consensus or "meeting of minds" should be adhered to and there should be no contract till the acceptance is received. Decision of the case In question A is bound to accept the parcel. When B posted his acceptance, a complete contract comes into existence. It does not matter that the letter is lost in transit. As Anson observed: "Acceptance to an offer is what a lighted match is to a train of gunpowder. It produced something which cannot be recalled or undone." Q.7. (a) A stock-broker in Delhi made an offer by teleprinter to a stock-broker in Calcutta who immediately accepted the offer by teleprinter. Due to a technical fault, the message of acceptance was not received in Delhi. Is there a contract between the stock-brokers? Discuss fully. [C.L.C.-95]

Page 53 Formation of an Agreement (Offer & Acceptance) (b) If an offer made by A is accepted by B, but shortly thereafter B changes his mind and sought to revoke his acceptance by giving a telex to A; however, the telex message did not reach A due to some fault in the machine in As office, whether there occurred a concluded contract or not? Decide. (c) A sends a letter to B stating that he is willing to purchase from him, a certain quantity of goods for a total consideration of Rs. 50,000. A sends, along with his letter, a cheque, on account of advance payment, for the aforesaid amount. The cheque is got credited by B to his bank account. B, later on, refuses to sell the goods. A sued B, claiming damages for the breach of contract. B defends the suit on the ground that there is no contract as there is no valid acceptance. Decide. [C.L.C-98] A.7. (a) When the parties are in direct communication, as for example by telephone or telex, the contract is complete only when the acceptance is received by the offeror. Thus, rule about instantaneous communication is different from the rule about the post under which posting of letter of acceptance completes the contract even though the letter never reaches its destination (See Bhagwan Das Kedia v Girdharilal & Co.). A teleprinter is an instantaneous (or direct) means of communication. Thus, in the present case, there is no contract between the stock-brokers as the message of acceptance was not received in Delhi. (b) There occurred a concluded contract. If the breakdown of the machinery was natural and not engineered only to shut out messages, acceptance takes effect because the proposer did not come to know of the fact of revocation. (c) Performance of the conditions of a proposal is an acceptance of the proposal. In Hindustan Cooperative Insurance Society v Shyam Sunder (AIR 1952 Cal 691), cashing of a cheque by the Insurance Company was held to be acceptance of the proposal without there being any formal acceptance. Thus communication of acceptance is not always necessary; the conduct of the parties may amount to an acceptance of the proposal (however, mere mental assent to an offer does not conclude a contract). Thus, in the case in question, A will succeed. Q.8. (a) A, from the territory of Punjab, makes an oral offer to sell certain goods to B who is standing on the territory of Haryana. B immediately communicates his acceptance to A. B, later on, commits a breach of contract. A institutes a suit in the civil court of Punjab. B argues that the court of Punjab has no jurisdiction to decide the dispute. Decide. Will your answer be different if acceptance was communicated on telephone from Haryana to Punjab? [C.L.C-2001]

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Whether there is a binding contract between the parties, where the proposer alleges that ne has not heard the words of acceptance because of some fault in the telephone receiver at that time? [L.C.I-98; C.L.C.2000] When the parties are in direct communication or in the presence of each other, the contract is complete only when the acceptance is received by the offeror. Thus, contract is concluded at the place where the offeror hears the words of acceptance. Therefore, in the instant case, the Punjab court will have the jurisdiction. The answer would be same in case of conversation on telephone (also a mode of direct communication). In the case of parties in direct communication (viz. by telephone) the contract is complete only when the acceptance is received by the offeror. Thus in case of telephonic conversation, if the line goes 'dead' so that one do not hear other's words of acceptance, there is no contract at that moment. The reasoning being that the principle of consensus or "meeting of minds" should be adhered to and there should be no contract till the acceptance is received. 9. "Provisional acceptance of a bid at an auction sale does not make a valid contract." Comment. [L.C.I98; C.LC.-97] Discuss the concept of 'Provisional acceptance' and its consequences. Can the offeror withdraw his offer after provisional acceptance but before final confirmation of the same? Is communication of final acceptance necessary for a binding contract? [C.L.C-2003; L.C. I-2000] A forest crop was put to public auction for sale with a reserve price of Rs. 50,000. X's bid was the highest but it was only for Rs. 40,000. The auctioneer provisionally accepted the bid but subject to confirmation from the Divisional Forest Officer. The Officer confirmed the bid but it was not communicated to X. Later the Officer accepted an offer of Rs. 50,000 from Y. X filed a case for specific performance of contract. Decide. [C.L.C-94/2000] Government of Orissa made a public auction of a forest crop. D was the highest bidder. His bid was provisionally accepted by the Divisional Forest Officer subject to final confirmation by the State Government. One of the conditions of the auction sale was that the bid could not be withdrawn between the date of provisional acceptance and final confirmation by the Government. No confirmation was received after lapse of long time. D revoked his bid. Could he do so? The State Government sent confirmation despite revocation by D, to its Divisional Forest Officer who kept it in his file. Is it binding on D? [C.L.C91] Explain the law laid down in the case of Haridwar Singh v Bagum Sambrui (AIR 1972 SC 1242). [L.C.I97]

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A.9. Provisional Acceptance/ Revocation of Bid An acceptance which is conditional upon the occurrence of a future event e.g. subject to confirmation by higher officers is called provisional acceptance. A provisional acceptance does not ordinarily bind either party until final approval is given. Meanwhile the offeror is at liberty to withdraw his offer before confirmation. In Somasundaram Pillai v Govt. of Madras (AIR 1947 Mad 336), it was held that "To have an enforceable contract there must be an offer and an unconditional acceptance. A provisional acceptance cannot in itself make a binding contract. There must be a definite acceptance or the fulfillment of the condition on which a provisional acceptance is based." In Union of India v S. Narain Singh (AIR 1953 Punj. 274), it was held that the bidder (offeror) would have the right to withdraw his bid (offer) even where it is a condition of auction sale that a bid which is provisionally accepted cannot be withdrawn. Such a prohibition against withdrawal does not have the force of law unless there is some consideration to bind the offeror down to the condition. Similarly in Sri Durga Saw Mill v State of Orissa (AIR 1978 Ori. 41) and in Somasundaram Pillai case, it was held that until such time as absolute and unqualified acceptance has been given, the person who makes the offer has the right to withdraw unless there is a condition to the contrary which is supported by consideration. The reason why the bidder has the liberty to withdraw is that the contract is concluded only when the bid is confirmed and formal communication of it is given to the bidder. Likewise, the auctioneer has liberty to withdraw the provisional acceptance and cancel the offer. LEADING CASE: HARIDWAR SINGH v BAGUN SAMBRUI (AIR 1972 SC 1242) In this case, a forest was knocked down to a bidder below the minimum price. The reserve price fixed in the tender (auction) was Rs. 95,000, the appellant's bid of Rs. 92,000 being the highest, was accepted by the Divisional Forest Officer. Its confirmation was still in the process that the bidder agreed to pay the minimum. The department accepted this and telegraphed its acceptance to the forest officer for onward transmission to the bidder. The forest officer never received the telegram. Meanwhile another person offered still higher price. The department accepted this and informed the forest officer, who received this communication and passed it on to the new bidder It was held that no contract had been made on the earlier bid. Whatever acceptance had taken place that was still within the

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department and not communicated to the bidder. In other words, the final acceptance of the plaintiff's tender was not put into the course of transmission to him. The existing state of affairs therefore, was that of provisional acceptance. The government was held free to accept a higher tender, on the principle that either party can withdraw before the final acceptance was given. If the time at which the acceptance was to become effectual is unreasonably remote, the offer may lapse before the acceptance becomes effective. But if neither party withdraws and the delay is not unreasonable a contract will arise when the contingency happens or stipulated event occurs [Williston on Contracts, Vol.1, 3rd Ed., para 77-A]. The court further said: "In this case, it is not the want of communication of the confirmation by the Government to the appellant that really stands in their way of there being concluded contract, but rather the want of confirmation by the Government of the conditional acceptance by the Divisional Forest Officer."] Decision of the first case in question X will not succeed; as the final acceptance was not communicated to him, so there was no contract. Decision of the second case in question D is free to revoke his bid before the confirmation. The condition against withdrawal in the auction is not supported by any consideration, so it is void. There can be no acceptance after an offer is revoked. Such acceptance is not binding on D. Q.10. (a) How is a contract made by auction? Can a person, who after reading an advertisement about an auction comes to participate in it from a distance, claim compensation if the auction is not held as announced? [L.C.I-97; C.L.C-2000] (b) A promises to purchase from B all of B's glass jars at Rs. 2 per jar and B promises to sell all that A wants at that price. Before A places any order for the jars, B withdraws his promise and A sues him for breach of contract. Advise B. A. 10. (a) Auction An auction is an 'invitation to offer'. The parties are invited to place their bids (quotation of prices), the highest bid is usually accepted. Fall of hammer in an auction sale amounts to acceptance. However, sometimes a bid is accepted subject to final approval by an authority, thus there is only provisional acceptance. A tender is in the same category as a bid. When a

Page 57 Formation of an Agreement (Offer & Acceptance) tender is approved it is converted into a standing offer and a contract arises only when an order is placed on the basis of tender. An auctioneer's announcement that specified goods will be sold by auction on a certain day is not an offer to hold the auction and he will not be liable to persons travelling up to the place if he changes his mind and does not hold the auction [Harris v Nickerson (1873) LR 8 QB 286]. Even when an auction is held the bid is not an acceptance so as to entitle the highest bidder to get the goods. The highest bid is nothing more than an offer to buy and it requires to be accepted by the auctioneer [Spencer v Herding (1870) 5 CP 561]. The highest bidder may be found to be an undesirable person for many reasons e.g. from the mere enormity of the bid [State of U.P. v Vijay Bahadur Singh AIR 1982 SC 1234]. However, one contractor should not be preferred over another without any rhyme or reason, this would be more so in the matter of Government contracts. (b) It was a kind of 'approved' tender and, therefore, rules relating to acceptance of tenders apply. See previous question. Q.11. Discuss the legal principles relating to communication by post, of 'offer', 'acceptance' and 'revocation' thereof.[C.L.C.-93; L.C.I-95/2002] Discuss the legal principles, relating to communication, by indirect method, of 'offer', 'acceptance' and 'revocation' thereof, [C.L.C.-98] Discuss the law relating to communication of 'offer', 'acceptance' and 'revocation' thereof as laid down under Sec. 4 and Sec. 5 of the Contract Act. [C.L.C.-99/2000] A.11. Communication by Post of Offer, Acceptance and Revocation Communication by indirect method means communication by post (cf. communication by direct method viz. by telephone, telex, etc. where the parties are in direct communication). OFFER: Sec. 2(a) - When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Sec. 3 - To 'signify' means that the proposal must be communicated to the other party. Sec. 4 - The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. ACCEPTANCE: Sec. 2(b) - When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. Sec. 4 - The communication of an acceptance is complete as against the proposer when it is put into a course of transmission to him, so as to

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be out of the power of the acceptor; as against the acceptor when it comes to the knowledge of the proposer. REVOCATION: Sec. 5 - A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Sec. 4 - The communication of revocation is complete as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. Sec. 6 - A proposal is revoked by the communication of notice of revocation by the proposer to the other party; by the lapse of time prescribed in such proposal; by the failure of acceptor to fulfill a condition precedent; or by the death or insanity of the proposer. Illustrations (Sec. 4) (a) A proposes, by letter, to sell a house to B. The communication of the proposal is complete when B receives the letter. (b) B accepts A's proposal by a letter sent by post. The communication of acceptance is complete as against A when the letter is posted, and as against B, when the letter is received by A. (c) A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched, and as against B when B receives it. B revokes his acceptance by telegram. B's revocation is complete as against B when the telegram is despatched, and as against A when it reaches him. Illustration (Sec. 5) A proposes by letter to B to sell a house, B accepts by letter. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards. Q.12. A posts an offer to B on 1-10-89. B posts his acceptance on 5-10-89. In the meantime A posts his letter of revocation of offer to B on 4-10-89 which is received by B on 6-10-89. Is there an enforceable contract in this case? Discuss. [C.L.C-91] A.12. The contract has been completed on 5-10-89 when B posted his acceptance to A. According to Sec. 5, A could have revoked his proposal before the communication of acceptance was complete against him. According to Sec. 4, revocation is complete against

Page 59 Formation of an Agreement (Offer & Acceptance) acceptor i.e. B only when it comes to his knowledge. Thus, for an effective revocation of proposal, the revocation must reach the acceptor before he mails his acceptance. In the present case, revocation reached B on 6-10-89, while B had mailed his letter of acceptance on 5-10-89. Thus, there is a valid contract between A and B and the contract has not been revoked. Q.13. K offers to sell his Maruit-800 to M for Rs. 1,45,000. On 1-10-95 M sends a letter to K accepting the offer. On 3-10-95 M changes his mind and sends a telegram to K. The telegram reaches K in the morning of 4-10-95; the same evening K gets M's letter of acceptance. Discuss whether the revocation of acceptance by M is permissible. [L.C.II-95] A.13. According to Sec. 5, an acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor (i.e. when the letter of acceptance reaches the offeror). Thus, an acceptor may cancel or revoke his acceptance by a speedier mode of communication which will reach earlier than the acceptance itself. Thus, in the present case, M's revocation is permissible. Q.14. A sends a letter of acceptance by post, to B on 5-12-02. The letter of acceptance reaches B on 10-1202. Decide, in the light of above facts, whether there is a binding contract in the following cases: (i) If the letter of acceptance is lost in the transit and never reaches B and acceptance is not revoked by A. (ii) B revokes his offer and the letter of revocation of offer reaches A on 6-12-02. (iii) A revokes his acceptance and the letter of revocation of acceptance reaches B at the moment when the letter of acceptance reaches B. [C.L.C-2003] A.14. (i) A valid contract has come into existence on 5-12-02; it does not matter that the letter of acceptance is lost in transit. (ii) Revocation by B is not effective; for the communication of revocation to be effective, it must reach the acceptor before he mails his acceptance and makes it out of his power. (iii) Revocation by A is effective; a person who has accepted a proposal may revoke his acceptance at any time before or at the moment when the letter of acceptance is received by the offeror.

Page 60 3 Consideration Consideration constitutes the very foundation of the contract. An agreement not supported by consideration is void (Sec. 25, Contract Act). Consideration is the cause of the promise and its absence would make the promise a gratuitous or bare promise (nudum pactum). The fact that a promise has been made for consideration goes to show that parties contemplated the creation of a legal obligation. Anson said that the offer and acceptance bring the parties together and constitute the outward semblance of a contract; but most systems of law require some further evidence of the intention of the parties, which is provided by consideration and form. In India, this further evidence is provided by consideration only. It may be noted that consideration is a cardinal necessity of the formation of a contract, but no consideration is necessary for the discharge or modification of a contract.1 Definition2 Blackstone defined consideration as the recompense given by the party contracting to the other. In other words, it is a price of the promise. Thus, Pollock defined consideration as "the price for which the promise of the other is bought, and the promise thus given for value is enforceable." ______________ 1. Though offer and acceptance bring the parties together and constitute the outward semblance of contract, yet most systems of law require some further evidence of the intention of the parties and in default of such evidence refuse to recognize an obligation. Comment and discuss the nature of evidence required to be supplied under the Indian Contract Act. [I.A.S. -94] 2. How is the term 'consideration' defined? [C.I-93/94/95] Analyse the definition of consideration given in Sec. 2(d) of the Contract Act and explain its main elements with reference to decided cases. [D.U. 2007]

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According to Salmond and Winfield "a promise without consideration is a gift; one made for consideration is a bargain". A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other [Currie v Misa (1875) LR 10 Ex. 153]. This is the most commonly accepted definition. Consideration is a return or quid pro quo (something for something), something of value received by the promisee as inducement of the promise (Fazaladdin v Panchanam Das AIR 1957 Cal 92). For example, A agrees to sell his immovable property (A's promise to sell- consideration) to B for Rs. 1 lakh (B's promise to pay- consideration). Section 2(d) of the Indian Contract Act defines consideration as follows: "when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstain from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise." This definition is wider and more comprehensive then is accepted in English courts. The three ingredients of this definition of consideration are: (1) that the act or abstinence, which is to be a consideration for the promise, should be done at the desire of the promisor, (2) that it should be done by promisee or any other person, (3) that the act or abstinence may have been already executed or is in the process of being done or may still be executory i.e. it is promised to be done. The Contract Act presents a practical definition. The purpose is to emphasize the simple fact that consideration is some act, done or promised to be done, at the desire of the promisor. It also avoids the practical difficulties caused by the theory of consideration as consisting of some act which is beneficial to one party or detrimental to the other. For example, if a man promises a charitable institution that he will pay £100 into its funds if it procures nine other persons to do the same, justice requires that his promise should be held binding on him as soon as it has procured the nine other persons to pay £100 each; but the act done by the institution is neither a benefit to him nor a detriment to the institution. (A) At the Desire of the Promisor (Promissory Estoppel) An act shall not be a good consideration for a promise unless it is done at the desire of the promisor. Thus in Durga Prasad v Baldeo (1880) 3 All 221, the plaintiff built a shopping complex on the order of the Collector. The shops came to be occupied by the defendants who, in consideration of the plaintiff having expended money in the construction, promised to pay him

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commission on articles sold by them. The plaintiff's action to recover the commission was rejected on the ground that plaintiff's act was the result not of the promise but of the Collector's order. On the other hand, an act done at the promisor's desire furnishes a good consideration for his promise even though it is of no personal significance or benefit to him. An act done at the request of another, express or implied, is sufficient consideration to support a promise. It may be noted that a liability arises only when the promisor had by doing some act, on the faith of the promise, altered his position (doctrine of promissory estoppel). The following cases will illustrate these points.3 LEADING CASE: KEDAR NATH V GORIE MOHD. [(1886) ILR 14 Cal 64J In this case, a town hall was to be constructed for which subscriptions were invited from the public by the commissioners of Howrah municipality. The defendant was a subscriber to this fund for Rs. 100. It was found that the subscriptions were received or promised to the required amount of Rs. 40, 000. On the faith of the promised subscription, the plaintiff (Vice-Chairman of the municipality) entered into a contract with a contractor for the purpose of building the hall. The defendant failed to pay the amount and contended that there was no consideration for his promise. Holding the defendant liable, the court observed that the persons were asked to subscribe knowing the purpose for which money was to be applied; they knew that on the faith of their subscription an obligation was to be incurred to pay the contractor for the work. The promise is: 'In consideration of your agreeing to enter into a contract to erect, I undertake to supply money for it.' The plaintiff's act in entering into contract with the contractor was done at the desire of the defendant (the promisor) so as to constitute consideration within the meaning of Sec. 2 (d). LEADING CASE: DORASWAMI IYER v ARUNACHALA AYYAR (AIR 1936 Mad 135) In this case, the repair of a temple was in progress. As the work proceeded, more money was required and to raise this money, ____________ 3. "An act done at the promisor's desire furnishes a good consideration for his promise even though it is of no personal significance or benefit to him." Discuss. [I.A.S. -2001]

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subscriptions were invited. The defendant became a subscriber for Rs. 125. It was to recover this sum that the suit was filed. But no recovery was allowed. The question was whether plaintiff's relying on the promise of the subscriber incurred liabilities in repairing the temple ... does this amount to consideration? The court observed that the definition of consideration in the Contract Act postulates that the promisee must have acted on something amounting to more than a bare promise. There must be some bargain between them in respect of which consideration has been given ... there must have been some request by the promisor to the promisee to do something in consideration of the promised subscription. Where there is no such request for an act the promise will be a bare promise and without any consideration. In Hudson Re (54 LJ Ch. 811), where the promise was to contribute a large sum of money for the payment of chapel debts, the promisor having died after paying a large instalments, the balance could not be recovered from his executors. The claim was considered to be not sustainable inasmuch as the promisee had not undertaken any liability as part of the bargain with the promisor. In the present case, the court said that there was no evidence of any request by the subscriber to the plaintiff to do the temple repairs. In Kedar Nath case the construction of the hall began on the faith of the promised subscriptions, but in the present case, temple repairs were already in progress when the subscriptions were invited. The action was not induced by the promise to subscribe but was rather independent of it.]4 In Abdul Aziz v Masum Ali (AIR 1974 All 22), the defendant promised Rs. 500 to a fund started to rebuild a mosque but nothing had been done to carry out the repairs. The subscribers were, thus, held not liable. A mere promise to subscribe to a charitable institution cannot be sued upon if nothing has been done in furtherance of the fund raised. In other words, a promise to pay subscription for charitable cause is not enforceable if the other party has not incurred any liability. In the present case, it does not matter that the promise was given by the treasurer himself. ___________ 4. A wants to construct a 'Barat Ghar' in his locality. He purchases a piece of land for this purpose. A, thereafter, approaches the public to make donations for this noble cause. Sixty persons agree to donate Rs. 10,000 each. Later on, however, some of the subscribers refuse to make the payment as promised by them. Can A enforce this payment through a court of law? Will your answer be same if A, on the faith of the subscribers, has purchased building material worth Rs.50,000? [C.L.C-98]

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A promise could not be revoked, once the promisee entered performance. A question arises if the promisor has no such liberty will he be bound when the promisee stop performance? In Morrison Steamship Co. v The Crown (1924) 20 LI LR 283, it was suggested that the mere commencement of performance does not convert the offer into a contract in the sense that the promisor is bound to stay with his promise, but that if he revokes it, he may be sued for damages or on a quantum meruit (as much as he merits or deserves). (B) Promisee or Any Other Person A promise is enforceable if there is some consideration for it and it is quite immaterial that it moves from the promisee or any other person. This is sometimes called as 'Doctrine of Constructive Consideration'. Under English law, however, there is a privity of consideration i.e. consideration must move from the promisee and promisor only, a stranger or third person cannot furnish consideration. LEADING CASE: VENKATA CHINNAYA RAU V VENKATA RAMAYA GARU5 [(1882) 4 Mad 137] In this case, A, an old lady, granted an estate to her daughter (the defendant) with the direction that the daughter should pay an annuity of Rs. 653 to A's brother (the plaintiff). On the same day, the defendant made a promise with the plaintiff that she would pay the annuity as directed by A. The defendant failed to pay the stipulated sum. In an action against her by the plaintiff she contended that since the plaintiffs themselves had furnished no consideration, they had no right of action. The Madras High Court held that in this agreement (between the defendant and the plaintiff), the consideration had been furnished by the defendant's mother and is enough consideration to enforce the promise between the plaintiff and the defendant. The court ruled that "plaintiff can only sue if the consideration moved indirectly from him wholly or partly", which is so in the present case. ___________ 5. A, a landlord, executed a gift deed of certain lands in favour of his son B, witha direction that he should pay to his uncle C an annuity of Rs. 8,000 for a period of three years. On the same day, B also executed a separate undertaking in favour of C agreeing to pay the annuity. B subsequently refused to keep his promise. C sued B to recover the amount due under the agreement. Decide, giving reasons. [L.C.I94/95; L C. II-93/94] Whether a resident's promise to subscribe a sum of money for construction of a sports complex by a Residents' Welfare Association can be enforced by law? [D.U.2007]

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In this case, the whole situation was this: the defendant's promise was given to the plaintiff, but consideration (gift of estate) was furnished by the plaintiff's sister. The court could have easily allowed the plaintiff to recover the annuity, as consideration given by '"any other person" is equally effective [Sec. 2 (d)]. The court, however, tried to equate the situation with the facts of Dutton v Poole (1677) 2 Lev 210. In that case, a person intended to sell a wood in order to provide his daughter a marriage portion. His son (defendant) promised that if he (father) abstains from selling he would pay the daughter £1,000. The father accordingly forbore but the defendant did not pay. The daughter and her husband (plaintiffs) sued the defendants for the same. Held that ... as the consideration moved indirectly from the plaintiff to the defendant and the action of defendant operated to shut out the plaintiff from a certain benefit, the plaintiff can sue. In the present case also, the failure to keep up the promise would have deprived the plaintiff of a certain benefit. It is a legal common place that if a promise causes some loss to the promisee, that is sufficient consideration for the promise. In Tweeddle v Atkinson (1861) 123 ER 762, the court however held that the plaintiff cannot sue. In that case the parents of the plaintiff and his wife agreed together that each would pay the plaintiff a sum of money after the marriage. The plaintiff's wife's father failed to do so and plaintiff sued his executors. The court observed that "no stranger to the consideration can take advantage of a contract, although made for his benefit". The plaintiff was not allowed to sue as the contract was made with his father and not with him. The distinction between Tweddle's case and Button's case is obvious. In Tweedle the plaintiff did not lose anything by the arrangement between the two parents, nor was he worse-off from the non-fulfillment of promises then he would've if they had not been made, nor did the promise result in any present benefit to the persons promising to the detriment of plaintiff; so that there was no consideration moving directly or indirectly from him to the defendants. Thus, the doctrine of ‘constructive consideration' was given up in England in Tweddle's case.] In Samuel v Ananthanatha (1883) 6 Mad 351, the administratix of the estate of a deceased person agreed to pay S, one of heirs, his full share of estate provided that S would give a Promissory Note to A, a creditor of estate. S executed the Note in favour of A and gave it to the administratix and in return the administratix transferred S's share of assets to S. The Note was subsequently handed over to A. who claimed the amount from S. The

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consideration in the form of transfer of full share of property from the administratix to S was considered to be good consideration in respect of promise by S in favour of A. A was, therefore, entitled to recover the amount. The great American writer Williston said: "The rule that consideration must move from the promisee only is somewhat technical, and in a developed system of contract law there seems to be good reason that why A should not be able for a consideration received from B to make an effective promise to C. Unquestionably he may in the form of a promissory note, and the same result is generally reached in this country in the case of a simple contract." Privity of Contract See under the Questions Section. (C) Has Done or Abstained from Doing Under Sec. 2(d), consideration is an act, which has already been done at the desire of the promisor (past consideration), or is in progress (executed or present consideration i.e. consideration is provided simultaneously with the making of the contract) or is promised to be done in future (executory or future consideration i.e. a simple exchange of promises). Thus consideration may consist of a past, present or a future act. Past Consideration If the act has been done before any promise is made, it is called past consideration. It means that the consideration for any promise was given earlier and the promise is made thereafter. Under English law, a past consideration is no consideration as it cannot be said to have been done as a price for the promise. The consideration and the promise ought to go together. A past consideration is no more than an expression of gratitude. Thus an action to enforce the following promise was rejected: "In consideration of your carrying out certain alterations and improvements, we the beneficiaries shall repay to you the sum of ..." However, a past act done at request will be good consideration for a subsequent promise (Lampleigh v Brathwait Hob 105:80 ER 255). In such cases it is ordinarily in the contemplation of the parties that the service rendered at request would be ultimately paid for. Further, a promise to pay time-barred debt and a negotiable instrument issued for a past consideration are both valid. In India. Sec. 25(2) adequately covers a past voluntary service i.e. a service rendered without any request or promise and there is a subsequent promise to pay for the same. Thus, where A finds B's purse and gives it to him and B promises to give A Rs. 50, this is a contract. Similarly, where A

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supports B's infant son and B promises to pay A's expenses in so doing, this is a contract.6 Past service at request is not adequately covered by Sec. 2(d) and Sec. 25(2). Sec. 2(d) requires that the act should be done at the desire of the promisor. This presupposes the existence of a promise to pay for the act. But the provision can be construed to include an act which has been done at request and for which a promise to pay is given later. Even if no subsequent promise is given the courts can infer an implied promise. Every request for an act carries an inbuilt promise to pay. Executed Consideration6a In case of executed consideration, the consideration is provided simultaneously along with the making of the contract. It is the act which forms the consideration. For example, A makes an offer of reward of Rs. 100 to anyone who finds out his lost dog. When B finds the lost dog, that constitutes not only the acceptance of the offer but that also provides the consideration in respect of the contract. In the case of past consideration, on the other hand, consideration is provided prior to the making of the contract. Executory Consideration6a There may be a simple exchange of promises and each promise is a consideration for the other. In other words, the consideration is 'a promise for a promise.' For example, A agrees to sell and B to buy a quantity of goods. In other words, A has promised to sell and B has promised to pay. Thus, in mercantile contracts, executory consideration is usually given. Unlike 'executed' consideration (where liability is outstanding on one side only), in 'executory' consideration, the liability is outstanding on both sides. (D) Such Act, Abstinence or Promise is called Consideration Consideration must be real and not illusory7 Where consideration is physically impossible, illegal, uncertain or illusory, it is not real. English common law has always insisted that "Consideration must be of some value in the eyes of the law.” Thus, where A promises to ___________ 6. H and W (H's wife) are bathing in a river. W slips into the water, and B, a boatman is able to save W's life and H promises to pay him Rs. 5000 for saving her life. Subsequently, H refuses to pay the said amount to B. On being sued by B for the amount, H contends that the promise to pay Rs. 5000 is without consideration. Hew would you decide the case? [L.C.II-93] 6a. Write a note on: Executed and executory considerations. [D.U.-2008] 7. 'Consideration need not be adequate, but it must be real or valuable'. Explain. [I.A.S. -90]

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give his new car to B, provided B will fetch it from the garage, or where a promise made by the father in consideration that his son would not bore him, there is no legal consideration. In the former case, the requirement that B is to fetch the car is not price of the promise, but a condition precedent to the operation of A's generosity. In White v Bluett (1853) 23 LJ Ex 36, a son used to complain to his father J that his brothers had been given more property than him, the father promised that he would release the son from a debt if the latter stopped complaining. Held that the promise by the son not to bore his father with complaints in I future did not constitute good consideration for the father's promise to release him. "The son had no right to complain, for the father might make what distribution of his property he liked; and the son's abstaining from what he j had no right to do can be no consideration". This case highlights the fact that a consideration should be real and should not be unsubstantial. The position is the same in India. In Kulasekaraperumal v Pathakutty (AIR 1961 Mad 405), the court observed: "Though the Indian Contract Act does not in terms provide that consideration must be good or valuable to sustain a contract it has always been accepted that consideration means something which not only the parties regard but the law can also regard as having some value. It must be real and not illusory, whether adequate or not ... So long as the consideration is not unreal it is sufficient if it be of slight value only." In Chidambara v P.S. Renga (AIR 1965 SC 193), the Supreme Court also similarly observed. But the courts have been very liberal in this respect and have always tried to find value in something to which parties attach value. Consideration need not be adequate8 Explanation 2 to Sec. 25 lays down that "an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate." Thus, if A agrees to sell a horse worth Rs. 1,000 for Rs. 10 and A's consent to the agreement was freely given, the agreement is a contract notwithstanding the inadequacy of the consideration. The parties are free to make any contract of their choice. If, with their consent, they strike a bargain where the consideration is too high or too little, the courts will not go into the question of adequacy or inadequacy of consideration. The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced. Thus, the transfer of the goodwill and the whole of ___________ 8. What is the effect of inadequacy of consideration? [L. C. I-95] "Inadequacy of consideration is immaterial, but an agreement without consideration is void." Comment. [L.C.I-94/95] [I.A.S.-2006]

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the assets of a business for only Rs. 1,000 has been upheld (Devji Shivji v Karsandas Ramji AIR 1954 Pat 280). Thus, consideration need not be quantitatively equal to the thing promised (A. Lakshmana Swami Mundaliar v LIC AIR 1963 SC 1185). In De La Here v Pearson (1908) 1 KB 280, the defendants, the newspaper proprietors, offered to answer inquiries from readers of the paper desiring financial advice. The plaintiff wrote to them asking for a safe investment and also for the name of a good stockbroker. The editor, unknowingly, recommended a person who was an undischarged bankrupt. The plaintiffs sums were misappropriated by that person. The question was whether there was sufficient consideration for the offer of the advice. Held that such publication has a tendency to increase the sale of the defendant's paper; this offer, when accepted, resulted in a contract for good consideration. Explanation 2 to Sec. 25 further lays down that "inadequacy of consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given". A party seeking to set aside a transaction on the ground of inadequacy of consideration, must show such inadequacy as will involve the conclusion that he either did not understand what it was about. For "once a court is satisfied that a person has entered into an agreement freely and with knowledge of its purport and effect" the agreement will be valid notwithstanding the inadequacy of consideration. Even where a transaction is avoided under this principle, it is not because of the inadequacy of consideration, but because of fraud or some other vitiating element. For "inadequacy of consideration, may in circumstances suggest fraud, coercion, mistake, etc." The same result would follow where the consideration is so markedly inadequate as to be unconscionable and there is a serious inequality of bargaining power between the parties. Abstinence, etc. Forbearance to sue has always been regarded as valuable consideration. It is a kind of abstinence. 'Forbearance to sue' means that the plaintiff has a certain right of action (bona fide, not a fabricated claim) against the defendant or any other person and on a promise by the defendant he refrains from bringing the action. Thus, in Kastoori Devi v Chiranji Lal (AIR 1960 All 446), the withdrawal of a pending suit by a wife against her husband was held to be a good consideration for his promise to pay her maintenance. Where A, a social reformer, promised B a reward of Rs. 1,000 if he refrained from smoking for two years, and B does so, B is entitled to the reward from A. B at the desire of A refrained from smoking. This is a valid consideration in the form of an act of abstinence. Similarly, where a person promised his nephew that if the nephew would refrain from drinking, gambling,

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etc. until he become 21 years of age, he would pay the nephew $ 5,000, and the nephew did so, the court held in favour of the nephew while the uncle pleaded that there was no consideration [Hamer v Sidway (1891) 124 N.Y. 538]. Compromise of a pending suit is a good consideration for the agreement of compromise. Where an agreement has been arrived at between certain members of a family that is designed to promote peace and goodwill, this by itself is a good consideration to support this transaction. Exceptions to Consideration9 According to English law, contracts are of two kinds - simple contracts and contracts under seal, or in the form of a deed. There, consideration is required only as regards simple contracts. A contract under seal (formal or real i.e. which is in writing and which is signed, sealed and delivered) is enforceable without consideration. Indian law, however, does not recognize any such exception. But Sec. 25 of the Contract Act lays down a few exceptions, when an agreement made without consideration is not void. It may be noted that even in the case of negotiable instruments, where the consideration is presumed under Sec. 118, they would be void if it is proved that no consideration has passed between the parties. Sec. 25. An agreement made without consideration is void unless (1) it is expressed in writing and registered, and is made on account of natural love and affection between parties standing in near relation to each other, or unless (2) it is 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 (3) it is a promise, made in writing and signed by the person to be charged therewith, or by his authorised agent, to pay a debt of which the creditor might have enforced payment but for the law of the limitation of suits. In any of these cases, such an agreement is a contract. ___________ 9. What are the three main exceptions to the requirement of consideration in contract? State clearly. [C.L.C-95; L.C.I-93/95] Whether an agreement without consideration is void? Discuss the rule with exceptions, if any. [I. A. S. - 2004/2005] Explain the circumstances under which an agreement without consideration can be enforced. [L.C. I-95]

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Explanation 1 makes it clear that Sec. 25 does not apply to the cases of gifts. A gift (which is not an agreement) does not require consideration in order to be valid. There need not be natural love and affection or nearness of relationship between the donor and donee. The gift must, however, be 'complete' i.e. it has been delivered; a promise of gift, being without consideration, is void. Explanation 2 makes it clear that the consideration must have some value in the eyes of law, even though it need not be adequate. Illustrations: (a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement. (b) A, for natural love and affection, promises to give his son, B, Rs. 1,000. A puts his promise to B into writing and registers it. This is a contract. Exception 1. Natural love and affection A written and registered agreement based on natural love and affection between near relatives is enforceable without consideration. The expression 'near relative' will include parties related by blood or marriage. The expression 'near relative' will include parties relates by blood or marriage. Love and affection has to be the basis of the promise because otherwise such emotional expressions and such human sentiments cannot take the place of consideration in the material sense of the word. In Rajlucky Dabee v Bhootnath Mookerjee (1900) 4 Cal WN 488, held that near relation between the two parties does not necessarily imply natural love and affection between them. In this case, the defendant promised to pay his wife a fixed sum of money every month for her separate residence and maintenance. The agreement mentioned certain quarrels and disagreements between them. The court could find no trace of love and affection between the parties whose quarrels had compelled them to separate. The agreement was held to be void for lack of consideration.10 In Bhiwa v Shivaram (1899) 1 Bom LR 495, where one brother, although not legally bound to do so, transfers half of his property in favour of another ___________ 10. A Hindu husband executed a registered document in favour of his wife, whereby, referring to quarrels and disagreement with his wife, he agreed to pay her for a separate maintenance. Later he refused to pay the said amount. The wife files a suit for the recovery of the amount. Decide. [D. U.-2009] Explain the law laid down in the case of Smt. Rajlukhy Dabee v Bhootnath Mookerjee [(1900) 4 Cal WN 488], [L.C.I-97]

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brother, so that they have cordial relations, that is deemed to have been done out of natural love and affection, and such an agreement is binding.103 Similarly, where a person promised to discharge the debts of his brother by a registered agreement, it was held that the latter was entitled to enforce the agreement [Venkataswamy v Rangaswami (1903) 13 Mad LJ 428]. Exception 2. Past voluntary service A promise to compensate a person, who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, is enforceable without consideration. In other words, a promise to pay for a past voluntary service is binding. Thus, where A finds B's purse and gives it to him and B promises to give A Rs. 50, this is a contract. However, such service should have been rendered voluntarily [and not at request, which is covered by past consideration under Sec. 2(d)] and without promisor's knowledge, and for the promisor only. This implies that the act must have been done for a person who is in existence at the time of the doing of the act, and, therefore, it does not cover expenses incurred by the promoter of a company before the company came into existence [Ahmedabad Jubilee S. & Co. v Chhotalal (1908) 10 Bom. L.R. 141]. In Karam Chandv Basant Kaur (1911) P.R. 31, the Punjab High Court held that a promise made after attaining majority to pay for goods supplied to the promisor during minority was held to be within the exception. However, the Allahabad High Court has held that a promise by a person on attaining majority to repay money lent and advanced to him during his minority does not come within the exception, the promisor not being competent to contract when the loan was made to him [Suraj Narain v Suraj Ahir (1928) 51 All 164]. If the intention of the promisor is not to compensate the promisee, the promise will not be covered by the exception. Thus, where a highly indebted person transferred some immovable property to his son in consideration of the latter helping him with money from time to time, the transaction was held to be not covered by the exception as the real intention was not to compensate the son but to defraud the creditors of the father [Abdulla Khan v Purshottam AIR 1948 Bom. 265] It may be noted that as per the exception the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor. An illustration- A and B are friends. B treats A during A's illness. B does not accept payment ___________ 10a. A filed a suit against his brother B for possession of a half-share in the property which was alleged to be ancestral one. The suit was dismissed. Later on, to secure reconciliation and family peace, B executed a registered deed agreeing to transfer the half share in the said property to A. A filed a suit for possession on the basis of this instrument. B raised the plea that the agreement was without consideration and hence void. Decide [D. U.-2009]

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from A for the treatment and A promises B's son, C, to pay him Rs. 1,000. Here, C, to whom the promise was made, did nothing for A, so A's promise is not enforceable. Exception 3. Time-barred debt A promise to pay a time-barred debt is enforceable. For example, A owes B Rs. 2,000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 1,000 on account of the debt. This promise is enforceable under this exception. A question arises: Is it necessary that the promise should be given by the person who was liable for the original time-barred debt? The Bombay High Court has held that "a promise made by a person who is under no obligation to pay the debts of another .... does not fall within the clause" [Pestanji M. Modo v Bai Meharbai (1928) 30 Bom LR 1407]. But, according to the Madras High Court "the words by the person to be charged therewith" in Sec. 25(3) are wide enough to include the case of a person who agrees to become liable for the payment of a debt due by another and need not be limited to the person who was indebted from the beginning" (P. Govinda Nair v P. Achutan Nair AIR 1940 Mad 678). A mere acknowledgement of the debt is not sufficient. There must be promise to pay the debt. The promise referred to in Sec. 25(3) must be express. Thus a debtor's letter to his creditor "to come and receive" what was due to him, was held to disclose no express promise. Where a tenant in a letter to the landlord referred to the arrears of time-barred rent and said: "I shall send by the end of Vysakh month", it was held that the document satisfies the requirements of Sec. 25(3). In R. Suresh Chandra & Co. v Vadnese Chemical Works(AIR 1991 Bom 441), held that a statement in the balance sheet of a firm signed by a partner showing that the firm was indebted to the plaintiff in respect of the stated sum became an implied promise to pay. Thus, the Bombay High Court has given a new turn to this exception. Other instances Some other instances where a consideration is not required to make a contract valid are: a contract of agency; remission by the promisee of performance of the promise; an agreement to extend time for performance of a contract; a promise to contribute to charity in certain circumstances. ___________ 11. A owes B Rs. 1,000, but the debt is time barred. C signs a written promise to pay B Rs. 500 on account of the above barred debt. Is B entitled to enforce the promise against C? [I.A S- 99]

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FURTHER QUESTIONS Q.1. (a) A drew up a scheme to construct a temple. He purchased a piece of land for the said purpose, out of his own money. He, however, made an appeal to the public to make donations for this noble cause. The response was very good. He contracted a draftsmen and got the drawings of the temple prepared. Later on, some of the subscribers refused to make the payment as promised by them. Discuss, whether A has got any remedy in law against the defaulting subscribers [C.L.C. 92, L.C.II-94]

(b) X has put his name for a subscription to a charitable purpose. In case of default can the subscription be recovered? Discuss.[D.C.-2009] (c) Kewal, a member of Managing Committee of 'Prem Mandir' Rudraprayag, agrees at a meeting of the committee to subscribe a sum of Rs. 1,25,000 for repairs of temple. Subsequently Kewal refused to pay the said amount. Under what circumstances, if any, can the committee recover the aforesaid amount from Kewal? Discuss. [L.C.I-95] A.1. (a) An agreement not supported by consideration is void. Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable. According to Sec.2 (d) of the Contract Act, consideration is some act, done or promised to be done, at the desire of the promisor. An act done at the request of another, express or implied, is sufficient consideration to support a promise. Thus in Durga Prasad v Baldeo, where the plaintiff built a shopping complex on the order of the collector, the plaintiff's act held to be not 'at the desire of the promisor.' In Kedar Nath v Gorie Mohd., on the faith of the promised subscription the plaintiff entered into a contract with a contractor for the purpose of building a town hall. Held that the plaintiffs act in entering into contract with the contractor was done 'at the desire of the defendant (the promisor)' so as to constitute consideration. In Doraswamy Iyer v A. Ayyar, the temple repairs were already in progress when the subscriptions were invited. Held that the action was not induced by the promise to subscribe but was rather independent of it. Thus, the subscriber (defendant) who had promised to pay but had later refused was not held liable. In Abdul Aziz v Masum Ali (AIR 1974 All 22), the defendant promised Rs. 500 to a fund started to rebuild a mosque but nothing had been done to carry out the repairs. The subscribers were, thus, held not liable.

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Thus, it is clear that a liability arises only when the promisor had by doing some act, on the faith of the promise, altered his position. In the present case, A started construction of temple on the faith of promises made by the subscribers. As act done at the desire of the promisor is sufficient consideration, the contract is enforceable in law. A will succeed in a suit for specific performance of the contract against the defaulting subscribers. (b) A mere promise to subscribe to a charitable institution cannot be sued upon if nothing has been done in furtherance of the fund raised. In a unilateral promise (promise from one side only), the promisee is not bound to act, for he gives no promise from his side. But if he carries out the act desired by the promisor, he can hold the promisor to his promise. His act is at the same time an acceptance of and consideration for the promise. Thus, a promise for a subscription to a charitable institution becomes a legal promise and enforceable by the promoters of charity as soon as any definite steps are taken in furtherance of the object and on the faith of the promised subscription. The Law Commission has suggested that the promise of subscription made to a charitable institution should be automatically enforceable. (c) If the Committee starts repairing the temple, then Kewal will be bound to pay the amount. Q.2. Explain the Doctrine of Privity of Contract. Enumerate the exceptions to this doctrine and discuss the case law in support "A stranger to a contract cannot enforce the contract." Comment on the statement with special reference to the legal position in India. [D.U.-2008] [L.C.II-94/95, C.L.C-93/95] "The general rule undoubtedly is that no third person can sue or be sued on a contract to which he is not a party; but at bottom that is only a rule of procedure. It goes to the form of remedy, not to the underlying right". Critically comment on the principle of privity of contract in the light of the above statement and state whether you agree with the statement. [I.A.S. 99] What are the exceptions to the principle that the contractual benefits or obligations are confined to the parties to the contract? [I.A.S. 2000] "A contract cannot be enforced by a person who is not a party to it though it is made for his benefit. He is a stranger to the contract and can claim no rights under it." Examine the above statement in the light of judicial pronouncements stating the exceptions thereto. [I.A.S. 2007] Write a short note on 'Privity of Contract'. [D.U. 2007/2009]

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A.2. Privity of Contract The doctrine of privity of contract means that a contract is a contract between the parties only and no third party (i.e. stranger to contract) can sue upon it even if it is avowedly made for his benefit. Similarly, the third person is not bound by the contract as there is no mutuality (doctrine of mutuality). The doctrine is rooted in the English common law especially in the famous case of Tweddle v Atkinson (1861) 123 ER 762, and Dunlop Pneumatic Tyre Co. Ltd. v Selfridge & Co. (1915) A.C. 847. In the latter case, the plaintiff (Dunlop Co.) sold goods to one Dew & Co. and secured an agreement from them not to sell goods below the list price and if they sold goods to another trader they would obtain from him a similar undertaking to maintain the price list. Dew & Co. sold goods to the defendants (Selfridge & Co.) who agreed not to sell goods at less than list price. On their not doing so, the plaintiffs sued them for the breach of contract. It was held that assuming that the plaintiffs were undisclosed principals, no consideration moved from them to the defendants and that the contract was unenforceable by them. The rule of privity of contract has been generally criticized. One of the criticism is that the general rule that 'no third person can sue' is only a rule of procedure. It goes to the form of remedy, not to the underlying right. In Beswick v Beswick (1966) 3 All ER 1, Lord Denning concluded that where a contract is made for the benefit of the third person who has a legitimate interest to enforce it, it can be enforced by the third person ... It is different when a third person has no legitimate interest, as when he is seeking to enforce the maintenance of prices to the public disadvantage, as in Dunlop Co. case. But the House of Lords showed no preference for Lord Denning's approach and emphasised that if the principle of jus quaesitum tertio (e.g. right conferred by way of property, as for example, under a trust) is to be introduced into our law, it must be done by Parliament. Position in India Even though under the Indian Contract Act the definition of consideration is wider than under English law, yet the common law principle of doctrine of privity of contract is generally applicable in India. It is important to note that Indian law expressly negatives the English doctrine of 'privity of consideration.' However, there is no provision in the Indian Contract Act either for or against the rule of 'privity of contract.' The authority for the application of the rule in India is the decision of the Privy Council in Jamna Das v Ram Avtar (1911) 30 I.A.7. In that case, A had mortgaged some property to X. A then sold this property to B, B having agreed with A to pay off the mortgaged debt to X. X brought an action against B to recover. Held that since there was no contract between X and B, X could not enforce the contract with mortgagee and the purchaser

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is not personally bound to pay the mortgage debt. In Iswaram Pillai v Sonivaveru, ILR (1913) 38 Mad 733, A mortgaged his lands to B and part of the consideration was B's promise to discharge A's debt to C. C sued B but C was held to be a stranger to the contract. Likewise, in Subbu Chetti v Arunachalam Chettiar (AIR 1930 Mad 382), held that "where all that appears is that a person transfers property to another and stipulates for the payment of money to a third person, a suit to enforce that stipulation by the third party will not lie". In a sale-deed between A and B, the stipulation to pay a certain sum to C cannot be enforced by C. In Krishna Lal v Promila Bala (AIR 1928 Cal 518), the court observed that the whole scheme of Sec. 2 of the Contract Act is that a promise comes into existence when one person signifies to another his willingness to do ..., and the person making the proposal is the promisor, the person accepting the proposal is the promisee and every promise forming the consideration for each other is an agreement between those two persons. Thus, it is wrong to say that there is no provision in Indian law in support of this principle. The Supreme Court of India has approved the rule of privity of contract in M.C.Chacko v State Bank of Travancore (AIR 1970 SC 504), where the Highland Bank was indebted to the State Bank of Travancore under an overdraft. One M was the manager of the Highland Bank and his father K had guaranteed the repayment of the overdraft. K gifted his properties to the members of his family. The gift deed provided that the liability, if any, under the guarantee should be met by M either from the bank or from the share of property gifted to him. The State Bank attempted to hold M liable under this provision of the deed. The Supreme Court, however, held that the State Bank not being a party to the deed could not enforce its covenants. In M. V. Shankar Bhat v Claude Pinto (Deceased) by LRs (2003) 4 SCC 86, it was held that an agreement subject to ratification by others who are not parties to it is not a conclusive contract. In Aries Advertising Bureau v C.T. Devaraj (AIR 1995 SC 2251), a circus owner placed order with the plaintiff for making advertisements for circus. The plaintiff-advertiser did not make any agreement with the financer of circus. The advertiser was not a party to the contract between financer and the circus owner. There being no privity of contract between the advertiser and the financer, the suit by the advertiser against the financer was, therefore, dismissed. In a landmark decision of the Delhi High Court [Klaus Mittelbachert v East India Hotels Ltd. AIR 1997 Del 201], however, such an action was allowed under 'exception to the privity rule'. In this case, there was a contract between Lufthansa (a German Airline) and Hotel Oberoi Intercontinental that crew of Lufthansa will stay in the latter's hotel. The plaintiff, a co-pilot of the Airline, who stayed in said 5-star hotel got serious head injuries due to defective structure of the hotel's swimming pool. He succeeded

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in an action against the hotel although he himself did not make any contract for stay in the hotel. He was held to be beneficiary to the contract between the Airline and the hotel. Exceptions to Privity Rule In the course of time, the courts have introduced a number of exceptions in which the rule of privity of contract does not prevent a person from enforcing a contract, which has been made for his benefit but without his being a party to it [Beswick v Beswick (1966) 3 ALL ER 1]. (1) Trust or Charge - A person (beneficiary) in whose favour a charge or other interest in some specific property has been created may enforce it. In Khwaja Muhammad Khan v Hussaini Begum (1910) 37 I.A. 152, there was an agreement between the lady's father-in-law and her father that in consideration of her marriage with his son, he would pay to her Rs. 500 per month in perpetuity for the betel-leaf expenses (Kharch-i-Pandan). Some immovable property was specifically charged for the payment of these expenses. A suit was brought by the wife for the recovery of arrears of annuity. Held that the wife, although not a party to the agreement, was entitled to enforce her claim as the contract had been entered into for her benefit and certain immovable properties had been specifically charged for the allowance. Further, among Mohammedans, where marriages are contracted for minors by parents and guardians, it might occasion serious injustice if the common law doctrine was applied to agreements or arrangements entered into in connection with such contracts. Thus, the rule laid down in Tweddle v Atkinson had no application to the circumstances of the case. A trust is the property held and managed by one or more persons for another's benefit (See Chinnaya case). In Rana Uma Nath Bakhsh Singh v Jang Bahadur (AIR 1938 PC 245), A was appointed by his father as his successor and put in possession of estate. In consideration thereof A agreed to pay a sum and to give a village to B, the illegitimate son of his father, on his attaining majority. Held that trust was created in favour of B for the specific amount and the village, thus he (B) is entitled to sue. In an English case, A was indebted to both B and C. A assigned all his property to B in satisfaction of his debt and B promised to pay A's debt to C. He failed to pay. But he was held liable to pay C in terms of his promise with A. In M.C. Chacko v State Bank of Travancore (AIR 1970 SC 504), the court said that in order to create charge, there must be evidence of intention disclosed by deed that a specific property or fund intended to be made liable to satisfy debt. The recitals in the deed (in the present case) do not evidence

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any intention of the donor to create a charge in favour of the State Bank ... it was merely an arrangement between donor and his family members. The covenant that M.C. Chacko will either personally or out of the properties given to him satisfy the debts is intended to confer a right of indemnity upon the members of the family, if the State Bank enforced the liability against them, but created no charge in favour of the Bank. Even if it is granted that there was an intention to create a charge, the State Bank not being a party to the deed cannot enforce the deed as it was not a beneficiary under the terms of the contract (See above). (2) Marriage settlement, Partition or other Family arrangements- Where a girl's father entered into an agreement for her marriage with the defendant, it was held that the girl could sue the defendant for damages for the breach of the promise of marriage even though she was not a party to the agreement (Rose v Joseph AIR 1925 Bom 97). Where two brothers, on a partition of joint properties, agreed to maintain their mother, she was held entitled to sue [Shuppu Ammal v Subramaniyam ILR (1910) 33 Mad. 238]. Where the defendant executed an agreement with his father-in-law to pay his wife monthly maintenance (in case she is ill-treated and driven out), she was held entitled to enforce the promise [Daropti v Jaspat Rai (1905) PR 171 ]. Similarly, an agreement between male members of a Hindu Undivided Family to provide for the marriage expenses of a female member at the time of partition was held to be enforceable [Sundaraja Aiyangar v Lakshmi Ammal, 38 Mad. 788 (1915)]. (3) Acknowledgement or Estoppel - Whereby the terms of a contract a party is required to make a payment to a third person and he acknowledges it to that third person (viz. while making a part-payment), a binding obligation is thereby incurred towards him. Acknowledgement can be express or implied. Thus, in Devaraja Urs v Ram Krishniah (AIR 1952 Mys 1091), A sold his house to B and left a part of the sale-price in his hands desiring him to pay this amount to C. Subsequently B made part payments to C, but failed to remit the balance. B while making part payments had informed C that they were out of the sale price left with him and the balance would be remitted soon. Held that though originally there was no privity of contract between B and C, B having subsequently acknowledged his liability. C was entitled to sue him. (4) Covenants running with land - A person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land, shall be bound by them although he was not a party to the agreement [Tulk v Moxhay (1919) 88 LKJB 861].

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(5) Assignee in insurance policy - The assignee of an insurance policy (e.g. a wife in case of husband or vice versa) is entitled to sue on the contract made between the insured and the insurer (insurance company). Q.3. S executed a sale-deed in favour of A for Rs. 3,500. In this sale-deed it was stated that S obtained Rs.2,300 from A but left the balance of Rs. 1,200 with him under the direction that A would pay it to one C to whom S owed Rs. 1,200 under a promissory note. A did not pay Rs. 1,200 to C. C filed a suit for recovery of Rs. 1,200 against A impleading S also a party to it. Will C succeed? [C.L.C-91] A.3. For the law relating to 'privity of contract' see previous question. In the present case, the contract is between S and A, C being a third party and stranger cannot enforce the contract. None of the exceptions to the rule of privity of contract apply to this case. Q.4. (a) An agreement without consideration is always void. Comment [C.LC.-93: L.C.I-95] (b) J contracts with K to build a fence between their premises. L a neighbour, is also interested in the idea of fence because it will provide an additional safeguard against straying cattie L promises K that if he will carry out his contract with J, he will pay him Rs. 1,000. On completion of the said fence work, L refuses to pay K, who files a suit to recover the amount. Decide. Suppose, after the fence is built, L, of his own, makes a pronote in favour of J in these words, "I promise to pay Rs. 1,000 to you as my share of the cost incurred by you in getting the fence built as the fence is also useful to me." What would be your advice to J about his right to enforce his pronote? [C.LC.-95] Discuss how far the performance of something which the promise is already under a legal obligation to perform can form consideration for a promise. [I.A.S.-92] A.4. (a) Consideration constitutes the very foundation of the contract. Consideration is the cause of the promise and in its absence the promise would only be a gratuitous promise or bare promise. That is why Sec. 25 of the Contract Act provides that an agreement without consideration is void. But as Sec. 25 provides some exceptions to it, it is not correct to state that an agreement without consideration is always void (For details about the exceptions, see the text).

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(b) Performance of Existing Duties (1) Performance of legal obligation - In order to constitute proper consideration there should be a promise to do something more than what a person is already bound to do. Doing of something, which a person is already legally bound to do, is no consideration. For instance, where a person having received summons to give evidence in a case; a promise to pay to such person for appearing in case is no consideration [Collins v Godefroy (1831) 109 ER 1040]. Similarly, a promise to pay a sum of money to a police officer for investigating into a crime will be without consideration. However, where the police authority provides a special form of protection outside the scope of their public duty (e.g. performing an extraordinary act) they may demand payment of it [Glassbrook Brothers Ltd. v Galmorgan County Council (1925) AC 270], (2) Performance of contractual obligations (a) Pre-existing contract with promisor- If A is already bound to perform a particular contractual duty owed to B, B's promise to pay something additional for the same promise is no consideration. In Ramchandra v Kalu Raju (1877) 2 Bom 362, it was held that a promise to pay a special reward ("wow") to a pleader (apart from usual fee) if the suit decided in the promisor's favour, does not constitute consideration. Held that the plaintiff was already bound to render his best service as a pleader, thus no fresh consideration proceeded from the plaintiff. Similarly, held in Lalman Shtikla's case- (discussed earlier in the present book). Where in the course of voyage of a ship, two sailors deserted, and the master of the ship promised to the rest of the crew extra wages for working the ship home short handed, it was held that the crew were already bound by their contract to meet the normal emergencies of the voyage and were doing no more than their duty in working the ship home [Stilk v Myrick (1809) 2 Camp. 317]. On the same principle, a promise to pay less than what is due under a contract cannot be regarded as a consideration (Pinnel's case, 1602). It means that inspite of a promise to pay and receive a smaller amount than due; the promisor can claim the whole of the amount due. However, there are certain exceptions to the Pinnel's rule. Thus, part-payment by a third party may be good consideration for the discharge of the whole debt. In India, the promisee may accept in satisfaction of the whole debt an amount smaller than that. No consideration is needed for such a promise (Sec. 63, Contract Act).

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(b) Pre-existing contract with third party - Where a person has contracted to do an act, and a third person promises to pay him a sum of money if he would go ahead with the performance, is there a consideration for the promise? According to Anson, "it seems reasonable to say that the performance or, the promise to perform, an outstanding contract with a third party may be good consideration for a promise." In Shadwell v Shadwell (1860) 9CB (NS) 159, the plaintiff A had already promised to marry one Miss Nicholl. A's uncle sent him a letter: "I am glad to hear of your intended marriage with Nicholl; and as I promised to assist you at starting, I will pay to you £150 yearly during my life ..." Thereafter, A married Nicholl. The majority judgment was that there is a sufficient consideration for the promise. The promise of the annuity might've intended as an inducement to the marriage. Consideration in this case was a benefit to the uncle, as marriage of a near relative could be of interest to him, and also detriment to A, as he might've incurred pecuniary liabilities on the faith of the promise. The dissenting judgment was that marriage of plaintiff at the testator's express request would be an ample consideration; but plaintiff's marriage without such request is no consideration to the testator ... for the plaintiff had already bound himself to marry and the testator knew it. In Scotson v Pegg (1861) 30 LJ Ex 225, it has been held that there is a possibility that A may make a promise to do something in favour of B and then A may make another promise to do the same thing in favour of C. A can enforce the agreement against C. But. if a person contracts with another to do a certain thing, he cannot make the performance of it a consideration for a new promise to the same individual. The court gave the general rule that "if A has refused or hesitated to perform an agreement with B, and is requested to do so by C who derives a benefit from such performance, and who promises to pay him a certain sum and A thereupon undertakes to do it, the performance by A of his agreement in consequence of such request and promise by C is a good consideration to support C's promise". The position in India is also the same. In Gopal Co. Ltd. v Hazarilal Co. (AIR 1963 M.P. 37), the plaintiff (Hazarilal Co.) contracted to purchase from a textile mill certain bales of cloth in instalments. The plaintiff, after taking first delivery, refused to take delivery of the rest of the bales as the price of cloth had fallen. After the refusal, the defendants (sole selling agents of the Mill) who had guaranteed the performance of the contract, proposed to the plaintiff to take delivery of remaining bales by offering to pay Rs. 25,000. The plaintiff lifted the remaining bales but the defendants did not pay the sum. The defendants contended that the promise was without any consideration and thus unenforceable. The promise to pay Rs.

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25,000 was nothing more than a gratuitous offer for something which the plaintiff was already bound under a contract with the Mills to do. It gave no benefit to the defendants, nor did it cause any detriment to the plaintiff. The High Court held that as per the definition of consideration as given in Sec. 2(d), all that is necessary is that the desire of one party and the action of another must have been induced by the desire and direct benefit from the act. The benefits may go to a third party or not at all to anyone. It is action of the promisor which is the essential element of consideration. In the present case, the defendants promised to gave Rs. 25,000 to the plaintiff and the plaintiff agreed to take delivery of bales was thus at the desire of the defendants to pay Rs. 25,000. Thus, in this way the act formed consideration for the contract. There were mutual promises forming consideration for each other. The defendants were interested in seeing the contract performed because they had guaranteed the contract. This was sufficient benefit. The court further held that the second agreement brings into existence a new contract between different parties and therefore a promise to do a thing, which the promisee is already bound to do, under a contract with a third party can be good consideration to support a contract. There is no authority for the proposition that where there has been a promise to one person to do a certain thing, it is not possible to make a valid promise to another to do the same thing. In Indermal v Ram Prasad (AIR 1970 MP. 40) where a person who had agreed to execute a sale-deed did so only when a third person promised to give him a promissory note for Rs. 30,000, it was held that the promise was for consideration. Decision of the case in question In view of the law discussed above, K can recover Rs. 1,000 from L, as L's promise provides a good consideration to sustain the promise. In the second situation also, J can recover the amount from L. L's promise would be to compensate J for the past voluntary service (Sec. 25, Exception 2). Q.5. What are the main points of difference between the English Law and the Indian Law on the doctrine of consideration? A.5. English Law v Indian Law on Consideration (1) Under the English law, there is a 'privity of consideration', i.e. consideration must move from the promisee only. Under the Indian law, consideration may flow from promisee or any other person, thus there is no privity of consideration.

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(2) Under the English law, a past consideration is no consideration. While under the Indian law, it (past voluntary service) is a good consideration (Sec. 25). (3) Under the English law, for a contract under seal (formal or real contract) no consideration is required, while for a simple contract consideration is required. Under the Indian law, all promises must be supported by consideration except those covered by Sec. 25. Even in the case of negotiable instruments, where the consideration is presumed under Sec. 118 of Negotiable Instruments Act, they would be void if as a matter of fact it is proved that no consideration has passed between the parties. Q.6. K executed a gift-deed of certain immovable property in favour of her daughter C, with a direction to pay to her brother R (the son of maternal uncle of C) an annuity of Rs. 500 for a period of 5 years. Immediately thereafter, C executed an Ikrarnama (agreement) in favour of R agreeing to pay the annuity. Subsequently C declined to fulfil her promise. Can R recover the annuity from C? Will your answer make any difference if there was no Ikrarnama between C and R though C agreed with K to pay the annuity to R? [C.L.C-95] A.6. In India, there is no 'privity of consideration' i.e. consideration may move from any other person than the promisee. In the present case, thus, for an agreement between C and R, the consideration (gift of property) is provided by K. Thus, R can recover the annuity form C (See Chinnaya v Ramaya). If there was no agreement between C and R, though C agreed with K to pay the annuity to R, then the case falls under 'privity of contract'. According to this doctrine, a stranger or third person cannot sue upon a contract between the two parties. However, if the contract benefits a third person (by way of trust or charge or under a family arrangement) then such person can sue upon the contract. Thus in the present case, R can still sue C when there was no agreement between R and C but between C and K. Q.7 Distinguish Consideration from Motive. A.7. Consideration and Motive Consideration should be distinguished from motive or a pious desire to fulfil an obligation. If the consideration is lawful, then the agreement is valid (Union Carbide Corporation v Union of India AIR 1992 SC 248). In Thomas v Thomas (1842) 2 QB 851, a testator had declared in his will that he was desirous that his wife should enjoy certain premises for her life. The executor of the will in consideration of such desire agreed with the widow to convey her, the promises, provided she would pay the sum of £1 yearly towards the ground rent. The court pointed out that the cause for the gift was

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unquestionable respect for the memory of the testator. But a motive should not be confounded with consideration. The agreement was, however, held to be binding as the undertaking to pay the ground rent was a sufficient consideration. The distinction thus drawn between a moral obligation and consideration has been approved by the Madhya Pradesh High Court in Gopal Co. Ltd. v Hazarilal Co. (AIR 1963 MP 37). Q.8. "The legal effects of a contract are confined to the contracting parties" "It is a rule of law that if a person intends to contract with A, B cannot give himself any right under it". Discuss A agrees with B to give a motor car to B's son in consideration of his marrying As daughter. Can B's son sue A on the agreement? A.8. See "Privity of Contract". In the case in question, B's son cannot sue, being not a party to the contract. Moreover, the agreement is in the nature of a dowry, which is forbidden by law. The agreement is thus void under Sec.23. Q.9. There was a contract between X and Y for the carriage of a cargo of goods belonging to Y. There was another contract between X and Z for the unloading of cargo from X's ship. Y's goods were damaged through Z's negligence during unloading. Y claim damages from Z. Z, relying on a clause in the contract between X and Y exempting X from any loss or damage occasioned by the negligence of himself or his servants, declines to pay. Advise Y A.9. The contract which contained the exemption clause against liability was between X and Y and not X and Z and, therefore, Z cannot take the advantage of it against X. Q.10. (a) M, the mother of an illegitimate child, makes a contract with F, father of the child, whereby F agrees to pay to M Rs.200 per month in consideration for maintaining the child. After paying the promised amount for 6 months, F refuses to pay the same and takes the defence that M was performing only the statutory duty to maintain the child and therefore there was no consideration for the promise. Decide. Will your answer be different if M married another person? (b) A wife deserted her husband. He entered into an agreement by which he promised to pay her 30 shillings a week if she would maintain herself and undertake not to pledge his credit. He fell into arrear with the payments, and the wife sued him. He pleaded in defence that there was no consideration for the agreement at that time. Decide. A. 10. (a) Performance of a legal duty is no consideration for a promise. Consideration must be something more than what the promisee is already bound to do. But doing or agreeing to do more than one's legal duty will serve as a consideration.

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In the case in question, the father should be liable [Ward v Byham (1956) 2 All ER 318]. To maintain a person's child has always been recognized as good consideration. It is no doubt true that the mother is herself bound to maintain the child, but statutory maintenance is something different from looking after the child well and keeping him happy. There was no condition in the contract that the father would not be liable if the mother married another person. (b) The undertaking to maintain herself and not to pledge her former husband's credit (i.e. to lead a chaste life) is a good consideration [Williams v Williams (1957)1 All ER 325]. Q.11. "In many cases, the doctrine of consideration is a mere technicality irreconcilable either with business expediency or common sense". "Consideration, offer and acceptance are an indivisible trinity, facets of one identical notion which is that of bargain". Discuss. A.11. The doctrine of consideration has several ill-effects. For instance, the complications caused by the requirement that consideration need not be adequate, but must be valuable; the complications caused by the rules relating to performance of existing contractual duties and the barely flimsy or technical grounds on which the courts have tried to escape the consequences of the rule in Pinnel’s case. Also see the artificial distinction between past voluntary service and past service on request. The doctrine of consideration is too firmly fixed to be thrown by a side wind. Its ill-effects have been largely mitigated of late, but it still remains a cardinal necessity of the formation of a contract. However, no consideration is necessary for the discharge or modification of a contract. Consideration, offer and acceptance are an indivisible trinity, facets of one identical notion which is that of bargain. Indeed consideration may conveniently be explained as merely the acceptance viewed from the offeror's side. Acceptance is defined to be the doing of that act, which is requested by the offeror in exchange for his promise: it is the response to the offer. An act done at the offeror's request in response to his promise is consideration; and consideration in its essence is nothing else but response to such a request. To a gratuitous promise (i.e. gift) the common law notion of offer and acceptance does not apply. The definition of consideration in terms of a "price of the promise" has also been commended by Cheshire and Fifoot. According to them, "it is easier to understand, it corresponds more happily to the normal exchange of promises and it emphasises the commercial character of the English contract" which is that of bargain. The main purpose of a contract being to arrive at a business deal or bargain, the steps by which this is attained may often be indistinguishable.

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4 Capacity to Contract Section 10 of the Contract Act requires that the parties must be competent to contract. Sec. 11 defines who are competent to contract: "Every person is competent to contract who is the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject." Thus minors, persons of unsound mind and persons disqualified bylaw are incompetent to contract.1 The age of the majority is 18, but where a guardian is appointed it is 21. [A] MINOR PERSONS Nature and Effects of Minor's Agreement2 Neither Sec. 10 nor Sec. 11 makes it clear whether, if a minor enters into an agreement, it would be voidable at his option or altogether void. However, after the decision in Mohoribibi case, it is now well settled that a minor's agreement is absolutely void. A minor cannot make a promise enforceable in law (Raj Rani case). The 'specific performance' of a contract (actual carrying out of the contract as agreed) is not possible in the case of an agreement by a minor. ___________ 1. Who are the persons 'not competent to contract'? 2. What is the nature of an agreement entered into by a minor? Discuss the remedies available to the other party in agreements entered into by a minor. [C.L.C-93] Explain the nature of an agreement with a minor with reference to statutory provisions and decided cases. [D. U. 2007]

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The rationale behind is clear: A child may show poor judgment in making a particular contract, and it is a protection against his own ignorance and immaturity - not merely fraudulent manipulation by others - that the law affords. The general presumption that every man is the best judge of his own interests is suspended in the case of children. Thus, law acts as the guardian of minors and protects their rights, because their mental faculties are not mature. It is important to note that the parents or guardian of a minor can contract on behalf of the minor. If the contract is within the competence of the guardian and it is for the benefit of the minor it is specifically enforceable (S. Subrahmanyam v K.S. Rao ILR 1949 Mad 141 PC). The minor will be bound with such contract and could obtain specific performance of the contract. Also, in the modern circumstances of society it does not seem to be possible and much less desirable for law to adhere to the categorical declaration that a minor's agreement is always "absolutely void". Today, minors are frequently involved in contractual transactions e.g. travel, education, shopping, entertainment, etc. A minor's agreement being void, ordinarily it should be wholly devoid of all effects (except where the contract is for the benefit of minor). As there is no contract, all the effects of a minor's agreement must be worked out independently of any contract. (1) No Estoppel against Minor When a minor misrepresents at the time of the contract that he is a major, the question arises - does the law of estoppel contained in Sec. 115, Evidence Act, apply against him, so as to prevent him from alleging that he was a minor when the contract was made? As per Sec. 115: "When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed in any suit or proceeding between himself and such other person or his representative to deny the truth of that thing." It is now well settled that there is no such estoppel against the minor even if he has acted fraudulently. The minor is not estopped from setting up the defence of minority. There can be no estoppel against a statute which has declared a minor's contract to be void (Sadiq Ali Khan v Jai Kishore AIR 1928 PC 152). The policy of the law of contract is to protect persons below the age from contractual liability and naturally the doctrine of estoppel cannot be used to defeat that policy. Further, a procedural rule like estoppel cannot

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overrule a plain provision of law laid down in the Contract Act i.e. a matter of substantive law (Gadigeppa v Balagowda AIR 1931 Bom 561). In Khan Gul v Lakha Singh (AIR 1928 Lah 609), held that the law of estoppel, which is the rule of evidence, is a general law and this has to be read subject to the special law contained in the Indian Contract Act. When the law of contract lays down that a minor shall not be liable upon a contract entered into by him he should not be made liable upon the same contract by virtue of the general rule of estoppel. (2) No Liability in Contract or in Tort arising out of Contract A minor may be liable in tort generally. However, he will not be liable for a tort arising out of contract, for the reason that such liability is an indirect way of enforcing his agreement. Where the tort is independent of the contract the mere fact that a contract is also involved, will not absolve the minor from liability. Thus where an infant borrowed a mare for riding only and not for jumping, he was held liable when he lent her to one of his friends who jumped and killed her [Burnard v Haggis (1863) 4 C BNS 45]. Here the defendant was liable on the ground that the act resulting in injury to the mare was quite outside the contract and could not be said to be an abuse of the contract. In Jennings v Randall (1799) 8 TR 335, on the other hand, where an infant had hired a horse to be ridden for a short journey and took it on a much longer journey, with the result that it was injured, the court held him not liable on the ground that the action was founded in contract, and the plaintiff could not turn what was in substance a claim in contract to one in tort. (3) Doctrine of Restitution English Law. If the minor has unjustly enriched himself, equity demands that such property or goods be restored. The English courts developed the equitable 'doctrine of restitution' to deal with the matter. In Leslie (R) Ltd. v Sheill (1914) 3 KB 607, the court laid down the three main propositions of this doctrine: (i) If an infant obtains property or goods by misrepresenting his age, he can be compelled to restore it, but only so long as the same is traceable in his possession. (ii) Where the infant has sold the goods or converted them, he cannot be made to repay the value of goods, because that would amount to enforcing a void contract. (iii) The doctrine of restitution is not applied where the infant has obtained cash instead of goods, for 'restitution stopped where

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repayment began'. Since it is difficult to identify money and to prove whether it is the same money or different one, the doctrine does not apply to money. In this case, an infant succeeded in deceiving some money-lenders by telling them a lie about his age, and so got them to lend him £ 400 on the faith of his being adult. The court held that infant cannot be compelled to restore the money. The money was paid over in order to be used as the infant's own and he so used it. There is no question of tracing it, no possibility of restoring the very thing got by the fraud. The object of the doctrine of restitution is to restore back the ill-gotten gains taken by the minor, rather than enforcing the contract. If a minor is asked to pay money which cannot be traced and which he no more possesses it would amount to enforcing the (void) agreement. Thus, the cause of action was held in substance ex contractu. Regarding the remedy of equitable restitution, Anson said: "The exact extent of this remedy is the subject of some dispute. It is clear that an infant who obtains property, whether consisting of goods or money or any other security, by means of a false representation of full age, can be compelled to restore that property to the person deceived, provided that is identifiable and still in his possession. It is equally clear that it is impossible to make him repay a loan of money which he has borrowed by such fraud and subsequently spent." Indian Law: The English doctrine of restitution is contained in the Indian law, though with some modifications: (a) Mohoribibi v Dharmodas Ghose3 (1903) 30 Cal 539- In this case, a minor executed a mortgage for Rs. 20,000 and received certain sum from the mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and for the sale of property in case of default. The Privy Council held that an agreement by a minor was absolutely void as against him, thus the mortgagee could not recover the mortgage money nor could he have the minor's property sold under his mortgage. A detailed discussion of the case is as follows: ___________ 3. Explain the law laid down in the case of Mohoribibi v Dharmodas Ghose. [L.C. I-93/95] In Mohoribibi v Dharmodas Ghose, the Privy Council interpreted that an agreement made by a minor is totally void under the Indian Contract Act. Describe the reasons given by the court in arriving at that conclusion. [L.C. I-2003]

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LEADING CASE: MOHORIBIBI V DHARMODAS GHOSE [(1903) 30 Cal 539] In this case, the plaintiff, a minor, mortgaged his house in favour of the defendant, a money-lender, to secure a loan of Rs. 20,000. A part of this amount was actually advanced to him. While considering the proposed advance, the attorney (acting for the money-lender) received information that the plaintiff was still a minor. Subsequently the minor commenced this action stating that he was under-age when he executed the mortgage and the same should, therefore, be cancelled. The relief of cancellation had to be granted as the plaintiff was entitled to it under Sec. 39 of the Specific Relief Act, 1877. The moneylender's only request was for the repayment by the minor of the sum or Rs. 10,500 advanced as part of the consideration for the mortgage. The defendant first relied upon the Sec. 64 of the Contract Act, according to which a person who, having the right to do so, rescinds a voidable contract, he shall have to restore to the other party any benefit received by him under the contract. The court held that this section cannot apply to the agreement of a minor, which is absolutely void. Similarly no relief-was allowed under Sec. 65 of the Contract Act, according to which a party receiving any benefit under a contract shall have to restore it if the contract becomes void or is discovered to be void. The court said that Sees. 64 and 65 starts from the basis of there being a contract between competent parties, while in a minor's case there never was. and never could have been any contract. The question whether a contract is void or voidable presupposes the existence of a contract within the meaning of the Act, and cannot arise in the case of a minor because of his incompetency to contract. Thus a minor's contract is absolutely void.4 The Privy Council observed that under Indian law, a contract by an infant is absolutely void and not as under English law, where it is voidable only. In India, all agreements entered into by minors are of no legal effect whatsoever, and the policy of law appears to be to protect the minors not only from the viles of unscrupulous persons who may choose to deal with them, but also against their actions, however generous or honourable they may be. ___________ 4. The Law Commission of India in its 13th Report recommended that an agreement is void or discovered to be void, even though the invalidity arises by reason of the incompetency of a party to contract. Thus Sec. 65 covers the case of a minor. The recommendation has not been implemented so far.

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The Privy Council also held that it was not necessary to deal with the rule of estoppel in the present case because the statement relied upon is made to a person who knows the real facts and is not misled by untrue statement. Further, it is clear from the Act that a minor is not to be liable even for necessaries supplied to him, and that no demand in respect thereof is enforceable against him by law, though a statutory claim is created against his property (Sec. 68, Contract Act). Finally, the defendant relied upon Sec. 41 of the Specific Relief Act, 1877 (Sec. 33 of 1963), according to which on adjudging the cancellation of an instrument the court may require the party to whom such relief is granted to make any compensation to the other which justice may require. The court, however, said that under the circumstances of this case (the defendant was aware that he was dealing with a minor); considering the provisions for protection of minors in Contract Act and Partnership Act (a minor may be admitted to benefits of a partnership but he can not be made liable for any of its obligations); and, that doctrine of restitution does not cover the cases of money, a minor cannot be made to repay. From this case, it is evident that relief under the Specific Relief Act is discretionary, and the court must be satisfied of the justice in the defendant's case.] (b) Khan Gul v Lakha Singh. LEADING CASE: KHAN GUL v LAKHA SINGH (AIR 1928 Lah 609) (F.B.) In this case, a minor, by fraudulently concealing his age, contracted to sell a plot of land to the plaintiff. He received the consideration of Rs. 17,500 and then refused to perform his part of the bargain. The plaintiff sued the defendant minor for delivery of the possession of the plot, or in the alternative, for a decree for recovery of the amount along with interest. The defendant minor pleaded minority to avoid the contract. The issue arose whether a minor can be made to repay, as the English doctrine of restitution does not cover the cases of money. The court observed that the doctrine of restitution finds expression in Sec. 41 of the Specific Relief Act. The statute, however, nowhere says that pecuniary compensation should not be allowed, when the award thereof would tantamount to a repayment of money borrowed on the strength of void transaction. The courts in India have ordered the minor to refund the money received by him before

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allowing him to recover the property sold or mortgaged to the other party. Thus, the doctrine of restitution would not be of any help unless it was extended in India to cover money cases also. The learned Chief Justice, Sir Shadilal, found sufficient reason for the extension as he said: "There is no real difference between restoring the property and refunding the money, except that the property can be identified but cash cannot be traced ... It must be remembered that, while in India all contracts made by infants are void, there is no such general rule in England. There should therefore be a greater scope in India than in England for the application of the doctrine of restitution. The doctrine rests upon the salutary principle that an infant cannot be allowed by a court of equity to take advantage of his own fraud. A false representation by an infant that he was of full age gives rise to an equitable liability." The court (Shadilal, C.J.) observed that the grant of such a relief is not an enforcement of the contract, but a restoration of the state of affairs as they existed before the formation of the contract (status quo ante). The court, while giving this relief, has not look at the contract to give effect to any of the stipulations contained therein. Indeed the relief is granted not because there is a contract which should be enforced but because the transaction being void does not exist and the parties should revert to the condition in which they were before the transaction. Thus, the court relied upon the equitable jurisdiction of the court to order restitution of Rs. 17,500 to the plaintiff. It may be noted that Sec. 41 of the Specific Relief Act is applicable only when the minor himself invokes the aid of the court (i.e. when minor is a plaintiff); while in the present case he is a defendant. The court held that the equitable jurisdiction of the court rests purely upon the principles of justice, whether the quondam infant is a plaintiff or a defendant.] (c) Ajudhia Prasad v Chandan Lal (AIR 1937 All 610) (F.B.) - In this case, Sulaiman CJ refused to follow the enlarged view of restitution made in Khan Gul case. His Lordship felt that the courts in India were probably bound by the principle of restitution as explained in Leslie case. Where a contract of transfer of property' is void, and such property can be traced, the property belongs to the promisor and can be followed. There is every equity in his favour for restoring the property to him. Where the property is not traceable and the only way to grant compensation would be by granting a money decree against the minor, decreeing the claim would be almost

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tantamount to enforcing the minor's pecuniary liability under the contract which is void ... There is no rule of equity, justice and good conscience which entitles a court to enforce a void contract of a minor against him under the cloak of restitution. (d) Gokeda v Bhimayya (AIR 1956 AP 182) - In this case, a minor by fraudulently representing his age obtained Rs. 2,500 on promissory notes. The Andhra Pradesh High Court followed the Ajudhia case, and refused to grant a money decree against a minor. Subba Rao C) said: A person, who had parted with his goods can trace them into the hands of the quondam minor and recover them back in specie, for he has not lost his title to them. But he cannot seek to recover their price or damages, for, if allowed to do so, the court would be enforcing the contract of loan. (e) Sec. 33, The Specific Relief Act, 1963 clears the position5- The Law Commission of India (9tn Report) preferred the view enunciated in Khan (Jul case and accordingly the controversy has now been set at rest by the new Specific Relief Act, i 963. The principle of restitution is contained in Sec. 33 of the new Act: (1) Where a void or voidable contract has been cancelled at the instance of a party thereto (i.e. minor goes to the court as plaintiff for cancellation of contract), the court may require him to restore such benefits as he has received under the contract and to make any compensation to the other party which justice may require. (2) Where the minor is defendant in a case and he resists the enforcement of the suit on the ground that he is incompetent to contract, the court may ask him to restore such benefits to the other party, to the extent he or his estate has benefited thereby (Clause b). (Note: Sec. 41 of the old Relief Act applied only when the minor was the plaintiff). The object of sub-sec. (1) is to restore the parties to their original position, as far as possible. It incorporates the principle that he who seeks equity must do equity. But the court will not compel any restitution by a minor even if he is a plaintiff, where the other party was aware of the infancy so that he was not deceived (Bhim Mandal v Mange Raw AIR 1961 Pat 21), ___________ 5. Discuss the effect of the provisions of the Specific Relief Act with regard to agreements entered into by minors. What is the court's power to order restitution in case a minor fraudulently receives advantages under a contract but later pleads the defence of minority?

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or where the other party has been unscrupulous in his dealings with the minor (Md. Said v Bishamber Nath AIR 1924 All 156), or where, though the minor has misrepresented his age, the other party was so zealous to enter into the transaction that the false representation exerted no influence on him (K. Mungall v Mahadavan AIR 1939 Rang. 545) or where the other party lays no material before the court for coming to the conclusion that justice requires return of the money paid to the minor [Kanta Prasad Singh v Sheo Gopal (1904) 26 All 342]. In all these cases, the minor had committed no fraud and, therefore, he was allowed to recover the property sold without restoring the consideration obtained by him. While Sec. 33(1) has not changed the earlier law, Sec. 33(2)(b) has made the difference. Through sub-sec. (2) the parties are tried to be put to the pre-contract position. Moreover, compensation in terms of money (excluding interest) is also permitted. A minor (as a defendant) can be compelled to account for such portion of money or anything else received by him as has gone to benefit him personally, such as education or training, or has resulted in an accretion to his estate (viz. buying the assets, or deposit in bank account). The phrase 'estate has benefited' means some permanent benefit as opposed to a transient one (viz. entertainment, eating, gifts to friends, etc.). Thus money spent by the minor on watching a film cannot be said to benefit his estate. Sec. 33(2)(b) implies that the rule of English law laid down in Leslie v Sheill is not applicable in India, as the doctrine of restitution extended to money matters in India. Beneficial Contracts The meaning of the proposition that an infant is incompetent to contract or that his contract is void is that the law will not enforce any contractual obligation of an infant. The decision in Mohoribibi case is confined to cases where a minor is charged with obligations and the other contracting party seeks to enforce those obligations against him. Accordingly, a minor is allowed to enforce a contract, which is of some benefit to him and under which he is required to bear no obligation. A minor is not debarred from accepting a benefit. Incapacity to contract does not preclude the capacity for legal rights. The rationale behind it is: "The provision of law which renders minors incompetent to bind themselves by contract was enacted in their favour and for their protection, and it would be a strange consequence of this legislation if they are to take nothing under transfers in consideration of which they have parted with their money. In cases where consideration passes from a third party, or when it passes from the minor, the minor can enforce the promise of an adult promisor" (Raghava/ Chariar v Srinivisa AIR 1917 Mad 630) (F.B.). A minor will have the option of retiring from a beneficial contract on attaining majority.

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The following are the instances of contracts beneficial to a minor: (i) If a minor has advanced the whole of the mortgage money and there is a mortgage in his favour, he can sue for enforcement of the contract. Thus, where a minor has already given the full consideration to be supplied by him he is entitled to enforce the contract (Raghava Chariar case). In the aforesaid case, the court observed that there is nothing in the Contract Act which prevents an infant from being a promisee; on the other hand, the provisions contained in the Act as regards minor partners, minor agents, and in the Negotiable Instruments Act as to minor drawers and endorsers suggest that the Indian Legislature recognized the capacity of the minor to accept a promise. It may be noted that where the consideration is still to be supplied by the minor, he cannot enforce the contract (see Raj Rani case, below). (ii) Similarly, a minor can sue on a Promissory Note executed in his favour. An infant may become a promisee (Sharfath Ali v Noor v. AIR 1924 Rang. 136). (iii) A minor can recover insurance money when on his behalf the goods were insured. (iv) For the same reason if a contract is made on behalf of a minor by his guardian having competence to do so, and, for the benefit of the minor, the minor is entitled to sue on the contract. However, such contract can also be specifically enforced against the minor. Thus, where the father of the minor had incurred certain debts and by a written agreement the minor through guardian and mother agreed to sell the lands in suit to the appellants, held that the contract was binding upon the minor (Subramanyam v Subha Rao AIR 1948 PC 25). (v) A minor is capable of purchasing immovable property and he may sue to recover the possession of the property purchased upon tender of the purchase money. (vi) A contract for the marriage of a minor is also prima facie for his or her benefit. However, an agreement to marry in future entered into by a minor has been held void (Ma Pwa We v Maung Hmat Gyi AIR 1939 Rang. 86). But, it has also been held that (taking into account the custom of the parties' communities and laws as to marriage) the contract of marriage could be enforced against the other contracting party at the instance of the minor, though it cannot be enforced against the minor (Khimji Kuverji v Lalji AIR 1941 Bom. 129).

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(vii) A minor can also be supplied with "necessaries suited to his condition in life" (e.g. food, lodging, education) and the supplier of such necessaries is entitled to be reimbursed from the property of the minor. However, a minor is not personally liable for necessaries. Therefore, a minor cannot be declared insolvent. (viii) A minor is bound by the contract of apprenticeship under the Indian Apprenticeship Act, 1850. Under English law, infant is bound by the contract of apprenticeship as well as contract of service because such contracts are beneficial to him and help him in earning his livelihood. (ix) A minor cannot be a partner in a partnership firm, but under Sec. 30 of the Indian Partnership Act, he can be admitted to the 'benefits of partnership'. The minor shall not share losses except when liability to third parties has arisen but then too up to his share in the partnership assets; he cannot be made personally liable. The following contracts are not binding on a minor: v (i) A lease to a minor is void. (ii) When an infant has paid for something and has consumed or used it (e.g. furniture), it is contrary to natural justice that he (the minor) should recover back the money he has paid. (iii) Unlike English law, contracts of service entered into by a minor are void in India. (iv) Trade contracts are not included in beneficial contracts. Thus when a minor, while carrying on business, enters into a trade contract such contract will not be binding on him. It is important to note that the law does not regard a minor as incapable of accepting a benefit, but only when he has already given the full consideration to be supplied by him and there is nothing that remains to be done by him under the contract. He is now a mere promisee and prays the court for recovering the benefit stipulated. But where the contract is still executory or the consideration is still to be supplied, the principle of the Mohoribibi case will thwart any action on the contract. It may be noted that the parents of a minor are not liable for agreements made by a minor, whether the agreement is for the purchase of necessaries or not. The parents can be held liable only when the minor is contracting as an agent for the parents. Where a minor and an adult jointly enter into an agreement with another person, the minor has no liability but the contract as a whole can be enforced against the adult [Jamna Bai v Vasanta Rao (1916) 39 Mad 409 (PC)]. A minor can be an agent, but the liability will be of the principal. A minor cannot be adjudicated an insolvent, for he is incapable of contracting debts.

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LEADING CASE: RAJ RANI v PREM ADIB6 (AIR 1949 Bom 215) In this case, the father of Raj Rani, who was a minor, entered into a contract on her behalf with Prem Adib, a film producer. According to the contract, Raj Rani was to act as a film actress on payment of a certain amount. Raj Rani was not given any work. She sued the producer for the breach of contract. The Bombay High Court held that neither she nor her father could have sued on the promise. If it was a contract with the plaintiff, she being a minor, it was a nullity. If it was a contract with her father it was void for being without consideration. The promise of a minor girl to serve, being not enforceable against her (a minor cannot make a promise enforceable in law), cannot furnish any consideration for the defendant's promise to pay her a salary. If the plaintiff had been a major, such promise would have formed good consideration. Desai, J. opined that a contract of service made by the father of a minor is not a contract which the minor is entitled to sue, on the ground that it is for his benefit, where the contract is executory and the full consideration payable by or on behalf of the minor is not paid. He added: "The contract of personal service does not stand on the same footing as the contract of apprenticeship or a marriage contract of a minor. If the agreement was of apprenticeship or of marriage, then the minor girl could sue for breach of contract. The contract of apprenticeship entered into by the guardian is protected by the Apprentices Act, 1850, but no such exception is made in the contracts of service. I realize that as a result of this judgment minors may lose the benefit of contracts of service which have been considered so beneficial to them as to be put in the category of necessaries. I am, however, not concerned with the policy of the legislation under which all contracts of minors were made void and therefore unenforceable by or against the minor." In English law, contracts of service and apprenticeship are put on the same footing and in the same category as contracts for necessaries. In Roberts v Gray (1913) 1 KB 520, the defendant, an ____________ 6. The guardian of a minor girl executed an agreement with a film producer for girl's acting in a T.V. serial. The film producer gave no work to the girl in that T.V. serial. Can she file a suit for breach of contract? Will your answer be different if the guardian had entered into an apprenticeship agreement for minor daughter instead of acting in a T.V. serial? [C.LC. -95] (Note: If the agreement was of apprenticeship, then the minor girl could sue for breach of contract.)

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infant, agreed with the plaintiff, a noted billiard player, to join him in a billiard-playing tour of the world. The plaintiff spent time and money in making arrangements for matches, but the defendant repudiated the contract. The plaintiff succeeded in recovering damages for the breach of the contract. The contract was held to be one for necessaries as it was for the infant's good teaching or instruction whereby he may profit afterwards. Desai J. suggested that "though according to English law the minor would be liable in the case of a contract of service where the contract was for his benefit, it is clear that under Sec. 11, the minor's contract being void, the minor would not be held liable. Further, a contract of marriage is not void for want of consideration as contract of service by minor is. The only consideration for a marriage contract is the promise of father that minor will fulfill his contract, while in a contract of service, what the other party relies upon is the promise of minor to serve. In a contract of service, it is the employer and not the minor who is seriously prejudiced ... as in Indian law, the contract being void, the minor is at liberty to take up service on better term, even while his first contract remains unfulfilled."] Ratification of the Minor's Agreement A person cannot on attaining majority ratify an agreement made by him during his minority. Ratification relates back to the date of the making of the contract and, therefore, a contract, which was then void, cannot be made valid by subsequent ratification and on that a suit cannot be maintained (Gobind Ram v Piram Ehitta AIR 1935 Lah 561). If it is necessary, a fresh contract should be made on attaining majority. And a new contract will also require a fresh consideration. In Suraj Narain v Sukhu Aheer (AIR 1928 All 440) (F.B.), it was held that a minor when he attained majority could not take upon himself a liability which from the point of view of law, never really existed. In this case, a person borrowed some money during his minority by executing a promissory note and then made a fresh promise by executing a second bond, after attaining majority, to pay that sum plus interest thereon. Held that the consideration received by a person during his minority cannot be called consideration within the meaning of Sec. 2(d), and there is no question of that consideration being considered valid for a fresh promise. No doubt under Sec. 2, a past consideration may be a good consideration, but that past consideration must be an existing one and a valid one. The promisor, therefore, could not be made liable in respect of such a promise. In the aforesaid case, the court also held that where, in addition to the consideration already given during minority, a further advance is made or a

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fresh consideration given after majority, a promise to pay the whole of the amount becomes binding. There is no question of ratification in such cases. A person can always make a fresh promise after attaining majority in terms of the promise made during minority. All that is necessary is that there should be some fresh consideration for it. It has been held that a person after attaining majority may elect to pay a debt incurred by him during his minority. However, if he does so, he cannot subsequently bring a suit for refund of that amount because a contract entered into by a minor, though void, is not unlawful (Anant Rai v Bhagwan Rai AIR 1940 All 12). [B] PERSONS OF UNSOUND MIND According to Sec. 12, "a person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when: he is of unsound mind." Illustrations: (a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals. (b) A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts. In Inder Singh v Parmeshwardhari Singh (AIR 1957 Pat 491), a property worth about Rs. 25,000 was agreed to be sold by a person for Rs. 7,000 only. His mother proved that he was a born idiot incapable of understanding the transaction. The court held sale to be void. The court observed: "According to Sec. 12, the person entering into a contract must be a person who understands what he is doing and is able to form a rational judgment as to whether what he is about to do is to his interest or not. The crucial point, therefore, is to find out whether he is entering into the contract after he has understood it and has decided to entering into that contract after forming a rational judgment in regard to his interest... It does not necessarily mean that a man must be suffering from lunacy to disable him from entering into a contract. A person may behave in a normal fashion, but at the same time, he may be incapable of forming a judgment of his own ... In the present case (he) was incapable of exercising his own judgment."

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Illustration (b) to Sec. 12 shows that a delirious or drunken person is in the same category as a person of unsound mind. Under English law, a person of unsound mind is competent to contract, although he may avoid his contract if he satisfies the court that he was incapable of understanding the contract and the other party knew it. The contract is voidable at his option. An agreement by a person of unsound mind is absolutely void as against him but he can derive benefit under it. Further, the property of an insane person is always liable for necessaries supplied to him or to any one whom he is legally bound to support. In R. Lingaraj v Parvathi (AIR 1975 Mad 285), it was observed that the court must keep in view the distinction between mere weakness of intellect on one hand and 'lunacy' on the other as understood in the Indian Lunacy Act, 1912, Under that Act, a person of unsound mind is one who is totally unsuited to manage himself and his affairs due to the incapacity of his mind. The unsoundness of mind has reference to a mental condition which falls outside the range of the wide spectrum of mental caliber ranging from nincompoop to genius. In the present case, the appellant was not held to be a person of unsound mind as he was able to give relevant and rational answers to simple questions put to him. The court held: A capacity of a person to manage himself and his affairs may vary from person to person, but the total incapacity which alone would justify a court finding a person to be of unsound mind is wholly different from the inadequate ability of a person to look after himself and his affairs according to accepted norms and standards and by no stretch of imagination, bequeathed with incapacity following from unsoundness of mind. In Rajinder Kaur v Mangal Singh (1987) 91 PLR 444, it was held that a mere simplicity of mind or being of weak intellect would not mean that a person is idiot or of unsound mind. It is the duty of the court ultimately to record its opinion as to whether the person in question is lunatic or of unsound mind and in doing so while the opinion of the experts is to be given weight the court is not to give up its duty to decide. [C] DISQUALIFIED PERSONS The third type of incompetent persons, as per Sec. 11, are those who are "disqualified from contracting by any law to which they are subject". Thus alien enemies, foreign sovereigns and ambassadors, convicts, married women (with respect to their husband's properties), insolvents in certain cases, and joint-stock companies and corporations incorporated under a special Act (like L.I.C., U.T.I.).

Page 102 Law of Contract FURTHER QUESTIONS Q.1 (a) "Lack of capacity goes to the root of the contract and invalidates it completely." Discuss. [C.C.C95; L.C.I.-95] What is the legal effect of an agreement by a minor. (b) M lends a type-writer to N, an infant, for typing practice for a period of six months. It was agreed that N would pay monthly hire charges of Rs: 50. At the end of six months, N refuses to pay the hire charges or to return the type-writer. Suppose N had sold the type-writer, spent half of the price he could get for the type-writer on entertaining his friends and deposited the remaining amount in his bank account, how would you advise M? [C.L.C-95] Raju, a wealthy minor aged 17, misrepresents to Shyam that he is a major and then borrows Rs. 3,000 from him. With the money Raju purchases a radio costing Rs. 1,500 and he spends the balance in eating and drinking. Has Shyam any remedy against Raju? Discuss. [L.C.I. -95] A.1.(a) According to Sec. 10 of the Contract Act, the parties must be competent to contract. According to Sec. 11, the minors, persons of unsound mind and persons disqualified by law are incompetent to contract. In other words, these persons lack the capacity to contract. The question arises whether the lack of capacity invalidates the contract completely? Neither Sec. 10 nor Sec. 11 makes it clear whether, if a minor enters into an agreement, it would be voidable at his option or altogether void. However, after the decision in Mohoribibi case, it is now well-settled that a minor's agreement is absolutely void. There never could have been any contract in the case of a minor. Similarly, a contract with a person of unsound mind is absolutely void, under Sec. 12. The rationale behind is clear: A child may show poor judgment in making a contract, and it is a protection against his own ignorance and immaturity that the law affords. Similarly, a person of unsound mind while entering into a contact may not understand what he is doing and may not able to form a rational judgment as to whether what he is about to do is to his interest or not. As there is no contract, all the effects of a minor's agreement must be worked out independently of any contract. In view of the doctrine of restitution contained in Sec. 33 of the Specific Relief Act, 1963, a minor may be required to restore such benefit as he has received under the contract, to the other party.

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However, in the case of a minor, if the contract is within the competence of the parent or guardian and it is for the benefit of the minor, it is specifically enforceable. Thus the meaning of the proposition that an infant is incompetent to contract or that his contract is absolutely void is that the law will not enforce any contractual obligation of an infant. A minor is not debarred form accepting a benefit. Thus a minor can sue on a Promissory Note executed in his favour. If a minor has advanced mortgage money and there is a mortgage in his favour, he can sue for enforcement of the contract. Thus, the proposition that the lack of capacity goes to the root of contract and invalidates it completely is subject to the equitable doctrine of restitution contained in Sec. 33 of the Specific Relief Act, and the beneficial contracts, in the case of a minor. Further, an agreement by a minor, though void, is not unlawful. (b) A minor's contract is absolutely void and no contractual obligations can be enforced against him. The recovery of hire charges would amount to enforcing the void contract, thus M cannot recover them. But M can recover back the possession of his type-writer because that would be outside the scope of the contract. If N had sold the type-writer, then under Sec. 33(2)(b) of the Specific Relief Act, 1963, M can recover such money from N as has benefited him personally or his estate (in view of the equitable doctrine of restitution). The benefit to the minor should be a 'permanent' one, thus money spent on entertainment, drinking, eating, etc. cannot be said to benefit him or his estate, but the money spent on education, training, buying the assets can be. Thus M can only recover half the amount from sale proceeds of the type-writer which are in the bank on the ground that they benefit the estate of N. Decision of the second case Shyam can recover Rs. 1,500 spent by Raju in purchasing a radio, as it is a benefit to Raju's estate. However, Shyam cannot recover the balance spent by Raju in eating and drinking. Q.2.(a) Rohit executed a promissory note in favour of Mohit for Rs. 10,000 on 8 August 1993. Rohit was a minor at the time of execution but he made a false representation to Mohit that he was major and obtained money under the promissory note. Later Rohit refused to pay; Mohit filed a suit for recovery of Rs. 10,000 under the said promissory note. Rohit took the defence that the promissory note was not enforceable as he was a minor on the date of execution. Can Mohit recover the amount? Decide with the help of relevant case law. [C.L.C-94] (b) Discuss the remedies available to Mohit in the light of the law as it existed before 1963 and after 1963.

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A.2. (a) For the case-law, please see the text. According to Sec. 33 (2)(b) of the Specific Relief Act, 1963, where the minor is defendant in a case and he resists the enforcement of suit on the ground that he is incompetent to contract, the court may ask him to restore such benefits to the other party, to the extent he or his estate has benefited thereby. Under this section, compensation in terms of money is also permitted. Thus, in the present case, Rohit can be required by the court to restore the money (to the extent to which he or his estate has been benefited) to Mohit. (b) If the promissory note was executed before 1963, Mohit could not have recovered the said amount as doctrine of restitution did not apply to cash and Sec. 41 of the Specific Relief Act, 1877, was applicable only when the minor was the plaintiff. In the present case, the minor was the defendant. If the promissory note was executed after 1963, Sec. 33(2)(b) of the Specific Relief Act, 1963 applies and the court can order restoration of the money to the extent it has benefited Rohit's estate. Q.3. MB, a money lender, lends Rs. 40,000 to a minor for mortgaging his (minor's) house on the basis of a representation that he was a major (the minor fraudulently concealed the fact from MB that a guardian had been appointed by the court for his property). Out of this amount, Rs. 21,000 is spent by the minor for purchasing a two-wheeler scooter and Rs. 19,000 is spent on entertaining his friends in a Five-star Hotel. On minor's failure to pay back the borrowed amount, MB files a suit for recovery of Rs. 55,000 (inclusive of interest). The defendant pleads that the contract was void because of his minority. Discuss whether: (a) The minor is estopped from pleading his minority; (b) MB can seek the refund of money under Sec. 64 or 65 of the Contract Act; (c) MB can at all seek some relief. [D.U.-2009][L.C.II-95l Will your answer be different if MB lent the amount without making any further inquiry? What will be the position if the minor invests the borrowed sum with a limited company, and the said company went into liquidation and the minor's entire investment is lost? [D.U.-2008] [L.C.II-94] A.3. The minor cannot be estopped from pleading his minority. MB cannot seek refund of money under Sec. 64 or 65 of the Contract Act (Mohoribibi case) but under Sec. 33(2)(b) of the Specific Relief Act, 1963, and the doctrine of restitution contained therein. Under Sec. 33(2)(b), the minor is liable to return money which benefits him personally or his estate; the benefit should be a permanent one (e.g. education, buying of assets, etc.) and not temporary (e.g. entertainment). Now, in the present case: _ purchasing a two-wheeler scooter is a benefit to minor's estate, thus Rs. 21,000 spent on it is recoverable,

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_ entertaining the friends in a hotel is not a permanent benefit to the minor, thus Rs. 19,000 spent on it is not recoverable. _ the interest on the borrowed sum is not recoverable, as a minor is accountable only for such portion of money as has gone to benefit him or his estate. Thus, MB can only recover Rs. 21,000 from the minor. Second part of the question It was pointed out by the Privy Council in Mohoribibi case that no liability arises towards a lender who is too careless in advancing money to a minor. Sec. 33(1) of the Specific Relief Act, 1963 also lays down the similar principle. Third part of the question When a minor loses the money to a limited company, there occurs no benefit to him (even though he intended to benefit from such investment and the benefit might have resulted but for the liquidation of company). Thus the minor cannot be made accountable in such case. Q.4. Boby aged 17 ½ years sold his house to Panna for Rs. 1.5 lacs. Subsequently, Boby refused to give the possession of the house to Panna on the ground that the sale is not binding on him as he was minor at the time of selling the house. Can Panna obtain possession of the house from Bobby? Has Panna any other remedy against Bobby? [L.C.II 93] [D.U. 2007] A.4. Panna cannot obtain possession of the house form Bobby, as it would amount to enforcing a contract against the minor which is impermissible under the Contract Act. However, Panna can recover his money from Bobby under Sec. 33(2)(b) of the Specific Relief Act, 1963. Q.5. A, aged 20 years, is a candidate for the D.U.S.U. election, 1998. He purchases, after representing himself as a 'major', 100 quintals of paper, on credit, from B for printing of posters for the purpose of his election. A, later on, refused to make the payment to B on the ground that the agreement is 'void' as a legal guardian had been appointed for him before he attained the age of 18 years. B argued that he can claim a relief under Sec. 68 of the Contract Act and/or by virtue of the 'Doctrine of Restitution'. Decide. [C.L.C.-98] A.5. B cannot recover under Sec. 68 of the Contract Act, as standing at the student's election by a minor cannot be said to be a 'necessary of life'. Likewise, B cannot recover under the 'Doctrine of Restitution', as there is no permanent benefit to the minor personally or to his estate by the printing of posters.

Page 106 5 Free Consent Consent and Free Consent1 A mere consent is not enough for a valid contract. One of the essentials of a valid contract mentioned in Sec. 10 is that the parties should enter into the contract with their free consent. Sec. 13 defines consent as: 'Two or more persons are said to consent when they agree upon the same thing in the same sense' i.e. consensus ad idem. In other words, there must be real consent, in the absence of which there is no contract formed. When there is no consent, the agreement is void. However, in certain cases there is real consent, but one of the parties has given his consent not out of his free will but due to factors in the absence of which he might not have given his consent. Consent so given is said to be not free. In such cases, the contract is voidable. According to Sec. 14, consent is said to be free when it is not caused by(1) coercion (Sec. 15), or (2) undue influence (Sec. 16), or (3) fraud (Sec. 17), or (4) misrepresentation (Sec. 18), or (5) mistake, subject to the provisions of Secs. 20, 21 and 22. Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake. ___________ 1. Write a short note on 'Difference between the consent and free consent'. [D.U.-2009] [L.C.II-95] Explain the meaning of 'free consent' as an essential element of a valid contract and enumerate the factors vitiating 'free consent'. [I.A.S. 2007]

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Where consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. 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 is not enforceable at the option of either party. Examples of No free consent (i) A threatens to shoot 6, if B does not agree to sell his property to A at a stated price. B's consent has been obtained by coercion. (ii) A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services, B employs undue influence. (iii) 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 i.e. a case of fraud. (iv) 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 to the purchaser. The contract is vitiated by misrepresentation. (v) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void on account of mistake. [A] COERCION An agreement to which the consent is caused by coercion is voidable at the option of the party whose consent was so caused. According to Sec. 15, consent is said to be caused by coercion when it is obtained by pressure exerted by either of the following techniques- (i) committing or threatening to commit any act forbidden by the Indian Penal Code, or (ii) unlawfully detaining or threatening to detain any property. The explanation to the section says that "it is immaterial whether the I.P.C. is or is not in force in the place where the coercion is employed."

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Illustration: A, on board an English ship on the high seas, causes B to enter, into an agreement by an act amounting to criminal intimidation under I.P.C. A afterwards sues B for breach of contract at Calcutta. A has employed coercion, although his act is not an offence by the law of England and although Sec. 506, I.P.C. was not in force when or where the act was done. A clear illustration of coercion would be consent obtained at the point of pistol, or by threatening to cause hurt, or by intimidation. In Chikham Amiraju v Chikham Seshamma (1912) 16 IC 344, a Hindu by threat of suicide induced his wife and son to execute a release in favour of his brother in respect of certain properties. Held that me threat of suicide amounted to coercion within Section 15. Where a young widow agreed to adopt a boy under the threat that her husband's body would not be removed unless she consented to the adoption, it was held to be a case of coercion [Ranganayakamma v Alwar Setti (1889) 13 Mad. 214]. Similarly, where an agent refused to handover the books of a business after the expiry of his term unless the principal gave him the release from all liability in respect of agency, held that release deed was not enforceable [Muthia v Karrupan (1927) 50 Mad. 786]. Where a contract was made to avoid the threatened prosecution, this was held to be no coercion [Askari Mirza v Bibi Jai Kishori (1912) 16 IC 344]. To threaten a criminal prosecution is not per se an act forbidden by I.P.C. Such an act could be so forbidden if it amounted to a threat to file a false charge. Threat to strike is no coercion, because the strike may be a lawful weapon for collective bargaining. Similarly, when a contract is made under a statutory compulsion, there is no coercion. Duress under English Law The term 'duress' in English law is narrower than the term 'coercion' as defined in Sec. 15. Under Common law, duress consists in actual violence or threat of violence to a person. It only includes fear of loss to life or bodily harm, and not to his goods, unlike Sec. 15 of the Indian Contract Act. Further, in England duress should proceed from a party to the contract and also should be directed against the party to the contract himself, or his wife, child, or near relative. In India, coercion may proceed from a person who is not party to the contract, and it may also be directed against a person who, again may be a stranger to the contract. Thus if P unlawfully detain Q, R's friend, and thereby obtains R's consent to the contract, it would amount to coercion.

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[B] UNDUE INFLUENCE2 According to Sec. 16(1), where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and uses that position to obtain an unfair advantage over the other, there is said to be undue influence. According to clause (2), a person is said to be able to dominate the will of another (a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other, or (b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. According to clause (3), where a person who is n a position to dominate the will of another enters into a contract with him, ant the transaction appears, on the face of it or on evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. Meaning of Undue Influence3 (Clause 1) Undue influence is said to be a subtle species of coercion or fraud whereby mastery is obtained over the victim's mind, by insidious approaches and seductive artifices. Sometimes the result is brought about by fear, coercion, or other domination (viz. unfair moral pressure) calculated to prevent expression of the victim's true mind. As was said in England by Lindley, L.J.: "The equitable doctrine of undue influence has grown out of, and been developed by, the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud." Illustrations (a) A, having advanced money to his son, B, during his minority, upon B's coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. ___________ 2. Discuss the essential ingredients of 'undue influence'. [L.C.II-95] [D.U. 2007] When is a contract said to be induced by 'Undue Influence'? Explain the proper mode of considering a case of undue influence with the help of case law. What would the consequences if the court finds that consent to an agreement is caused by undue influence? [D.U.-2008/2009] [L.C.I-97/98] 3. Outline the nature of undue influence in the law of contract. [I.A.S-93]

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(b) A, a man enfeebled by disease or age, is induced by B's influence over him as his medical attendant to agree to pay an unreasonable sum for his professional services. B employs undue influence. Undue influence depends upon the existence of a relationship between two parties which, while it continues, causes one to place a confidence in the other which produces a natural influence over the one which that other abuses to his own advantage. This is aptly explained in Tate v Williamson (1866)2 Ch.App. 55: "Wherever two persons stand in such a relation that while it continues, confidence is necessarily reposed by one and the influence which necessarily grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position, will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation had existed." For example, where spiritual adviser (guru) induced the plaintiff, his devotee, to gift to him the whole of his property to secure benefits to his soul in the next world, the consent is said to be obtained by undue influence [Mannu Singh v Umadat Pandey (1890) 12 All 523]. Where a son forged his father's signature on several promissory notes and paid them into his banking account and on the discovery of truth, the bank manager threatened prosecution of the son, and the father to avert this threat gave an equitable mortgage to the bank on his property, it was held that the bank took unfair advantage of the situation of the other and used undue influence to force an agreement from the father. The court observed that the fears of the father were stimulated and operated on to an extent to deprive him of free agency [Williams v Bayley (1866) LR 1HL 200]. Mere statutory compulsion is not to be regarded as undue influence (Andhra Sugars Ltd. v State of A.P. AIR 1968 SC 599). Relations which involve Domination (Clause 2) In all cases where there is active trust and confidence between the parties or the parties are not on equal footing, it can be said that one party is able to dominate the will of the other. A person in authority is definitely able to dominate the will of the person over whom the authority is held. The authority may be real or apparent. An employer may be deemed to be having authority over his employee, an income-tax authority over the assessee, a police or judicial officer over the accused, etc. Fiduciary relationship means a relationship of confidence and trust. When one person reposes confidence in the other it is hoped that the same will not be betrayed. Examples of fiduciary relationship are solicitor and

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client, trustee and beneficiary, spiritual adviser and devotee, medical attendant and patient, parent and child, husband and wife, creditor and debtor, master and servant, etc. The relationship of trust and confidence presents a very good opportunity to the person in whom confidence is held to exploit it to his own use. In Moody v Cox (1917) 2 CH 71, it is rightly observed: "But there are certain relations and certain contracts in which a higher duty is imposed upon the parties and they must not only tell the truth, but they must tell the whole truth so far as it is material. Those cases are cases where the relation is such that there is confidence reposed by one party and influence exercised by the other." A person is said to be in distress when his mental capacity is temporarily or permanently affected. Such a person is easily persuaded to give consent to a contract, which may be unfavorable to him. In Ranee Annapumi v Swaminatha (1910) 34 Mad. 7, a poor Hindu widow, who was in great need of money to establish her right to maintenance, was persuaded by a moneylender to agree to pay 100 per cent rate of interest. This is a clear instance of undue influence being exerted upon a person in distress. However, as noted below, an urgent need of money in itself is not sufficient evidence of mental distress. Where the father of the defendant (25 years of age) helped him in establishing his profession but put before him an unpleasant alternative of marrying the girl of his (father's) choice and receiving financial assistance or of not marrying the girl and receiving no such assistance, it was held that placing of this alternative before the defendant did not amount to undue influence (Rehana Khatun v Iqtidar Uddin). Undue influence by a person, who is not a party to the contract, may make the contract voidable. In other words, it is not necessary that the person in a position to dominate the will of the other party must himself be benefited. It is sufficient if the third person in whom he is interested is benefited (Chinnamma v Devenga Sangha AIR 1973 Mys 338). Presumption of Undue Influence4 (Unconscionable or Catching Bargains) (Clause 3) Whether a transaction is vitiated on the ground of undue influence is primarily a question of fact. Sec. 16(3) does not lay down any rule of law ___________ 4. On whom lies the burden of proving that undue influence has vitiated free consent in a contract? What is the rule regarding the shifting of that burden of proof? [L.C.I-97/98] How a plaintiff who seeks relief on this ground should proceed to prove his case and when a defendant is called upon to show that Contract was not induced by undue influence. [D.U. 2007]

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but lays down a rule of evidence. According to clause (3), where a person who is in a position to dominate the will of another enters into a contract with him, and the transaction appears, on the face of it or on evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. Ordinarily it is for the plaintiff to prove that his consent was not free i.e. he has to prove that the defendant had a dominant position and the defendant actually did influence him - both the conditions laid down in Sec. 16(1) have to be satisfied. But in certain cases, presumption of undue influence is raised i.e. once it is shown that the defendant was in a position to dominate the will of the plaintiff it will be presumed that he must have used his position to obtain an unfair advantage. It will be then for the defendant to show that the plaintiff freely consented (Ladli Prasad Jaiswal v Karnal Distillery Co. AIR 1963 SC 1279). Thus, the presumption is rebuttable, but the burden of proof is on the party in a position to dominate the will. If a party has got exorbitant gain at the cost of the other party, it is for him to prove that this advantage had not been gained by undue influence. For example, A being in debt to B, a moneylender, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence [Illustration (c) to Sec. 16]. A presumption of undue influence arises in case of a contract by or with a pardanasheen woman (i.e. a woman who, according to the custom of her community, lives in complete seclusion; it does not mean simply a woman who observes pardah). Such women cannot, generally, appreciate the transaction without an independent advice and are thus exposed to the danger of entering into unfair deals. Thus, transactions by such women are very carefully scrutinized. The burden of proof shall always rest upon the person who seeks to sustain transaction entered into with such lady to establish that the said document was executed by her after clearly understanding the nature of transaction. The burden can be discharged not only by proving that the document was explained to her and that she understood it, but also by other evidence direct and circumstantial (Kharbuja Kuer v Jang Bahadur AIR 1963 SC 1203). Similarly, questions of undue influence as vitiating the quality of consent have often arisen in the context of 'illiterate' women. In Sethan v Bhana (AIR 1993 SC 956), the following facts showed that the purchaser of land was in a position to dominate the will of the seller: (i) The sale deed was by a tribal woman, who was old, illiterate and blind. (ii) No apparent evidence of the passing of consideration existed.

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(iii) The woman was living with the purchaser (till her death) and was dependent on him. It was held that the purchaser carried the burden of proving that the sale deed was not executed under undue influence. Similarly, held in Smt. Takri Devi V Smt. Rama Dogra (AIR 1984 H.P. 11). In this case, an old illiterate woman gifted her valuable immovable property to her advocate. Held that the relationship was fiduciary and it could be presumed that the advocate was in a position to dominate the will of the woman and as the transaction appeared to be unconscionable, the gift deed was the result of undue influence by the donee-advocate. The presumption of undue influence is also raised in the following cases: (1) Unconscionable bargain5 An 'unconscionable bargain' is one as no sane man, not setting under a delusion, would make, and no honest man would take advantage of. The term 'unconscionable' means something as shows no regard for conscience and which is irreconcilable with what is right or reasonable. It means a transaction which is so much to the advantage of one party and disadvantage to the other that it "shocks the conscience." Some examples of unconscionable bargains are as follows: (i) 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 a trust [Wajid Khan v Raja Ewaz Ali Khan (1891) 18 IA 144]. (ii) An illiterate rustic girl, who had been living since her childhood with the defendant, due to the death of her parents, was divested of all her movable and immovable property through a gift deed in favour of the defendant (Niko Devi v Kirpa AIR 1989 HP 51). (iii) A person, without having the means of subsistence, in order to prefer an appeal against a judgment, borrowed Rs. 3,700 on a bond promising to pay Rs. 25,000 within a year from recovery of the possession of an estate [Chunni Kaur v Rup Singh (1899) 11 All 57]. (iv) Gift in favour of a religious organisation by a person weak in mind and suffering in health (Philip Luka v Franciscan Assn. AIR 1987 Ker 204). ___________ 5. Discuss the law relating to 'unconscionable bargains.' [L.C.II-95]

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Hard bargains Not Necessarily Unconscionable It is important to note that every transaction where the terms are to the disadvantage of one of the parties need not necessarily to be unconscionable. If the contract is to the advantage of one of the parties but the same has been made in the ordinary course of business, the presumption of undue influence would not be raised. For example, A applies to a banker for loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence [Illustration (d) to Sec. 16]. Therefore, mere urgent need of money on the part of borrower is not, of itself, a sufficient evidence of mental distress.6 LEADING CASE: RAGHUNATH PRASAD v SARJU PRASAD (AIR 1924 PC 60) In this case, a person who was facing a criminal prosecution at the instance of his father borrowed on exorbitant terms a sum of money to defend himself. He (the son) mortgaged his property for a sum of Rs. 10,000 borrowed from the respondent (father) at 2 per cent rate of interest (per month), subject to the condition that in the event of non-payment of interest, the interest will be calculated at the same rate on the principle of compound interest. In eleven years, the amount borrowed with interest came to Rs. 1,12,885. The appellant son, in a suit by the respondent for the recovery of the amount, contended that there should be presumption of undue influence as the lender by fixing high rate of interest, had taken unconscionable advantage of his mental distress. The Privy Council, in this case, laid down some important principles:7 (i) The relations between the parties to each other must be such that one is in a position to dominate the will of the other. Once that position is substantiated then only unconscionableness of the bargain is to be considered i.e. whether the contract has been induced ___________ 6. S sold his land worth Rs. 2 Lacs to Y for Rs. 50,000 as he needed the money badly for medical expenses of his son who had serous injuries in an accident. S applies for cancellation of the sale on the ground that contract to sell the land was based on undue influence. Decide. [D.U.-2008] [L.C.II. -93] 7. How the court should proceed in a case when there is allegation of 'undue influence' in a contract. [L C. II. -95/2000/2004/2006]

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By undue influence. Upon the determination of this issue a third point emerges, which is that of the onus probandi (burden of proof) (ii) As between parties on equal footing, the mere unconscionableness of the bargain does not create the presumption of undue influence. (iii) The mere fact that the bargain is a hard one is no ground in itself for granting relief. It was held that the appellant was not in such mental distress as would enable a moneylender to dominate his will. Since the fact of the domination of the will was not there, presumption of undue influence could not be raised, even though the bargain had been unconscionable. LEADING CASE: SHRIMATI V SUDHAKAR R. BHATKAR (AIR 1998 Bom 122) In this case, the defendant stayed as a tenant in a part of the house owned by plaintiff - an illiterate widow, but was managing her agricultural properties for over two decades. The defendant treated her as his mother and persuaded her to gift her entire property. She executed the gift deed, out of love and affection, in favour of the defendant. It was held that the defendant could not be said to be in a position to dominate her will and the gift deed could not be said to have been executed under his undue influence. The High Court observed: "Influence in the eye of law has to be contra-distinguished with persuasion. Any and every persuasion by one party to the other to contract cannot lead to inference/conclusion that such party has influenced the other party. One may by his act/conduct convince and persuade the other party to do a particular act and if the other party does such an act freely and of own volition (may be to his/her prejudice or to his/her disadvantage or even to his/her peril), it cannot be said that such act was influenced by the other". In the present case, the plaintiff was illiterate, but she was intelligent enough to manage her properties and was getting agricultural land cultivated from various persons from time to time for about two decades and, therefore, from the available facts it cannot be inferred that she would sign a document without understanding the purport of such document. The High Court distinguished the present case, from the following decisions:

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(a) Smt. Jakri Devi v Smt. Rama Dogra (AIR 1984 HP 11) - In that case an illiterate lady living separately from her husband gifted all her landed property to the donee who was her lover. Held, that there was an undue influence exercised by the donee who was in a position to dominate the will of the owner. (b) Shivagangawa Madiwalappa Vulvari v Basangouda (AIR 1938 Bom 304) - In that case, a young widow who had inherited her brother's property had no relative to look after her and who could give her disinterested advice. Her husband's brother came and lived with her appropriating her income/property. Through the advice/assistance of an influential watandar Patil she recovered her property back. Patil lived with her in a stage of immorality and having obtained from her a gift of all her property drove her away. Held that the gift was presumably obtained through undue influence. (c) Smt. Feroze v Makhan Singh (AIR 1973 MP 252) - In that case the sale of the entire property by an illiterate women was set aside on the ground of undue influence/fraud because there was absence of independent advice, payment of sale consideration to her, urgency to sell the property to the vendee, and reading over the sale deed to the vendor. In the present case, the High Court observed, in relation to "burden of proof”: Unconscionableness of the transaction can be gone into without deciding whether one party was in a position to dominate the will of the other and whether the transaction was the result of undue influence. The question of onus of proof arises only thereafter.] Relationship by blood, marriage or adoption not sine qua non The presumption of undue influence can be more easily established and indeed may be assumed in such cases as transactions between parent and infant child, solicitor and client, or spiritual adviser and penitent, but it will arise in any case in which the facts show that the circumstances are such that influence can fairly be inferred. Thus, what is necessary to establish the presumption is not that the parties should be related by blood, marriage or adoption, but that their relations are such that one is in a superior position over the other. Even where they are so related, the presumption may not arise, for the influence may as well be fairly and wisely exercised.

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LEADING CASE: SUBHAS CHANDRA DAS MUSHIB v GANGA PRASAD DAS MUSHIB8 (AIR 1967 SC 878) In this case, some agricultural property was gifted by a person to his only grandson (through one of his two sons) to the total exclusion of his sons. Although the donor was quite old, he was taking active interest in his property. Four years after the gift he died and still four years after that the other son questioned the validity of the gift on the ground of undue influence. The court approved the principles laid down in Raghunath Prasad v Sarju Prasad (discussed above) and also noted the fact that Sec. 16 is based on the English common law as noted in the judgment of the Supreme Court in Ladli Prasad Jaiswal v Karnal Distillery Co., and held that on the facts of the case no presumption of undue influence could arise. "The circumstance that a grandfather made a gift of a portion of his property to his only grandson (on account of natural love and affection), a few years before his death is not on the face of it an unconscionable transaction." The court noted that merely because the parties were nearly related to each other there is no presumption of undue influence. It is a mistake to treat undue influence as having been established by a proof of the relations of the parties having been such that the one naturally relied upon the other for advice, and the other was in a position to dominate the will of the first in giving it. Up to that point, 'influence' alone has been made out. Such influence may be used wisely, judiciously and helpfully. But whether by the law of India or the law of England, more than mere influence must be proved as to render influence in the language of law, 'undue'. It must be established that a person is in a position to obtain unfair advantage for himself. The court further noted that where there is no relationship shown to exist from which undue influence is presumed, that influence must be proved (Halsbury's Laws of England, Third Edn., Vol. 17, p. 673, Art. 1293). There is no presumption of imposition of fraud merely because a donor is old or of week character. There is no presumption of undue influence in the case of a gift to a son, grandson, or son-in-law, although made during the donor's illness and a few days before his death. In the present case, there was practically no evidence about the domination of the son (whose son had been gifted the property) over his father at the time of the execution of the deed of gift. Also, as noted above, the transaction was not unconscionable. ___________ 8. Discuss the law relating to 'undue influence' in the light of Supreme Court judgment in Subhas Chandra v Ganga Prasad Das AIR 1967 SC 878. [L.C.II-94]

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LEADING CASE: LAKSHMI AMMA V TALENGAL NARAYANA BHATTA (AIR 1970 SC 1367) In this case, a person made a very negligent provision for his third wife (the first two being dead) and the daughters borne by her, and donated the whole of his property only to one of his grandsons. The donor was suffering from several ailments and executed the deed in the nursing home. The Supreme Court held that, in the absence of any explanation from the side of the donor for the discrimination, the presumption of undue influence arose. The deed of settlement on the face of it was an unnatural and unconscionable document. The plaintiff (donor) made negligible provision for his third wife in the form of maintenance from the respondent. Thus, she was left to the mercy of the respondent. No provision was made regarding her right to reside in the residential house till her death. Further, there was no reason why he should have left nothing to his two daughters or to his other children and given his entire estate to only one grandson. In the present case, no draft of settlement deed was prepared with the approval or under the plaintiffs directions. The plaintiffs wife had stated that the document was got executed by using pressure on the plaintiff while he was of an infirm mind and was not in a fit condition to realize what he was doing. The respondent grandson had failed to dispel the suspicion as to the genuineness of the execution of the deed. Thus, the settlement deed was held to be invalid.] Thus, difficult questions arise when one member of the family is preferred in a testament to the total exclusion of all others. In such cases, courts usually require proof that undue advantage was taken of the situation that created 'dominance of will' [Afsar Sheikh v Soleman Bibi (1976) 2 SCC 142]. Mere preference is not a proof of undue influence. Of course, the circumstances may be so outrageous, that the 'thing speaks for itself’.9 (2) Inequality of bargaining power (Economic duress) The presumption of undue influence may also arise from the fact that there is such an inequality of bargaining power between the parties that one can cause economic duress to the other. Thus, in Lloyd Bank v Bundy (1975) 1 QB 326, a contractor borrowed a sum from a bank, but could not pay back in time. His father mortgaged the family's only residential house to help him. The contractor still could not ___________ 9. See, P.M. Bakshi, "Mercantile Law" in Verma & Kusum (Eds.), Fifty Years of the Supreme Court of India, pp. 319-320, ILI (2000).

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pay and the banker sought to enforce the mortgage. The court set aside the mortgage on the ground that the bank exploited the vulnerability of the father, caused by his desire to help his son, to such an extent that he charged his house to his ruin for a very short moratorium, which was a highly inadequate consideration for the mortgage. Exploitation of the needy - In determining the respective bargaining positions of the parties, the court will look at a number of factors, such as age, poverty, illiteracy and emotional state. Forcing a person to accept less money that is due to him by exploiting his economic stringency is an example of unfair bargain. In a case, a song writer's copyright was purchased on terms that he was not to publish his songs through any other company but the company had the right to reject his songs. It was held to be unconscionable [Schroeder Music Publishing Co. v Macauly (1974) 1 WLR 1308]. As regards exorbitant price charged by the trader, it is never considered a case of undue influence. Also, there is no presumption of undue influence between landlord and tenant [Promoda Nath v Kinoo Mollali (1908) 8 Cal. LJ 135]. Distinction between Coercion and Undue influence10 Undue influence as well as coercion renders the contract voidable at the option of the party whose consent was so caused. However, in case of coercion, the contract becomes voidable under Sec. 19 and the party avoiding the contract has to restore any benefit he has received under the contract to the other party. Under Sec. 19-A, the court has the power to set aside a contract induced by undue influence. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just. Unlike coercion which involves physical force, undue influence involves moral pressure. In coercion, a person is forced to give his consent; in undue influence, the giver gives consent freely under the belief that he is not to be put to any loss by giving such consent. Thus, there may be criminal liability in case of coercion but not so in case of undue influence. However, in both, the freedom of will is impaired. While coercion is of an avowedly violent character, undue influence is more subtle and intangible, but nevertheless equally effective. Further, there is no presumption of coercion under any circumstances, while in the case of undue influence it is presumed in certain cases viz. unconscionable transactions. ___________ 10. "There is more a similarity than diversity between coercion and undue influence." Do you agree with this statement? Substantiate your answer with illustrations.

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[C] FRAUD An agreement to which the consent is caused by fraud is voidable at the option of the party whose consent was so caused. According to Sec. 17, "Fraud" means and includes any of the following acts, committed by a party to a contract or with his connivance or by his agent, done with "intent to deceive" or to induce a person (or his agent) to enter into a contract (i) the suggestion that a fact is true when it is not true and the person making the suggestion does not believe it to be true, (ii) active concealment of a fact by a person who has knowledge or belief of the fact, (iii) promise made without any intention of performing it (e.g. buying goods with the intention of not paying the price), (iv) any other act fitted to deceive, or (v) any such act or omission as the law specially declares to be fraudulent (viz. according to Transfer of Property Act, the seller of immovable property must disclose to the buyer any material defect in the property of the seller's title). It may be noted that the various acts amounting to fraud are so diverse in nature, that it is very difficult to circumscribe them within the limits of a simple and precise definition. Human mind is very fertile and new forms of deceit can be devised which are incapable of being defined. 'Equity judges have said that fraud is so far-reaching in its effects and so infinitely varied in its form that it is impossible to lay down any definition of it which will cover all cases' (Slater). The essentials of fraud are that there should be a "false statement of fact” by a person who himself does not believe the statement to be true (however, a mere expression of opinion viz. advertisements about superior quality of goods, etc. do not amounts to fraud). Further, there must be a "wrongful intention" i.e. an intention to deceive and induce the other party to enter into the contract. If a false statement is not made deliberately but recklessly without enquiring whether it is true or false, it will amount to fraud. Intentional misrepresentation is of the essence of fraud. Thus, if the person making false representation honestly believes in its truth, he is not guilty of fraud. In Derry v Peek (1889) 14 App Cas 337, the directors of a company mentioned in the prospectus that they had got the authority to run tramways with steam or mechanical power instead of animal power. Such permission had not yet been granted by the Board of Trade, but the directors honestly believed that the permission will be granted in the ordinary course. The Board refused the permission; the company had to be wound up. The

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directors were sued for fraud, but held that they had no intention to deceive. If a company needs money to pay pressing liabilities, but the directors advertise that they need money for the expansion of business, it is a false statement of fact amounting to fraud. Active concealment of fact amounts to fraud. In Rex v Kylsant (1932) 1 KB 442, the prospectus of a company disclosed that the company had paid dividends regularly between 1921 and 1927, which created the impression that it was in a sound financial position. The truth was that those dividends had been paid not out of current earnings, but out of funds which had been earned during the abnormal period of the war. The fact that the company had incurred heavy trading losses during these years was omitted. Held, that it amounted to fraud. It may be noted that an 'attempt to deceive' which has not in fact deceived the party can have no legal effect because the other party has not suffered any damage. Thus, where a seller of specific goods conceals a fault (viz. inserts a metal plug into the weak spot of a defective gun) so that the buyer may not discover it if he inspects the goods, but the buyer does not, in fact, make an inspection, there is no fraud [Horstall v Thomas (1862) 1 H&C 90]. Similarly, if a person in order to sell his unsound horse forges a certificate and pins it at the door of the stable and the buyer without noticing the forged certificate buys the horse. Silence (Mere silence is no fraud) The explanation to Sec. 17 provides that 'mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak or unless his silence is itself equivalent to speech.' Ordinarily, 'passive concealment' or mere silence is no fraud, as a contracting party is not obliged to disclose each and every thing to the other party. "The failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract even though it is obvious that the contractor has a wrong impression that would be removed by disclosure". Merely because a person does not disclose the defects in the goods sold by him, there is no fraud. This principle is known as caveat emptor (let the buyer beware). Thus a seller who puts forth an unsound horse for sale, but says nothing about its quality, commits no fraud, Illus. (a), Sec. 17 reads: 'A sells, by auction, to B a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A.'

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It has been held that a director of a company who had inside information that the value of share is likely to go up was under no duty to disclose this fact to a shareholder whose shares he purchased [Percival v Wright (1902) 2 Ch. 421]. Illus. (d), Sec. 17 reads: 'A and B, being traders, enter upon a contract. A has private information of a change in price which would affect B's willingness to proceed with the contract. A is not bound to inform B.' But, silence may become deceptive in certain cases ('constructive fraud'), as discussed below: (i) The first such case is when the person keeping silence is under 'duty to speak', which arises where one contracting party reposes trust and confidence in the other. An insurance company, for example, knows nothing about the life or circumstances of the assured. It has to depend on the disclosures made by the assured. A contract of insurance is, therefore, called a contract of absolute or utmost good faith, uberrima fides. Thus, an action for refund of money will not be entertained by the courts, where, in order to succeed, the plaintiff (assured) has to prove his own fraud [Mithoo Lal Nayak v LIC of India AIR 3 962 SC 814]. Where the insured did not disclose, even after asked to do so, the fact that several other insurance companies have declined to insure his life, held that it amounted to fraud [London Assurance Co. v Mensal (1879) 11 Ch. Div. 363]. (ii) Similarly, in case of fiduciary relationships, contracts of family arrangements/ partnership after its formation, contracts for sale of immovable property, etc. all material facts must be disclosed. Thus, a father, selling his horse to his son must tell him if the horse is unsound', as the son is likely to rely upon his father. Illus. (b), Sec. 17 reads: 'B is A's daughter, and has just come of age. Here the relations between the parties would make it A's duty to tell B if the horse is unsound.' Likewise, the concealment of the fact of annulment of first marriage of the girl on the ground of unsoundness of her mind by the girl and her parents, was considered to be a fraud against the second bridegroom (Kiran Bala v B.P.Srivastava AIR 1982 MP 242). Similarly, if a broker is employed to buy shares for a client and he sells his own shares to the client without disclosing this fact, the client can avoid the contract. (iii) Sometimes, silence is itself 'equivalent to speech'. Where, for example, a buyer asks the seller whether the horse is sound, and he remains silent. This is fraud if the horse is unsound. Illus. (c), Sec. 17 reads: 'B says to A, "if you do not deny it, I shall assume that the horse is sound." A says nothing. Here A's silence is equivalent to speech.'

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(iv) Sometimes a statement is true when made but because of change of circumstances' it subsequently becomes false, there is then a duty to disclose the truth. For example, a medical practitioner, who wants to sell his business, states that his average practice is £2000 per annum, but before the transaction is finalised his practice is considerably reduced due to his illness, it is his duty to inform about this fact to the other party [With v O' Flangan (1936) Ch. 575 CA]. (v) Lastly, a person may keep silence, but if he speaks, a duty arises to disclose the whole truth. 'Halftruths' amount to fraud. Thus, when a person speaks of another as his 'son' he holds him out as his legitimate, natural or adopted son. It cannot possibly include an illegitimate son. Thus, the representation was fraudulent when a Hindu father represented his illegitimate son as his son (Bimla Devi v Shankar Lal AIR 1959 M.P. 8) It may be noted that when the silence amounts to fraud, but the other party could discover the truth by ordinary diligence, he cannot avoid the contract {see, exception to Sec. 19, below). For example, a candidate for the LL.B Part I examination omits to fill in the admission form for the exam that he is short of attendance, and the university authorities could discover the truth by proper scrutiny (but they failed to do so), the authorities have no right to cancel the candidature of such a candidate (Shri Krishna v Kurukshetra University AIR 1976 SC 376). Thus, negative or passive silence (when there is no duty to speak or disclose the facts) is not fraud. It is important to note that in all other cases of fraud (i.e. excepting silence), the fraudulent party cannot say that the other could have discovered the truth. Distinction between Fraud, Coercion and Undue Influence Fraud by a stranger to the contract does not affect contract. However, 'coercion' as well as 'undue influence' by a stranger to a contract affects the contract. While fraud is a civil wrong, 'coercion' is a criminal wrong also. [D] MISREPRESENTATION A contract the consent to which is induced by misrepresentation is voidable at the option of the deceived party. Misrepresentation means misstatement of a fact material to the contract. When a person makes a false statement which he himself believes to be true, and he does not intend to deceive the

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other party, there is "misrepresentation". The representation must've been instrumental in inducing the other party to enter into a contract. Sec. 18 includes the following types of misrepresentation: (i) Unwarranted statements - When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be true, this is misrepresentation. In a Bombay case, the seller of a ship stated the ship to be of certain tonnage, when in fact he had never seen the ship, and it turned out to be of a greater tonnage, the buyer was allowed to avoid [The Oceanic Steam Navigation Co. v S. Dharamsey (1890) 14 ILR Bom 241]. The case of Derry v Peek (supra) is an illustration of misrepresentation. (ii) Breach of duty - Any breach of duty which brings an advantage to the person committing it (or any one claiming under him) by misleading the other to his prejudice is a misrepresentation ('constructive fraud'). There is no intention to deceive, but 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. In Oriental Banking Corporation v John Fleming (1879) 3 Bom 242, the plaintiff having no time to read the contents of a deed, signed it as he was given the impression by the defendant that it contained nothing but formal matters already settled between them. The deed, however, contained a release in favour of the defendant. Accordingly, the defendant was allowed to avoid the deed. Sec. 18(2) also applies to a case where a statement is true when it is made but it becomes false later on, and to the knowledge of the maker, before it has been acted upon (see, With v O'Flangan, supra). (iii) 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. It may be noted that misrepresentation should be of facts 'material' or 'vital' to the contract. Mere "commendatory expressions" such as men of business will habitually make about their goods are not sufficient to avoid the contract. For example, in a sale of land, a mere general statement that the land is fertile and improvable, whereas part of it is abandoned as useless, cannot be considered a misrepresentation. A mere expression of opinion cannot be regarded as misrepresentation of facts even if the opinion turns out to be wrong.

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Distinction between Fraud and Misrepresentation In both there is a false representation, but in fraud the person making the statement knows it to be false (intentional wrong) while in the misrepresentation he believes that the statement is true (innocent act). In case of fraud the party whose consent had been so obtained can avoid the contract. He can also sue for damages for the tort of deceit. In case of misrepresentation, the only remedy available is to avoid the contract. Further, when there is misrepresentation, the other party cannot avoid the contract if he could have discovered the truth with ordinary diligence. But, except in case of fraudulent silence, a person obtaining the consent of the other party by fraud cannot be allowed to say that the other party could have discovered the truth by ordinary diligence. "Fools have to be protected against knaves". Right of Rescission of Contract11 Sec. 19 deals with the effect of flaw in consent caused by coercion, misrepresentation and fraud and Sec.19-A when the consent obtained by undue influence. A contract induced by coercion, undue influence, fraud or misrepresentation is voidable at the option of the party whose consent was so caused (i.e. a "right of rescission of the contract"). Illustration (a) to Sec. 19 reads: "A intending to deceive B, falsely represents that 500 mounds of indigo are made annually at As factory and thereby induces B to buy the factory. The contract is voidable at the option of B." Sec. 19 further provides that a party to a contract whose consent was caused by fraud/misrepresentation may, if he thinks fit, insist that contract shall be performed and that he shall be put in the position in which he would have been if the representation made had been true. Illustration (c), Sec. 19 reads: 'A fraudulently informs that A's estate is free from encumbrance. B thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist of its being carried out, and the mortgage debt redeemed.' However, the right to rescind is subject to certain limitations. Thus, where the party, after becoming aware of his right to rescind, expressly or impliedly affirms the contract, the right of rescission is lost (viz. where he appropriates to his use the goods received under a voidable contract or has sold or attempted to sell them). The right of rescission may be lost due to a long lapse of time. Further, the right of rescission is lost as soon as a third party, acting in good faith, acquires rights in the subject-matter of the contract. ___________ 11. 'The right to rescind a contract is a more drastic remedy than the right to damages, and therefore some restrictions are placed on it.' What are they? When may rescission be refused? [I.A.S-90]

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The affirmation of a contract may be made either expressly or implicitly or it could be inferred from a person's conduct. In Long v Lloyd (1958) 1 WLR 753, A sold his lorry to B by making a false representation that the lorry was in "excellent condition". On the lorry's first journey B discovered serious defects in the lorry, but he did not rescind the contract and instead accepted A's offer of half the cost of repairs. The lorry completely broke in the next journey and then B wanted to rescind the contract. Held that B had affirmed the contract and he had now no right to rescind it. A person having a right to avoid the contract must do so within a reasonable time. Thus, if a person purchasing a picture on the basis of an innocent but false representation that it has been painted by a particular renowned artist, wants to avoid the contract after 5 years of its purchase, the rescission would not be allowed [Leaf v International Galleries (1950) 2 KB 86]. A voidable contract is valid until avoided and it becomes void only after it has been avoided. There is a possibility that so long as the contract has not been avoided, there could be creation of an interest in favour of a third party. For example, in a contract of sale of goods between A and B, A has a right to avoid the contract. Before A avoids it, B sells those goods to C, while C is acting in good faith and has no notice of the defective title of B. C has acquired a good title to the goods and A's right of avoiding the contract and taking back the goods has come to an end. Still further, rescission is subject to the condition that the party seeking rescission must be in a position to restore the benefits (restitution) he may have obtained under the contract (Sec. 64). Even where the party seeking rescission is not in a position to restore to the defendant his status quo ante, the court may allow rescission by doing what is particularly just in the circumstances. Exception to Sec.19 (When rescission may be refused) If the consent to the contract was caused by misrepresentation or by fraudulent silence, the contract is not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Illustration (b) to Sec.19 reads: A, by a misrepresentation, leads B erroneously to believe that 500 maunds of indigo are made annually at A's factory. B examines the factory's accounts, which show that only 400 maunds have been made. After this, B buys the factory. The contract is not voidable on account of A's misrepresentation. Thus if a person's mind has not been influenced by the false statement when he enters into the contract, there is no fraud. In Kamal Kant v Prakash Devi (AIR 1976 Raj 79), the plaintiff filed a suit against his mother and some others seeking cancellation of a trust deed on the ground that his signatures to it were obtained by fraud by falsely telling him that it was a general power of attorney. The deed was

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attested by the plaintiff's father and an advocate. The plaintiff was an educated man and had all the means to know the contents of the documents. Under these circumstances it was held that there was no fraud in this case. Where P, the purchaser of some stock of rice, stored up at a place to which P had easy access, refused to take delivery on the ground that the rice was of inferior quality to that contracted for and wants to get the contract rescinded on this ground, it was held that P will not succeed as he might've discovered the truth with ordinary diligence [Shoshi Mohum Pal Choudhary v N.K.Poddar (1874) 5 Cal 801]. [E] MISTAKE Mistake means an erroneous belief about something it has not been defined in the Indian Contract Act. Consent obtained by mistake is also not free consent. Mistake or error makes the contract void i.e. it is not enforceable at the option of either party. Mistake may operate upon a contract in two ways: it may defeat the consent altogether or it may mislead the parties as to the purpose which they contemplated. The former case falls under Sec. 13 ('Two or more persons are said to consent when they agree upon the same thing in the same sense' i.e. consensus ad idem). If the mistake prevents the consent itself, then there is no consensus ad idem and thus no contract. In such cases, it is immaterial of what kind the mistake was or how it was brought about. The latter case fails under Sec. 20 ('Mistake as to a matter of fact essential to the agreement'). It may be noted that mistake in cause for the contract i.e. 'Error in Causa' (viz. on account of one party's fraud) makes the contract voidable only.12 Sec. 20 will come into operation: (i) when both the parties to an agreement are mistaken, (ii) their mistake is as to a matter of fact, and (iii) that fact is essential to the agreement.13 Mistake which vitiates a contract must be fundamental. Broadly speaking, certain facts are essential to the agreement, viz. identity of parties, subject-matter and the nature of promise. "Fundamental error will not prevent a contract from corning into existence _____________ 12. "The law of mistake is a comedy of errors." The law of mistake is full of many contradictory decisions, at the wisdom of which people can laugh, as they do in a comedy whether wise or unwise [K.O.Shatwell (1955) 33 Can. B. Review 196], 13. Explain the effect of 'mistake of fact' on agreements with illustrations and decided cases. [I.A.S.90/95]

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unless the mistake be as to the identity of other party - as opposed to this attribute, as to the substance of the subject-matter - as opposed to its qualities, or as to the nature of transaction as opposed to its terms." A unilateral mistake (from one party only) does not affect the validity of the contract. The mistake under Sec. 20 has to be bilateral i.e. both the parties must be shown to be suffering from mistake of fact from the very beginning but had not realized it, at the time of entering into the agreement and acted bona fide on such agreement. The mistake of both the parties must be about the same vital fact. The Supreme Court has clarified that Sec. 20 is concerned with common rather than mutual mistake of fact. A 'common' mistake is made or shared alike by both (e.g. where the subject matter of the agreement has already perished) while 'mutual' mistake is made or entertained by each of the parties towards or with regard to each other. In the latter case, the parties misunderstand each other and are at cross purposes, there is no real correspondence of offer and acceptance and the parties are not really consensus ad idem. There is thus no agreement at all and the contract is also void (I.T.C. Ltd. v George Joseph Fernandes AIR 1989 SC 839). (i) Mistake as to Identity14 Mistake as to identity occurs when one of the parties represents himself to be some other person than he really is. Thus, a mistaken belief by A that he is contracting with B, whereas in fact he is contracting with C (and C knows it), will negate consent. Therefore, such contracts are an exception to the rule that a unilateral mistake does not affect the validity of the contract. Such contracts are void. In Lake v Simmons (1927) AC 487, a woman posing as the wife of a wealthy customer made few purchases from a jeweller to inspire confidence. The jeweller allowed her to take away two necklaces of considerable value "on approval" for her supposed husband. It was held that the contract was void as the jeweller thought that he was dealing with a different person, the wife of a wealthy customer. In Jaggan Nath v Secy, of State for India (1886) 21 Punj Rec No. 21, a person called S, a brother of the plaintiff, represented himself to be the plaintiff, and thereby induced a Government agent to contract with him. In Boulton v Jones (1857)27 LJ Ex 117, Jones sent an order to Brocklehurst for the purchase of certain goods. By the time this order _____________ 14. "The strict adherence of the theoretical consideration that a contract made under mistake as to the identity of parties or identity of the subject matter is void, would lead to absurd result." Do you agree with this statement? Give reasons. [I.A.S.-2004]

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reached, Brocklehurst has sold his business to Boulton. Boulton supplied the goods to Jones. Jones refused to pay on the ground that he had never placed an order with Boulton and had never intended to make a contract with him. Held that Jones had never made any agreement with Boulton and he was not bound to pay for the goods. Similarly, in Cundy v Lindsay (1878)3 AC 459, the plaintiffs received orders in writing from a fraudulent men, called Blenkarn. The order papers had a printed heading: "Blenkarn & Co., 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 goods! Blenkarn received the goods and disposed them off to the defendants, who acted in good faith. The plaintiffs sued the defendants. Held that there was no contract between the plaintiffs and Blenkarn and he had no right to sell the goods. The defendants were bound to return the goods to the plaintiffs. There can be a mistake of identity only when a person bearing a particular identity exists within the plaintiff's knowledge. In other words, the person contracting must prove not merely that he did not intend to contract with the person with whom the apparent contract was concluded but also that there was a third identifiable person with whom he did intend to contract (Anson). If the name assumed by the swindler is fictitious, there will be no mistake of identity and the contract in such case will be voidable only on the account of fraud. Thus, in the Cundy v Lindsay case, if "Blenkarn & Co." was to be a non-existent firm, the contract will not be void but only voidable. The scope of operative mistake as to identity is further reduced when the parties are in each other's presence. The following cases pose the question - 'which of the two innocent parties is to bear a loss caused by the fraud of a third': In Phillips v Brooks (1919) 2 KB 243, A goes to the jeweller and selects a ring which he agrees to purchase. Then he tells the jeweller that he (A) is a well-known person, B, and makes the payment by cheque. A then pledges the ring to C. Held that a valid contract between the parties has arisen (though voidable by reason of the fraud) as giving wrong identity at the time of payment subsequent to the making of contract does not affect the validity of the contract. If pledgee C is acting in good faith and innocently while taking the ring, He is not bound to return the same to the jeweller. However, in Ingram v Little15 (1961)1 QB 31, the court acted on a different approach. X offered to buy a car from Y and to pay by cheque. Y refused the offer and the cheque, since she did not know him. X then convinced her that he was a well-known person, and being convinced, she _____________ 15. A question based on the same facts. [I.A.S.-93]

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accepted his cheque and let him take the car. He sold the car to L and the cheque proved worthless. Y filed a suit to recover the car from L. The court held that X's right to the car was no more than that of a thief or a finder (as the lady intended to contract only with the real or well-known X) and he could not convey a good title to the defendant. The court reasoned that unlike Phillips v Brooks case, here, the fraudulent representation was made before the contract was concluded. But in a subsequent case of Lewis v Aver ay (1972)1 QB 198, the court (on the similar facts) held that the car was delivered under a contract voidable by reason of the fraud and the contract having not been avoided before the car passed into the hands of an innocent buyer, he acquired a good title. The car owner (seller) should suffer as he allowed the possession of his goods to pass to another without waiting for the cheque to be cleared. 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 really is, except where identity should be of special importance. The court in Lewis v Averay adopted a different approach viz. the title of the person who purchases the goods in good faith and for consideration should not depend on the state of a contract between third parties. The court applied Phillips v Brooks case. (ii) Mistake as to subject-matter In the first place, the subject-matter may have ceased to exist before16 the contract was made, viz. the sale of a horse which, unknown to the parties, was dead at the time of the bargain [Illus. (b), Sec. 20]. Illus. (a) reads: 'A agrees to sell B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of bargain, the ship conveying the cargo has been cast away, and the goods lost. Neither party was aware of this fact. The agreement is void.' Similarly, where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell to him (mistake as to title or rights). Illus. (c) reads: 'A being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement but both parties were ignorant of the fact. The agreement is void.' Where the parties, due to a reasonable mistake of fact, have different subject-matters in mind, the agreement will be void for the want of true _____________ 16 Where the expectations of the parties are frustrated by subsequent events, their contract may fall under Sec. 56 but cannot be declared void ab initio under Sec. 20.

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consent. In Raffles v Wichelhaus [Exch. (864)2 H & C 906], the defendant bought of the plaintiff a quantity of Surat Cotton "to arrive ex Peerless from Bombay". Two ships with the name Peerless sailed from Bombay, one in October, which the defendant had in mind and the other in December which the plaintiff had in mind. In Tarsem Singh v Sukhminder Singh (AIR 1998 SC 1400), it was held that if the forfeiture clause contained in an agreement is void on account of the fact that the parties were not ad idem and were suffering from mistake of fact in respect of a matter essential to the contract (viz. the unit of measuring land), it cannot be enforced as the agreement itself is void under Sec. 20. Unilateral mistake is outside the scope of Sec. 20. The mistake has to be bilateral, which is so in the present case. Both the parties must be shown to be suffering from mistake of fact from very beginning but had not realized it, at the time of entering into the agreement and acted bona fide on such agreements. The Supreme Court observed: It may often be that the parties may realize, after having entered into the agreement, that one of the matters which was essential to the agreement, was not understood by them in the same sense and that both of them were carrying totally different impressions of that matter at the time of entering into the agreement. Such realization would invalidate the agreement under Sec. 20. On such realization, it can be legitimately said that the agreement was "discovered to be void". In this case, the seller intended to sell land in terms of "kanals" whereas the buyer intended to purchase it in terms of "bighas". Both convey different impressions regarding area of the land, which is as much essential to the agreement as the price; in fact, price was to be calculated on the basis of the area. A mistake as to the quantity of the subject-matter as distinguished from its substance may not render the agreement void. For example, in Smith v Hughes (1871 LR 6 QB 597), the buyer wanted old oats, the seller showed the oats he had but said nothing about them, they turned out to be new, the court held that this was a mistake only as to quantity and age of the oats and that was not a condition of the contract. The contract was binding. (iii) Mistake as to the nature of promise When a deed of one character is executed under the mistaken impression that it is of a different character (viz. gift deed signed by an old illiterate woman under the impression that it is only a power of attorneyBala Devi v Shanti Mazumdar AIR 1956 SC 575), then it is wholly void and inoperative. A mistake of this kind is often brought about by the fraud of one party viz. a party fails to disclose to the other the true nature of the document. Such contracts are also an exception to the rule that a unilateral mistake does not affect the validity of the contract.

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The defence of non est factum17 ('the mind did not go with the pen') enables a person who has signed a contract to say that it is not his document because he signed it under some mistake. Thus in Foster v MacKinnon (1869) LR 4 CP 704, a person was induced to sign the back of the paper the face of which was not shown to him, and he was told it was an ordinary guarantee when, in fact, the paper was a bill of exchange. The court held that the defendant never intended to sign the contract, thus the contract was void. In Ningawwa v Byrappa Hirekurabar (AIR 1968 SC 956), the husband obtained his wife's signature to a gift deed without making any misrepresentation as to its character, but later included two more plots in the deed, it was held that the transaction was only voidable and not void. The court clarified that there is a distinction between character of the document and fraudulent misrepresentation as to the contents thereof. In the former case, the transaction is void, while in the latter case it is voidable. Thus, where a person fraudulently obtained thumb impressions of an illiterate lady upon some blank papers which were registered as sale deeds in the name of some persons, held that the sale deeds were void (Pratap v Puniya AIR 1977 M.R 108). The defence of non est factum 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. But subsequently it was extended to others. However, the plea could not be available to anyone who signed without taking the trouble to find out at least the general effect of the document i.e. where the signer has been careless in not taking ordinary precautions against being deceived. A man cannot escape from the consequences, as regards innocent third parties, of signing a document, if being a man of ordinary education and competence he chooses to sign it without informing himself of its purport and effect. In Gallie v Lee (1970)3 All ER 961, a widow aged 78 years wanted to help her trusted nephew. The nephew came to her with one Lee and Lee told her to sign a document saying that it was a gift deed to the nephew. She had broken her spectacles so that she could not read. She put her signature which was witnessed by her nephew. The document was an assignment in favour of Lee. The court held that she was bound by the contract. She would've done anything to help her nephew. She was not, therefore, mistaken about the character of the document. The person who signs must take care. The plea of non est factum could not be; available to a person (who is not deceived) whose mistake was really a mistake as to the legal effect of the document (Bihar State Electricity Board v Green Rubber Industries _____________ 17. Explain the principle of non est factum, and comment on its rationality when applied in reference to a document executed by a well-educated person. [I.A.S.-91]

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AIR 1990 SC 699). There must be a radical or fundamental difference between what he signed and what he thought he was signing (Bismillaah v Janeshwar pd. AIR 1990 SC 540). Limitations: Mistake Mistake operates to avoid an agreement subject to the following conditions or limitations: (i) Mistake of both parties - To make an agreement void on account of the mistake under Sec. 20, the mistake must be common. Sec. 22 says that a contract is not voidable merely because of the mistake by one of the parties (unilateral mistake). Thus, 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 3 years, when in fact it was for one year only, he could not avoid the agreement because it was his unilateral mistake (A.A.Singh v Union of India AIR 1970 Mani 16). Similarly, where the plaintiff believed that he was contracting for the 15th day after the Haj, while the defendant had no such belief and contracted only with respect to the English date, it was held that it was a unilateral mistake on the part of the plaintiff [Haji Abdul Rehman v The Bombay & Persia Steam Navigation Co. (1892) 16 Bom. 561]. Likewise, where A offers to sell B a painting which A knows is a "copy" of a well known masterpiece, B thinking that the painting is an "original" one and that A must be unaware of this, accepts A's offer. The contract is a valid one. However, where the unilateral mistake is caused by fraud or misrepresentation on the part of the other party, the contract is voidable. And, where the unilateral mistake is as to the identity of the person contracted with, or, as to the nature/character of the written document, the contract is void (discussed above). (ii) Erroneous opinion - The explanation to Sec. 20 provides that an erroneous opinion as to the value of the thing (subject-matter of agreement) is not to be deemed as mistake as to a matter of fact. (iii) Mistake of fact not of law - Sec. 21 declares that a contract is not voidable because it is caused by a mistake as to any law in force in India, viz. A and B makes a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. The contract is not voidable. But a mistake as to a foreign Saw will avoid. Thus, a mistake as to law not in force in India has the same effect as a mistake of fact.

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Mistake of law (e.g. mistake as to the effect of registration upon the validity of a document) does not nullify the contract (Rolyanpur Time Works v State of Bihar AIR 1954 SC 165). FURTHER QUESTIONS Q.1. What is the power of the Court under Sec. 19-A to set aside a contract induced by undue influence? [L.C.I-97/98] A.1. Under Sec. 19-A, the Court has the power to set aside a contract (rescission of the contract) induced by undue influence. Such contract is voidable at the option of the party whose consent was caused by undue influence. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just. Thus, where A, a moneylender advances Rs. 100 to B, an agriculturist and, by undue influence, induced B to execute a bond for Rs.200 with interest at 6 per cent per month, the Court may set the bond aside, ordering B to repay Rs. 100 with such interest as may seem just. Another illustration - A's son has forged B's signature to a promissory note. B under threat of prosecuting A's son, obtains a bond from A, for the amount of the forged note. If B sues on this bond, the Court may set the bond aside. In Ranee Annapurni v Swaminatha (1910) 34 Mad. 7, a poor Hindu widow, who was in great need of money to establish her right to maintenance, was persuaded by a moneylender to agree to pay 100 per cent rate of interest. Holding that the moneylender exercised undue influence, the court reduced the rate of interest to 24 per cent. Thus the court has discretion to direct the aggrieved party for giving back the benefit whether in whole or in part or set aside the contract without any direction for refund or benefit. In money lending transactions, the lender has been given a decree for the money actually advanced and with reasonable rate of interest. Q.2. Mrs. Geeta brought an action against her husband, Naresh, for declaring an agreement void on the ground that its execution was induced through the husband's undue influence at a time when she was suffering from a serious nervous breakdown and was not mentally competent to appreciate the nature or quality of her acts. She stated that her nervous breakdown was result of maltreatment by Naresh having adulterous relationship with Shruti.

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During her confinement in the hospital, Naresh presented an agreement, prepared by solicitor, relinquishing all rights to maintenance and transferring to Naresh 50 acres of land, which was in joint names, for consideration of Rs.5000 only and she was made to put her signature under his influence. Discuss whether Mrs.Geeta would succeed in her action. [L.C.II-97] A.2. Mrs. Geeta will succeed in her action. The fiduciary relationship (i.e. of trust and confidence) presents a very good opportunity to the person in whom confidence is placed to exploit it to his own use. Further, a person is said to be in distress when his mental capacity is temporarily or permanently affected. Such a person is easily persuaded to give consent to a contract which may be unfavourable to him. Q.3. The Government has notified an order under an appropriate statute that no one shall buy or sell a particular explosive substance except under a license obtained by the specified authority. A has obtained a license to buy, but B who has no license to sell, represents to A that he has license to sell and induces him to enter into a contract for the sale of a certain quantity of explosive. A pays a part of the price. A learns that B has no license to sell and has no chance of obtaining it within a reasonable time. Can A sue to recover the advance paid? If B delivers the commodity as promised, can he recover the balance of the price from A, when it is clear to the court that the sale is prohibited? [I.A.S.-92] A.3. It is a voidable contract on account of the 'fraud' committed by B, and thus A can avoid or rescind the contract. A can sue to recover the advance paid (also, A has a right to claim compensation for any damage which he has sustained through non-fulfillment of the contract). If B delivers the commodity as promised, then he cannot recover the balance of the price from A, as that would amount to fulfillment of an 'unlawful' contract. However, in that situation, A has to return the goods to B (restoring the benefits received under a voidable contract-Sec. 64). Q.4. (a) Does void contract have similar legal implications to voidable contract? [I.A.S.-98] (b) One of the requirements for formation of a valid contract is free consent. Why then, in some cases of absence of free consent, does it make the contract voidable, not a void agreement? [I.A.S.-98] A.4. (a) Distinction between void and voidable contracts - A void agreement is not enforceable at the option of either party [Sec. 2(g)]. An agreement which is enforceable by law at the option of one or more

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of the parties thereto, but not at the option of the other or others, is a voidable contract [Sec. 2(i)]. In Dhurandhar Prasad Singh v Jai Prakash University (AIR 2001 SC 2552), the apex court observed that the expressions "void and voidable" have been subject matter of consideration on innumerable occasions by courts. One type of "void" acts, transactions, decrees are those which are wholly without jurisdiction, ab initio void and for avoiding the same no declaration is necessary. The other type of void act, for example, may be transaction against a minor without being represented by a next friend. Such a transaction is good one against the whole world. So far the minor is concerned, if he decides to avoid the same and succeeds in avoiding it by taking recourse to appropriate proceeding, the transaction becomes void from the very beginning. Another type of void act may be which is not a nullity but for avoiding the same a declaration has to be made. "Voidable" act is that which is good unless avoided e.g. if a suit is filed for a declaration that a document is fraudulent and/ or forged and fabricated, it is voidable as apparent state of affairs is real state of affairs and a party who alleges otherwise is obliged to prove it. If it is proved that the document is forged, etc. and a declaration to that effect is given a transaction becomes void from the very beginning. There may be a voidable transaction which is required to be set aside and the same is avoided from the day it is so set aside and not any day prior to it. In cases, where legal effect of a document cannot be taken away without setting aside the same, it cannot be treated to be void but would be obviously voidable. (b) Where consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. However, where consent is caused by mistake, the agreement is void. The reason for such distinction lies in the definition of 'consent' as given in Sec. 13: "Two or more persons are said to consent when they agree upon the same thing in the same sense." An agreement upon the same thing in the same sense is known as true consent or consensus ad idem, and is at the root of every contract. In the case of 'voidable' contract, the parties do enter into a contract and agree upon the same thing in the same sense though by way of fraud, coercion, etc. While in the case of 'void' contract caused by mistake, the consent is 'unreal' as there is no consensus ad idem. The offer and acceptance do not coincide and thus no genuine agreement is constituted between the

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parties. Even if a genuine agreement is there, one or both of the parties may be working under some misunderstanding or misapprehension of some fact relating to the agreement. If such a misunderstanding or misapprehension had not been there, probably they would not have entered into the agreement. In other words, the parties never intended to sign what they did sign. To make it more clear: in the case of 'voidable' contract, the "content" of the document is in question, while in the case of 'void' contract, the "character" of the document is in question which is a more fundamental aspect.

Page 138 6 Limitations on Freedom of Contract (Illegal, Void and Contingent Contracts) For the validity of a contract it is essential that the consideration and object should be lawful. A contract the object of which is opposed to the law of the land may be either unlawful or simply void, depending upon the provisions of the law to which it is opposed. The "object" and "consideration" may in some cases be the same thing but may also be different. For example, where money is borrowed for the purpose of the marriage of a minor, the consideration for the contract is the loan and the object the marriage. It may be noted that the parties to a so called "illegal agreement" are not liable to punishment, unless it is expressly punishable by law or amounts to a criminal conspiracy. They have committed no offence. They have merely concluded a transaction that will be spurned by the courts (Chesire & Fifoot). Unlawful Agreements (Sec. 23) According to Sec. 23, the consideration or object of an agreement are lawful unless: (i) it is forbidden by law, or (ii) is of such a nature that it would defeat the provision of law, or (iii) it is fraudulent, or (iv) it involves or implies injury to the person or property of another, or (v) the court regards it as immoral or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. (i) Forbidden by Law When something is forbidden by law an agreement to do that is unlawful, viz. sale of liquor without licence, an agreement to pay money if a person commits a crime or tort, etc. However, merely because a person does not observe statutory requirements do not mean that the agreement is void, especially when the intention of the legislature is to regulate an act by

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prescribing certain terms and conditions. In other words, the object of the statute is not to forbid certain transactions, but only to impose a penalty. Thus if a statute requires that a dealer in tobacco should hold a licence to sell the same and also have his name painted outside the place of his business, such requirement is only for the purpose of revenue. In case, a dealer does not observe these statutory requirements, he can still recover the price of the goods sold by him. Similarly, where a sub-lease as such is not forbidden by law, but can be made only with the consent of the landlord, the agreement of sublease would not be void and the person making the sublease without the landlord's consent will be entitled to recover the rent from the tenant (Banarsi Dass v Shakuntala AIR 1989 Del 184), In Abdul Jabbar v Abdul Muthaliff (AIR 1983 P & H 180), where a rice mill had been constructed with monies remitted by the plaintiff in contravention of the FERA, it was held that although the remittances were illegal, the construction of the rice mill by itself did not involve the execution of any unlawful object, and thus the plaintiff was entitled to the relief sought by him i.e. an injunction to restrain the defendants from interfering with his possession of rice mill. (ii) Defeats the Provisions of Any Law Sometimes the object of, or the consideration for, an agreement is such that, though not directly forbidden by law, it would, if permitted, defeat the provisions of any law. Thus according to the Mohammedan law it is not competent to parties contracting a marriage to enter into a separation deed by which the husband covenanted that his wife might live with her parents. Likewise, accepting a son in adoption in consideration of money is unlawful. An agreement to maintain an illegitimate child has been held to be not unlawful (Sukha v Ninni AIR 1966 Raj 163). However, an agreement contemporaneous with marriage stipulating payment of customary maintenance allowance by the husband in case of strained relations between husband and wife is not void under any provision of law (Jamila Khatoon v Abdul Rashid AIR 1939 Lah 165). Illustration (i) to Sec. 23 reads: A's estate is sold for arrears of revenue under the provisions of an Act of the legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void as it renders the transaction, in effect, a purchase by the defaulter, and would so defeat the provision of the law. In Ram Sewak v Ram Char an (AIR 1982 All 177), the parties agreed to carry on business in partnership. The agreement provided that they would

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conceal some part of their business activity and would not enter certain items in the books of accounts with a view to evading payment of income tax and sales tax. As the agreement was aimed at defeating the provisions of tax laws, an action brought by one partner against the other was dismissed. When a transaction is not per se illegal, for example, giving loan for the marriage of borrower's daughter, the lawfulness or otherwise of the particular transaction would depend on the lender's knowledge of that fact. Thus, if the lender did not have the knowledge that the girl's age was below 15 and the marriage was being celebrated in contravention of the provisions of the Child Marriage Restraint Act, he cannot be denied the recovery of the loan (Punnakotiah v Kallapalli Kolikamba AIR 1967 A.P.83). (iii) Fraudulent Purpose An agreement made for a "fraudulent" purpose is illegal, viz. an agreement to defraud creditors, or to defraud revenue authorities, or investors in a company. But if two persons agree not to compete with each other, and one of them in consideration for the other person not competing in the submission of tenders agrees to pay a certain sum of money, the agreement does not aim at defrauding anybody, and the same is enforceable (Jai Ram v Kahna Ram AIR 1963 HP 3). However, if the object of an agreement is to manage to procure a contract for one party which would otherwise be refused, the object is fraudulent. In Manni Ram v Purshottam Lal (AIR 1930 All 732), A knew that the railway company would not grant him a contract. He entered into a contract with B that B should put forward an application for the contract and after the contract was granted A shall serve as the real contractor. A brought an action to put his claim as the real contractor. Held that the object of the contract was to commit fraud upon the railway company and thus the agreement was void. Illustration (h) to Sec. 23 reads: A being agent for a landed proprietor, agrees, for money without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment by A on his principal. (iv) Injurious to Person or Property An agreement between two persons to injure the person or property of another is unlawful, viz. an agreement to commit a crime or civil wrong, for example, to assault or beat a person or to publish a libel against him. If the borrower of money is made to execute a bond to do manual labour and until repayment, and in default agrees to pay exorbitant rate of interest, the agreement was held to amount to slavery and thus opposed to public policy and, therefore, void [Ram Sarup v Bansi Mandar (1915) 42 Cal 742].

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In Ramalingam v Natesa (AIR 1967 Mad 461), B, whose title to the property was doubtful, was persuaded by A to sell the same to him with a view to creating trouble to the real owner. A, not succeeding in his objective, filed a suit claiming to be indemnified against B. A could not succeed since the object of the agreement was to cause injury to the property and person for the real owner. (v) Immoral The law does not allow an agreement tainted with immorality to be enforced. What is "immoral" depends upon the standards of morality prevailing at a particular time and as approved by the courts. For instance, A, who is B's mukhtar, promises to exercise his influence, as such, with B in favour of C, and C promises to pay Rs. 1,000 to A. The agreement is void, because it is immoral [Illustration (j) to Sec. 23]. A agrees to daughter to hire to B for concubinage. The agreement is void, because it is immoral though the letting may not be punishable under the I.P.C [Illustration (k)]. A promise to marry a married woman after the death of her husband or after she obtains a divorce from him is immoral [Bai Vijli v Nansa Nagar (1885) 10 Bom. 152]. It may be noted that what is immoral is 'interference with marital status'; thus where a married man promised to marry a woman (plaintiff) as soon as the decree of divorce with his wife was made absolute (the decree had been pronounced), but he committed breach of this promise by marrying another woman, the plaintiff was allowed to recover [Fender v St. John Mildmay (1938) AC 1]. An agreement for future separation between a husband and wife is void. Dealing with prostitutes has always been regarded as immoral. If articles are sold or something is hired to a prostitute for the purpose of enabling her to carry on her profession, neither the price of the articles sold nor the rent of the thing hired can be recovered (Gangamma v Kupammal AIR 1939 Mad 139). As noted above, if the object or consideration for an agreement is future illicit cohabitation between a man and a woman, the agreement is unlawful whether such cohabitation amounts to the offence of adultery or not. But a promise to pay for the past cohabitation has been held to be valid. The Rajasthan High Court in Naraini v Pyare Mohan (AIR 1982 Raj 43) held that if a part of the consideration is cohabitation (not adulterous) and a part of the consideration also consists in rendering of some household service by the lady, gift made to her for such living as well as services was a valid one. However, the Bombay and Madras High Courts have held it to be invalid. The Supreme Court in D. Nagaratnamba v Kunuku Ramayya (AIR 1968 SC 253) recognised past cohabitation as good consideration, but a gift in lieu of past as well as future cohabitation as vitiated (viz. where cohabitation is a continuing affair).

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A help given or promised to a dancing girl is not tainted with immorality [Khubchand v Beram (1888)13 Bom 150]]. The Supreme Court has pointed out in Gherulal v Mahadeo Das (1959) 2 SCA 342, that the case law both in England and India confines the operation of the doctrine to sexual immorality (viz. settlements in consideration of concubinage, promises in regard to marriage for consideration, contracts facilitating divorce, etc.). The word "immoral", being very comprehensive one, must be given restricted meaning. The juxtaposition of immorality with public policy, an equally elusive subject, indicates that it is used in restricted sense, otherwise there would be overlapping between the two. Accordingly the court held that a wagering agreement could not be regarded as immoral. (vi) Opposed to Public Policy1 Public policy is a principle of judicial interpretation founded on the current needs of the community. If the court regards an agreement as opposed to public policy, the agreement is void. Public policy means the policy of the law at a stated time. It broadly means public good or public interest. An act which is injurious to the society (social or economic interests) is against public policy. The concept of 'freedom of contract' (laissez faire) has been considered to be of great significance and, therefore, if the courts are given freedom to interfere with contracts on their own notions of public policy, this may be unjust. In the view of Burrough, J., "public policy is an unruly horse, and when once you get astride it you never know where it will carry you." Subba Rao, J. in Gherulal v Mahadeo Das (1959) 2 SCA 342 explained the present position of the doctrine in India: Public policy or the policy of the law is an illusive concept: it has been described as an 'untrustworthy guide', 'variable quality', 'uncertain one', etc. The primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy. Something done contrary to public policy is harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies. This doctrine of public policy is only a branch of common law, and thus, it is governed by precedents and the principles have been crystallized under different heads. The ordinary functions of the courts is to rely on the well-settled heads of public policy and to expound and apply them to varying situations; it should only be invoked in clear and incontestable cases of harm _____________ 1. 'A contract shall not be enforced if the agreement is opposed to public policy'. Examine. [I.A.S.95] "Public policy is an unruly horse, and when once you get astride it you never know where it will carry you" (Burrough, J.). Examine relevancy of this statement under the Indian law. [I.A. S. - 2000]

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to the public. Though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days. In Ratan Chand v Askar (AIR 1976 A.P.112), the Andhra Pradesh High Court even went to the extent of suggesting that even if a new head of public policy is to be created the courts should do that because of the changing social values and concepts in the progressive modern society. Freedom of contract has now ceased to have the idealistic attraction it had in the 19th century. We are now more and more concerned with the social and economic interest of the community rather than individual interest. Thus, where the attack on an agreement is based on public policy (or morality), the role of the court becomes a difficult one, because, here, the court takes leave of definite boundaries and has to enter an area that is unbounded, unaccepted and uncharted. It seems that prevailing social values would be the criterion for the decision of the court in this regard. The law relating to public policy cannot remain immutable. It must change with the passage of time [Ratan Chand v Askar (1991) 3 SCC 67]. In Central Inland Water Transport Copn, Ltd. v Brojo Nath (AIR 1986 SC 1571), the court observed: "The principles governing public policy must be and are capable on proper occasion, of expansion or modification. New heads of public policy can be evolved in the light of the Fundamental Rights and Directive Principles in the Constitution of India." In this case, it was held that an unfair and unreasonable contract entered into between parties unequal in bargaining power (government corporation and its employees) is opposed to public policy. Such contracts, which are rarely induced by undue influence as defined by Sec. 16, Contract Act, and which affect a large number of persons, if they are unconscionable, unfair and unreasonable, are injurious to the public interest. To hold that such contracts are only voidable will result in more misery to the weaker party as it had to go to the court to have the contract adjudged voidable. Such contracts are thus void. In the aforesaid case, a government corporation imposed upon a needy employee a term that he can be removed just by three months' notice or pay in lieu thereof and without any ground. The court held that it is harmful and injurious to the public interest for it tends to create a sense of insecurity in the minds of those to whom it applies and consequently it is against public good. Similarly, in D. T.C. v D. T.C Mazdoor Congress (AIR 1991 SC 101), the provision for termination of service of permanent employees of public/semi-government undertakings or statutory corporations only on one month's notice or pay in lieu of notice without any inquiry was held illegal. However, in Her Highness Maharani Shantidevi P. Gaikwad v Savjibhai Harihhai Patel (2001) 5 SCC 101, it was held that under general

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law of contract any clause giving absolute power to one party to cancel the contract does not amount to interfering with the integrity of the contract. Otherwise, it would interfere with the rights of the parties to freely enter into the contracts. Such a broad proposition of law that a term in a contract giving absolute right to the parties to cancel the contract is itself enough to void it cannot be accepted. If there is an agreement between all the competing bidders at the auction sale and they form a ring to peg down the price and to purchase the property at knock out price to defraud the debtor or public, it comes within the meaning of Sec. 23 [Gurumukh Singh v Amar Singh (1991) 3 SCC 79]. In Secy., Jaipur Dev. Authority v Daulat Ram Jain (1997) 1 SCC 35, certain lands acquired for "public purpose" (a housing scheme) under the Rajasthan Land Acquisition Act, 1953. The property became vested in the ] State free from encumbrances, and an award of compensation made to the owners of the land. Later, the same lands were allotted to the owners under the Government's housing scheme (for which the lands were acquired). The subsequent sale of the land by the owner-allottee, to others described as 'subawardees' or 'nominees' (of the erstwhile owner) was held to be opposed to the public policy and void under Sec.23 of the Contract Act. The preexisting right, title and interest of the landowner ceased to exist when the land was acquired by the Government. The allotment of that land to the landowner was void ab initio. It was held that 'public policy' must be for the public goods and welfare and in the public interest. It cannot be a camouflage for abuse or misuse of the power. In the present case, the policy of the Government was to fritter away the public property for persona! gains. Similarly, in an earlier case, Papaiah v State of Karnataka (AIR 1997 SC 2670), the court held that where land is assigned to a member of the depressed classes, its assignment to a third person is against public policy, and the purchaser does not get any right to such land. In England, a contract of marriage brokerage, the creation of a perpetuity, a contract in restraint of trade, a gaming or wagering contract, or the assisting of the king's enemies, are all unlawful things. The heads of public policy in India are discussed below: (1) Trading with an enemy - i.e. a government at war with the king. (2) Trafficking in public offices - An agreement by which it is intended to induce a public officer to act corruptly is contrary to public policy. A promises to obtain for B an employment in the public service, and B promises to pay 1,000 rupees to A. The agreement is void, as the consideration for it is unlawful [Ill.(f) to Sec.23].

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(3) Interference with administration of justice - An agreement to delay the execution of a decree and a promise to give money to induce a person to give false evidence have been held void. It is in public interest that criminals should be prosecuted and punished. An agreement not to prosecute an offender or to withdraw a pending prosecution is void if the offence is of public nature. Such agreements are called 'agreements to stifle prosecution.' Illus. (h), Sec. 23 reads: 'A promises B to drop a prosection which he has instituted against B for robbery, and B promises to restore the value of the thing taken. The agreement is void as its object is unlawful.' Some minor offences have been recognised as compoundable offences, which permit of a compromise. In all other cases (i.e. non-compoundable offences) any compromise to frustrate an action against a criminal, would be deemed to be unlawful ('you cannot make a trade of a felony'). A promise of reward by a Muslim litigant to a Hindu devotee in consideration of offering prayers for the success of his suit has been held not against public policy (Balasundara Mudaliar v Mahomed Usman AIR 1929 Mad 812). However, a contrary view has been taken by the Allahabad High Court (Bhagwan Datt Shastri v Raja Ram AIR 1927 All 406). In Narasimha Raju v Gurumurthy Raju (AIR 1963 SC 107), certain partners who had filed criminal complaints against co-partners for falsification and forgery allowed the complaint to go by default because they agreed to refer the matter to arbitration, the arbitrator's award was held to be unenforceable. Held that the agreement was for unlawful consideration and thus void. However, if A has a choice to bring a civil or a criminal action against B, and he procures a promissory note from B instead in satisfaction of his claim and drops the idea of bringing any kind of action against B, there is no stifling of prosecution and the pronote is valid (P. Shivaram v T.A.John AIR 1975 Ker 101). The court has made a distinction between 'motive' and 'consideration'. If the consideration is lawful, then the agreement is valid {Union Carbide Corporation v Union of India AIR 1992 SC 248). A compromise agreement made before a complaint is filed, would not amount to stifling a prosecution, although the agreement might be implemented after the filing of the complaint which is subsequently withdrawn (Ouseph Poule v Catholic Union Bank AIR 1965 SC 166). The withdrawal by a wife of her petition for judicial separation on the husband's promising and paying her and the children separate support has been held to be not objectionable under Sec, 23. She was allowed to sue for continued payments in terms of the promise (Sandhya Chatterjee v Salil Chandra Chatterjee AIR 1980 Cal 244).

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(4) Maintenance and Champerty - Maintenance consists in aiding a party in civil proceedings by providing financial or other assistance without lawful justification. When a person (stranger) intermeddles in the litigation between others by providing assistance to one of the parties, and he has no interest of his own in the litigation, such intermeddling is unlawful. Maintenance has been considered to be both a crime and a tort. Champerty is a kind of maintenance in which the person assisting in proceeding is to receive a share in the gain made in the proceedings made by him. When the assistance is without justification, it is unlawful. Because of peculiar Indian conditions, English law of maintenance and champerty has no application in India. The mere fact of an agreement being champertous is not of itself sufficient to render it void it must be shown in addition that it is contrary to public policy. Agreements to share the proceeds of litigation, if recovered, in consideration of supplying funds to carry it on are not themselves opposed to public policy. A fair agreement to assist a ; person in the enforcement of his legal rights (viz. recovery of property) may be held valid even if the person providing the assistance is to be reimbursed out of the proceeds of the action, as such agreement is not per se opposed to public policy. An agreement for improper objects, as for the purpose of gambling in litigation or of injuring or oppressing others by abetting and encouraging unrighteous suits is contrary to public policy [Ram Coomar Coondoo v Chunder Canto Mookerjee, 4 IA 23 PC (1876)]. Thus, the share should not be unconscionable or inequitable; agreements to pay 3/6th share, l/4th share and I /8th share have been upheld but not a promise to pay one-half. An agreement by a client to pay his lawyer according to the result of the case is against public policy (Kothi Jairam v Vishvanath AIR 1925 Bom 470). An agreement to pay 40 percent of the amount recovered to the lawyer by the client is unlawful. (5) Marriage brokerage contracts - Such contracts under which a person agrees to procure a marriage between two persons on some consideration are opposed to public policy and thus void. If the father of a boy or a girl is to be paid some money (dowry) in consideration for his agreement to give his son or daughter in marriage, the agreement will be void. Similarly, an agreement for the sale of a girl will be void. If, however, some advance has been given to a person (defendant) to procure a marriage, but he fails to do the needful the money paid as advance can be recovered by the plaintiff [Hermann v Charlesworth (1905) 2 KB 123], because in such cases the plaintiff is not relying on the illegal transaction, it is the defendant who is relying so. The plaintiff is seeking to recover the money by putting himself and the defendant in the same position as they were before

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the transaction. If, however, the marriage has been solemnised, the money already paid cannot be recovered back. Thus, once the dowry is paid as a consideration for the marriage and the marriage is performed the dowry cannot be recovered back [Baldev Das v Mohamuya (1911) 15 CWN 447], (6) Agreements creating an interest opposed to duty- For example, A agrees to pay B, the lieutenant colonel in the army, Rs.50,000 if he will assist her brother to desert the army. The object of the agreement is opposed to public policy and thus void. Similarly, agreements to reward parents for giving their children in marriage, or, agreements to reward (i.e. bribe) officials for doing favours to a party, or an agreement by a newspaper proprietor not to comment upon the conduct of a particular person, etc. are opposed to public policy and thus void. Consideration and Object Unlawful in Part (Sec. 24) According to Sec. 24, if any part of a single consideration for one or more objects, or any one or any part of one of several considerations for a single object, is unlawful, the agreement is void. This means that if a part of the consideration/object which is unlawful can be separated from the other lawful part the court will enforce only the lawful part. If no such severance is possible, the whole of the agreement is void. Thus, partial illegality may avoid the whole agreement. Thus, if A promises to superintend, on behalf of B, legal manufacture of indigo and an illegal traffic in other articles, and B promises to pay to A a salary of Rs. 10,000 for both the jobs, the whole of the agreement is void [Ill. to Sec. 24]. Similarly, where the plaintiff, a married woman, agreed to live in adultery with the defendant and also agreed to serve him as his housekeeper, and the defendant agreed to pay her Rs.50 per month, the whole of the agreement is void. If the agreement had stipulated payment of Rs.30 p.m. for living in adultery and Rs.20 for housekeeping, the agreement would have been void as to the first object, but valid as to the second. Void Agreements Sec. 2(g) says: "An agreement not enforceable by law is said to be void". There are some agreements which have been specifically or expressly declared as void by the Indian Contract Act. These are; (i) Agreements of which the consideration or object is unlawful (Secs. 23 and 24). (ii) Agreements without consideration (Sec. 25). (iii) Agreements in restraint of marriage (Sec. 26).

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(iv) Agreements in restraint of trade (Sec. 27). (v) Agreements in restraint of legal proceedings (Sec. 28). (vi) Agreements which are uncertain and ambiguous (Sec. 29). (vii) Agreements by way of wager (Sec. 30). (viii) Agreements to do impossible acts (Sec. 56). [Note: Agreement (i) stated above has been discussed earlier in this chapter; agreement (ii), and, agreement (viii) have been discussed elsewhere in the present book. The other agreements are being discussed hereunder.] Restraint of Marriage (Sec. 26) Every agreement in restraint of the marriage of any person, other than a minor, is void (Sec. 26). The restraint may be general or partial. A party may be restrained from marrying at all, or from marrying for a fixed period, or from marrying a particular person, or a class of persons, or not to marry outside a group of families, in all such cases the agreement is void. If the agreement is not in the form of promise to marry a particular lady, but it stipulates that the promisor will not marry any other lady than the promisee, the agreement is void [Lowe v Peers (1768) 4 Burr. 2225]. An agreement restraining the marriage of minor is valid. A penalty upon remarriage may not be construed as a restraint of marriage. An agreement between two cowidows that if any of them remarried she should forfeit her right to a share in deceased husband's property, or an agreement that upon remarriage the widow would lose the right of maintenance, have been upheld. A promise to marry a particular person does not imply any restraint of marriage. Where A and B enter into an agreement that B's daughter 'C’ shall many A's son 'D' and in case 'C’ fails to many 'D', B will pay Rs. 10,000 to A, the contract is valid as there is no restraint of marriage, and an action would lie for damages for breach of contract under Sec. 73. However, if A and B make a family arrangement for intermarriages of their sons and daughters, the agreement would become unlawful under Sec. 26 being in restraint of marriage. Restraint of Trade2 (Sec. 27) An agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void (Sec. 27). _____________ 2. "Liberty to trade is not an aspect which the law would permit a person to barter." Examine. [I.A.S.—96] There is a very limited application of law relating to agreement in restraint of trade in India. Critically examine the statement and suggest the area of limitations. [I.A.S.- 2002]

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Freedom of trade and commerce is a fundamental right protected by the Constitution of India; the individual cannot barter it away by agreement. The principle of law is this: Public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the State of his labour, skill or talent, by any contract that he enters into. Restraining a person from carrying on a trade generally aims at avoiding competition and has monopolistic tendency and this is both against an individual's interest and the society's interest. "The law concerning restraint of trade has changed from time to time with the changing conditions of trade, but these changes have on the whole been a continuous development of a general rule" (Anson). Whether the restraint is general or partiable, unqualified or qualified, if the agreement is in the nature of a restraint of trade, it is void. Thus an agreement requiring a person not to trade within a certain area or for certain duration is void. Where the defendant and the plaintiff were rival shopkeepers in a locality and the former agreed to pay a sum of money to the latter for closing his shop and the latter did so but the former refused to pay, held that the agreement was void [Madhu Chander v Raj Coomar (1874) XIV Bengal Law Reports 76]. A contract by a newspaper proprietor not to comment on the conduct of a particular person is void. In Gujarat Bottling Co. Ltd. v Coca Cola (AIR 1995 SC 2372), an agreement by the Coca Cola Company with a licencee for use of certain trade marks like Thumps Up, Limca, etc. with a condition that the licencee/franchisee shall not deal with competing goods was held to be valid. Read literally, Sec. 27 would seem to prohibit every restraint - even a restraint limited geographically (in point of area), or duration. But, pragmatic considerations seem to have induced, some High Courts in India to dilute the rigour of the section by upholding partial restraints, if they are reasonable. The Supreme Court has been mainly concerned with restraints imposed on employees. In England all agreements in restraint of trade are void, unless there is some justification for the restraint making it reasonable. Indian law is stricter. It recognises only certain exceptions through statutes and judicial decisions. Any agreement which is not covered by anyone of the recognised exceptions is void. Statutory Exceptions (i) Sale of Goodwill - The only exception mentioned in Sec. 27 is that relating to sale of goodwill. An agreement by a person, who sells the goodwill of his business not to carry on a similar business within specified local limits, so long as the buyer carries on a similar business, is valid provided that the restrictions are reasonable. If the object of the agreement is to protect the right of the buyer of goodwill, the restraint is valid.

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Thus, in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co. Ltd. (1894) AC 535, there occurred a sale of goodwill by an inventor and manufacturer of guns and ammunition who agreed with the buyer company: (1) not to practise the same trade for 25 years, and (2) not to engage in any business competing or liable to compete in any way with the business for the time being carried on by the company. It was held that the first part of the agreement was valid being reasonably necessary for the protection of the purchaser's interest, but the second part was considered to be unreasonable and void. Where the aim of an agreement is prevention of competition, it will be void. Thus in Vancouver Malt & Salt Brewing Co. v Vancouver Breweries Ltd. (AIR 1934 PC 101), a company which produced only 'sake' (Japanese liquor made from rice), sold its goodwill for producing 'beer' (which the company never manufactured or sold although it could do so by virtue of a licence), the agreement was held to be devoid of all contents. This only means an agreement not to make any competition in future in manufacturing beer. The agreement has to specify the local limits of restraint. The restraint should not be very wide, viz. 'anywhere in the world'. The seller can only be restrained from carrying on a similar business and also only for such period for which the business sold is actually carried on either by the buyer or by any person deriving title to the goodwill from him. (ii) Partnership Act3- There are four provisions in Partnership Act which validate agreements in restraint of trade. Sec. 11 enables partners during the continuance of the firm to restrict their mutual liberty by agreeing that none of them shall carry on any business other than that of the firm. Sec. 36 enables them to restrain an outgoing partner from carrying on a similar business within a specified period/ local limits. A similar agreement may be made by partners under Sec. 54 upon or in anticipation of dissolution by which they may restrain each other from carrying on a business similar to that of the firm. Sec. 55 relates to the sale of goodwill of the firm. Judicially Recognized Exceptions (i) Trade combinations- Sometimes the traders and manufacturers combine together (e.g. via an Association, or, joint agreements) to eliminate competition as between themselves and make agreements fixing minimum price, regulating the supply of goods and putting profits in a common pool and then dividing the same amongst _____________ 3. Are there any exceptions in the partnership law to the rule that contracts in restraint of trade are void? [I. A. S. -93]

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themselves. Such agreements are neither void on the ground of being opposed to public policy, nor are they deemed to be in restraint of trade as their primary object is to regulate business. Thus, the rules of an association of traders may provide that members shall not deal with outsiders. But the court would not allow a restraint to be imposed disguised as trade regulations. Thus an agreement between certain persons to carry on business with the members of their caste only, and an agreement to restrict the business of a sugar mill within a zone allotted to it, have been held void. Agreements attempting to create monopoly would be void. (ii) Solus or exclusive dealing agreements - In such a case one party agrees to deal with the other party and none else. It is a common business practice that a producer or manufacturer likes to market his goods through a sole agent /distributor and the latter agrees in turn not to deal with the goods of any other manufacturer. So long as the object of the agreement is the benefit of the parties to the contract rather than monopolising the trade, there is nothing unreasonable in it. But where a manufacturer or supplier, after meeting all the requirements of a buyer, has surplus to sell to others, he cannot be restrained from selling it to others (Har Bilas v Mahadeo Pd. AIR 1931 All 539). Further, when the object of the agreement is to corner goods or to monopolise trade, or the restraint is for unduly long time, for example binding a party with such agreement "from generation to generation" the agreement cannot be considered to be lawful. In Shaikh Kalu v Ram Saran Bhagat (1908) 8 CWN 388, a seller of combs entered into an agreement with all the manufacturers of combs in the city of Patna whereby the latter undertook during their life time to sell all their products to R.S., and to his heirs and not to sell the same to anyone else. The agreement was held to be void. (iii) Contract of service - An agreement of service by which an employee agrees that he will serve a particular employer for a certain duration, and that he will not serve anybody else during that period, is a valid agreement. Trade secrets, name of customers, etc., may not be given away by a servant, they are his master's property. A servant may, therefore, be restrained from taking part in any business in direct competition with that of his employer. But an agreement to restrain a servant from competing with his employer after the termination of employment may not be allowed by the courts (unless the restraint is necessary for protecting the employer's goodwill).

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In Charlesworth v MacDonald ILR (1898) 23 Bom 103, the defendant agreed to serve as an assistant to the plaintiff, a physician and surgeon, for a period of three years and not to practise himself during that period. After one year he left plaintiff's service and started his own practice in the same city. The defendant was restrained from doing so during the period of three years. Similarly, held in Niranjan Shanker Golikari v Century Spinning & Mftg. Co. Ltd. (AIR 1967 SC 1098). In this case, the company, while engaging the defendant as its employee secured an undertaking from him that for five years, he shall not serve anywhere else having similar or substantially similar work, even if he left the company's employment. This condition was upheld as valid by the Supreme Court, as it was reasonable and necessary for the protection of the company's interests. The court pointed out that the agreement was only for five years and was not unconscionable. The court observed that such negative covenants in service contracts operating during the period of the contract of employment are not generally regarded as in restraint of trade. If the restraint is to operate after the termination of employment, it does not amount to restraint of trade unless the contract is unconscionable or excessively harsh or unreasonable or one-sided. Thus, where the negative covenant was for 20 years and the contract gave the employer an arbitrary power to terminate the service without notice, it was held to be unreasonable (Gopal Paper Mills Ltd. v Surender K. Ganesh Das AIR 1962 Cal 61). Similarly, in Brahamputra Tea Co. v E. Scarth ILR (1885) 11 Cal 545, where an attempt was made to restrain a servant from competing for 5 years after the period of service, the court disallowed it. However, in England, employee's freedom to work can be restrained even after the employment is over, provided the restraint is reasonable. The rationale being that an employer is entitled to reasonable protection against exploitation of trade secrets. Thus, an agreement by a solicitor's clerk not to practise within 7 miles of that place after leaving his employment, was held to be valid even though the restraint was unlimited in point of time [Fitch v Dewes (1921) 2 AC 158]. A rule in the terms of employment that in case a servant took employment with a competitor, his pension benefits would be forfeited, has been held to be void [Bull v Pitney Bowers Ltd, (1966) 3 All ER384). An agreement between two employers that neither would employ any person who had been the other's employee within a period of 5 years has been held to be void [Kores Mfg. Co. v Koloh Mfg. Co. (1958) 2 All ER 65]. Where a restraint is to operate after an employee leaves service, it will not bind him if he is removed without fault (Superintendence Co. of India v Krishna Murgai AIR 1980 SC 1717).

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Restraint of Legal Proceedings4 (Sec. 28) Sec. 28 states that an agreement absolutely restraining a party from enforcing his rights through a court of law, or an agreement which places a limit as to the time within which a right can be enforced, is void (unless it is not a contract but only a gentlemen's agreement). Further, the right to appeal does not come within the purview of the section. A party to a suit may agree not to appeal against the decision. This section overrides the maxim that custom and agreement may override the law (modus et conventio vincunt leggem). An agreement to oust the jurisdiction of the courts is opposed to public policy and thus void. The agreement is void if restraint is an absolute one. A partial restriction will be valid. Thus if two competent courts can possibly deal with the subject matter of litigation, it is open to the parties to a contract to agree that a dispute should be adjudicated upon by one of the courts only ('Forum Selection Clauses') e.g. a clause that the Delhi Court alone shall have the jurisdiction to adjudicate. Such exclusion clause would not be violative of Sec. 23 or Sec. 28 of the Contract Act. In Hakam Singh v Gammon (India) Ltd. (AIR 1971 SC 740), a clause in the agreement provided that the Bombay Court alone shall have the jurisdiction to adjudicate. The plaintiff filed a suit at Varanasi, but it was dismissed in view of the said agreement. The Supreme Court held that the suit filed at Varanasi was rightly dismissed. The position would be different if the Bombay Court has no jurisdiction. The intention to exclude the jurisdiction of other courts should be expressed clearly, say by using words such as 'only', 'exclusive', 'alone', etc. In C. Satyanarayna v K.L. Narasimham (AIR 1968 A.R330), the defendant wrote a letter to the plaintiff on the top of which was printed: "Subject to Madras Jurisdiction." It was held that such words could not become a part of the contract unless it was expressly agreed to by the plaintiff. An agreement conferring jurisdiction on a court not having jurisdiction is also opposed to the public policy and void. The parties could enter into an agreement conferring jurisdiction on a particular court, and, such an agreement is not hit by Sec. 28. However, such a provision would apply to those cases where two or more courts have jurisdiction to entertain a suit and the parties have agreed to submit to the jurisdiction of one court. A clause vesting jurisdiction on a court which otherwise does not have jurisdiction to decide the matter, would be void as being against the public policy. Hence even though there is an agreement between the parties to the _____________ 4. "Jurisdiction of a court to decide disputes arising out of contractual relations cannot be ousted by an agreement between the parties." Discuss. [I.A.S.- 2003]

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contrary, it has no effect and cannot be enforced [Harshad Chiman Lal Modi v D.L.F. Universal Ltd. AIR 2005 SC 4446]. Another kind of agreement rendered void by the section is where an attempt is made by the parties to restrict the time within which an action may be brought so as to make it shorter than that prescribed by the Law of Limitation. According to the Indian Limitation Act, for example, an action for the breach of contract may be brought within 3 years from the date of breach. If a clause in an agreement provides that no action should be brought after 2 years, the clause is void. An agreement curtailing the 'period of limitation' should be distinguished from an agreement resulting in the release or forfeiture of the rights if an action is not brought within a certain period. Such clauses are generally there in- insurance agreements viz. a clause that the company shall not be liable if no suit were brought within 12 months after the occurrence of loss was held valid. Such agreements do not curtail the time period for an action, they rather extinguishes the right because of the delay in bringing the action (lapse of time in insurance cases is quite crucial) (Prithvi Nath Mall v Union of India AIR 1962 J&K 15). However, Sec. 28 has been amended by the Indian Contract (Amendment) Act, 1997. The amended section provides that, "Every agreement which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent". The amendment has brought about the change that all clauses which reduced the period of limitation would be void to that extent. Thus the artificial distinction between a clause cutting short the period of limitation and a clause providing for extinction of rights after a specified period has been eliminated. Sec. 28 does not provide for enhancing the period of limitation. But, if the right to sue is kept subsisting even after the period of limitation, then such an agreement will be void under Sec. 23, being as tending to defeat the provision of law i.e. Indian Limitation Act. Exceptions to Sec. 28 Exception 1 to Sec. 28 allows a contract by which two or more persons agree that any dispute which may arise between them shall be referred to arbitration and that only the amount awarded in the arbitration shall be recoverable. An agreement to refer dispute to arbitration does not close the final door to court of law. Thus, the right to proceed against the arbitrator's award, for example, to have it set aside, cannot be excluded by the contract. Exception 2 states that contracts to refer to arbitration questions that have already arisen are valid.

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Uncertain Agreements (Sec. 29) Agreements, the meaning of which is not certain, or capable of being made certain, are void (Sec. 29). For example, A agrees to sell to B "a hundred tons of oil". There is nothing whatever to show what kind of oil was intended. However, A, who is a dealer in coconut oil only, agrees to sell to B "one hundred tons of oil", then there is a certainty in the agreement. Similarly, where A agrees to sell to B "all the grain in my granary at Ram Nagar", there is no uncertainty to make the agreement void. Where A agrees to sell to B "my white horse for Rs.500 or Rs. 1000", there is nothing to show which of the two prices was to be given, thus the agreement is void. A promises to pay B for his services whatever A himself will think right or reasonable. Later, being dissatisfied with the payment made, B sues A. B's suit will not be admitted by the court because if the performance of a promise is contingent upon the mere will and pleasure of the promisor, there is no contract. In Guthing v Lynn 1831 (2 B Ad 232, a horse was bought for a certain price coupled with a promise to give £5 more if the horse proved lucky. The agreement was held to be void for uncertainty. Where goods are sold, the price being payable subject to 'hire purchase terms' or 'at such price as should be agreed upon between the parties', the agreement were held to be void for uncertainty as to price. An 'agreement to agree in the future' is a void contract, for there is no certainty whether the parties will be able to agree. There cannot be a contract to make a contract. Similarly, an agreement to pay a certain sum with interest after two years "after deductions as would be agreed upon" has been held void for uncertainty (Kovuru Devara v Kumara Krishna Mitter AIR 1945 Mad. 10). Where the price is left to be fixed by a third party, there is no uncertainty and the agreement will be enforceable. If A agrees to sell to B "one thousand maunds of rice at a price to be fixed by C", there is no uncertainty as the price is capable of being made certain. Similarly, if the agreement is totally silent as to price, it will be valid, for, in that case, Sec. 2 of the Sales of Goods Act, 1932, will apply and the reasonable price shall be payable. A provision in a contract, employing the phrase 'usual condition of acceptance only' is void, if there is no evidence of such usual conditions [Kolliapara Sriramula v T. Awastha Narayana AIR 1968 SC 1028]. In contrast, a clause in an agreement subject to the usual force majeure clause is valid [Dhanrajmal Gobindram v Shamji Kalidas & Co. AIR 1961 SC 1285].

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Wagering Agreements (Sec. 30) An agreement by way of wager is void, subject to certain exceptions (Sec. 30). The section does not define the expression 'wager'. The word 'wager' means a 'bet'. It is a promise to give money or money's worth upon the determination or ascertainment of an uncertain event (Anson). The Supreme Court adopted this definition in Gherulal v Mahadeo (AIR 1959 SC 781). It is an agreement by A to pay money to B on the happening of a given event in consideration of B paying money to him on the event not happening. In a wagering agreement, two parties have opposite views regarding an uncertain event, and they stipulate that upon the determination of the event in a certain way the parties shall win or lose from each other a certain sum of money, and the parties have no other interest in the event except winning or losing a bet [Carlill v Carbolic Smoke Ball Co. (1892) 2 QB 434]. For instance, A and B may enter into a contract that if it rains today, B will pay him Rs. 1,000 or if it does not rain today, A will pay him Rs. 1,000, it will be a wagering agreement. If either of the parties may win but cannot lose, it is not a wagering contract. In Subhash Kumar Manwani v State (AIR 2000 M.P. 109), it was observed by the High Court: "To treat an agreement by way of wager as void is that the law discourages people to enter into games of chance and make earning by trying their luck instead of spending their time, energy and labour for more fruitful and useful work for themselves, their family and the society." The essential characteristics of a wagering agreement are as follows: (i) Uncertain event - Such event generally is a future event, but may be a past event when the parties are not aware of its result or the time of its happening. (ii) Mutual chances of gain or loss - There should be a chance of one party winning and the other losing, on the determination of the event. For example, A agrees to sell his cow to B for Rs. 500 if the cow gives 6 kg milk every day, but for Rs. 10 only if it fails to do so. The cow fails; but B will not succeed as the transaction, though ostensibly a sale, is in reality a wager [Brogden v Marriott 5 LJ (CP) 302]. In Babasaheb v Rajaram (AIR 1931 Bom 264), two wrestlers agreed to play a wrestling match on the condition that the party failing to appear on the day fixed was to forfeit Rs. 500 to the opposite party, and the winner was to receive Rs.1,125 out of the gate money. The defendant failed to appear in the ring and the plaintiff sued him for Rs.500. The defendant took the plea of a 'contract by wager' which was rejected by the court on the ground that neither side stood to lose according to the result of wrestling match. The stakes did not come out of the pockets of the parties, but had to be paid from the gate money provided by the public. In Diggle v Hige (1877) 2 ExD.

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422, each one of the two parties in a walking match deposited £200 with the stakeholder with the condition that the loser would forfeit the amount of £200 paid by him. The agreement was held to be a wagering one, as the stakes come out of the pocket of the loser. In Carlill v Carbolic Smoke Ball Co. (1892) 2 QB 434, the defendant company agreed to pay £ 100 if a person contracted influenza after using the smoke ball manufactured by it, for a certain period according to a prescribed manner. The plaintiff used the smoke ball but contracted influenza. She was held entitled to recover the amount. It was not held to be a wagering agreement because the plaintiff was not to lose anything if she did not contract influenza and the defendant company was not to gain anything from the plaintiff if the ball had the desired effect. (iii) Neither party to have control over the event. A wager is a game of chance. (iv) No other interest in the event - Lastly, neither party have any interest in the contract than the sum on stake he will so win or lose and there is no other real com aeration for the making of such contract. This distinguishes a vagering contract from a contract of insurance which requires an "insurable interest" i.e. an interest in the existence and preservation of the thing insured. A wife, for example, has an insurable interest in her husband's life and she can take an insurance policy on her husband's life. If a person does not have any insurable interest in the life / property of another person, the agreement will be a mere wager and, therefore, void. Speculative transactions- One of the forms of wagering agreement is an agreement to pay differences (between contract price and market price of goods) only, rather than actually making or taking the delivery of goods. Such transactions are not the commercial one but a wager on the rise or fall of the market which comes within the connotation of "gaming". Thus, where a rice mill owner agreed to sell 1,99,000 bags of rice, worth about a crore of rupees, when his actual capacity was much less, the court held the agreement to be a wager since neither party intended the performance of the contract. When the parties intend the performance of a future contract and such a performance is not otherwise impossible, it would be a valid business transaction. Thus if in a contract for sale of shares an actual delivery is intended, it cannot be considered to be a wagering contract. In all "forward contracts" there is an element of speculation. The teji-mandi transactions may be wagers, and the pacca aditya (commission agent) may not recover. A 'chit' fund is not a wager. It is no doubt true that some chance gain may come to some of the members, but none of them stands to lose his

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money, for his periodical deposits are refunded to him at the end of the scheme [Narayana Ayyangar v K.V. Ambalam (1927) ILR 50 Mad 696]. A 'lottery' is a game of chance. Hence it is a wagering transaction. It is also illegal under the Indian Penal Code. Effects of Wagering Agreements and Collateral Transactions A wagering agreement is non-enforceable, thus the amount won on a wager cannot be recovered. A and B entered into wagering transactions in shares. B became indebted to A. B then executed a promissory note in favour of A to pay the amount. A could not recover the amount. Though a wagering agreement is void and unenforceable, it is not forbidden by law, and therefore transactions collateral to the main transaction are enforceable. Thus, the plaintiff who lent money to the defendant to enable him to pay off a gambling debt could recover the same from the defendant. The Supreme Court held in Gherulal Parekh v Mahadeo Das (AIR 1959 SC 781), that a partnership to enter into wagering transactions is not illegal, and therefore a partner who has paid the losses on such transactions may recover proportionate indemnity from his co-partners. Likewise, an agent who paid the losses on wagering transactions was allowed to recover the amount paid by him from his principal. The Supreme Court also pointed out in Mahadeo case that a wager is neither opposed to public policy (it has been recognized for centuries and has been tolerated by the public and the State alike), nor immoral (the precedents confine immorality only to sexual immorality). In States like Maharashtra and Gujarat, wagering agreements have been declared illegal also. Thus in these States the collateral transactions to wagering agreements are also void. Exceptions Sec. 30 does not render void a subscription/contribution, or an agreement to subscribe/contribute towards any plate, prize or sum of money (of the value of Rs. 500 or upwards) to the winner or winners of any horse-races. Thus a bet on a horse race carrying a prize of Rs. 500 or more to the winners is valid. In K.R. Lakshman v State of T.N. (1996) 2 SCC 226, it was held that the business of horse racing did not constitute either gambling or gaming but was a game of mere skill. Further, crossword competitions in which skill plays a substantial part are not wagers. But where prizes depend upon a chance, that is a Tottery', it is a wager.

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Distinction between Illegal and Void Agreements5 (Consequences of Illegal Agreements) An illegal transaction is one which is actually forbidden by law (Sec. 23), but a void agreement may not be forbidden, "the law may merely say that if it is made, the courts will not enforce it" (Secs. 25 to 30). Thus every illegal contract is also void, but a void contract is not necessarily illegal. However, in both, the main or the primary agreement is unenforceable. But a collateral transaction to the main agreement is enforceable if the main agreement is void but not illegal (see above). If the main transaction is illegal, for instance, smuggling, a collateral transaction like money given to enable a person to smuggle, will also be illegal. Exceptions The general rule is that 'no action arises from a disgraceful cause' i.e. ex turpi causa non oritur actio. According to Anson, however, there are three exceptional cases in which a man will be relieved of the consequences of an illegal contact into which he has entered: (i) Where the contract is still executory - Where no part of the illegal purpose has been carried into effect, the money paid or goods delivered under it may be recovered. A debtor executed a transfer to deceive the creditors, but before any creditor could be deceived, he repented and sought to recover back the property, which he was allowed to do so [Bigos v Bowstead (1951) 1 All ER 92 QB]. Repentance should not be due to the failure of the illegal object; frustration is different from repentance. Where money is paid to a person to induce him to commit a crime, the court may not allow its recovery even on the ground of repentance, particularly where the crime is of violent nature. (ii) Parties not 'in pari delicto' - Pari delicto means 'in equal fault'. Where the parties are not in pari delicto the less guilty may be able to recover money paid, or property transferred, under the contract. Thus, where the contract is of the kind made illegal by the statute in the interest of a particular class of persons of whom the plaintiff is one; or, where the plaintiff was induced by fraud or strong pressure; or, the defendant is under a fiduciary duty to the plaintiff, the plaintiff may recover back the money or property. Thus a lawyer would be bound to refund the money obtained by him from his client under a champertous agreement, because the payment involved breach of fiduciary duty. _____________ 5. "All illegal agreements are void but all void agreements are not illegal". Discuss. [I.A.S.-2007]

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(iii) Where recovery possible without; relying on the illegal contract-Machine tools delivered under an illegal sale were allowed to be recovered. A man's right to his property will be enforced as against a person in possession who obtained possession under an unlawful agreement. In Surosaibalini Debi v P.M.Majumdar (AIR 1965 SC 1364), a person was allowed to recover possession of his property and business which he had made over to his brother-in-law for evasion of taxes. Likewise, where a building was let out for gambling purpose, the tenancy being for unlawful purpose, the rent could not be recovered but possession can be recovered. In Rajat Kumar Rath v Government of India (AIR 2000 Ori 32), it was held that if an agreement is merely collateral to another or constitutes an aid facilitating the carrying out of the object of the other agreement which though void, is not prohibited by law, it may be enforced as a collateral agreement. Where a person entering into an illegal contract promises expressly or by implication that the contract is blameless, such a promise amount to collateral agreement upon which the other party if in fact innocent of turpitude may sue for damages. Contingent Contracts (See. 31) According to Sec. 31, 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." Thus the contract is dependent or conditional upon the happening or non-happening of a future event or contingency. For example, A contracts to pay B Rs. 10,000 if B's house is burnt, this is a contingent contract. The payment of the amount is contingent on the happening of the collateral event i.e. burning of the house. All contracts of insurance or indemnity and guarantee are contingent contracts. A distinction is to be drawn between a contract under which a present obligation is created but performance is postponed to a future date, and a contract under which there is no present obligation at all and the obligation is to arise by reason of some condition being complied with or some contingency arising in future. Thus when the agreement states that the delivery is to be made when the goods are received from the mills or when they arrive, such contracts are not contingent contracts. In a contingent contract there should be some event collateral or incidental to the contract. According to Pollock and Mulla, a 'collateral event' means an event which is "neither a performance directly promised as part of contract, nor the whole of the consideration for a promise". It is one which does not form part of consideration of the contract, and is independent of it. If the event consists in performance of the contract itself by one party,

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it is not a contingent contract. For instance, A announces a reward of Rs. 100 to be paid to any one who finds his lost dog. B finds the dog. B's act of finding the dog is acceptance of the offer as well as of the performance of contract. It is not a contingent but an absolute contract. Similarly, where C contracts to pay Rs. 100 to D for white-washing his house on the terms that no payment shall be made till the completion of the work, it is not a contingent contract because the event (D's completing the work) is an integral part of the contract and not collateral to the contract. However, where A contracts to pay Rs. 50,000 to B, a contractor for constructing a building, provided the construction is approved by an architect, it is contingent contract because approval by an architect is a collateral event which is independent of consideration i.e. construction of the building. Where with a view to set up a company for the manufacture and sale of Unani medicines, a State Government paid an advance to B for the purchase of his book on Unani medicine; however, the scheme of manufacturing medicines could not materialize. Held that the contract was not contingent on the happening of collateral event (setting up of the company) and thus B can claim the remaining sum from the Government (Bashir Ahmedv Govt. of A.P. AIR 1970 SC 1089). A 'wagering agreement' is also a contingent contract, but it has been declared void by Sec. 30. The only chief element of a contingent contract is that its performance is linked with the happening of a contingency. A car insurance against accident, for example, creates liability only when an accident takes place. The performance of a wagering agreement is also linked with an uncertain event. But a contingent contract serves some business or social purpose while a wagering contract is an' attempt to make gain out of a pure chance. There is no business or consideration in it. Further, in a wagering contract, there are mutual chances of gain or loss, if either of the party may win but cannot lose, it is not a wagering contract. It then becomes a contingent contract. Thus if A enters into a contract with B to pay him a sum of Rs.5,000 if India wins the world cup, it is a contingent contract. Enforcement of Contingent Contract The rules governing the enforcement of various kinds of contingent contracts are as follows: 1 (i) Contracts contingent on an event happening – Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced unless and until that event happened. If the event becomes impossible, the contract becomes void (Sec. 32).

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For example, A makes a contract with B to buy B's house if A survives C. This contract cannot be enforced by law unless and until C dies in A's life-time. Likewise, A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been offered refuses to buy him. The contract cannot be enforced unless and until C refuses to buy. But where A contracts to pay B a sum of money if B marries C, C dies without being married to B, the contract becomes void. (ii) Contracts contingent on the event not happening - Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before (Sec. 33). For example, A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. (iii) Contracts contingent on the future conduct of a living person - If the event contemplates the way in which a particular individual 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 act so within any definite time, or otherwise than under further contingencies (Sec. 34). If for example, a person promises to marry a certain person and marries another, his marriage with the promisee is then deemed to have become impossible. (iv) Contracts contingent on happening of specified event within fixed time - If the contract contemplates the happening of the event within a certain time, the contract becomes void if the event does not happen or its happening becomes impossible before the expiry of that time. Where the contract is to be performed if the event does not happen within a specified time, its performance can be demanded if the event does not happen or its happening becomes impossible before the expiry of that time (Sec. 35). Thus, if A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year. (v) Contracts contingent on impossible event - If the performance is made to depend upon an event which is already impossible, the contract is void whether or not the fact is known to the parties (Sec. 36). For example, A agrees to pay B Rs. 1,000 if two straight lines should enclose a space, the agreement is void.

Page 163 7 Discharge of Contract (Performance, Agreement and Novation) When the object of a contract is fulfilled, the liability of either party under the contract comes to an end. The contract is then said to be discharged or terminated. In other words, when the agreement which was binding on the parties to it, ceases to bind them, the contract is said to be discharged, or, when the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged. A contract may be discharged in the following ways: (1) By Performance of the contract (Secs. 37-67); (2) By Breach of the contract (including anticipatory breach-Sec.39); (3) By Impossibility of performance (doctrine of frustration- Sec.56); (4) By Agreement and Novation (Secs. 62-67). (5) By Operation of law. [1] Performance of Contract Every contract consists of reciprocal and actionable promises.1 Each party to the contract is bound to perform the promise made by him i.e. his part of the obligation otherwise an action would lie against him. After the parties have made due performance of the contract, their liability under the contract comes to an end. In such a case the contract is said to be 'discharged by performance.' __________ 1. "A contract consists of the actionable promise or promises." Examine. [I.A.S.-96 [Note: Also see Sec. 2(h) and (f), and Secs. 51 54]

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According to Sec. 37, "parties to the contract have a duty to perform, or offer to perform their respective promises, unless the performance is dispensed with or excused under the provisions of the Contract Act, or of any other law." Thus if A promises to deliver goods to B on a certain day on payment of Rs. 1,000 but A died, then A's representatives are bound to fulfill the contract made by A. However, where the contract depends on personal skill, such as painting a picture, on the death of the promisor the representatives are not bound by the obligation. Likewise, where the contract becomes impossible to perform under Sec. 56, the contract becomes void and need not be performed. Offer or Tender of Performance (Sec. 38) The promisor must offer to perform his obligation under the contract to the promisee. The offer is called "tender of performance." It is then for the promisee to accept the performance. If he does not accept, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract (Sec. 38). The promisor, then, can sue the promisee for breach of the contract. Sec. 38 further lays down that every such offer of performance must fulfill the following conditions: (i) The tender must be unconditional. A tender becomes conditional when it is not in accordance with the terms of the contract. Payment by cheque is deemed to be subject to encashment and, therefore, it is only a conditional tender. (ii) The tender must be made at proper time and place, and under such circumstances that the promisee may have a reasonable opportunity of ascertaining that the promisor is able and willing there and then to do the whole of what he is bound by his promise to do. In Startup v MacDonald (1843) 64 RR 810, the defendant bought of the plaintiff ten tons of linseed oil to be delivered within the last 14 days of the month of March. The plaintiff tendered on the last of the fourteen days at 9 O'clock at night. The defendant refused to accept owing to the lateness of the hour. He was held liable for the breach as the jury found that, though the hour was unreasonable, yet there was time for the defendant to have taken in and weighed the goods before midnight. Where a payment had to be made on June 14, but the same was sent by telex to a wrong address and on 14th itself a notice of default was issued, the court regarded the notice as bad as the debtor had to pay before or at midnight on June 14 [Afovos Shipping Co. v R. Paganan (1982) 1 Lloyd's Rep 562 CA]. If the tenderer has to deliver something to the promisee, the

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latter must have reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver. (iii) An offer to one of several joint promisees has the same legal consequences as an offer to all of them. By Whom Contract should be Performed (Secs. 40-41) According to. Sec. 40, if the contract is one which is based on personal confidence, or involves the exercise of personal skill like painting, dancing, singing, marrying, or writing a book, etc., it must be performed by the promisor himself and nobody else. If, on the other hand, the contract does not involve personal skill, the promisor or his representatives may employ a competent person to perform the same. According to Sec. 41, when the promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. By agreeing to the performance by a third person, the promisee is deemed to have waived his right of getting the performance personally from the promisor. Thus, if A owes, B a sum of Rs. 5,000; C, who is As friend pays to B Rs. 5,000. The payment by C to B discharges A from the debt. Performance of Joint Promises (Secs. 42-45) Sections 42-45 deal with the question of liability of the joint promisors. The following rules are contained in these sections: (i) The liability of the joint promisors is joint and several. When a joint promise is made, and there is no express agreement to the contrary, the promisee may compel any one or more joint promisors to perform the whole of the promise (Sec. 43). For example, A, B and C jointly promise to pay D, Rs.3000. D may compel either A or B or C to pay him Rs.3000. However, it would be illegal to pass a decree directing that one of the promisors should perform, in the first instance [Rama Shankar Singh v Shyamlata Devi AIR 1970 SC 716]. Contracts involving personal skill (e.g. to paint a picture) come to an end on the death of any of the joint promisors. Successive action against different joint promisors - If the promisee brings an action against one or some of the joint promisors only, and leaves others, a judgment against those some promisors does not bar an action against others, if the full amount has not being recovered from them. Under English law; such an action is barred [King v Hoare (1844) 13 M &W 494]. In India, according to Strachey CJ, there is no such bar in the words of Sec. 43. But some High Courts have disallowed such actions. (ii) According to Sec. 42, "joint promisors" must, during their joint lives, fulfill the promise. And if any one of them dies, his

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representatives must, jointly with the surviving promisors, fulfill the promise. On the death of the last survivor, the representatives of all of them must fulfill the promise. But this is subject to any private agreement between the parties. According to English law, the representatives of the deceased promisor neither obtain any rights nor assume any liability, unless they are representatives of the last surviving promisors. (iii) There can be contribution between joint promisors. It means that if one joint promisor is made to pay more than his share, he can recover contribution from the other joint promisors, according to their shares. If any one joint promisor makes a default in making contribution, the remaining joint promisors must bear the loss arising from such default in equal shares (Paras 2 and 3, Sec. 43). (iv) The creditor is also given the right to release anyone of the joint promisors from his liability (Sec. 44). Under English law, a discharge of one joint promisor amounts to a discharge of all, unless the creditor expressly preserves his rights against them, (v) According to Sec. 45, when a promise is made to several persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests with all the promisees jointly and a single promisee cannot demand performance. Thus if A and B execute a promissory note in favour of C and D; C will not succeed if he sues alone, D must join him. Under the terms of Sec. 45, a payment to one of several joint promisees does not operate as a complete discharge of a debt. Thus if A borrows Rs. 3,000 from B, C and D, and when the debt becomes due A tenders it to B who accepts it, A is not discharged by the payment. Time and Place for Performance (Secs. 46-50) According to Sec. 46, even though no time for performance is fixed by the parties, the contract is not rendered void for uncertainty. The performance, in such a case, has to be made within a 'reasonable' time. According to Sec. 47, when the promise is to be performed on a certain day, the promisor's duty in such a case is to perform the contract during the usual business hours on such day, otherwise it would amount to non-fulfilment of the promise. According to Sec. 48, when a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business. According to Sec. 49, where no place is fixed and the promisor has undertaken to perform without application by the promisee, the promise should be performed at the

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place where it ought to be performed. It may be noted that where the place for performance is fixed in the promise, the performance must be offered at that place. According to Sec. 50, the performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions. For instance, B owes A Rs.2,000. A desires B to pay the amount to A's account with C, a banker. B, who also banks with C, orders the amount to be transferred from his account to A's credit, and this is done by C. Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B. Where A owes B Rs.2,000 and B accepts some of A's goods in reduction of the debt, the delivery of the goods operates as a part payment. Where A desires B, who owes him Rs.100, to send him a note for Rs.100 by the post. The debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A. Effect of Failure to Perform the Contract in Time2 (Sec.55) Sometimes the parties to a contract specify the time for its performance. Until the exact date has arrived, performance cannot be demanded. Ordinarily it is expected that either party will perform his' obligation at the stipulated time. If the intention of the parties was that time should be of the essence of the contract, then a failure to perform at the agreed time renders the contract voidable at the option of the opposite party (Sec. 55), because nonperformance of the contract in time would frustrate the purpose which the parties have in mind. Time is generally considered to be of the essence of the contract: (1) where the parties have expressly agreed to treat it as of the essence, (2) where delay operates as an injury, (3) where the nature and necessity of the contract requires it to be so construed, for example, where a party asks for extension of time for performance (if the time were not of the essence of contract, a party need not have asked for extension of time). Even where a specific date is mentioned in the contract, one has not to look at the letter but at the substance of the agreement in order to ascertain the real intention of the parties. In "commercial contracts" times is ordinarily of the essence of the contract (Wasoo Enterprises v J.J. Oil Mills AIR 1968 Guj. 57); similarly when the prices of the goods like shares or bullion are subject to rapid fluctuation. In an auction purchase, where the price was to be paid within 15 days, time was held to be of the essence of the contract. In China Cotton Exporters v Biharilal Ramchandra Cotton Mills Ltd. (AIR 1961 SC 1295), the shipment time was "October-November, 1950", and it was added that contract is subject to import licence and therefore the shipment __________ 2. Explain the principle of 'time is the essence of contract'. [I.A.S.- 2000]

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date is not guaranteed. It was held that the shipment date must be regarded as that of the essence despite the fact that delay in obtaining import licence might stand in the way of keeping to the shipment dates. In case of sale of immovable property, the time is generally not the essence of the contract (Gomathinayagam Pillai v Paliniswami Mindaw AIR 1967 SC 868). Thus merely because the date of execution of sale deed has been fixed does not make the time as the essence of the contract. However, the right to renew a lease must be exercised strictly within the time limited because it is a personal privilege [Caltex (India) Ltd. v Bhagwan Devi Marodia AIR 1969 SC 405]. Further, where a lady was compelled to sell a house to repay loan and to meet her day-to-day living expenses, the time of payment fixed in such a case was held to be of the essence of the contract (Suraj Singh v Nathi Bai AIR 1990 M.P. 323). In a contract for the reconveyance of immovable property, time is of the essence (Bismillah Begam v Rahamolullah Khan AIR 1998 SC 970). In K.S Vaidyanathanv Vaira Van (AIR 1997 SC 1751), the Supreme Court emphasized that having regard to the nature of the property, for example, urban houses, the purchaser who delays payment for two and half years, when the agreement allowed him only six months, cannot seek specific performance. The court further observed that the rule that time is not of the essence, for immovable property, now needs to be relaxed, if not modified. When the time is not the essence of the contract it must be performed within a reasonable time. The delay in the performance of such a contract does not make the contract voidable, but the remedy available to the aggrieved party in such a case is to claim compensation for any loss caused by delay. Even where time is of the essence, the injured party may at his option accept the delayed performance. If he does so he cannot afterwards recover compensation for the delay unless at the time of such acceptance he gives notice to the promisor of his intention to claim compensation. When the time was not originally of the essence of the contract it could be made so by a later notice, and if the time is of the essence of the contract, that may be waived by the conduct of the parties (as noted above). However, allowing an "extension of time" does not operate as an entire waiver of the essential condition as to time, but merely has the effect of substituting the extended time for that originally fixed (Halsbury's Laws of England, 4th ed., para 486). When at the instance of one party the other party extends the time, while granting extension he is free to stipulate that toss arising out on account of extension of time will have to be borne by the party seeking such extension.

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Performance of Reciprocal Promises3 (Secs. 51-54, 57, 58) Sec, 2(f) says: "Promises which form the consideration or the part of consideration for each other are called reciprocal promises". Thus when a contract consists of an exchange of promises, they are called reciprocal or mutual promises. "When such promises have to be performed simultaneously, the promisor is not bound to perform unless the promisee is ready and willing to perform his promise" (Sec. 51 - mutual and concurrent promises). In a contract, for example, for the sale of goods on payment of price, the seller need not deliver the goods unless the buyer is ready and willing to pay for the goods on delivery (though the buyer might not have the hard cash in his person). Similarly the buyer need not pay unless the seller is ready and willing to deliver the goods on payment (though the seller might not have a ready stock of goods). The order in which reciprocal promises must be performed may be fixed by the contract, but where it is not expressly fixed, they will have to be performed in the order in which the nature of the transaction admits (Sec. 52-mutual and independent promises). Thus when A and B contract that A shall build a house for B at a fixed price, A's promise to build the house must be performed before B's promise to pay for it. It may be noted that in the ordinary course of business, work is not usually paid for before it is done. Sec. 53 lays down the principle that where one of the parties to reciprocal promises prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled for compensation from the other party for any loss so occasioned. The same result would follow where the obstruction to performance is caused by the inadequacy of the machinery/material supplied by one of the parties. Sec. 54 lays down that where the nature of the reciprocal promises is such that one cannot be performed or its performance cannot be claimed unless the other party performs his promise in the first place, then if the latter fails to perform, he cannot claim performance from the other, but must make compensation to him for his loss (mutual and dependent promises). For instance, A hires B's ship to take in and convey, from Calcutta to Mauritius, a cargo to be provided by A, B receiving a certain freight for its conveyance. A does not provide any cargo for the ship. A cannot claim the performance of B's promise, and must compensate B for the loss which B sustains by the non-performance of the contract. In Nathulal v Phoolchand (AIR 1970 SC 546), Shah J. observed: "If under the terms of a contract the obligations of the parties have to be __________ 3. 'In a bilateral contract, where both parties have obligations to perform, questions may arise as to who is to perform first'. How are such questions answered? [I.A.S.- 90]

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performed in a certain sequence, one of the parties to the contract cannot require compliance with the obligations by the other party without in the first instance performing his own part of the contract." In this case, N sold his factory to P and received an advance, P agreed to pay the balance on or before May 7, 1951. N expressly agreed to get the records rectified (deletion of N's brother's name) and to get the sanction of the Collector. N did not fulfill both the conditions. P also did not pay the balance amount on or before the fixed date. N rescinded the contract and claimed back the possession of the factory from P. Held that since N had himself failed to perform his part of the obligation first, he could not succeed against P. Reciprocal Promise to do Things Legal and Illegal Sometimes persons may reciprocally agree, first to do certain things which are legal and secondly, under specified circumstances, to do certain things which are illegal. In such cases, the first set of promises is a contract, but the second is a void agreement (Sec. 57). For instance, A and B agree that A shall sell B a house for Rs. 10,000. but that if B uses it as a gambling house he shall pay Rs. 50,000 for it. The first set of promises is valid but the second void. It may be noted that when the legal and illegal parts are inseparable, the whole of the agreement is void (See under Sec. 24). Alternative Promises, One branch being Illegal In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced (Sec. 58). When A and B agreed that A shall pay B Rs. 1,000, for which B afterwards deliver to A either rice or smuggled opium, this is a valid contract to deliver rice only. Appropriation of Payments (Secs. 59-61) When a debtor, owing several distinct debts to one person, makes a payment, which is not sufficient to discharge all the debts, the question arises to which particular debt the payment is to be applied. Sections 59 to 61 lays down the following three principles: (i) Appropriation by debtor- Sec. 59 confers the right of appropriation upon the debtor i.e. the debtor has the right to request the creditor to apply the payment to the discharge of some particular debt. If the creditor accepts the payment, he is bound by the appropriation. If the creditor does not want to do that, he must not accept the payment. This principle applies to several distinct debts and not to a single debt payable by instalments.

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The debtor may either expressly mention about his intention regarding appropriation, or it could be implied also, for example, payment being made is of a certain sum which corresponds with one particular debt, or it is made on a certain day on which a particular debt falls due, etc, (ii) Appropriation by creditor- Sec. 66 enables the creditor to make appropriation. If the debtor makes payment without any appropriation, the creditor may use the payment at his discretion to wipe out anydebt which is due lawfully (even though it may be time-barred); he cannot make the appropriation to an illegal or void debt. When the debt is due with interest and the debtor makes the payment of a certain sum of money, the normal rule in such a case is that the amount so received by the creditor is to be applied in the first instance to the satisfaction of interest and thereafter to the principal. This rule is subject to an agreement between the parties to the contrary (Meghraj v Bayabai AIR 1970 SC 161). (iii) Appropriation by law- Sec. 61 applies when neither party makes an appropriation. In such a situation the law gets the right to appropriate the payment and the law prefers to wipe out the debts in the order of time in which they were incurred. The oldest one is to be discharged first of all, even though it may be time-barred debt. If the debts are of equal standing the payment shall be applied in discharge of each such debt proportionately. [2] Breach of Contract When a party having a duty to perform a contract fails to do that, or does an act whereby the performance of the contract by him becomes impossible, or he refuses to perform the contract, there is said to be a breach of contract on his part. On the breach of contract by one party, the other party is discharged from his obligation to perform his part of the obligation, and also gets a right to sue the guilty party for damages. The breach of contract may be either (i) actual or present i.e. nonperformance of the contract on the due date of performance, or (ii) anticipatory i.e. before the due date of performance has come. For example, A is to supply certain goods to B on 1st January. On 1st January, A does not supply the goods. He has made actual breach of contract. On the other hand, if A informs B on 1st December that he will not perform the contract on 1st Jan. next, A has made anticipatory breach of contract.

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Anticipatory Breach of Contract4 (Sec. 39) "An anticipatory repudiation occurs when, prior to the promised date of performance, the promisor absolutely repudiates the contract (expressly or impliedly)." It is an announcement by the contracting party of his intention not to fulfill the contract and that he will no longer be bound by it. Sec. 39 lays down that "anticipatory breach of contract could be made by promisor, either by refusing, to perform the contract, or disabling himself from performing the contract in its entirety, unless the promisee signifies by words or by conduct, his acquiescence in the continuance of contract." Illustration (a) to Sec. 39 reads: A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week daring the next two months, and B engages to pay her Rs.100 for each night's performance. On the sixth night, A wilfully absents herself from the theatre. B is at liberty to put an end to the contract. The above illustration may create a misapprehension that in this case absenting on one night is partial refusal to perform the contract and not failure to perform the contract in its entirety. In Sooltan Chand v Schillar, ILR (1879) 4 Cal 252, it was observed that even absence on one night in this illustration is breach of contract in its entirety. Illustration (b) further provides that with the assent of B, A sings on the seventh night. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for damages sustained by him through A's failure to sing on the sixth night. When one person makes anticipatory breach of contract, the other party has two alternatives open to him, viz. (i) He may rescind the contract immediately and may bring an action for the breach of contract without waiting for the appointed date of the performance of contract, (ii) He may not put an end to the contract but treat it as still subsisting and alive and wait for the performance of the contract on the appointed date. In Hochster v.De La Tour (1853) 2 E&B 678, A engaged B on 12th April, 1852 as a courier for accompanying him on a tour of Europe, which was to begin on 1st June. B was to be paid £10 per month for his services. On 11th May, 1852, A informed B that B's services were not needed. On 22nd May, 1852, B sued A for the breach of contract. Held that even though B had brought an action on 22nd May (i.e. before the due date of performance of the contract), he had a right to do so and his action was successful. If a man promises to marry a woman on a future day, and before that day marries another woman, he is instantly liable to an action for breach of promise of marriage. The principle applies to contingent contracts. Where _____________ 4. 'A contract is a contract from the time it is made and not from the time its performance is due.' Explain. [I.A.S.-94]

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a person promises to marry a woman on the death of his father, and during the life time of his father married another, he was held liable [Frost v Knight (1872) LR7 Exch 111]. When the contract is kept alive by the promisee (aggrieved party), the promisor may perform the same in spite of the fact that he had earlier repudiated it. However, if the promisor still fails, the promisee will be entitled for the compensation. In case the promisee has elected to keep the contract alive and subsisting it is just possible that before the due date of performance some event happens (viz. supervening impossibility or frustration) because of which the promisor gets excused from the performance of the contract. The promisor will be benefited in such a situation as he will be discharged from the performance of the contract. Thus in Avery v Bowden (1855) 5 E&B 714, A chartered B's ship at a Russian port and undertook to load the ship with the cargo within 45 days. Before this period had elapsed, A failed to supply the cargo and declined to supply the same. The master of the ship continued to insist that the cargo be supplied but A continued to refuse to load. Meanwhile, the war broke out between England and Russia, whereby it became illegal to load the cargo at a hostile port. In this case, B kept the contract alive instead of rescinding it, and when the performance of the contract became unlawful, A was discharged and could not be made liable for non-performance of the contract. In case the anticipatory repudiation is accepted, damages for breach would be assessed at the time when repudiation takes place. Where, on the other hand, the promisee does not accept the anticipatory repudiation, damages will be assessed at the time fixed for performance and the promisee takes the risk of market rate falling. Thus the law is that "repudiation by one party standing alone does not terminate the contract. It takes two to end it, by repudiation, on the one side, and acceptance of the repudiation, on the other." Minor Breach Not a Repudiation of Contract5 Every minor irregularity in the performance of the contract cannot be seized upon as a repudiation so as to put a premature end to the contract. The court has to take into account the effect of the breach upon the contract as a whole. Where out of the several deliveries by instalments, one delivery was below the standard, it could not be treated as a breach of the contract. In a contract for supply of iron by two instalments, payment to be made within 14 days of delivery, the buyer claimed reduction in price on account _____________ 5. 'If there has been a substantial though not exact and literal performance by the promisor, the promisee cannot treat himself as discharged.' Explain, What is the remedy in such a case regarding the deficiency in performance? [I.A.S. -92]

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of the delay in the first delivery and the seller treating this as repudiation refused to make further deliveries, it was held that the conduct complained of did not amount to intimation to abandon and altogether refuse performance of the contract [Freeth v Burr (1874) 43 LIC P91]. Where A agreed to purchase from B under two contracts 30 tons of sugar to be delivered at different dates, A having failed to take the delivery under the first contract, B claimed to rescind both contracts, it was held that as there was no refusal on the part of A to perform his promise in its entirety within the meaning of Sec. 39, B was not entitled to rescind the contract [Rash Behary Saha v N.Gopal Nundy (1906) 33 CWN 477]. Likewise, the withholding of a part payment under a bona fide claim cannot be regarded as a refusal to perform the contract in its entirety [Sooltan Chand v Schiller (1878)4 Cal 252]. [3] Impossibility of Performance Discussed later ('Frustration of Contracts'), under Chapter 8. [4] Discharge by Agreement and Novation Sections 62 and 63 deal with the contracts in which the obligation of the parties to it may end by the mutual consent of the parties. Contracts which Need Not be Performed6 (Sec.62) 'Those who, create a thing can also put an end to it'. Adopting this principle, Sec. 62 allows the parties the novation, rescission and alteration of contract. "If the parties to a contract agree to substitute a new contract for it, or to rescind or to alter it, the original contract need not be performed". Novation When the parties to a contract agree to substitute the existing contract for a new contract, that is called novation. In such a case the liability of the parties as regards the original agreement is extinguished and in its place they become bound by the new altered agreement. Novation is valid when both the parties agree to it. As the parties have a freedom to enter into a contract with any terms of their choice, they are also free to alter the terms of it by their mutual consent. When the new contract is breached, such breach does _____________ 6. Generally all the parties to a contract must assent to Its rescission or abrogation and there must be a meeting of their minds in order to accomplish a rescission by agreement. Discuss. [I.A.S. -82]

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not, by itself, revive the old contract, unless the parties so agree [R.N. Kumar v R.K. Soral AIR 1988 SC 1205]. A owes B Rs. 10,000. A enters into an agreement with B, and gives a mortgage of his (A's) estate for Rs.5,000 in place of debt of Rs. 10,000. This is a new contract and extinguishes the old. But, where A owes B Rs. 1,000, and B owes C Rs. 1,000, and B orders A to credit C with Rs. 1,000 in his books but C does not assent to the agreement, no new contract has been entered into and B still owes C Rs. 1,000. When the novation is by a 'change of contract', the original contract must be subsisting and unbroken. The substitution of a new contract is not possible after there has been a breach of the original agreement. It is further necessary that the new agreement should be valid and enforceable. Where an existing mortgage was replaced by a new agreement of mortgage, the new agreement being not enforceable for want of registration, it was held that the parties were still bound by the original mortgage (Shanker Lal Damodhar v Ambalal Ajaipal AIR 1964 Nag 260). "Sec. 62 requires an agreement which necessarily implies consideration" (Union of India v Kishori Lal Gupta & Bros. AIR 1953 Cal 642). Novation may involve 'change of parties to the contract. If A is a debtor and the creditor agrees to accept B in his place as the debtor, the original contract between the creditor and A is at an end. A novation of this kind usually takes place when a new partner is admitted into a existing firm or when a partner retires from a firm and the new firm as constituted after admission or retirement accepts the liabilities of the old firm and this is approved by the persons dealing with the firm. Concurrence of all the parties is necessary [Scarf v Jardine (1882) 7 App Cas 345]. Alteration and Rescission of Contract 'Alteration' of a contract means change in one or more of the material terms of a contract. The parties to the contract remain the same. In novation, there may be a change of parties also; when the parties are not changed then to be a novation the terms of the contract must be altered substantially. A contract may be discharged by agreement between the parties that it shall no longer bind them. Such an agreement amounts to 'rescission' or cancellation of the contract and no new contract is substituted in its place. Recission may, for example, be the only advisable course, where the particulars of quantity and quality of goods that are actually available, differ substantially from that which had been contracted for [Syed Issar Masood v State of M.P. (1981) 4 SCC 289].

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Remission of Performance (Sec. 63) According to Sec. 63, the party who has the right to demand the performance of the contract may (i) remit or dispense with it, wholly or in part, or (ii) extend the time for performance, or (iii) accept any other satisfaction instead of performance. Law cannot force the parties to take a legal action for breach of contract. 'An agreement to excuse performance' is valid, while an 'agreement not to sue for breach' is void being an agreement in restraint of legal proceedings. (i) Dispensing with or remitting performance7 - The promisee may remit or dispense with performance of the contract without any consideration. To "dispense with" means that the party entitled to claim performance may waive it i.e. abandon his right. The acceptance of less sum of money where more is due is a good discharge of the whole of the liability. Thus, if A promises to painta picture for B, B may forbid him to do so, or if A owes Rs.5,000 to- B, B may accept from A only Rs.2,000 in satisfaction of whole of the claim. In such cases A is discharged. Also, the promisee may accept performance from a third party. Where, for the assets worth 27 lakhs taken over by the State, a compensation of only 20 lakhs was offered and accepted, no claim for the balance was subsequently allowed (Kapur Chand Godha v Mir Nawab Himayatali Khan AIR 1963 SC 250). Where the government having decided to recover only 40 per cent, the Supreme Court held that the State could not subsequently sue for full payment (Hari Chand Madan Gopal v State of Punjab AIR 1973 SC 381). The position would be different if the promisee accepts some performance "under protest." In such a case the contract is not discharged. Explaining the implication of Sec. 63, the Rajasthan High Court observed: "If one party to contract express to the other party, by words or by conduct, an intention not to perform his obligation under the contract, it is open to the other party to accept or decline the offer regarding rescission of the contract. If the other party accepts the repudiation of the contract, he cannot turn around and insist on the performance thereof by the other side or complaint of breach of contract." (ii) Extending the time of performance - Sec. 63 permits the promisee to grant extension of time for the performance of the contract, and no consideration is, needed for the same. The extension of time must be by mutual understanding between the parties. ___________ 7. A owes B Rs.5,000 which A has failed to pay. B promises a rebate of Rs.1,500 if A pays the amount within a week. A pays B Rs.3,500 within one week. B then demands the balance from A. Will he succeed? [I.A. S.- 73]

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Thus, if the buyer wrote to the seller extending the time of performance and the seller neither replied to the letter nor did he supplied the goods within the extended time, it was held that by a mere letter from the buyer the time of supply of goods did not get extended (M/s Venkateswara Minerals v Jugalkishore AIR 1986 Kant 14). If the promisee grants the extension of time he becomes bound thereby. (iii) Accord and satisfaction - Sec. 63 permits the promisee to accept any other satisfaction in lieu of agreed performance, and this would discharge the promisor. For example, A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A without ascertaining the amount gives to B, and B, in satisfaction thereof, accepts the sum of Rs.2,000. This is a discharge of the whole debt, whatever may be its amount. Likewise, P who claims Rs.50,000 from Q, may accept a house of Q in satisfaction of the debt. Accepting some other satisfaction instead of actual performance is known as principle of "Accord (agreement) and Satisfaction" under English law. It has been defined as the "purchase of a release from an obligation, whether arising from the contract or tort by means of any valuable consideration but being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative." The liability arising out of the breach of the contract may be discharged by accord and satisfaction. Waiver of Contractual Rights Sometimes, questions of waiver are raised in the context of contractual rights. The Supreme Court has reiterated the insistence on clear evidence of waiver [Sham Singh v State of Mysore AIR 1972 SC 2440] Effect of Neglect of Promisee on Performance of Contract (Sec. 67) Sec. 67 lays down that if any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise the promisor is excused by such neglect or refusal as to any nonperformance caused thereby. Thus, if A contracts with B to repair B's house, and B neglects or refuses to point out to A the places in which his house requires repair, then A is excused for the non-performance of the contract.

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Restoring Benefits received under Voidable/ Void Contract (Secs. 64-66, 75) Sec. 64 lays down that the party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received. Thus a person avoiding a loan bond on the ground of undue influence has to pay back the loan, the court only reduces the rate of interest to what may seem to be reasonable in the circumstances. Even where the party seeking rescission is not in a position to restore to the defendant his status quo ante, the court may allow rescission by doing what is practically just in the circumstances.8 Thus, where a wife wanted to set aside on the ground of misrepresentation the separation deed made with her husband, under which she had already received some maintenance, but she was not able to restore the money, the court allowed her relief holding that the money may be set off against costs to which she was otherwise entitled [Hulton v Hulton (1917)1 KB 813]. According to Sec. 65, when the parties have entered into an apparently valid contract and some benefits have been passed under it, and subsequently the contract is either discovered to be void or becomes void, the party who has received the benefits must restore them to the other. The section does not apply to a contract which the party knew at the time of making it to be void. The section also may not apply to a case where the benefits are being passed at a time when the contract has, though unknown to the parties, already ceased to be enforceable. Thus, no restitution of the benefit received is allowed in the case of expressly declared void agreements (Secs. 26-30, 36, 56). Sec. 65 also does not apply to a case where the benefits are received after the contract has become void. The first part of Sec. 65 is concerned with an agreement which never amounted to a contract, it being void ab initio. But the parties discovered this at a later stage. This will cover cases of ''initial mistake". Where, for example, money is paid for the sale of goods, which, unknown to the parties, have already perished at the time, the money is refundable. In Faqir Chand Seth v Dambarudhar Bania (AIR 1987 Ori 50), the plaintiff advanced money to the defendant for supply of paddy, without knowing that the said agreement was ___________ 8. Even where the party seeking rescission is not in a position to restore to the defendant his status quo ante, the court may allow rescission by doing what is practically just in the circumstances. Explain. [I.A.S.- 2002]

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in violation of the Orissa Rice and Paddy Control Order, 1965. It was held to be a case, where the agreement was discovered to be void, and the plaintiff was held entitled to receive the refund of the advance paid by him. Thus, Sec. 65 will apply whether the agreement is void by reason of law or by reason of facts. Therefore, Sec. 65 will apply in cases where a contract is void by reason of "unlawful object", but the parties were not aware of it. The second part of Sec. 65 is concerned with the agreement which becomes void. This will cover cases where the contract was valid initially, but due to the happening of some event the performance of it becomes impossible or unlawful (frustration of contract). Thus, in Fibrosa Spolka Akeyina v Fairbairn Lawson Combe Barbou (1942) 2 All ER 122, the court allowed £1000 to be recovered which were paid in advance for purchasing a machinery and the performance was rendered illegal by the intervention of war. Similarly, A contracts to sing for B at a concert for Rs.1000 which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of profits which B would have made if A had been able to sing, but must refund to B Rs. 1000 paid in advance [Illus. (d), Sec. 65]. Where one party is a victim of exploitation by another party, restoration of benefits would be ordered - as was done in a case where a tenant had been forced to make, to the landlord, an advance prohibited by statute. The court ordered that the advance should be adjusted towards future rent [Mohd. Salimuddin v Misri Lal MR 1986 SC 1019]. Communication of Rescission - According to Sec. 66, the rescission of a voidable contract may be communicated in the same manner and subject to the same rules as apply to communication of proposals, etc. under Sec. 4. The usual method of rescinding a contract is by giving a notice to the other party of his intention to rescind. But where the other party cannot be contacted with, a public notice or one to a public authority will do. Compensation on Rescission9 - Apart from a right to rescind the contract, the aggrieved party also has a "right to claim compensation" for any damage which he has sustained through the non-fulfillment of the contract (Sec. 75). Illustration: A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her Rs. 100 for each night's performance. On the sixth night, A wilfully absents herself from the theatre and, B in consequence rescinds the contract. B is entitled to claim compensation for the damages which he has sustained through the nonfulfilment of the contract. ___________ 9. Is a party rightfully rescinding the contract entitled to compensation? Explain with the help of examples. [I.A.S.-2006]

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[5] Discharge by Operation of Law A contract terminates by operation of law in the following cases: (a) Lapse of time- The Limitation Act lays down that in case of breach of a contract, legal action should be taken within a specified period, called the period of limitation, otherwise the promisee is debarred from instituting a suit and the contract stands discharged. Under the Limitation Act, the limitation period for simple contracts is three years. (b) Insolvency- A contract is discharged by insolvency of one of the parties to it when Insolvency Court passes an order in this regard. (c) Merger- When an inferior right contract merges into a superior right contract, the former stands discharged automatically. For example, when a man holding property under a contract of tenancy buys the property, his rights as a tenant are merged into the rights of ownership. Similarly, where a part-time lecturer is made full-time lecturer, the contract of part-time lecturership is discharged by merger. (d) Unauthorised material alteration- A material alteration made in a written document/ contract by one party without the consent of the other, will make the whole contract void. The effect of making such! an alteration is exactly the same as that of cancelling the contract. Assignment of Contract "Assignment" means transfer of contractual rights or liability by a party to the contract to some other person who is not a party. The liability under a contract cannot be assigned without the consent of the promisee, however the rights and benefits may be assigned and the assignee can demand performance from the other party to the contract. The assignment thus made will, however, be subject to the activities, if any, between the original contracting parties. The rights under a lottery ticket are assignable.

Page 181 8 Discharge of Contract (Doctrine of Frustration) When the performance of the contract becomes impossible, the purpose, which the parties have in mind, is frustrated. If the performance becomes impossible, because of a supervening event, the promisor is excused from the performance of the contract. This is known as doctrine of frustration under English law, and is covered by Section 56 of the Indian Contract Act. Sec. 56, Contract Act Sec, 56. Agreement to do impossible act- An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful - A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non-performance of act known to be impossible or unlawful- Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did. not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise. Illustrations (a) A agrees with B to discover treasure of magic. The agreement is void. (b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. (c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practice

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polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise. (d) A contracts to take in cargo for B at a foreign port. A's government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. (e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void. Initial impossibility - Para 1 of Sec. 56 provides that if a contract is impossible of being performed, the parties to it will never be able to fulfill their object, and hence such an agreement is void [See Illustration (a)]. Subsequent or supervening impossibility - Para 2 of Sec. 56 provides that the performance of contract may be possible when the contract is entered into but because of some event, the performance may subsequently become impossible or unlawful [See Illustrations (b), (d) and (e)]. Para 3 of Sec. 56 deals with situation where one party knew about the impossibility of performance of the contract, but the other didn't [See Illustration (c)]. Frustration1 The "doctrine of implied term" was in vogue before the doctrine of frustration, i.e. an implied condition would be read into the contract when the performance becomes impossible from the perishing of the thing without default of the contracting parties. The court implies a term or exception and treats that as part of the contract. Thus, in Taylor v Caldwell, QB (1863) 3 B&S 826, Blackburn J., first formulated the doctrine in its modern form (i.e. 'Implied term'). Before that, there was rule of 'absolute liability'- a party to the contract was absolutely bound to perform the obligations undertaken by him, even though performance became subsequently impossible [Paradine v Jane K.B. (1647) Aleyn 26]. In Taylor v Caldwell it was laid down that the above "rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied." ___________ 1. Explain the doctrine of frustration of contracts. [I.A.S.-91] [CLC-93/94/2000; L.C.I.-95/2004] "In India the impossibility of performance covers both the agreement to do impossible act as well as the contract to do act afterwards becoming impossible or unlawful". Examine. [I.A.S.-97] Discuss, if there is any, difference between 'impossibility of performance and frustration' with reference to a contract.

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The explanation of the doctrine of frustration in terms of the 'theory of implied term' has been criticised. Lord Sumner said that "the doctrine of frustration is really a device by which the rules as to absolute contracts are reconciled with the special exceptions which justice demands" [Hirji Mulji v Cheong Yue S.S.Co.Ltd. (1926) AC 497]. The 'theory of qualifying power of the court' is another theory underlying frustration. In British Movietonews Ltd. v London & District Cinemas Ltd. (1951)1 KB 190, Denning LJ said: "The court really exercises a qualifying power-a power to qualify the absolute, literal or wide terms of the contract - in order to do what is just and reasonable in the new situation". The Supreme Court said in Satyabrata Ghose v Mugneeram Bangur (AIR 1954 SC 44): These differences in the way of formulating legal theories really do not concern us so long we have statutory provision in the Indian Contract Act. In deciding cases in India, the only doctrine that we have to go by is that of supervening impossibility or illegality as laid down in Sec. 56. The "doctrine of supervening impossibility" as enunciated in Sec. 56 (Para 2) is similar to the "doctrine of frustration" known to the English law. However, the former is wider than the latter and covers both the physical impossibility (initial impossibility) as well as failure of object (‘frustration' or subsequent impossibility), for the word "impossible" as used in Sec. 56 should not be taken literally, but practically so as to include cases where performance has become practically useless. "Frustration of the contract" means "occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the contract, and as entirely beyond what was contemplated by the parties when they entered into the contract". The word "frustration" is a sort of shorthand: it means that a contract has ceased to bind the parties because the common basis on which by mutual understanding it was based has failed. It is not that the contract has been frustrated, but that there has been a failure of what in the contemplation of both parties would be the essential condition or purpose of the performance (Twentsche Overseas Trading Co. Ltd. v Uganda Sugar Factory Ltd. AIR 1954 PC 144). "The essential idea upon which the doctrine (of frustration) is based is that of impossibility of performance of the contract2; in fact impossibility and frustration are often used as interchangeable expressions. The changed circumstances make the performance of the contract impossible and the ___________ 2. What is meant by the 'doctrine of impossibility of performance of contracts'? [L.C.II-93] What is meant by the doctrine of "supervening impossibility"? Under what circumstances the "supervening impossibility" may arise? [I.A.S.-2007]

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parties are absolved from the further performance of it as they did not promise to perform an impossibility. The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done' and hence comes within the purview of Sec. 56 of the Contract Act" (Satyabrata Ghose Case). The doctrine of supervening impossibility comes into play in two types of situations:3 (i) Where the performance becomes physically impossible because of disappearance of the subject matter. Thus in Taylor v Caldwell, QB (1863) 3 B&S 826, a contract was entered into for the use of a musical hall for concert purpose, but before the day of the concert, the hall was destroyed by fire, held that the performance becomes impossible. (ii) Where the object the parties had in mind failed to materialize. The performance of an act may not be literally (or physically) or legally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view. Thus in Krell v Henry (1903) 2 KB 740, where a flat was hired only for viewing a coronation procession but the procession having been cancelled due to king's illness, it was held that the taking place of procession was the foundation of the contract. The object of the contract was frustrated by non-happening of the coronation. Effects of Frustration4 The effect of frustration is that the dissolution of the contract occurs automatically; it does not depend on the choice or election of either party (as in the case of novation or rescission of contract) or on their intention or the opinion or even knowledge as to the event. A very important principle follows from this, that frustration should not be due to the act of a party to the contract i.e. self-induced. Thus in Maritime National Fish Ltd. v Ocean Trawlers Ltd. (1935) AC 524, trawlers were allowed to fish only after obtaining a licence from the government. The applicants had hired a trawler and by their own election did not obtain a licence for its operation. They were not allowed to plead frustration in payment of rent to the trawler owner. ___________ 3. Examine the statement: Cases of frustration of contracts are not simply cases of initial or supervening impossibility (physical or legal) of performance of contracts. [I.A.S. -91] 4. What are the consequences of the performance becoming impossible and what are the powers of the court to do justice in case of an intervening impossibility? [L.C.I-98]

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Para 3 of Sec. 56 deals with situation where one party knew about the impossibility of performance of the contract, but the other didn't. Illustration (c) reads: A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise. Frustration may terminate a contractual liability, but does not extinguish the contact itself. Thus, an arbitration clause may survive (AIR 1968 SC 522). Further, when a contract becomes frustrated (i.e. becomes void), the party who has received the benefits must restore them to the other (Sec. 65) or to make compensation for it. A contracts to sing for B at a concert for Rs.1000 which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of profits which B would have made if A had been able to sing, but must refund to B Rs. 1000 paid in advance4a [Illus. (d), Sec. 65]. It may be noted that the courts are rather cautious in discharging parties from their contract (See cases of "commercial hardship"). There has been desire of the courts not to extend the scope of the principle to such an extent that the law would become the destroyer of bargains, thereby reducing the sanctity of contract. "The sanctity of contract is the foundation of the law of contract and the doctrine of impossibility cannot be permitted to become a device for, destroying this sanctity." However, the courts have also kept in mind the aspects of serious injustice and extreme hardship to the affected party on account of frustration of a contract. Specific Grounds of Frustration5 The principle of frustration of contract, or of impossibility of performance is applicable to a great variety of contracts. The following grounds of frustration, however, have become well established. (1) Destruction of the Subject-matter Taylor v Caldwell is the best example of this class. There a promise to let out a music hall was held to have frustrated on the destruction of the hall. The court held that where the parties have contemplated that their contract ___________ 4a. A agrees to sing at B's theatre at the night on January 1, 2008 but falls ill and is unable to perform on the agreed date. B sues for breach of contract and claim damages. A takes the plea of 'frustration.' [D.U.-2008] 5. Illustrate the doctrine of frustration of contract. [L.C.I-95] "The doctrine of frustration is really an aspect of or part of law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done." Elucidate with suitable illustrations. [I.A.S.- 99] What are the circumstances under which a party to a contract can plead impossibility as an excuse, from performing his contractual obligation? [I.A.S.- 2006]

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could not be fulfilled unless some particular specified thing continued to exist when the time for the fulfillment of the contract arrived, then such a contract must be regarded as subject to an implied condition that the parties shall be excused, in case, before breach, performance becomes impossible from perishing of the thing without the default of the contractor. Similarly, in Howell v Coupland (1876) 3 QBD 258, the defendant was not held liable when he contracted to sell a specified quantity of potatoes to be grown on his farm, but failed to supply them as the crop was destroyed by a disease. In V.L. Narasu v P.S. V. Iyer6 (AIR 1953 Mad 300), a contract to exhibit a film in a cinema hall was held to have become impossible of performance when on account of heavy rains the hall's wall collapsed killing three persons and its licence was cancelled until the building was reconstructed to the satisfaction of the chief engineer. The court observed that the essence of frustration is that it would not be self-induced i.e. due to the act or election of the party (or without blame or fault on either side). This is so in the present case. Thus the owner was under no liability to reconstruct the hall and even if he did reconstruct, it took him some time, by that time the film would have lost its appeal. The same result followed where a ship ran aground, or where the subject-matter of the contract though intact has ceased to be available to parties. Thus where a ship chartered for one year (from April-April) and before it could be delivered, it was requisitioned (for State's use) and released only in September, held that there is a frustration of contract as a Sept.-to-Sept. term was not contemplated by the parties [Bank Line Ltd. v Arthur Cope & Co. (1919) AC 435]. (2) Change of Circumstances The change of circumstances must be such as to make performance of the contract impossible or even extremely difficult in the manner and at the time contemplated, and thus upset altogether the purpose of the contract. Illustration (b), Sec. 56 reads: 'A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.' Where a ship was chartered to carry some goods, but before it could proceed there was an explosion in the ship boiler making it impossible to undertake the journey in the scheduled time, held that the change in ___________ 6. There was a contract between N and I that N would exhibit a film in I's cinema hall on 14th Nov. 1995. On that day, the rear wail of the cinema got collapsed by an earthquake and its license was cancelled until the cinema hall was reconstructed. N failed to exhibit the film. The public who purchased the tickets in advance claimed compensation from N and in return N filed a suit against I for breach of contract. Decide. [C.L.C.-95]

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circumstances amounted to frustration of the contract [Joseph Steamline Lid. v Imperial Smelting Corp. (1941) 2 All ER 165]. Where the parties had full knowledge of the difficult conditions of performance or where the possibility of alteration of circumstances was within the contemplation of the parties at the time of the contract, they can hardly complain of any such alteration. The doctrine of frustration will not apply to such cases. Commercial Hardship The alteration of the circumstances must be such as to upset altogether the purpose of the contract. Some delay or some change is very common in all human affairs and the contract would not be frustrated merely because, on account of an uncontemplated turn of events, the performance of the contract may become onerous (or difficult). A situation like this has been described as one of "commercial hardship" which may make the performance unprofitable or more expensive or dilatory, but it is not sufficient to excuse performance, for it does "not bring about a fundamentally different situation such as to frustrate the venture." The nature and terms of the contract may help in deciding whether the performance has become impossible, or merely commercially difficult. The following cases were held to be the cases of commercial hardship. These cases show that merely because the procurement of the goods become difficult due to mill strike, or there is a rise in prices, or there is sudden depreciation of currency, or a person will not be able to earn the expected profits, or there is an unexpected obstacle to execution or the like, it is not enough to frustrate the contract. Disappointed expectations do not lead to frustrated contracts. "He that agrees to do an act must do it or pay damages for not doing it" is the general rule of the law of contract. These cases do not fall within the purview of Sec. 56. (i) Sachindra Nath v Gopal Chandra (AIR 1949 Cal 240)- The plaintiff let certain premises to the defendant for a restaurant at somewhat higher rent. The defendant agreed to pay high rent because the British troops were stationed in the town and a clause in the agreement specially provided that "this agreement will remain in force so long as British troops will remain in this town". After some months, the locality was declared out of. bounds to the British troops. Held that though it was possible that the defendant would not have paid such a high rent apart from the expectation of deriving high profits from the British troops, that was not sufficient to make out a case of frustration. (ii) Ganga Saran v Ram Char an Gopal (AIR 1952 SC 9)- In this case, a contract was made for supplying certain bales of cloth manufactured by the New Victoria Mills, Kanpur. The contract

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added: "We shall go on supplying goods to you of the Victoria Mills as soon as they are supplied to us by the said mills". The mill failed to supply goods to the sellers and, therefore, the sellers pleaded frustration. Held that there is no frustration and the sellers are liable for simple breach of contract. The court observed: "The agreement does not convey the meaning that the delivery of the goods was made contingent on their being supplied to the respondent firm by the Victoria Mills. The stipulation as to delivery didn't make delivery by Victoria Mills a condition precedent (such condition precedent to the obligation to delivery at all would make a new contract). We find it difficult to hold that the parties ever contemplated the possibility of goods not being supplied at all. The words 'prepared by the Mills' are only a description of the goods to be supplied, and the expression 'as soon as they are prepared" and "as soon as they are supplied to us by the said Mills" simply indicate the process of delivery." In a similar case, Harnandarai Fulchand v Pragdas (AIR 1923 PC 54), by a contract the plaintiff bought of the defendants a number of dhotis to be manufactured by specified mills and to be delivered as and when the same may be received from the mills. The sellers delivered only part of the goods owing to the mills, failing to perform their contract with the defendants as they were engaged in fulfilling certain government contracts. The defendants pleaded frustration. Held that it was a simple case of breach. The closing or even the destruction of the mills would not affect a contract between third parties, which is in terms absolute. It was suggested that the words "as and when the same may be received from mills" does not mean "if and when the same may be received from mills". This is to convert words, which fix the quantities and times for deliveries by instalments into a condition precedent to the obligation to deliver at all, and virtually make a new contract. The words certainly regulate the manner of performance, but they do not limit the sale to such goods as the mills might deliver. (iii) Samuel Fitz & Co. v Standard Cotton Co. (AIR 1945 Mad 291)- In this case, the defendant placed an order with the plaintiffs for the supply of certain goods, making it clear that they intended to sell it in Australia. But the Australian Government prohibited the import of such goods. The defendants lost their market and, therefore, cancelled their order. In an action for breach of contract, held that the courts should not read into a contract an implied term that the enforceability of the contract was dependent upon the ability of the purchaser to find customer for the goods. The foundation of the contract was not that the goods should be resold by the defendants to their clients in Australia.

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(iv) Similarly, a contract by a Hindu father to give his daughter in marriage to the plaintiff was held to be not frustrated simply because the girl has expressed her unwillingness to marry the plaintiff [Purshotamdas Tribhovandas v Purshotamdas Mangaldas (1986) 21 ILR Bom 23]. In the same way, where the performance of a contract for the sale of grain was made more difficult by Government restrictions on sale and storage imposed subsequently. (v)

LEADING CASE: M/S. ALOPI PARSHAD & SONS LTD. v UNION OF INDIA (AIR 1960 SC 588) In this case, the plaintiffs (Government agents) were supplying Ghee for the use of army personnel. The performance was in progress when the Second World War intervened and the rates fixed in peace time were entirely superseded by the totally altered conditions obtaining in wartime. The agents demanded revision of rates, but received no replies. They kept up the supplies. The Government terminated the contract in 1945 and the agents claimed payment on enhanced rates. Held that the performance of contract had not become impossible or unlawful but only onerous, thus it was not frustrated. The plaintiff's contention was that the terms of the contract agreed upon ... could not in view of the turn of events which were never in contemplation of parties, remain binding upon them. The court observed that a contract is not frustrated merely because the circumstances in which the contract was made, are altered, or that due to uncontemplated events, the performance of contract becomes onerous. The performance of contract had not become impossible or unlawful, the contract was in fact performed by the agents. Ghee having been supplied by the agents under the terms of the contract, the right of the agents was to receive remuneration under the terms of the contract. The plaintiffs thus could not succeed. The court observed that the parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate viz. a wholly abnormal rise or fall in prices, sudden depreciation of currency, an unexpected obstacle to the execution or the like. Yet this does not in itself affect the bargain they have made. Further, there is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract when the performance of the contract had become onerous. That is the law both in India and England. There

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is no general rule to which recourse may be had, relying upon which a party may ignore the express covenant on account of an uncontemplated turn of events since the date of the contract. The court further observed that if a consideration of the terms of the contract in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that time not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, bat because on its true construction it does not apply in that situation.] (vi) Davis Contractors Ltd. v Fareham Urban District Council (1956) 2 All ER 145 - In this case, there was a contract to build certain houses for a council for a fixed price and to be completed within 8 months. Bad weather and labour strikes intervened and it took 22 months to complete and at a cost much more than the contract price. The contractor claimed that the contract was discharged on account of inordinate delay and, therefore, he should be paid on quantum meruit basis i.e. his actual cost should be paid. The court observed that it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for. If this is the law, the appellants' case seems to be a long way from a case of frustration. (vii) An abnormal rise or fall in price is a commercial hardship. But, in Easun Engg. Co. Ltd. v Fertilizers & Chemicals Travancore Ltd. (AIR 1991 Mad. 158), where there was a 400% escalation of prices owing to a war as compared with the original prices on which certain transformers were undertaken to be supplied on a firm basis, the contract was held to have ended (on account of frustration). LEADING CASE: EASUN ENGG. CO. LTD. v FERTILIZERS & CHEMICALS TRAVANCORE LTD. (AIR 1991 Mad. 158) In this case, a contract for the supply of Power Transformers was entered into between the parties. Easun Co. failed to supply 2/3rd of transformers on account of price increase in transformer oil. The contract between the parties was a "firm price" contract, which meant that the prices indicated in the contract are firm without any escalation on any

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account till the contract is completely executed. The contract also provided for liquidated damages for any delay in the supply of goods, and that such damages would not be applicable in case of delay caused due to "force majeure'', viz. due to strikes, war, revolution, civil commotion, epidemics, accidents, fire, wind, flood, because of any law/ proclamation/ ordinance/ regulation of Government, an act of God, or any other cause beyond the control of the parties. Easun contended that they were prevented from supplying, due to force majeure conditions namely, strikes, power cut and phenomenal increase in the cost of the transformer oil (a 400% increase) due to war conditions in the Middle East and the Government of India's Ordinance imposing higher excise duties. The Arbitrator came to the conclusion that despite the contract being a firm price contract, Easun was justified in asking for variation of price in transformer oil, in view of the aforesaid force majeure conditions. Further, the contract itself provided that liquidated damages will not be applicable in case, of delay caused due to force majeure conditions. The Madras High Court upheld the Arbitrator's award. The court observed that the increase in price cannot be described as anything which would be normal in the ordinary trade conditions; it is very much abnormal. A contract ceases to exist if fundamentally different situation unexpectedly emerge. Therefore, the contract ceases to bind the parties at that point, not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation (as observed by the Supreme Court in M/s. Alopi Parshad v UOI AIR 1960 SC 588).] (3) Non-occurrence of a Contemplated Event7 Sometimes the performance of a contract remains possible, but owing to the non-occurrence of a contemplated event as the reason for the contract, the value of the performance is destroyed. Thus in Parshotam Das v Batala ___________ 7. The plaintiff, municipality of a town, sold to the defendant by contract the right to collect dung in the municipal area for one year. No dung was, however, left to be collected by the defendant as the same was removed by the pig-owners themselves in their own right. Is the contract frustrated? Discuss. [I.A.S-94] Aakash, a candidate for students' union elections, entered into an agreement with Suresh (a caterer) for supply of 1,000 food packets for use of his supporters to be put on election work on that day. The elections were, however, cancelled because of communal riots in the city. Is the contract frustrated? [C.L.C-2003] [Hint: The doctrine of frustration applies in the present case.]

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Municipal Committee (AIR 1949 EP 301), the Municipal Committee leased out certain tonga stands to the plaintiff for Rs. 5,000, but no tonga driver used the stands throughout the year. It was held that the lease was granted on the assumption that the tonga stands would be used by the drivers and the plaintiff would recover fees from them. The contemplated event not having occurred, the doctrine of frustration applied. Similarly, the doctrine applied to a case where a room was hired only for viewing coronation procession but the procession was cancelled due to king's illness [Krell v Henry (1903) 2 KB 740]. However, in Herne Bay Steam Boat Co. v Hutton (1903) 2 KB 683, where the defendant chartered a steamboat for two days "to take out a party of paying passengers for the purpose of viewing the naval review and for a day's cruise round the fleet." But the review was cancelled and the defendant had no use of the ship. Yet he was held liable to pay the unpaid balance of the hire on the ground that the happening of naval review was not the foundation of the contract. (4) Death or Incapacity of Party8 Where the nature or terms of a contract require personal performance by the promisor, his death or incapacity puts an end to the contract. The performance of the contract depends upon the existence of good health of the promisor in such cases e.g. to paint a picture, to play piano, to sing in a concert, etc. Illustration (e), Sec. 56 reads: 'A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.' In Robinson v Davison (1871) LR 6 Exch. 269, there was a contract for performance by an eminent pianist. On the morning of the day in question she informed the plaintiff that she was too ill to attend the concert. The concert had to be postponed and the plaintiff lost a sum of money. The plaintiff's action for breach of contract failed. The court said that under the circumstances she was not merely excused from playing, but she was also not at liberty to play, if she was unfit to do so. The contract was clearly subject to the condition of her being well enough to perform. The whole contract is based on the assumption of the continuance of the life, and on the conditions which existed at the time. That assumption is really the foundation of the contract. If the foundation fails, the whole contract must fail. ___________ 8. Michael Jackson entered into a contract with Jazz India Ltd. to perform in India on 1st Jan. 1994. On the 29th Dec. 1993, the agent of Michael Jackson informed Jazz India Ltd. that he could not perform on that day as he was physically unfit to perform and that the doctor had advised him complete rest for 2 months. Jazz India Ltd. sues Michael Jackson for damages. Decide. [C.L.C-94; L.C.II-95; LC.I.-93/95]

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(5) Government or Legislative Intervention A contract will be dissolved when legislative or administrative intervention has so directly operated upon the fulfillment of the contract of a specific work so as to transform the contemplated conditions of performance (i.e. when resumed, a different contract from the contract when broken-off). Thus where a vendor of land could not execute the sale-deed because he ceased to be the owner by operation of law, held that the contract had become impossible of performance.9 The following cases explain the effect of Government or Legislative intervention: (i) LEADING CASE: BOOTHALINGA AGENCIES v V.T.C. PORIASWAMI10 (AIR 1969 SC 110) The case illustrates the point that where the intervention makes the performance unlawful, the courts will have no choice but to put an end to the contract. The defendant had a licence to import 'chicory' for manufacturing coffee powder. The licence was subject to the condition that he would use it only in his factory. He agreed to sell the whole shipload. Before the arrival of the ship, the sale of such imported goods was banned. The contract thus held to have become void. It was, however, argued on behalf of the respondent that, in any event,- the appellant could have purchased chicory from the open market and supplied it to the respondent in terms of the contract. The court rejected this argument: Under the contract the quality of chicory to be sold was the chicory of specific description "Egberts chicory, packed in 495 wooden cases, each case containing 2 tins of 56 Ibs nett." It is manifest that the contract was for the sale of certain specific goods and it was not open to the appellant to supply chicory of any other description.] ___________ 9. A agreed to sell his plot of land to B. Subsequently the land is acquired by the State Government for public purpose. Can A refuse to perform the contract on the ground that the performance of the contract has become impossible. Refer to statutory provisions and case law. [L.C.II-93/94) 10. Star Co. Ltd. had an import licence to import 'chicory' for manufacturing coffee powder. They entered into a contract with Moon Co. Ltd. to supply them a consignment of imported chicory on 26.4.92. The goods were to be supplied within 2 months. On 30.4.92 the Import-Export Control Order, 1992 was passed whereby actual users' licence holders of 'chicory' could not further sell it in open market. It was made a punishable offence. Moon Co. Ltd. filed a suit for specific performance of contract. Decide. [C.L. C. -94]

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In Union of India v C. Damani & Co., 1980 (Supp.) SCC 707, contracts for export of silver were deemed to have ended with the ban on export of silver. (ii) LEADING CASE: SATYABRATA GHOSE V MUGNEERAM BANGUR & CO.11 (AIR 1954 SC 44) The case shows that an intervention of a temporary nature, which does not uproot the foundation of the contract, will not have the dissolving effect. Further, the doctrine of frustration does not apply where there is merely a likely delay in the performance of the contract. Also, the doctrine of frustration as recognized in English law comes within the purview of Sec. 56, Contract Act. Moreover, the doctrine of frustration applies equally to a contract for sale of land as it is for an ordinary contract. The defendant company started a scheme for the development of a land tract into a housing colony. The plaintiff was granted a plot on payment of earnest money. The company undertook to construct the roads and drains necessary for making the land suitable for building and residential purposes and as soon as they were completed, the purchaser was to be called upon to complete the conveyance by payment of the balance of purchase money. Before the defendant could make the above stated development, considerable portion of the land was requisitioned by the Government during the Second World War, for military purposes. The defendant attempted to cancel the contract on the ground that by reason of the supervening events its performance had become impossible. Held that the contract was not frustrated, in view of the facts that there was absolutely no time-limit fixed with which the roads and drains were to be made, and that the requisition of land was only of a temporary character. Mukherjee, J. observed: "Undoubtedly the commencement of the work was delayed but was the delay going to be so great and ___________ 11. The word 'Impossibility' has not been used in Sec. 56 in the sense of mere physical or literal impossibility. Examine the validity of the above statement with reference to decision in Satyabrata Ghose v Mugneeram Bangur. [D.U. 2007] "The doctrine of English law relating to frustration of contract has no application to India in view of the statutory provision contained in Sec. 56 of the Contract Act." Critically examine the validity of the above statement with reference to decided cases. [L.C.I-2003) What is the technique of finding out whether a contract has become impossible of performance or not in the changed circumstances? Explain with the help of Satyabrata Ghose v Mugneeram Bangur and other cases. [L.C.I-2005]

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of such a character that it would totally upset the basis of the bargain and commercial object which the parties had in view? The requisition orders were, by their very nature, of a temporary character. If there was a definite time-limit within the contract, it could be said that an indefinite delay would make the performance of contract impossible within the specified time and this would seriously affect the object and purpose of the venture. But where there is no time-limit whatsoever in the contract and when during the war the parties could naturally anticipate restrictions of various kind which would make the carrying out of these operations more difficult than in times of peace, we do not think that the requisition order affected the fundamental basis upon which the agreement rested or struck at the root of the adventure or makes its performance impossible." The appellant in the present case contended that the doctrine of English law relating to frustration of contract has no application to India in view of the statutory provision contained in Sec. 56 of the Contract Act. Referring to the English theories of frustration, Mukherjee J. said: The "doctrine of implied term" was in vogue before the doctrine of frustration, i.e. an implied condition would be read into the contract when the performance becomes impossible from the perishing of the thing without default of the contracting parties. The court implies a term or exception and treats that as part of the contract. Thus, in Taylor v Caldwell, QB (1863) 3 B&S 826, Blackburn J., first formulated the doctrine in its modern form (i.e. 'Implied term'). The explanation of the doctrine of frustration in terms of the 'theory of implied term' has been criticised. Lord Sumner said that "the doctrine of frustration is really a device by which the rules as to absolute contracts are reconciled with the special exceptions which justice demands" [Hirji Mulji v Cheong Yue S.S.Co.Ltd. (1926) AC 497]. The 'theory of qualifying power of the court' is another theory underlying frustration. In British Movietonews Ltd. v London & District Cinemas Ltd, (1951)1 KB 190, Denning LJ said: "The court really exercises a qualifying power-a power to qualify the absolute, literal or wide terms of the contract - in order to do what is just and reasonable in the new situation." These differences in the way of formulating legal theories really do not concern us so long we have statutory provision in the Indian Contract Act. In deciding cases in India, the only doctrine that we have to go by is that of supervening impossibility or illegality as laid down in Sec. 56. The "doctrine of supervening impossibility" is similar to the "doctrine of frustration" known to the English law. However, the former is wider than the latter and covers both the physical impossibility (initial impossibility) as well

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as failure of object ('frustration' or subsequent impossibility). The essential idea upon which the doctrine (of frustration) is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often used as interchangeable expressions. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility. The 'doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done' and hence comes within the purview of Sec. 56. The word 'Impossibility' has not been used in Sec. 56 in the sense of mere physical or literal impossibility. The performance of an act may not be literally (or physically) or legally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view. And, if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.12 The court further observed: Sec. 56 lays down a. positive rule and does not leave the matter to be determined by the intention of the parties. It is well-settled that if and when there is frustration the dissolution of the contract occurs automatically. It does not depend, as does rescission of a contract, on the ground of repudiation or breach, or on the choice or election of either party. It depends on the effect of what has actually happened on the possibility of performing the contract. Frustration operates automatically to discharge the contract "irrespective of the individuals concerned, their temperaments and failings, their interests and circumstances". "The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event." It is the court that will determine the matter. If the contract itself contained certain implied or express terms as to the discharge ___________ 12. The words 'totally upsets the foundation' seem to indicate that there is distinction between total and partial upsetting - in other words, that there may be differences of degree, which may have to be considered. It is these differences of degree that often prove to be material in various situations. For instance, how far a rise in prices leads to frustration is a question, the answer to which brings out the element of degree. A normal rise in prices does not frustrate the contract. [See, P.M. Bakshi, "Mercantile Law" in Verma & Kusum (Eds.), Fifty Years of the Supreme Court of India, p. 330, ILI (2000)].

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of the contract, it would be dealt with under Sec. 32 and not under Sec. 56, although in English law these are treated as cases of frustration. In large majority of cases, the doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term. The relief is given by the court on the ground of subsequent impossibility when it finds that whole purpose or basis of contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. The court has to examine the contract, the circumstances under which it is made, the belief, knowledge and intention of the parties being evidence of whether the changed circumstances destroyed altogether the basis of the adventure -and its underlying object. (iii) NAIHATI JUTE MILLS LTD. v KHYALIRAM JAGANNATH (AIR 1968 SC 522) In this case, held that the effect of an administrative intervention has to be viewed in the light of the terms of the contract, and if the terms show that the parties have undertaken an absolute obligation regardless of administrative changes, they cannot claim to be discharged. Also, the apex court made a distinction between total ban on import and a restriction in the nature of licensing. There was an agreement to purchase raw jute to be imported from East Pakistan. The buyer was to supply the import licence failing which he was to pay the difference between the contract and market prices. The buyer applied for a licence, which was refused because he had stock in his mill sufficient for two months. He applied again, but was advised that the rules had been changed and to obtain a licence he must show that he had used an equal quantity of Indian jute. Thus the buyer failed to supply the licence and was sued for breach. He pleaded frustration caused by the change in Government policy. But he was held liable. Shelat J. pointed out that if the Government had completely forbidden imports, Sec. 56 would have applied. But the policy of the Government was that the licensing authority would scrutinize the case of each applicant on its own merits. The terms of the contract clearly show that the buyers were conscious of the difficulty of getting the licence in time. The question would depend upon whether the contract was that the buyers would make their best endeavours to get the licence or whether the contract was that they would obtain it or else be liable for breach of that stipulation. There is

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nothing improper or illegal for a party to take upon himself an absolute obligation to obtain a permit or licence and in such a case if he took the risk, he must be held bound to his stipulation. The court relied upon the following observation made in Bank Line Ltd. v Capel Co. Ltd. (1919) AC 535: "Where the contract makes provision for a given contingency, it is not for the court to import into the contract some other different provisions for the same contingency called by a different name." (iv) LEADING CASE: PUNJ SONS (PVT.) LTD. v UNION OF INDIA (AIR 1986 Del 158) In this case, there was a contract between M/s Punj Sons Pvt. Ltd. and the Union of India under which the former agreed to supply to the latter 8,420 milk containers of 20 litres each. The containers were to be coated with "hot dip coating". The coating was to be done with tin ingots, which was not available in the market (it being a canalised item). The supply of tin ingots could be obtained by the promisors on the release of the quota by the Director General of Supplies and Disposals. Inspite of reasonable efforts on the part of the promisors, the quota was not released and thus they were not able to perform the contract. The respondent (Union of India) pleaded that there was no condition or stipulation in the tender for arranging release orders/ import licence for tin ingots. The respondent admitted that the ingots were not available but pleaded that it was not obliged under the contract to make available tin ingots. The petitioners pleaded that tin ingots formed integral part of the performance of the contract which could not be procured unless the respondent got the release orders issued, thus it was impossible to perform the contract. The court observed that the said item could only be issued to the petitioner by the MMTC, India Ltd. on the recommendation of the Union of India and/ or its Department. It was held that the contract had become impossible of being performed (because of nonavailability of one of the essential items) and thus void. The promisors were, therefore, not liable for the non-performance of the contract.] (v) Huda v (Dr.) Babeswar Kanhar (AIR 2005 SC 1491)- In this case, it was held that if due to the circumstances beyond the control of the party, it is prevented from performance of an act in a office or court expiring on a holiday, then the act should be considered to have been done within that period when it is done on the next day on which the court or office is to open, because in such cases the law does not compel performance of an impossibility.

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(6) Intervention of War Intervention of war or warlike conditions in the performance of a contract has often created difficult questions (See under the Questions Section). Cases Not Covered by Doctrine of Frustration impossibility of performance is, as a rule, not an excuse for non-performance of a contract'. Some of the cases where impossibility of performance is not an excuse are: (1) Commercial hardship or difficulty- discussed earlier. (2) Self-induced- The doctrine of frustration does not apply to cases of non-performance of the contract due to the events happening because of the default of the contracting party himself (See Maritime National Fish v Ocean Trawler Ltd. under the heading 'Frustration'). For example, if the intervention of war is due to the delay caused by the negligence of a party, the principle of frustration cannot be relied upon (Gambhirmal v Indian Bank Ltd. AIR 1963 Cal 163). (3) Act of third person- The principle of supervening impossibility does not extend to case of a third person on whose work the promisor relied (See Ganga Saran v Ram Charan Gopal above). (4) Failure of one of the objects- When there are several purposes for which the contract is entered into, failure of one of the objects does not terminate the contract. Thus where a ship was chartered by the defendant for two days for the purpose of viewing the naval review and for a day's cruise round the fleet, but the review was cancelled, the defendant was held liable to pay the hire amount [Herne Bay-Steam Boat Co. v Hutton (1903) 2 KB 683]. (5) Completed transfers or Executed contracts- Sec. 56 covers cases of executory (future) contracts only, and does not apply to executed (present) contracts. Thus in Raja Dhruv Dev v Raja Harmohinder Singh (AIR 1968 SC 1024) where there was a lease of land for one year and the lessee was given possession, the fact that the lessee could not work the land (for any crops) due to partition of the country was held not to attract Sec. 56, as it was the case of a completed transfer. The lessee's action for the refund of the rent was thus dismissed. The court observed that there was no agreement, express or implied, that the rent was payable only if lessee was able to perform agricultural operations. The court also observed that Sec. 56 is not applicable when the rights and obligations of the parties arise under a transfer of property under a lease.

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On the other hand, where on account of an event beyond the parities' control, the lessor is not able to transfer possession to the lessee, the lessee would be entitled to take back his rent (Gurdashan Singh v Bishen Singh AIR 1963 Punj. 49). Similarly, in Sushila Devi v Hari Singh (AIR 1971 SC 1956), the frustration of contract occurs as the parties could not go to Pakistan to give or take possession. Thus if the transfer of lease has not been made complete, the doctrine of frustration applies. In other words, a lease (completed transfer) is outside Sec. 56, but an agreement of lease may come to an end by frustration. In Raja Dhruv Dev case, regarding the question of applicability of doctrine of frustration to a lease, Shah J. observed: "Under a lease of land, there is a transfer of right to enjoy that land. If any material part of property is destroyed or rendered unfit for the purpose for which it was let out because of fire, floods, violence, or other irresistible forces, the lease may at the option of lessee be avoided [Sec. 108(c), Transfer of Property Act]. Where the leased property is not destroyed or rendered unfit, the lessee cannot avoid the lease only because he does not or is unable to use the land for purpose for which it is let out to him". Under English law also, a lease is more than a contract and amounts to estate i.e. creates in the lessee a vested estate or interest and, therefore, it can never end prematurely by frustration i.e. when one party or the other unable to carry out some of its obligations as landlord and tenant because of change of circumstances. The lease would remain or interest continues to be vested in the lessee. In Amir Chand v Chuni Lal (AIR 1990 P&H 345), it was held that the doctrine of frustration does not apply to contracts creating estates or interests in land, which had already occurred. In this case, the tenant of a house was evicted in terms of a decree but later possession was granted to him. The landlord contended that as the rented building had been demolished by the municipality leaving only a vacant land, the tenant was not entitled to the land. Held that the contract of lease had not become impossible of performance because the landlord could reconstruct the premises. In Karuna Ram Medhi v Kamakhya Prasad Baruah (1997) 5 SCC 530, under the terms of the contract of tenancy, the tenant was entitled to built a permanent structure on the land of tenancy for residential/commercial purposes, within five years from the date of contract. The tenant did so with the knowledge and acquiescence of the landlord. However, the structure was destroyed by fire. The landlord sought ejectment of the tenant, pleading discharge of the contract on account of act of God. It was held that where the permanent structure was constructed within the said period of five years, the mere fact that the structure was destroyed by fire would not disentitle the tenant to the protection from ejectment.

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In K. J. Coal Co. Ltd. v Mercantile Bank (AIR 1981 Cal 418), the Mercantile Bank had advanced a huge amount of money to K. J. Coal Co. through overdraft. Thereafter the coal company was nationalized. In an action to recover back the loan, the company pleaded non-liability to pay on the ground of frustration of contract in view of nationalization of company. Held that such change in the management simpliciter cannot amount to supervening of an event frustrating the contract. FURTHER QUESTIONS Q.1. N had a licence to import jute for manufacturing jute bags. N sold the licence to B. Before jute could actually be imported by B under the licence, the import of such jute was totally banned. Can B recover the sale consideration from N on the ground of frustration? [C.L.C-91] A.1. Sec. 56 of the Contract Act covers cases of executory contracts only, and does not apply to executed contracts i.e. completed transfers (See the text). In the present case, the contract for the sale of import licence had been completed before the import licence was made useless by the ban. Thus B cannot recover the sale consideration from N, as there is no frustration of the contract. If the ban had occurred before the licence was transferred in the name of B, then B could have recovered the sale consideration. Q.2. G agrees to deliver Kashmiri apples to H at Denver, England. The ship carrying the apples is trapped in the Suez Canal because of the closure of the canal as a result of the 1967 war. (a) Is the contract frustrated? (b) Suppose the ship carrying the apples had not been caught in the canal but, having reached the Persian Gulf, was forced to re-route around the Cape of Good Hope making the route longer by 4,000 miles. Would the contract be frustrated in such a case? [C.L.C.-92/95; L.C.I-94] A.2. Intervention of War (A ground of frustration) Intervention of war or warlike conditions in the performance of a contract is a ground of frustration of the contract. Illustration (d), Sec. 56 reads: 'A contracts to take in cargo for B at a foreign port. A's government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.'

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In A.F. Ferguson & Co. v Lalit Mohan Ghose (AIR 1954 Pat 596), the further performance of a contract of life insurance had become impossible because the insurer was a German company and on the outbreak of war in 1939 its business was closed by the Indian Government and the disposal of pending policies was handed over to a C.A. firm. The assured pleaded that due to the declaration of war the contract had become void and thus he should be allowed to recover the money paid by him under the policy. The defendants contended that the contract was not frustrated, as their firm being authorized by the Central Government to manage the business of the firm, thus the contract revived. The plaintiff failed to ratify the contract so his claim was barred by waiver and acquiescence. The Patna High Court held that when the war broke out it became impossible for the plaintiff to make any payment as the payment of any sum of money to an enemy firm had become unlawful and punishable. When there is a frustration, the dissolution of the contract occurs automatically. The contract having become void, the question of ratification did not arise. In Basanti Bastralaya v River Steam Navg. Co. Ltd. (AIR 1987 Cal 271), the contract exempted the defendant from liabilities due to delay, damage or loss on account of any act of State's enemies during transit. Due to hostility between India and Pakistan the vessel and cargo of the common carrier (the defendant) was seized and detained by the Pakistani Government. Held that the contract of carriage was frustrated in this case due to impossibility of performance and, therefore, the defendant was exempted from delivering the goods to the plaintiff. In Tsakiorglou & Co Ltd. v Noblee & Throl GmbH (1962) AC 93, the contract was to supply 300 tonnes of groundnuts from Sudan to Hamburg. The usual and normal route at the date of the contract was via Suez Canal. Shipment was to be in Nov./Dec. 1956, but on Nov. 2, 1956, the Canal was closed to traffic and it was not reopened until the following April. It is stated that the appellants could have transported the goods via the Cape of Good Hope. The appellants refused to ship goods via the Cape as it was a costlier route. The issue was whether by reason of the closing of Suez route, the contract had been ended by frustration. The House of Lords held: (i) that a term that shipment should be via the Suez Canal should not be implied into the contract; (ii) that since the customary or usual route via the Suez was closed, the sellers had to ship the goods by a reasonable and practical route, if available; (iii) that although the route via the Cape involved a change in the method of performance from that taken under the contract, yet

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it was not such a fundamental or radical change as to amount to frustration. In Twentsche Overseas Trading Co. Ltd. v Uganda Sugar Factory Ltd. (AIR 1954 PC 144), it was held that if there are more than one ways of performing a contract and the war cuts off only one of them, the party is still bound to perform by the other way, however inconvenient or expensive (The above two cases fall under the cases of commercial hardship). Decision of the case in question (a) The contract is frustrated due to impossibility of performance, as the ship gets trapped in the Suez Canal. (b) The contract is not frustrated, if the apples can be delivered in good shape, when the ship has to take a 4,000 miles longer route, though it might be inconvenient or expensive to the carrier (a case of commercial hardship). Q.3. Discuss whether A can take plea of 'frustration' in the following case - A agreed to supply 500 picture tubes of T.V. @ 3,000 per piece to B on 1-1-95. The goods were to be delivered within one month. On 15th Jan. 1995, the government enhanced the duty leviable on these picture tubes and thus the cost price rises form Rs. 2,700 to Rs. 4,000 per tube. A declines to supply the goods. [D.U.-2008] [L.C.II. -95] A.3. It is a case of 'commercial hardship' which may make the performance of the contract unprofitable or more expensive, but it is not sufficient to excuse performance, for it does not bring about a fundamentally different situation such as to frustrate the venture. A cannot take the plea of 'frustration' and has to supply the goods. Q.4. Rajesh, supplier of greeting cards at Delhi agreed to supply by air on 24-12-1997, a consignment of cards to Rakesh, the purchaser, at Mumbai. Rajesh knew that if Rakesh did not get the said cards by 4 p.m. on the agreed date, i.e. 24-12-97, he will suffer huge loss. However, the consignment of cards reached Mumbai by the first available flight from Delhi to Mumbai on 26-12-97. Rakesh files a suit against Rajesh seeking damages. Rajesh takes the plea that he was ready to send the consignment on 23-12-97 but due to inclement weather conditions all the flights were cancelled for 3 days, i.e. from 25-12-97 to 25-12-97 and as such he is not liable for the damages in view of the provisions of Sec. 56 of the Contract Act. Decide. [L.C.II-97] A.4. It is a case covered by Sec. 56 of the Contract Act; the ground of frustration of contract being the 'change of circumstances'. The change of circumstances on account of the bad weather conditions

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was such as to make performance of the contract impossible or even extremely difficult in the manner and at the time contemplated. Q.5. A, a resident of Delhi, takes on hire, for Rs.5,000, a special camera from B for the intervening night of 18-11-98 and 19-11-98 so as to take photographs of the 'meteoric shower' (shooting stars) which was predicted to occur between 1.30 a.m. to 3.00 a.m. of the aforesaid night. The 'meteoric shower', however, failed to materialise on the capital's skies. A, therefore could not take photographs of the 'shower' and therefore refused to make the payment of the promised amount to B on the ground that the contract was frustrated. Decide. [C.L.C.-98] A.5. Where the parties had full knowledge of difficult conditions of performance at the time of the contract, the doctrine of frustration will not apply to such cases. The event (meteoric shower) was predicted to happen on the capital's skies and thus not quite certain to happen. Moreover, the event would have happened but could not be viewed because of unclear skies or because of its taking place in some other parts of the country or world. Thus in the present case it could not be said that the contract was frustrated. Q.6. A contracted with B to hire to B a music hall on certain day for the purposes of entertainment. Before the day of performance arrived, the music hail was destroyed by fire due to which A was unable to hire the hall to B. B sued A for compensation for breach of contract. Will B succeed? Will your answer be different if it is found that fire was due to As fault? [C.L.C.-97] A.6. B will not succeed as it is a case of frustration of contract owing to the destruction of the subject matter of contract. However, if the fire had occurred due to A's fault, then A will be liable for the breach of the contract because frustration should not be self-induced i.e. due to the act of a party to the contract. Q.7. A entered into a contract with B for supplying 600 tons of coal to B within 6 months. A failed to make the delivery in accordance with the terms of the contract owing to Government restrictions on the transport of coal from collieries but A admitted that coal was available and could be purchased in the local market. Can A successfully take the plea that the contract stood discharged because of impossibility of performance? A.7. It is a case of commercial hardship and not one of impossibility. Q.8. A was due to perform a contract on 1st May, 1970, but on 20th April repudiated his obligation. On 29th April, the contract became illegal through a change in the law. B, the other party to the contract filed a suit for breach of contract on 30th April, 1970. Discuss.

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A.8. After an 'anticipatory breach' of contract has occurred, the injured party may at his option either sue immediately or wait till the time the contract was to be performed. However, if he decides to wait he keeps the contract alive for the benefit of the other party as well as his own. In such a case, if while the contract is lying open, some event happens which discharges it otherwise than by repudiation, for example, by supervening impossibility or frustration, the promisor (guilty party) would also be entitled to take the advantage of the changed circumstances. Thus in such a situation the contract (as in the case in question) ends by frustration and not by breach. Therefore, B will not succeed in the present case. Q.9. What do you mean by 'force majeure' clause in a contract? What implications does the clause have in view of the provision for supervening impossibility? [I.A.S.-98] A.9. Force majeure Clause in a Contract The expression "force majeure" (literally "superior force") means irresistible force or compulsion or circumstance beyond one's control. Such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care. In other words the parties are not liable for the breach of the contract caused due to such superior forces against which their skill and care cannot possibly provide for. The expression "force majeure" is not a mere French version of the Latin expression "vis major" (act of God). It is a term of wide import and includes act of God, war, insurrection, roit, civil commotion, strike, earthquake, tide, storm, flood, explosion, fire, break down of machinery, etc. [Dhanrajmal Gobindran v Shamji Kalidas AIR 1961 SC 1285]. The term cannot, however, be extended to cover bad weather, funeral, etc. The expression means some physical or material restraint and does not include a reasonable fear or apprehension of such a restraint [Hackney Borough Council v Dore (1922) 1 KB 431]. What will happen in a situation when force majeure clause in a contract is not provided for and the performance of the contract becomes impossible because of supervening impossibility? In an earlier English case - Paradine v Jane [KB (1647) Aleyn 26] it was pointed out that subsequent happening should not affect a contract already made. It was held that "when the party by his own contract creates a duty, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract."

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But in the subsequent case - Taylor v Caldwell [QB (1863) 3 B & S 826], Blackburn J. laid down that the above "rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied". An implied condition would be read into the contract when the performance becomes impossible from the perishing of the thing without default of the contractor. The explanation of the doctrine of frustration in terms of the 'theory of implied term' has been Criticised. Lord Sumner said that "the doctrine of frustration is really a device by which the rules as to absolute contracts are reconciled with the special exceptions which justice demands" [Hirji Mulji v Cheong Yue S.S.Co.Ltd. (1926) AC 497]. "In ascertaining the meaning of the contract and its application to the actual occurrences, the court has to decide, not what the parties actually intended but what as reasonable men they should have intended" [Joesph Constantine Steamship Line Ltd. v Imperial Smelting Corpn. Ltd. (1942) AC 154]. In British Movietonews Ltd. v London & District Cinemas Ltd. (1951) 1 KB 190, Denning LJ said: "The court really exercises a qualifying power-a power to qualify the absolute, literal or wide terms of the contract - in order to do what is just and reasonable in the new situation". In Easun Engg. Co. Ltd. v Fertilizers & Chemicals Travancore Ltd. (AIR 1991 Mad 158), Easun Co. failed to supply 2/3rd of transformers on account of price increase in transformer oil. The contract also provided for liquidated damages for any delay in the supply of goods, and that such damages would not be applicable in case of delay caused due to "force majeure", viz. due to strikes, war, revolution, civil commotion, epidemics, accidents, fire, wind, flood, because of any law/ proclamation/ ordinance/ regulation of Government, an act of God, or any other cause beyond the control of the parties. Easun contended that they were prevented from supplying, due to force majeure conditions namely, strikes, power cut and phenomenal increase in the cost of the transformer oil (a 400% increase) due to war conditions in the Middle East and the Government of India's Ordinance imposing higher excise duties. The Arbitrator came to the conclusion that Easun was justified in asking for variation of price in transformer oil, in view of the aforesaid force majeure conditions. Further, the contract itself provided that liquidated damages will not be applicable in case of delay caused due to force majeure conditions. The Madras High Court upheld the Arbitrator's award.

Page 207 9 Remedies for Breach of Contract A 'breach of contract' occurs when(i) a party renounces his liability under the contract, or (ii) by his own act makes it impossible that he should perform his obligations under the contract, or (iii) totally or partially fails to perform, his part of the contract. The failure to perform or renunciation may take place when the time for performance has arrived (present or actual breach) or even before that (anticipatory breach). In the case of an 'anticipatory breach' (discussed earlier in the present book), the innocent party is excused from further performance and it entitles the injured party to an option either to sue immediately or to wait till the time the act was to be done. If, however, the injured party does not accept the repudiation and keeps the contract alive till the date of performance, he becomes bound to accept the performance of the contract if rendered, and if a supervening impossibility discharges the contract, he loses his claim to damages. In such case, the contract ends by frustration and not by breach, so no damages need to be paid. The date for assessment of damages in case the anticipatory repudiation is accepted, is the date of repudiation. If it is not accepted, then the date for assessment of damages is the date of performance. Remedies for Breach of Contracts1 Three remedies are available for breach of contract, namely: (1) Rescission and Damages - It is the most common remedy. This entitles the injured party to recover compensation for the loss ___________ 1. "Where there is a right, there is a remedy." In the light of this maxim, discuss the various remedies for breach of contract and the circumstances in which each is available.

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suffered by it due to the breach of contract, from the party who causes the breach (Secs. 73-75). Applying to the court for 'rescission of the contract' is necessary for claiming damages for breach. However, in certain cases a suit for 'rescission' may be filed even when no damages are to be claimed. (2) Specific performance and Injunction - Specific performance of the contract consists in the contracting party's exact fulfilment of the obligation which he has assumed -in his doing or omitting the very act which he has undertaken to do or omit. It is an equitable relief given by the courts, under the Specific Relief Act, requiring the defendant to actually perform the contract according to its terms and stipulations. It is allowed when damages would not be an adequate remedy. The courts issue a decree for specific performance only where it is just and equitable so to do i.e. where the legal remedy is inadequate or ineffective. Specific performance is not granted where monetary compensation is an adequate relief, or where the court cannot supervise the actual execution of the contract (viz. a building construction contract), or where the contract is for personal services (viz. a contract to paint a picture). Specific performance is usually granted in contracts with lands, buildings, rare articles and unique goods having some special value to the party suing. An injunction restrains the other party from making a breach of the contract. It is also issued under the Specific Relief Act. It is a preventive relief and is appropriate in cases of 'anticipatory breach of contract' where damages would not be an adequate relief. It secures the specific performance of the negative terms of the contract (i.e. where a party is doing something which he promised not to do). In contracts for personal services, an injunction is granted in place of specific performance. (3) Quantum Meruit - It literally means "as much as is earned" or "in proportion to the work done". When the injured party has performed a part of his obligation under the contract before the breach of contract has occurred, he is entitled to recover the value of what he has done, under this remedy. It is an action which is alternative to an action for the breach of contract. This action in essence is one of restitution, putting the party injured by the breach of contract in a position in which he would have been had the contract not been entered into. It may be noted that if the party making a breach of contract has done a part of the work in connection with it, he cannot claim anything in respect thereof under this remedy. The party in default cannot sue upon quantum meruit.

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Conclusion - The law tries to give an appropriate remedy for every type of breach. But even so the maxim ubi jus ibi remedium ('where there is a right, there is a remedy') is not wholly true. There are cases, for example, where a contract has been broken and the plaintiff has suffered no loss, according to a few decisions of the Supreme Court, damages would not be allowed. Damages for Breach2 The party who is injured by the breach of a contract may bring an action for damages. 'Damages' means compensation in terms of money for the loss suffered by the injured party. In every case of assessment of damages, there are two problems: (1) Remoteness of damage, and (2) Measure of damages. (1) Remoteness of Damage Theoretically the consequences of a breach may be endless (e.g. loss of profits, loss of social prestige and of business reputation, time and money and energy wasted on defence), but there must be an end to liability. The defendant cannot be held liable for all that follows from his breach. In other words, the compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach. The decision in Hadley v Baxendale3 (1854) 9 Ex 341, laid down two rules: (i) General damages- those which arise naturally in the usual course of things from the breach itself. This rule is 'objective' as it makes the liability to depend upon a "reasonable man's foresight" of the loss that will naturally result from the breach. (ii) Special damages- those which arise on account of the unusual circumstances affecting the plaintiff. They are not recoverable unless the special circumstances are brought to the knowledge of the defendant so that the possibility of the special loss was in the "contemplation of the parties". This rule is 'subjective' ___________ 2. Explain the principles for assessment of damages in case of breach of contract with the help of statutory provisions and case law. Bring out the distinction between ordinary and special damages. [C.L.C.-92; L.C.I-94/95/2003; L.C.II-93/2002/2005] 3. Explain the law relating to damages as propounded in Hadley v Baxendale. [L.C.I.-93/94/95; LC.II-94] State the facts and discuss the principles of law laid down in Hadley v Baxendale for payment of damages for breach of contract. [D. U. 2007]

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as the extent of liability depends upon the actual knowledge of parties at the time of the contract about the likely result of breach. The relationship between the two rules was re-examined in Victoria Laundry Ltd. v Newman Industries Ltd. (1949) 1 All ER 997. The judgment emphasizes that both the rules are based upon the principle of "forseeability". Forseeability depends upon knowledge. Accordingly what was at that time reasonably foreseeable depends upon the knowledge then possessed by the parties. Knowledge possessed is of two types: One imputed i.e. assumed to be possessed by everyone ('first rule' in Hadley v Baxendale), and the other actual ('second rule'). Thus, two rules formulated in Hadley are only two different instances of the application of a single rule. The Victoria Laundry case had virtually replaced the expression "contemplation of the parties" with "reasonable man's foresight" and this being the principle in the law of tort also, hardly any distinction remained between tort and contract principles relating to remoteness of damages. But in Heron II, Koufos v Czarnikow Ltd., (1967) 3 All ER 686, the decision restored the distinction by again laying emphasis upon the "contemplation of the parties", as laid down in Hadley case. It was observed that a result which will happen in the great majority of cases should reasonably be regarded as having been in the contemplation of the panics, but a result which, though foreseeable as a substantial possibility would happen only in a small minority of cases should not be regarded as having been in their contemplation. Thus the damages recoverable for breach of contract are such as flow naturally in most cases from the breach, whether under ordinary circumstances or from special circumstances due to the knowledge either in the possession of or communicated to the defendants. This means that the claim depends on the contemplation of the parties to the contract and question of remoteness as such does not arise. Consequently liability in tort may often be of a wider kind. The facts of major English cases could be summarized as below: (i) In Hadley v Baxendale (1854) 9 Ex 341, the plaintiff’s mill had been stopped due to the breakage of a crankshaft. The defendants, a firm of carriers, were engaged to carry the shaft to the manufacturers as a pattern for a new one. The plaintiff's servant told the defendants that the mill was stopped, and that the shaft must be sent immediately. But the defendants delayed the delivery by some neglect, thus the mill remained stopped for a longer time than it would have been. The action was brought for the loss of profits arising out of the delay. The defendants were held not liable for the loss of profits, because in the great multitude of cases of millers sending off broken

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shafts for repair, it does not following the ordinary circumstances that the mill is stopped (as the millers might have another shaft in reserve). The fact that the mill was out of action for the want of shaft was a 'special circumstance' affecting the plaintiff's mill and the same should have been pointed out to the defendants in clear terms. (ii) In British Columbia Saw Mills v Nettleship (1868) LR 3 CP 499, also, lack of knowledge of special circumstances once again prevented recovery of special damages. The parts of a saw mill machinery, packed in cases, were given to the defendant, a carrier, for carriage to Vancouver. One of the cases was lost and consequently a complete mill could not be erected and operated. The plaintiff claimed the cost of lost machinery and the profits which could have been earned if the mill had been installed in time. Holding that the defendant was mere carrier having no knowledge of the purpose to be served by the goods to be transported by it, his liability was only for the cost of lost machinery. The court gave an illustration: "If a barrister on his way to practice at the Calcutta Bar, where he may have a large number of briefs awaiting him. got stranded in the Suez boat through the default of Peninsular and Oriental Company, is the company to be responsible for that, because they happened to know the purpose for which the traveller was going?" (iii) In Simpson v London & North Western Railway Co. (1876) 1 QBD 274, held that if the special circumstances are already within the knowledge of the party breaking the contract, the formality of communicating them to him may not be necessary. The plaintiff was in the habit of exhibiting samples of his implements at cattle shows. He delivered his samples to the defendant company for consignment to the show ground at New Castle. The consignment note said: "must be at New Castle on Monday certain". But no mention was made of the intention to place the goods in the exhibition. Due to defendant's negligence, the goods reached the destination only after the exhibition was over. It was held that since the defendant company was having the knowledge of the special circumstances that the goods were being sent for the New Castle show, they were liable for the loss of profits resulting from late arrival of goods. (iv) In Diamond v Campbell-Jones (1960) 1 All ER 583, the defendants contracted to sell certain leasehold premises to the plaintiff, who intended to make profits by converting the

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premises into offices. The defendants having made a breach of contract, the plaintiff sued them for recovering loss of profits which he could earn by using premises according to his intended use. The court disallowed on the ground that the defendants did not have the knowledge about the plaintiff's intended use of premises. Section 73, Contract Act 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 other party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual 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. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach." Thus, Sec. 73 is declaratory of the common law as to damages (i.e. rule of Hadley v Baxendale).4 In Hadley case, Alderson, J. laid down the following rule: "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in the respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally i.e. according to the usual course of things, from such breach of contract itself, or such as may be reasonably 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." Sec. 73 also provides that the same principles will apply in relation to breach of a quasicontract. Illustration (i) (Delay caused by carrier)5- A delivers to B, a common carrier, a machine, to be conveyed without delay, to A's mill, informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of machine, and A in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profits which would have been made by the working of ___________ 4. How far Sec. 73 incorporates law laid down in Hadley v Baxendale. [D.U. 2007] "Damages which will occur in the great multitude of cases can always be recovered." Discuss the provisions of Sec. 73 highlighting the above statement. (C.L.C-2003] 5. A question based on this illustration. [L.C.I.-95]

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the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract (This illustration is a Hadley v Baxendale module). (A is entitled to profit as A has brought to the knowledge of B the 'special circumstance' affecting him i.e. mill is stopped for want of machine. A is not entitled to loss sustained through the loss of Government contract as this fact was not brought to the knowledge of B). In Madras Railway Co. v Govinda Rau6 (1898) 21 Mad 172, the plaintiff, a tailor, delivered a sewing machine and some cloth to the defendant railway company to be sent to a place where he expected to carry on his business with special profit by reason of a forthcoming festival. The goods were delayed due to company's negligence and were delivered after the conclusion of festival. The plaintiff claimed damages for the expenses of travelling up to the place of festival and of staying there and the loss of profits, which he would have earned. The court held that the damages claimed were too remote. All of these were due to the frustration of the ‘special purpose' and that was not known to the company. A similar case is - Fazal Illahi v East Indian Railway Co. (AIR 1922 All. 774) In Dominion of India v All India Reporter Ltd. (AIR 1952 Nag 32), the loss by railways of three volumes of a set of books without which the set of 8 volumes became useless, recovery allowed only for the lost volumes. Since the fact that the loss of three volumes would render the whole set useless was not brought to the knowledge of the defendant, the value of whole set could not be claimed. Compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Illustration (n) to Sec. 73 reads: A contracts to pay a sum of money to B on a specific day. A does not pay money on that day. B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest up to the date of payment. ___________ 6. O contracts to sell and deliver to P, on 1st Oct. 1993, one hundred bales of cotton which P intended to use for manufacturing school uniforms for which there is no demand except in the months of November and December. The cloth is not delivered till 15 of December, when it is too late to be used that year for making uniforms. P sues O for damages for the expenses incurred by him in making preparation for the manufacture and for profits which he expected to obtain by making uniforms. O is willing to pay by way of compensation only the difference between the contract price of the cloth and the market value on 15 th December. Is P entitled for the expected profits also? [C.L.C.-95] [Note: P would be entitled for expected profits only if the "special circumstances" affecting him i.e. manufacture of uniforms, was in the knowledge of O, which is not so in the present case.]

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In Union of India v Steel Stock Holder's Syndicate, Poona (1976) 3 SCC 108, a consignment of goods with the railways reached its destination after inordinate delay of seven months. The plaintiff's money remained blocked for the period. He was allowed to recover interest on the money by way of damages for the loss. In Dwarka Das v State of M.P. (AIR 1999 SC 1031), a works contract was rescinded on the ground that the contractor had not completed within the stipulated time even 10% of the works. But evidence showed that the contract was improperly rescinded and, therefore, it amounted to a breach of contract. The contractor claimed Rs. 20,000 as compensation, being 10% of the value of the contract. The court said that the contractor was entitled to claim damages for loss of profit which he expected from the project. His claim was held to be fully justified. The High Court erred in holding that the claim should've been based on actual loss suffered. Loss of Profits is a Special Loss The loss of profits, which were to accrue upon resale, cannot be recovered unless it is communicated to the other party that the goods are for resale upon a special contract. Illustration (J) [knowledge of resale, loss of profit)- A, having contracted with B to supply B with 1,000 tons of iron at 100 Rs./ ton, to be delivered at a stated time, contracts with C for the purchase of 1000 tons of iron at 80 Rs./ ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, who cannot procure other iron, and B in consequence, rescinds the contract. C must pay to A Rs. 20,000, being the profit, which A would have made by the performance of his contract with B. Illustration (k) (Where no knowledge of resale agreement, no more than market difference recoverable)- A contracts with B to deliver to B, by a fixed day, for a specified price, a machinery. On A’s failure to do so, B is obliged to procure another piece at a higher price, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been communicated to A), and is compelled to make compensation for breach of that contract. A must pay to B the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation

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LEADING CASE: KARSANDAS H. THACKER V SARAN ENGINEERING CO.7 (AIR 1965 SC 1981) In this case, there was a contract to supply 200 tons of scrap iron. The buyer undertook to supply the same quantity to the Export Corporation, Calcutta. The seller failed to supply in consequence the buyer could not perform his contract with the Corporation. The Corporation recovered from him the difference between the contract price and the market price. The seller contended that he should not be held liable for anything because control price of iron scrap was still the same and he had no knowledge of the contract of resale to the Corporation. The court accepted the seller's contentions. The court observed: Sec. 73 lays down that when a contract has been broken, the party who suffers by such breach is entitled to receive, from the other party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual 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. Compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. According to illustration (k), Sec. 73, the seller has not to pay any compensation that the buyer may have to pay to his sub-buyers by reason of the breach unless he was made aware of the buyer's promise at the time of the contract, in the present case, on account of non-delivery of scrap iron the buyer could've purchased the scrap iron from the market at the same controlled price. This means that the buyer did not stand to pay a higher price than what he was to pay to the respondent (the seller) and therefore he could not have suffered any loss on account of the breach ... Thus, the loss which could have naturally arisen in the usual course of things from the breach of contract by the respondent would be nil. The actual loss he (the buyer) suffered on account of the breach was the result of his contracting to sell 200 tons of scrap iron for export to the Corporation. As the parties did not know and could not have known when the contract was made that the scrap ___________ A contracts with B to deliver 100 tons of pig iron at controlled price on a fixed day. A does not deliver the pig iron at the time specified, and in consequence of this, B is prevented from performing a contract with C. A was not aware of the contract between B and C. Whether A is liable to pay any damages to B due to breach of contract? [C.L.C.-97] [Note: A is not liable.]

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iron would be ultimately sold by the appellant (buyer) to the Corporation, the parties could not have known of the likelihood of the loss actually suffered by the appellant on account of the failure of the respondent to fulfil the contract.] Market Rate Theory8 Illustration (a) (Market rate criterion) - A contracts to sell and deliver certain goods to B, at a certain price. A breaks his promise, B is entitled to receive from A, the sum, if any, by which the contract price falls short of the price for which B might have obtained goods of like quality at the time when the goods ought to have been delivered. Illustration (h) (Buyer's breach, difference between market and contract prices) - A contracts to supply B with a certain quantity of iron at a fixed price, being a higher price that that for which A could procure and deliver the iron. B wrongfully refuses to receive the iron. B must pay to A, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it. In almost all sale transactions, which fail to go through, the normal yardstick for working out the sum of money to which the aggrieved party is entitled is the difference between the contract and market prices. This rule presupposes the existence of a market and the possibility of ascertaining the price of the goods in that market. The 'market price' is the buying price at which buyer can obtain equivalent goods. It is the current price at the contractual time of delivery when the buyer can obtain identical goods in an available market. The buyer has not to prove that he actually bought the goods after the seller had failed to deliver. Sec. 73 does not envisage that buyer must resort to actual purchase before claiming damages. In Shearson Lehman Hutton Inc. v Machine Watson & Co. (1990) 3 All ER 723 QBD, the buyer refused to accept the goods. The court observed: In assessing damages for failure to perform a contract for the purchase of goods the measure of damages payable by the defaulting buyer is the difference between the contract price and the current or market price 'at the date of the breach.' This is based on a hypothetical sale of the particular amount of the goods in question in the available market (disregarding any characteristics of the seller which might have led to a lower price being obtained). In determining whether there is an 'available market' for the goods in question, if the seller actually offered the goods for sale there is no available market unless there is one actual buyer on that day at a fair price. If, on the other hand, there is only a hypothetical sale there is no available ___________ 8. With the help of decided cases discuss in detail the market rate theory of assessment of damages in cases of breach of contract. [I.A. S. -95]

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market unless on the relevant day there were in the market sufficient traders potentially in touch with each other to evidence a market in which the seller could if he had wished have sold the goods. Furthermore, the market price on a hypothetical sale is the fair market price for the total quantity of goods if they had to be sold on the relevant day but taking into account the price which might be negotiated within a few days with other potential buyers who were not part of the market on that day only because of difficulties in communication. Thus the damages are based on the fair market or current price on the date of the breach, which in turn is based on both the price obtained by a sale of all goods on the date of the breach and the price obtained by sales negotiated over a short period before or after that date. In Rajasthan Rajya Sahkari Kraya Vikrya Sangh Ltd., Jaipur (1988) 2 Raj LR 962 (a case of seller's breach), it was observed that it is not necessary to prove actual loss. Anticipated loss of profits can be determined by the court while determining compensation. What is necessary is that the plaintiff should establish what the contractual rate of purchase was and what the rate of article was on the date on which it was to be supplied. The difference between the two is a loss to the purchaser, if it is not supplied by the seller to purchaser. This is so because the buyer cannot be allowed to be put in a better position than he would have been if the contract had been performed. What would be the position when the goods are delivered, but delivered late? In Wertheim v Chicoutimi Pulp Co. (1911) AC 301, goods were delivered by the seller late when they were worth Rs. 50 per ton in the market as against the contract price of Rs. 80, but the buyer got Rs. 70 per ton on resale. He was allowed Rs. 10 per ton by way of his loss. If :he carrier causes the delay in delivering the goods at the destination he can be made liable to pay the difference between the prices prevailing on the agreed date of delivery and that on which the goods are actually delivered (Koufos v C. Czarmilkow Ltd.). In Collard v South Eastern Rly. (1891) 7 H&N 79, it was held that if due to carrier's fault the goods are damaged and consequently there is delay in disposing off such goods, the loss due to the fall in tie market value of the goods can be claimed as compensation. (2) Measure of Damages8a Once the extent of recoverable loss is determined, it has to be evaluated in terms of money. This is the problem of measure of damages and is governed by certain fundamental principles. It may be noted that the fact that damages are difficult to assess does not prevent the injured party from recovering them. The governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if the rights have been observed. ___________ 8a. "The consequences of breach of contract may be endless, but there must be an end to liability. The defendant cannot be held liable for all that follows from his breach of contract." Discuss the principle 'measure of damages' in the light of the above statement. Refer to relevant statutory provisions and case law. [D.U. -2009]

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"The object of damages is to put the suffering party in the same position as if the contract had been performed. Hence, loss of profits can be awarded, as part of damages" [A. T. Brij Paul Singh & Bros, v State of Gujarat AIR 1984 SC 1703]. (a) Damages are Compensatory, not Penal9 Damages are compensatory in nature. The object of awarding damages to the aggrieved party is to put him in the same position in which he would have been if the contract had been performed. Damages are, therefore, assessed on that basis. Thus, in Robinson v Harman (1848) 18 LJ Ex 202, the defendant, having agreed to grant a lease of a certain property to the plaintiff, refused to do so. The plaintiff was allowed by way of damages the expenses incurred by him on the preliminary legal work and also for the profits which he would have earned if the lease had been granted to him. Thus damages are given by way of compensation for the loss suffered by the plaintiff and not for the purpose of punishing the defendant for the breach (i.e. damages are not penal). Motive for and the manner of breach is not taken into account because generally "punitive damages" are not recoverable for the breach of contract. But the inconvenience caused by breach may be taken into account. Thus, in Hobbs v London & SouthWestern Rly. Co. (1875) LR 10 QB 111, due to the negligence of the defendant railway company, the plaintiff and his family were set down at a wrong station. Neither any nearby hotel accommodation nor any conveyance was available to them, and they had to walk several miles in rain. The plaintiff was entitled to substantial damages for inconvenience to the family (however, cold to the wife was considered to be too remote). In McMohan v Fields (1881)7 QBD 591 CA, this decision was criticized for not awarding damages for wife's illness. The principle is that of compensation, and no more than compensation, thus the benefits (if any) received by plaintiff against the loss suffered are to be taken into account. For example, where a dismissed employee receives unemployment benefit, his compensation is reduced by that amount. Sometimes the expenditure incurred by one party to the contract before the contract was entered into is wasted because of breach of contract by other party. Such pre-contract expenditure may be recovered as damages if it was within the contemplation of the parties. Thus, in Anglia Television Ltd. v Reed (1971) 3 All ER 690, a T.V. artiste, who having been engaged as a leading actor for a film, repudiated the contract. The producer, unable to find a substitute, abandoned the project. The loss of profit was incapable ___________ 9 "Damages are compensatory, not penal". Elucidate. [D.U. -2008] [L.C.II-95]

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of being estimated. The court allowed him as damages the money spent by him in engaging a director, a designer, arranging for shooting place, etc., as this kind of expenditure was within the contemplation of the parties. However, in such cases, the plaintiff can either claim for his loss of profits or his wasted expenditure. He cannot claim both. (b) Mental Pain and Suffering Ordinarily damages for mental pain and suffering are not allowed for the breach of a commercial contract. But they may be allowed in special cases. In U.S. such damages may be allowed where the breach was wanton or reckless and caused bodily harm and where the defendant had reasons to know that the breach would cause mental suffering. Thus, in Westesen v Olathe State Bank (1925) 78 Colo 217, the defendant, a banking corporation, agreed to loan plaintiff money for a trip to California by crediting his account with such sums as he might need there. The plaintiff reached California, but the defendant refused to give him the promised credit. The court allowed damages for humiliation and mental suffering. In Addis v Gramophone Co. Ltd. (1909) AC 488, the House of Lords listed three situations in which mental pain and suffering can be taken into account: action against a banker for refusing to pay a customer's cheque when he has in his hands funds of the customer; actions for breach of promise of marriage (now abolished in England); and actions where the vendor of real estate fails to make title. In this case, the court did not allowed damages in respect of harsh and humiliating way in which the plaintiff was dismissed; it only allowed wages for the period of notice and the commission which he would have earned during that period. In Hayes v Dodd (1978) 10 Build LR 19, it was observed that where the contract which has been broken was itself a contract to provide peace of mind (comfort or pleasure) or freedom from distress, the mental pain and suffering to be taken into account. The position today is that in every proper case damages for mental distress can be recovered. Thus, where a photographer failed to appear at wedding, as a result the bride had no photographs of her wedding, she was allowed damages for the resulting injury to her feelings10 [Diesen v Samson (1971) SLT 49]. Similarly, the court allowed damages when the hotel management cancelled the contract two days before the wedding and the plaintiff was forced to organize only a simple function for his only daughter's wedding reception [Hotson & Hotson v Payne11 (1988) CLY 1047]. It was ___________ 10. A question based on the similar facts. [C.L.C.-2004] 11 A question based on the similar facts. [I.A.S. -95]

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held that an only daughter's wedding reception is of unique importance for a parent. General damages awarded for inconvenience and disappointment (mental torture) and special damages for cancellation fee of band and telephone calls to notify guests of the changed venue. In Jarvis v Swan Tours Ltd. (1973) QB 233, it was held that in a proper case damages for mental distress can be recovered in contract just as damages for shock can be recovered in tort. One such case is a contract for a holiday, or any other contract to provide entertainment. In this case, the plaintiff wanted to spend his holidays. He was attracted by the representations held by a tourist agency that certain kind of facilities, recreation, etc. would be provided by them on tours conducted by them. The promises turned out to be unreal. The plaintiff was allowed damages for disappointed expectations. Similarly, where the plaintiff had become depressed, frustrated and ill, on the account of his demotion without reasonable cause, the court allowed damages to him [Cox v Philips Industries Ltd. (1976) 3 All ER 161]. In Raj Kishore v Binod (AIR 1989 Pat 111) there was a contract to purchase an American car, which the seller failed to supply. The court allowed compensation for pain and agony. LEADING CASE: GHAZIABAD DEVELOPMENT AUTHORITY v UNION OF INDIA (AIR 2000 SC 2003) In this case, the Ghaziabad Development Authority had announced through advertisements schemes for allotment of developed plots. There was unreasonable delay by the Authority in completing scheme for development of plots. Thus, the complainants filed petitions against Authority on grounds of excessive delay and failure to hand over possession of plots. The question arose whether compensation can be awarded for mental agony suffered by the claimants. Also, whether in the absence of any contract or promise held out by the Authority, an amount by way of interest can be directed to be paid on the amount (refund) found due and payable by the Authority to the claimants. There was a term in the brochure issued by the Authority that it shall not be liable to pay interest in the event of the applicant withdrawing its offer i.e. in the event of an occasion arising for refund. The Supreme Court observed that broadly the principle underlying the assessment of damages is to put the aggrieved party in the same position as far as possible, in which he would have been if the contract had been performed. It was held that "mental anguish" cannot be a head of damages for breach of ordinary commercial contract.

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The ordinary heads of damages allowable in contracts for sale of land are settled. A vendor who breaks the contract by failing to convey the land to the purchaser is liable to damages for the purchaser's loss of bargain by paying the market value of the property at the fixed time for completion less the contract price. The purchaser could claim the loss of profit which occurred due to delay by the vendor of the plots if the vendor had actual or imputed knowledge thereof (normally it is the use of the land for the period of delay viz. its rental value). However, the buyer of plots could not claim any compensation for mental anguish and vexation caused by the delay in the performance of the contract. The court further held that interest on equitable grounds can be awarded in appropriate cases (for example, where the claimant himself is not responsible). The Authority is liable to pay interest as it was at fault, although the brochure issued by it provided that no interest would be payable by it. The rate of interest should not be too high or too low viz. rate of 12 per cent per annum would be just and proper.] (c) Nominal Damages Where the plaintiff suffered no loss the court may still award him nominal damages (small sum of money) in recognition of his right. However, Sec. 73 does not give any cause of action unless and until damage is actually suffered. "If actual loss is not proved, no damages will be awarded." In State of M.P. v Recondo Ltd. (1989 MPLJ 822), a Government contract was terminated before the expiry of the notice period in circumstances which did not entitle the contractor to recover loss of profit, but he was allowed nominal damages. In Union of India v Tribhuwan Das Lalji Patel (AIR 1971 Del 120), a person agreed to supply sleepers to the Railway on the condition that irrespective of whether the Railway suffered any loss or not on account of the contractor's failure to supply the sleepers the Railway will be entitled to damages. The contractor failed to supply but the Railway did not suffer any loss. The court dismissed the action for damages. In such a case, the nominal damages may be awarded by the court. (d) Exemplary or Vindictive Damages These are awarded with a view to punishing the guilty party for the breach and not by way of compensation. Thus these damages have no place in the law of contract. There are, however, certain exceptional cases, viz. breach of a contract to marry, dishonour of a cheque by a banker when there are sufficient funds to the credit of the customer.

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(e) Duty to Mitigate12 Explanation to Sec. 73 says: In estimating the loss or damages arising from a breach of contract, the means, which existed of remedying the inconvenience caused by the non-performance of the contract, must be taken into account. Thus the injured party has to make reasonable efforts to avoid the losses resulting from the breach so that his as well, as other party's loss is kept to the minimum. The plaintiff is debarred from claiming any part of the damage, which is due to his neglect to make such efforts. The onus of proof is on the defendant to show that the plaintiff has failed in his duty of mitigation and the plaintiff is free from the burden of proving that he tried his best to mitigate the loss. The duty to mitigate damages in its essence means that the court can take into account the conduct of the injured party so as to see what he ought in reason to have done, whereby his loss has been or would have been diminished. What matters is the reasonabless of the conduct of the injured party which is a question of fact. Where the aggrieved party increases his loss by unreasonable conduct, he cannot hold the defendant liable for the same. However, he is under no obligation to destroy his property or to injure himself or his commercial reputation to keep down the damages payable by the defendant. The Explanation to Sec. 73 is not in the nature of an independent rule but is merely a factor to be taken into account in assessing the damages naturally arising from the breach, for the purpose of main part of Sec. 73 (K.G Hiranandani v Bharat Barrel & Drum Mfg. Co. AIR 1963 Bom. 373). Thus, the principle of mitigation of loss does not give any right to a party in breach of contract but it is a circumstance to be borne in mind in assessing damages [M. Lochia Setty & Sons Ltd. v Coffee Board, Bangalore (1980) 4 SCC 636]. It is a positive defence in the matter of quantum of damages. The loss to be ascertained is the loss at the date of the breach of contract. If at that date the plaintiff could do something to mitigate the damage, the defendant is entitled to the benefit of it. However, the rule in regard to mitigation must be applied with discretion and a man who has already put himself in the wrong by breaking his contract has no right to impose new and extraordinary duties on the aggrieved party (Pollock and Mulla). The most frequent application of this rule takes place in contracts for sale or purchase of goods. On the buyer's refusal to take delivery, the seller could resell the goods at the prevailing market price and he may then recover ___________ 12. The plaintiff cannot claim damages which are caused because of his failure to perform the 'duty to mitigate' the damages. Discuss the law of damages in the light of this statement. [C.L.C.-93]

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from the defaulting buyer the difference between the price he realized and the contract price. If the seller does not resell the goods and his loss is aggravated by the falling market, he cannot recover the enhanced loss. Similarly, where the seller refuses to perform the contract, the buyer should buy the goods if they are available from any alternative source and cannot recover any further loss that may be due to his own neglect. It is important to note that it is not necessary that the seller (or buyer) should resell (or re-purchase) on the date of breach of the contract. Actual re-sale by the seller is not necessary; similarly, actual repurchase by the buyer is not necessary. LEADING CASE: JAMAL V MOOLA DAWOOD SONS & CO.13 [(1916) 43 IA 6] In this case, it was held that the proper measure of damages is the difference between the contract price and the market price on the date of the breach of contract irrespective of the fact that the seller does not again sell the goods on that day, but sells the same on a subsequent date and the actual loss to him is different from the difference in prices on the date of the breach of contract. In this case, the appellants sold 23,500 shares to the respondent. The date of delivery was 30th Dec. 1911. The shares ___________ 13. Explain the rule contained in the explanation to Sec. 73 regarding the mitigation of damages with the help of Jamal v Moola Dawood Sons & Co. (1916) 431A 6. [L.C.I-97] A agrees to sell 200 shares of a company to B @ Rs. 170/- share. B was to take delivery on 15.02.1995. By that date there was depression in the share market and the value of the share had gone down to Rs. 80 only. B did not take delivery on 15.02.1995. A retained the said shares and ultimately sold them in Sept. 1995 @ Rs. 170/- share. A files a suit against B for the recovery of Rs. 1,80,000 as damages. B contends that as A did not suffer any losses he is not entitled to the damages as claimed by the plaintiff. Decide. [D.U.-2008] [L.C.II-95; C.L.C-92] A contracts to sell 500 shares to B for Rs. 50,000 on 1.10.2003. The shares were to be delivered on 1.11.2003 and the price to be paid on that day. A tenders the performance of the contract on 1.11.2003, but B refuses to buy the shares as the market price of the shares fell by Rs. 20,000 on that day. Later, A sells the shares on 1.12.2003, when the price of the shares is Rs. 25,000. A sues B for damages for breach of contract. Decide, If A sells the shares for Rs. 60,000, what will be his position for claim of damages? [C.L.C. -2004] [Hint: A is entitled to Rs. 20,000 as damages as the loss to be ascertained is the loss at the date of the breach of contract, subsequent loss or profit by A is immaterial.]

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were tendered on that date but the respondents refused to take them. On that date the market price of those shares was lower than the contract price by Rs. 1,09,218. The appellants sold those shares in the market subsequently when the market was again rising and he realized only Rs. 79,862 less than the price under the contract. The respondents contended that they should be held liable to pay the loss of only Rs. 79,862. But they were held liable for Rs. 1,09,218. The Privy Council observed: It is undoubted law that a plaintiff who sues for damages owes the duty of taking all reasonable steps to mitigate the loss subsequent upon the breach and cannot claim as damages any sum which is due to his own neglect. But the loss to be ascertained is the loss at the date of the breach. If at that date the plaintiff could do something or did something which mitigated the damage, the defendant is entitled to the benefit of it. If the seller retains the shares after the breach, the speculation as to the way the market will subsequently go is the speculation of the seller. Thus, he cannot recover from the buyer any further loss if the market falls, nor is he liable to have the damages reduced if the market rises (Thus, any loss or profit made by the seller after the date of the breach is of no concern to the purchaser). In other words, the fact that by reason of the loss of the contract which the defendant had failed to perform the plaintiff obtains the benefit of another contract which is of value to him does not entitle the defendant to the benefit of the latter contract.] In M/s. Murlidhar Chiranjilal v M/s. Harishchandra Dwarkadas (AIR 1962 SC 366), a person contracted to supply canvas to Calcutta f.o.r. Kanpur. The transport and labour charges were to be borne by the buyer. The seller did not supply the canvas. Held that as the contract was to be performed at Kanpur the damages would be assessed according to the difference between the contract and market price at Kanpur. As the respondent (buyer) failed to prove the rate for similar canvas in Kanpur on the date of breach, he was held not entitled to any damages. In Sotiros Shipping Inc. v Someret Solholt (1981) Com LR 201, in a contract for sale of ship, the seller defaulted, but offered alternative ship which the buyer refused to accept. Held that the buyer had reasonably failed to mitigate his loss. The duty of mitigation also finds application in reference to premature termination of a contract of employment. In such cases, even if an employee has been dismissed wrongfully, it is his duty to mitigate the loss by seeking other employment. He can only recover nominal damages if he refuses a reasonable offer of fresh employment. However, here the burden is on the

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defendant (employer) to show the availability of an alternative job of equal status. Where no alternative employment of equal standing is available to dismissed employee, the ex-employer cannot ask that he should have mitigated his loss by accepting a lesser job (S.S. Shetty v Bharat Nidhi Ltd. AIR 1958 SC 12). Liquidated Damages Sometimes the parties to a contract, at the time of making the contract agreed to the amount of compensation payable in the event of the breach of contract. Such amount, which has been agreed beforehand, may be either liquidated damages or penalty. If the sum to be paid on the breach of contract is the genuine pre-estimate of the prospective damages, it is known as liquidated damages. If such sum is excessive and highly disproportionate to the likely loss, viz. the amount is fixed in terrorem, with a view to discouraging breach of contract, it is known as penalty. 'Penalty' as a rule is never awarded as damages in the law of contract (damages will then be calculated according to the ordinary principles); while the whole of liquidated damages is recoverable (English law). The stipulation contained in contract which specifies the damages or penalties to be paid by the party in breach to the other party, reflects good business sense and is advantageous to both parties. It enables them to envisage the financial consequence of a breach; and if litigation proves inevitable it avoids the difficulty and legal costs, often heavy, of proving what loss has in fact been suffered by the innocent party.14 In Dunlop Pneumatic Tyre Co. Ltd. v New Garage & Motor Co. Ltd. (1915) AC 79, the court laid down the following propositions: (1) The expression used by the parties is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages. (2) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract. (3) To assist this task, various tests have been suggested: (a) It will be a penalty if the stipulated sum is extravagant and unconscionable in amount in comparison with the greatest loss that could followed from the breach. ___________ 14. Examine the value of stipulations contained in a contract which specifies the damages or penalties to be paid by the party in breach to the other party. [I.A.S.-91] Write a short note on: Liquidated damages. [D. U.-2008]

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(b) It will be a penalty if the breach consists only in not paying a sum of money and the sum stipulated is a sum greater than the sum which ought to have been paid. (c) The penalty may be presumed when a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion a serious and others but trifling damage. An illustration of 'liquidated damages' is Dunlop Pneumatic Tyre Co. case, in which a manufacturer of tyres supplied a quantity of tyres on the condition that they would not be sold below the list prices and that liquidated damages, not penalty, of £ 5 would be payable for every tyre sold in breach of the agreement. Held that the stipulated sum was intended to be genuine compensation for the loss suffered, and thus liquidated damages. An illustration of 'penalty' is Ford Motor Co. v Armstrong (1915) 31 TLR 267, in which the defendant, a retailer, received from the plaintiffs, supplies of cars and parts and agreed not to sell any item below the listed price. A sum of £ 250 was payable for every breach as "agreed damages". Held that the sum fixed was penalty as it might happen that a part sold in breach was of lesser value than the damages payable. The sum bore no relation with the degree or extent of breach. Similarly, where two-third of the price was made payable in the event of a default, it was held to be penalty. Where a party is required to forfeit or pay a sum which he has already paid, it is a penalty (Maula Bux v Union of India AIR 1970 SC 1955). Where a hire-purchase agreement provides for the payment of full amount or a fixed amount whether the default takes place in the beginning or towards the end of the period of agreement is a penalty (Anglo-Auto Finance Ltd v James (1963) 3 All BR 566]. However, every payment cannot be regarded as 'penalty' (Sova Ray v Gostha Gopal Day AIR 1988 SC 981). Section 74, Contract Act Section 74 of the Indian Contract Act lays down a slightly different rule: Compensation for breach of contract where penalty stipulated for- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

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Explanation- A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Illustration (d) reads: 'A gives B a bond for repayment of Rs. 1,000 with interest at 12% per annum at the end of six months with a stipulation that in case of default, interest will be payable at the rate of 75% from the date of default. This is a stipulation by way of penalty and B is only entitled to recover from A such compensation as the court considers reasonable.' It may be noted that unless the parties have made a stipulation for the payment of interest, or there is a usage to that effect, interest cannot be recovered legally as damages, generally speaking (Mahabir Prasad v Durga Datta AIR 1961 SC 990). Illustration (a)- A contracts with B to pay B Rs. 1000 if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceeding Rs. 1000, as the court considers reasonable. Illustration (by A contracts with B that if A practices as a surgeon within Calcutta, he will pay B Rs. 5,000. A practices as surgeon in Calcutta. B is entitled to such compensation, not exceeding Rs. 5,000 as the court considers reasonable. Illustration (e)- A, who owes money to B, a money-lender, undertakes to repay him by delivering to him 10 mounds of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 mounds. This is stipulation by way of penalty and B is only entitled to reasonable compensation in case of breach. Illustration (f)- A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that, in default of any instalment the whole shall become due. This stipulation is not by way of penalty, and contract may be enforced according to its terms. Illustration (g)- A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable in five yearly instalments of Rs. 40, with a stipulation that, in default of any instalments the whole shall become due. This is a stipulation by way of penalty. Comparison with English law- Sec. 74 dispenses with the requirement of distinguishing liquidated damages from penalty. Thus, unlike the English law, it enacts a uniform principle applicable to all stipulations. Further, unlike English law where the court must either accept the amount in whole or reject it in whole, the court may either accept the amount or reduce it to what appears reasonable. The named sum constitutes the maximum limit of liability. The court cannot order damages beyond that. Further, the actual loss or damage suffered by the party is immaterial. Thus even if the actual loss exceed the liquidated damages, the damages payable will not exceed the stipulated sum.

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However, like the English law, under Sec. 74 the amount contemplated by the parties will be reduced only if it appears to be by way of 'penalty'. Otherwise the whole of it is recoverable as liquidated damages. Further, by providing for compensation in express terms the right to claim damages under the general law is necessarily excluded (Sir Chunnilal Mehta & Sons v Century Spinning & Mfg. Co. AIR 1962 SC 1314). Thus exception to Sec. 74 provides that when any person enters into any bail-bond, recognizance, etc., or under the provisions of any law or under the Government's order, gives any bond for the performance of any public duty/ act, he shall be liable to pay the whole sum mentioned therein upon breach of the condition of any such instrument. Illustration (c) reads: 'A gives a recognizance binding him in a penalty of Rs. 500 to appear in court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.' Forfeiture of Earnest Money or Deposit15 Today, many commercial contracts involve either 'earnest money' or 'security deposit' as a way of ensuring the promisor's seriousness towards the contract. In the application of Sec. 74 to forfeiture clause in the contract, a distinction has been drawn between earnest money and security deposit. The essence of the distinction is the fact that earnest money is part payment of the purchase price while security deposit is not. As a general rule it may be noted that the rule of forfeiture applies to earnest money but not to security deposit.16 Forfeiture is not an automatic act; it should be done by the contracting party himself. In Fateh Chand v Balkishan Das (AIR 1963 SC 1405), an agreement for sale of a bungalow for Rs. 1,12,500 provided that the buyer was to pay Rs. 1,000 as earnest money and Rs. 24,000 on delivery of possession. The agreement further provided that if the buyer failed to pay the balance price, the sum of Rs. 25,000 would stand forfeited. On breach, the seller was allowed to forfeit only Rs. 1,000 being earnest money. The seller was allowed to retain the sum of Rs. 24,000 also, but it was not by virtue of his right to forfeit, but as representing the use value for the time the buyer had remained in possession. The court observed that Sec. 74 is applicable to every kind of deposit by whatever name it may be called. The words 'any other stipulation by way of penalty' are wide enough to cover all kinds of forfeiture provisions in relation to money or other property already delivered. Further, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of the contract, the court (under ___________ 15. What are the rules regarding forfeiture of earnest money and security deposits under Sec. 74. Discuss with the help of relevant case law. [C.L.C.-94/2000] 16. Write a short note on distinction between earnest money and security deposit under Sec. 74. [C.L.C-95/2003]

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Sec. 74) can award such sum as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. "A contract is a bilateral transaction between two or more than two patties. Every contract has to pass through several stages beginning with the stage of negotiation during which the parties discuss and negotiate proposals and counter proposals as also the consideration resulting finally in the acceptance of the proposal... the remedies available under Secs. 73 and 74 for the breach of contract contemplate a valid and binding agreement between the parties. Earnest money or any other kind of deposit cannot be forfeited if the underlying contract is void." [Tarsem Singh v Sukhminder Singh AIR 1998 SC 1400]. It may be noted that Sec. 74 comes into operation only when there is a 'breach' of contract. A 'discharge' of contract, on the other hand, necessarily presumes termination of contract by operation of law and not by breach. Thus earnest money cannot be forfeited if the contract has been discharged by frustration. In such cases, the vendor is entitled to the return of earnest money and no compensation is payable17 [Habil Ali v Rafik-ud-Din (1968) A. Asm 26]. LEADING CASE: MAULA BUX V UNION OF INDIA [(1969) 2 SCC 554] In this case, the plaintiff contracted to supply to Military Headquarters with potatoes, eggs and fish for one year and deposited Rs. 18,500 for due performance of the contract. On breach of the contract, the Government forfeited the amount deposited by the plaintiff. Held that the deposit was not in the nature of earnest money; it did not represent a genuine pre-estimate of the probable damage. The amount in question was a security deposit as it was not to be appropriated towards the payment of the price. Thus, the Government shall pay to the plaintiff Rs. 18,500 with interest at the rate of 3% per annum from the date of the suit till payment.18 The Supreme Court in this case laid down some very important propositions: (f) Earnest money - Giving an earnest or earnest money is a mode of signifying assent to a contract of sale or the like by giving to the vendor a nominal sum as a token that the parties are in earnest, have made up their minds. 'Earnest money' is a part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through by reason ___________ 17. Can the earnest money be forfeited if the contract is discharged by frustration? [C.L.C-94] 18. A question based on the similar facts. [C.L.C-91]

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of the fault or failure of the vendee (Chiranjit Singh v Har Swamp AIR 1926 PC 1). In this case, a contract stipulated that Rs. 20,000 was to be paid by the buyer as earnest money. The buyer did not paid any earnest as such but actually paid Rs. 1,65,000 towards the purchase price; he could not pay the rest. The court allowed the seller to forfeit Rs. 20,000 out of the paid sum, it being the earnest money. In the present case, the deposit was not made of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. The plaintiff had deposited the amount claimed as security for guaranteeing due performance of the contract, such deposits cannot be regarded as earnest money. (ii) Sec. 74 is applicable to forfeiture of deposits — Forfeiture of earnest money under a contract of sale, if the amount is reasonable, does not fall within Sec. 74 (as it does not amount to imposing a penalty). But if forfeiture is of the nature of penalty i.e. amount to be forfeited is unreasonable, Sec. 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, such undertaking is a penalty (Fateh Chand v Balkishan Das AIR 1963 SC 1405). (iii) Actual loss whether necessary - Sec. 74 says that the named sum is recoverable 'whether or not actual damage or loss is proved to have been caused thereby'. The court observed that these words only dispense with proof of 'actual loss or damage.' The section does not justify the award of compensation, in consequence of a breach when no legal injury has resulted. This is so because compensation can only be awarded under Sec. 73 for loss which normally arose or was in the contemplation of the parties. Thus, if no loss is proved to have been suffered, Secs. 73 and 74 are not attracted. The court confined the above words of Sec. 74 to cases in which it is not possible to prove the monetary value of the loss and therefore, the value fixed by the parties, if it be regarded as a genuine pre-estimate (not in the nature of penalty), may be taken as the reasonable measure of compensation. But where the loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. Since the Government did not prove any loss, in the present case, no compensation or damages for the breach was awarded. Further, the Government cannot forfeit the amount in question.

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Comments - (1) The distinction between earnest and deposit is not practical. The initial payment, whether named as earnest or security deposit, was intended as a cover or; protection against inconvenience or possible loss likely to be caused by the breach. If the deposit was named as earnest the court allowed it to be forfeited, but not otherwise, thus defeating the purport of the bargain that the parties had voluntarily made [See, Avtar Singh, 'Law of Contract']. Thus, in Maula Bux, the defaulting contractor not only recovered his security deposit, but also got away without paying any damages for breach of contract. (2) In Dwarka Das v State of M.P. (AIR 1999 SC 1031), the court held that a claim cannot be disallowed merely on the ground that there was no proof of actual loss. Similarly, held in the case discussed below. LEADING CASE: OIL & NATURAL GAS CORPN. LTD. v SAW PIPES LTD. (AIR 2003 SC 2629) In this case, it was held that the court is competent to award compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of a contract. In cases where the parties know when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation, and there may not be any necessity of leading evidence for proving damage, unless the court arrives at the conclusion that no loss is likely to occur because of such breach. In this case, the agreement between the parties stipulated pre-estimated damages (not by way of penalty) in case of delay in supply of goods. There was delay on the respondent's part in supply of goods. The appellant deducted the amount of pre-estimated damages while making payment for delay in supply of goods. The Arbitral Tribunal, however, held that for recovery of liquidated damages, it was for the appellant to establish that it had suffered any loss because of the non-supply of the goods within the prescribed time limit. The Supreme Court setting aside the Arbitrator's award held that the appellant was entitled to the pre-estimated damages. The court observed: "It is settled law that the intention of the parties is to be gathered from the words used in the agreement. Therefore, when the parties have expressly agreed that recovery from the contractor for breach of the contract is pre-estimated genuine liquidated damages and is not by way of penalty, there was no justifiable reason for the Arbitral Tribunal to arrive at a conclusion that still the purchaser should prove loss suffered by it because of delay in supply of goods. It is in the cases where court arrives at the conclusion that the term contemplating damages is by way of

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penalty, the court may grant reasonable compensation not exceeding the amount so named in the contract on proof of damages. In certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care of by Secs. 73 and 74 of the Contract Act (Sec. 74 is to be read along with Sec. 73) and in the present case by the specific terms of the contract. When the terms of the contract are clear and unambiguous then its meaning is to be gathered only from the words used therein. Despite that, if a party contends that the stipulated amount is not reasonable compensation, then it has to prove the same." LEADING CASE: SHRI HANUMAN COTTON MILLS v TATA AIRCRAFT LTD. (AIR 1970 SC 1986) In this case, it was held that if a contract requires the buyer to deposit 25% of the total value of the goods (as part of the purchase price of Rs. 10 lacs) while placing the order, with a stipulation that the amount shall be forfeited in case of default in balance payment of price, the term is reasonable and binding on the parties. The deposit in question was intended as earnest money. It was a part of the price and the seller was entitled to forfeit it. The contract read with the terms of business of the company clearly referred to the earnest money being paid and to the fact of Rs. 2.5 lacs having been paid as earnest. In this case, the learned judge refused to consider the obiter observations made in Maula Bux, that the earnest money can be forfeited without attracting Sec. 74 if the amount thereof is reasonable as binding. He pointed out that the Supreme Court itself had no occasion in that case to consider the question of reasonableness or otherwise of the earnest deposit being forfeited. The Supreme Court also laid down five principles regarding earnest money: (i) It must be given at the moment when the contract is concluded; (ii) It represents a guarantee that the contract will be fulfilled or, in other words, "earnest" is given to bind the contract; (iii) It is part of the purchase price when the transaction is carried out; (iv) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser; and (v) Unless there is anything to the contrary in the terms of the contract, on default by purchaser, the seller is entitled to forfeit the earnest.

Page 233 10 Quasi-Contracts There are many situations in which law as well as justice requires that a certain person be required to conform to an obligation, although he has neither broken any contract nor committed any tort. For example, a person in whose home certain goods have been left, by mistake is bound to restore them. Such obligations are called as quasi-contractual obligations, because they do not arise out of an agreement (the legal obligations are imposed by law without offer and acceptance). They are manifestly not based upon consent and their description as a quasi-contractual liability serves only to emphasise their remoteness from genuine conception of contract. It may be noted that if an agreement does not create a legal obligation it is not a contract at all. A liability of this kind is hard to classify. Partly it resembles liability under the law of tort in as much as it arises independently of any contract. Partly it resembles contract in as much as it owed only to one party and not "to persons generally". Thus it can be accounted for either under an 'implied contract' or under natural justice and equity for the prevention of 'unjust enrichment' i.e. enrichment of one person at the cost of another. The identification of quasi-contracts with implied or notional or fictional contracts restricted the scope of relief, because where the circumstances of a case do not lead to an inference of implied contract or where such an influence would be against the law, no liability will arise. There was no such hindrance under the principle of "natural justice and equity". In Fibrosa S.Akeyjna v Fairbain L.C.Barbour Ltd. (1943) AC 32, a sum of money was paid in advance under a contract for the supply of a machinery, and the performance was obstructed by the out break of war. The court allowed the advance to be recovered back as having been paid for a consideration which had wholly failed. The court noted that "it is clear that any civilised system of law is bound to provide remedies for cases of unjust enrichment or unjust

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benefit. Such remedies are generally different from remedies in contract or tort, and are now recognised under quasi-contract or restitution".1 Chapter V of the Indian Contract Act provides for the "quasi-contracts", however the said term is not used as in view of the clear statutory authorisation the courts in India are not hindered in allowing relief under the different sections by the theoretical considerations concerning quasi-contracts. But English cases do provide valuable guidance as to the interpretation of provisions or scope of relief. Sections 68 to 72 deal with those five obligations which are known as "Quasi-Contracts" or "Constructive Contracts" under English law. The Indian Contract Act describes these obligations as 'certain relations resembling those created by the contract.'2 The quasi-contractual obligations are based on the principle that law as well as justice should try to prevent unjust enrichment, i.e. enrichment of one person at the cost of another [Lord Mansfield in Moses v Macfertan (1760) 2 Burr 1005] or to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep (Fibrosa case). In an action for unjust enrichment the following essentials have to be proved: (1) The defendant has been 'enriched' by the receipt of a 'benefit'. (2) That this enrichment is 'at the expense of the plaintiff'. (3) That the retention of the enrichment is 'unjust' (Mahabir Kishore v State of M.P. AIR 1990 SC 313). Supply of Necessaries (Sec. 68) See under the Questions-section. Payment by an Interested Person (Sec. 69) Sec. 69 reads: "A person who is interested in the payment of money, which another is bound by law to pay, and who therefore, pays it, is entitled to be reimbursed by the other." Illustration: B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government being in arrears, his land is advertised for sale by Government. Under the revenue law, the consequences of such sale will be the annulment of B's lease. B, to prevent sale and the consequent annulment of his own lease, pays to the Government the sum due from A. A is bound to make good to B the amount so paid. ________________ 1. "A quasi-contract arises out of judicial principles and not out of a contractual agreement between two persons". Examine. [I.A.S.-96] 2. Enumerate and explain briefly those relations in the Indian Contract Act which resemble those created by a contract. [I.A.S.- 2005]

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The conditions of liability under Sec. 69 are: (i) The plaintiff should be interested in making the payment. It is not necessary that he should have a legal proprietary interest in the property in respect of which the payment is made. However, often it is used to determine whether plaintiff was interested. His honest belief that he has an interest to protect is enough. Sec. 69 does not invite such judicial limitation that a person who has not an interest in the property can be interested in a payment in respect of that property. (ii) The plaintiff himself should not be bound to pay. He should only be interested in making the payment in order to protect his own interest. (iii) The defendant should be under legal compulsion (covering obligations of contract or tort) to pay. For example, where a party had agreed to purchase certain mills, he was allowed to recover from the seller the amount of already overdue municipal taxes paid by him in order to save the property from being sold in execution (Govindram Gordhandas v State AIR 1950 PC 99). (iv) The plaintiff should have made the payment to another person and not to himself. In a case, a zamindar gave his land on lease to the Forest Department of Madras Government. On zamindar's failure to pay the land revenue to the Revenue Department of Madras Government, his land was advertised for sale. The Forest Department made payment of the land revenue. It was held that the payment was not made to another person [Secretary of State v Fernandes (1907) 30 Mad 375]. Liability to Pay for Non-Gratuitous Act2a (Sec. 70) Three conditions must be satisfied before Sec. 70 can be invoked: (1) a person should lawfully do something for another person or deliver something to him; (2) in doing the said thing or delivering the said thing he must not intend to act gratuitously; and (3) the other person for whom something is done or to whom something is delivered must enjoy the benefit thereof. Illustrations: (a) A, a tradesman, leaves goods at B's house by mistake. B treats goods as his own. He is bound to pay A for them. (b) A save B's property from fire. A is not entitled to compensation from B if the circumstances show that he intended to act gratuitously. ____________ 2a. Discuss the 'Obligation of persons enjoying benefit of non-gratuitous act'? [D.U-2009]

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Similarly, where a coolie takes the luggage at the railway station without being asked by the passenger or a shoe-shiner starts shining shoes of the passenger without being asked to do so, and if the passenger does not object to that, then he is bound to pay reasonably for the same as the work was not intended to be gratuitous. In cases falling under Sec. 70, the person doing something for another cannot sue for specific performance, nor ask for damages for breach, as there is no contract between the parties. All that Sec. 70 provides for is that if the services or goods are accepted a liability to pay arises. Thus, one of the purposes of the section is to assure payment to a person who has done something for another voluntarily and yet with the thought of being paid (it does not matter that he is personally interested in the work). He should have contemplated being paid from the very beginning. The Municipal Council, which constructed and maintained a bus stand was allowed to recover some charges from bus operators who used the stand though there was no agreement to that effect. Secondly, the person for whom the act is done is not bound to pay unless he had the choice to reject the services. Sec. 70 would not encourage officious interference in the affairs of others. It is only where a person voluntarily accepts the thing or enjoys the work done that the liability under Sec. 70 arises. The court will not compel a person to pay for services which have been thrust upon him against his will. Thirdly, it is necessary that services should have been rendered without any request. However, reasonable compensation may be recovered for services rendered at request. Fourthly, services should have been rendered lawfully. Payment for extra work done in connection with a contract without any agreement has been allowed to be recovered under this section. The lawful relationship should arise by reason of the fact that what has been done by the plaintiff has been accepted and enjoyed by the defendant. When a practising advocate is appointed to act as Astt. Govt. Council and she renders those services, she will be entitled to claim the fees for those services, even if her appointment is void under the law (Indu Mehta v State of U.P. AIR 1987 All 309). Similarly, where a candidate who is selected in Forest Department gets the necessary training, but later he refused to join the service, the Government was allowed to recover cost of training3 (P.C. Wadhwa v State of Punjab AIR 1987 P & H 117). Lastly, the defendant must have derived a direct benefit from the payment or services. Where the works done by a railway company developed the adjoining lands and consequently the municipality received more taxes, this was held to be not a sufficient benefit to enable the railway company to recover compensation from the municipality. Services rendered to a person incompetent to contract (e.g. minor) at the time cannot be made the basis of an action under this section. Even where the party making payment or ______________ 3. Discuss the scope of Sec. 70 of the Indian Contract Act, 1872. Can a State recover cost of training on failure of the defendant to join the service? [I.A.S.- 2004]

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rendering services is personally interested in the matter, he can recover proportional contribution from those who have enjoyed the benefits of his services [Damodara Mudaliar v Secy, of State, India (1894) 18 Mad 88]. Sec. 70 applies even if there is a non-compliance of constitutional requirement of contracting with the State (viz. Art. 299 of the Constitution). Thus in State of W. B. v B.K. Mondal & Sons (AIR 1962 SC 779), the plaintiff made certain constructions at the request of an officer of State. The State accepted the work but refused to pay pleading that there was no valid contract. The court held in favour of the plaintiff. Finder Of Goods (Sec. 71) Sec. 71 reads: "A person, who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee." A bailee is bound to take as much care of the goods as a man of ordinary prudence would, under similar circumstances, take of his own goods. To avoid liability for criminal misappropriation of property, the finder must try to find out the real owner of the goods and must not appropriate the property to his own use (Sec. 151, Contract Act). Mistake or Coercion4 (Sec. 72) Sec. 72 reads: "A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it." Illustrations: (a) A and B jointly owe Rs. 100 to C. A alone pays the amount to C, and B, not knowing this fact, pays Rs. 100 over again to C. C is bound to repay the amount to B. (b) A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive. Sec. 72 is usually regarded as dealing with the doctrine of 'unjust enrichment'. Lord Mansfield in Moses v Macfertan (1760) 2 Burr 1005, observed that an action lies for money paid by mistake; or upon a ____________ 4. Write a short note on - "Mistake or Coercion under Sec. 72". [C. L. C. -94] Examine the obligation under the Indian Contract Act of a person to whom money has been paid by mistake. In this connection is there a distinction required to be drawn between a mistake of fact and mistake of law? [I.A.S.- 99] A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. Is he bound to pay A for them? [D. U. 2007]

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consideration which happens to fail or for money got through imposition, extortion or oppression. The defendant in such cases is obliged by ties of natural justice and equity, to refund the money. The view of Lord Mansfield on 'equity' has been accepted by the Supreme Court in Mafatlal Industries Ltd. v Union of India (1997) 5 SCC 536 (discussed below). In Sales Tax Officer v Kanhaiya Lal Saraf (AIR 1959 SC 135), it has been held that the money paid under mistake is recoverable whether the mistake be of fact or of law. And the term 'mistake' has been used without any limitation under Sec. 72. In this case, a certain amount of sales tax was paid by a firm under the U.P. Sales Tax laws on its forward transactions. Subsequently to the payment the Allahabad High Court ruled the levy of sales tax on such transactions to be ultra vires. The firm sought to recover back the tax money. The Supreme Court allowed it. The court referred to the decision in Shri Shiba Prasad Singh v Maharaja S.C. Nandi (1949) 76 IA 44 PC: Payment by 'mistake' in Sec. 72 must refer to a payment which was not legally due and which could not have been enforced; the 'mistake' is thinking that the money paid was due when, in fact, it was not due. There is nothing inconsistent in enacting, on the one hand, that if parties enters into a contract under mistake in law that contract must stand and is enforceable, but on the other hand, that if one party acting under mistake of law pays to another party money which is not due by contract or otherwise, that money must be repaid. Sec. 72 did not conflict with Sec. 21 of the Contract Act. It is not that every sum paid under mistake is recoverable. There may be circumstances which disentitle a plaintiff by estoppel or otherwise. The Supreme Court found no ground for any estoppel against the firm and disapproved the following statement of the Nagpur High Court: If the reason for the rule is that a person paying money under mistake is entitled to recover it, because it is against the conscience of the receiver to retain it, then when the receiver has no longer the money with him (e.g. has spent it on his own purposes), different considerations must arise. The Supreme Court said that no such equitable consideration can be imported when the terms of Sec. 72 are clear and unambiguous. In Trilok Chand Moti Chand v Commr. of Sales Tax (AIR 1970 SC 898), the Supreme Court further exemplified the scope of the word "mistake." A firm paid sales tax in respect of sales to consumers outside the State of Bombay and which were, therefore, not liable to any sales tax. The firm had itself collected the tax money from its customers. The amount was ordered to be refunded to the customers. The firm failed to do so and was therefore, informed to return the tax money to the State failing which it would be recovered as arrears of land revenue. The firm paid back the amount only when it received an order of attachment. When all this was going on but

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unknown to the firm the Act under which the recovery was made from the firm had been declared to be ultra vires. The firm sought to recover back the money as having been paid under either mistake of law or coercion. The Supreme Court held that the firm did not suffer from any "mistake" under Sec. 72 (i.e. mistake in thinking that the money was due when in fact it was not due). The firm fully appreciated the legal position and knew that the money was in fact due until the statute under which recovery was made was declared to be ultra vires. The court, however, held that the payment was made under coercion and would have been recoverable under Sec. 72 had it not been for the expiry of the period of limitation. The court observed that a 'payment under coercion' has to be treated in the same way for the purpose of a claim to refund as a 'payment under mistake of law.' However, the latter may be questioned only when the mistake is discovered, but a person having no misapprehension about his legal rights when complaints about the illegality of the order passed against him, he can immediately after payment formulate his cause of action as one of payment under coercion. In Mafatlal Industries Ltd, v Union of India (1997) 5 SCC 536, it was held that when the excise or custom duty is levied on misinterpretation / misapplication or erroneous interpretation of the statutory provisions, or under unconstitutional provision(s) or under mistake of law, and the assessee passes on the tax burden to the third persons, "no suit for the refund on the ground of mistake of law would be maintainable. The assessee cannot claim refund in such situations, as it would amount to unjust enrichment. The Supreme Court observed: Sec. 72 is based upon and incorporates a rule of equity. One of the equitable considerations may be the fact that the person claiming the refund has passed on the burden of duty to another. In other words, the claimant has not really suffered any prejudice or loss. If so, there is no question of reimbursing him. The loser, if any, is the person who has really borne the burden of duty; the manufacturer (claimant) has certainly not borne the duty notwithstanding the fact that it is he who has paid the duty because he passed on the duty to a third party. "The law of Restitution is founded upon the principle of "unjust enrichment". The person claiming restitution under Sec. 72 should plead and prove a loss or injury to him; in other words, he had not passed on the liability. That is the nature of "accounting" in cases falling under Sec. 72. A person who seeks restitution, has a duty to disclose or account for what he had received in the transaction. An accounting is a condition precedent in an action for restitution." In S. Ketrabarsappa v Indian Bank (AIR 1987 Kant 236), a bank has wrongly credited the account of a person with a sum of Rs. 1,00,000 and he withdraws the same. The amount so received has got to be paid back. The word 'coercion' in Sec. 72 implies 'under pressure' [See Illus. (b)]. It has been used in its general or ordinary sense and not as defined in Sec. 15 of the Contract Act.

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FURTHER QUESTIONS Q.1. On an oral order of an officer of Delhi administration, a contractor supplied food to the Administration for an official party. When the contractor sent bills for payment an audit objection was put that there was no valid government contract hence payment was not made. Can contractor recover the bills? Discuss. [C.L.C-98/2000/04/06] The plaintiff on the oral request of an officer of the State of Bihar made certain constructions which were voluntarily enjoyed by the State. The State, however, refused payment on the ground that there was no valid contract in accordance with law. The plaintiff then claimed payment under doctrine of unjust enrichment under Sec. 70. The State contended that it did not apply to Government contracts which were not made according to law. Decide. [C.L.C.-91] A.1. Sec. 70, Contract Act The three ingredients of Sec. 70 are: (i) a person should lawfully do something for another person or deliver something to him; (ii) in doing the said thing or delivering the said thing he must not intend to act gratuitously; and (iii) the other person for whom something is done or to whom something is delivered must enjoy the benefits thereof. LEADING CASE: STATE OF WEST BENGAL v B.K. MONDAL & SONS (AIR 1962 SC 779) In this case, the plaintiff made certain constructions at the request of an officer of the State. The State accepted the work but refused to pay pleading that there was no valid contract. The court held ins favour of the plaintiff. The Supreme Court, in this case, made some important observations: (i) The State even after having requested for the works had the right to reject. The person said to be liable under Sec. 70 always has the option not to accept the thing. Sec. 70 is not intended to entertain claims made by persons who officiously interfere with the affairs of others or who impose on others services not desired by them. It is only when a person voluntarily accept things or enjoys the work done that the liability under Sec. 70 arises. The State could have called upon the contractor to demolish

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the constructions and take away the material used; but if the State accepted the constructions and used them and enjoyed their benefit, then Sec. 70 applies. (ii) The plaintiff had no intention to act gratuitously. He contemplated being paid from the very beginning. A request is not an element of Sec. 70 although the existence of an invalid request may not make Sec. 70 inapplicable. However, the thing delivered or done must not be delivered or done fraudulently or dishonestly. (iii) Non-compliance of constitutional requirements of contracting with State - Article 299 (1) of the Constitution of India states that - "All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor of the State, and all such contracts ... shall be executed on behalf of the President or the Governor by such persons and in such manner as he may direct or authorise." In view of Article 299 (1), the work carried out at the oral request of an officer who is not authorised, would not be under a valid contract. Sec. 70 applies to such cases because an award of compensation under this section is not a mode of enforcing a contract, but rather a mode of preventing unjust enrichment. What was sought to be enforced was not a contract, but a relation resembling those created by a contract. Thus, in cases falling under Sec. 70 the person doing something for another cannot sue for specific performance, nor ask for damages for breach as there is no contract between the parties. All that Sec. 70 provides for is that if the services or goods are accepted a liability to pay arises. The mere act of construction and its acceptance by the State cannot be said to contravene the provisions of Art. 299 (1). Sec. 70 does not nullify the effect of Art. 299 (1), because a cause of action for a claim under Sec. 70 is based not upon the delivery of the goods or the doing of any work as such but upon acceptance and enjoyment of the said goods or said work. This requirement afford sufficient and effective safeguard against spurious claim based on unauthorized acts. Thus, there is no conflict between the two provisions; in fact, Sec. 70 should be read as supplementing the provisions of Art. 299 (1). It would not be reasonable to suggest that in recognizing the claim under Sec. 70, the court is either directly or indirectly mystifying the effect of Art. 299 (1), or, treating as valid a contract which is not valid. The fields covered by the two provisions are separate and distinct.

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(iv) Sec. 70 requires that a person lawfully do something or lawfully deliver something to another. The word "lawfully" is not surplusage and must be treated as an essential part of the requirement of Sec. 70. However, all that word "lawfully" in the context indicates is that after something is delivered or something is done by one person for another and that thing is accepted and enjoyed by the latter, a lawful relationship is born between the two which under the provisions of Sec. 70 gives rise to claim for compensation. (v) Sec. 70 prevents unjust enrichment and it applies as much to Corporations and Government as to an individual. In a modern welfare State, government officers have invariably to enter into variety of contracts which are often of a petty nature; they may have to act orally or through correspondence, without complying with the provisions of Art. 299 (1). (vi) The position of the State cannot be compared with that of a minor (it was contended that Art. 299 (1) make appellant State incompetent to enter into a contract, unless the contract is made as required by Art. 299). The minor is excluded from the operation of Sec. 70 for the reason that his case has been specifically provided for by Sec. 68. Besides, in the case of a minor even the voluntary acceptance of the benefit ... would not be present, and so Sec. 70 cannot be invoked against a minor.] The principle of this case has been reaffirmed in Pillo Dhunjishaw v Municipal Corpn., Poona (AIR 1970 SC 1201). Here too the corporation tried to escape liability for spare motor parts supplied to it on the ground that the contract was not made in accordance with the Bombay Municipal Corporation Act. The Corporation was held liable under Sec. 70. Decision of the cases in question In both the cases, there is no valid contract, but Government will be liable under Sec. 70. Q.2. Write a short note on 'Minor's liabilities for necessaries under Sec. 68 of the Contract Act'. [D.U.-2008] [C.L.C.-94/95] "While a minor's contract is void, his estate is subject to quasi-contractual liability". What are the conditions of quasi-contractual liabilities to which the estate of a minor is subject? [I.A.S.-90] A minor is liable to pay out of his property for necessaries supplied to him. Discuss with the help of decided cases. [I.A.S.- 2000]

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A.2. Liability for Necessaries of Life (Sec. 68) Minor's agreement being void ab initio, he cannot therefore, as a general rule, be asked to pay for the services rendered or goods supplied to him. Sec, 68, however, permits reimbursement to a person, who supplies "necessaries" to a minor or a lunatic person. Such duty to reimburse is not there because of any valid contract with the minor, etc. but because the law recognises this to be a 'quasi-contractual' obligation (similarly recognized in English law). Sec. 68 permits reimbursement if: (i) necessaries are supplied, (ii) to a person who is incapable of making a contract (e.g. a minor or a lunatic), or, (iii) to a person who is dependent upon such person incapable of making contract (e.g. wife and children of a lunatic) i.e. a person whom the incapable person is legally bound to support, (iv) suited to that person's conditions in life. Illustrations (a) A supplies B, a lunatic, with necessaries suited to his conditions in life. A is entitled to be reimbursed from B's property. (b) A supplies the wife and children of B, with necessaries suited to their conditions in life. A is entitled to be reimbursed from B's property. For reimbursement no personal action can lie against the minor, etc., but reimbursement is permitted from the property or estate of such incapable person. What are Necessaries? Necessaries does not mean bare necessities of life (e.g. food, cloth, shelter, etc.), but means such things as may be necessary to maintain a person 'according to his conditions in life' (i.e. his status and requirements). Thus it is to be determined with reference to fortune and circumstances of the particular minor. As the proper cultivation of the mind is as expedient as the support of the body, instruction in art or trade, or intellectual, moral and religious education may be necessary also. Articles of mere luxury are always excluded, though luxurious articles of utility are in some cases allowed. Further, what are 'necessaries' may depend upon the status of a person, and also his requirements at the time of actual delivery of the goods [Chappel v Cooper (1844) 13M & W 252]. To render an infant's estate liable for necessaries, two conditions must be satisfied (the onus is on the plaintiff to prove them): (1) the contract must be for goods reasonably necessary for his support in his station in life, and

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(2) he must not have already a sufficient supply of these necessaries at the time of sale and delivery [Nash v Inman (1908) 2 KB 1]. In this case, a minor who was amply supplied with proper clothes according to his position, was supplied by the plaintiff with a number of dresses, including fancy waist coats. Held, that the plaintiff cannot recover price of dresses. However, in Peters v Fleming (1840) 6 M & W 42, it was observed that an undergraduate at a college should have a watch. The following have been held to be 'necessaries': Supply of racing cycle for an infant apprentice. Debt incurred for performing the funeral rites of minor's father. Funeral expenses of the husband by the infant widow [Chappel v Cooper]. House given to a minor on rent for living and continuing his studies. Wedding presents for a bride of minor. Money advanced for defending criminal proceedings. Loan given to a minor on the mortgage of his property with a view to save that minor's property from the execution of a decree. But where a minor is engaged in trade, contracts entered into by him for trading purposes are not for necessaries and are not binding on him. It may be noted that the necessaries may be supplied to someone whom the minor is legally bound to support, such as his wife and children. Ornamental articles and diamonds are usually not considered necessaries even if the minor moves in a high society, unless the articles are especially necessary for the minor [Ryder v Wombell (1868) 38 LJ Ex 8]. Further, certain things like ear rings for a male, spectacles for a blind person, or a wild animal, cannot be considered as necessaries. Nature of Liability of Minor's Estate for Necessaries The liability does not depend upon the minor's consent. It arises because the necessaries have been supplied to him and is, therefore, quasi-contractual in nature. The real foundation is an obligation, which the law imposes on the infant to make a fair payment in respect of needs satisfied. In other words, the obligation arises re and not consensu. Further, the liability is not personal, but is only that of the minor's estate. Thus it has a little contractual element. Another view is that the liability is contractual. A contract for necessaries is just one of those categories of contracts which the minor is permitted to make. Q.3. A supplies B, a minor, necessaries suitable to his condition in life. B subsequently refuses to pay. What are A's rights as against B or his property? [C.L.C.-97; L.C.II-97]

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A.3. The liability of B is not personal, but is only that of his property or estate. In other words, reimbursement is permitted from the property or estate of a minor. Q.4. "A quantum meruit, although it is a quasi-contract arises out of a contract." Comment and illustrate your answer. Write a short note on: 'Quantum Meruit' with special reference to Art. 299 of the Constitution of India. [C.L.C.-98] A.4. Quantum Meruit Ordinarily if a person, having agreed to do some work or render some services, has done only a part of what he was required to do, he cannot claim anything for what he has done. When a person agrees to complete some work for a lump sum, non-completion of the work does not entitle him to any remuneration even for the part of the work done. But the law recognises an important exception to this rule by way of an action for 'Quantum meruit'. Under it, when a party has in the performance of his contract done some work or rendered some service and the further performance has been made useless by the other party, he may recover reasonable compensation for the work or service. It is so called because the compensation can be recovered on the basis of the quantity of work done under the contract. It may be noted that this action is not an action for compensation for the breach of contract by the other side. It is an action which is alternative to an action for the breach of contract. This action in essence is one of restitution, putting the party injured by the breach of contract in a position in which he would have been had the contract not been entered into. It merely entitles the injured party to be compensated for whatever work he may have already done or whatever expense he may have incurred [De Bernardy v Harding (1853) 3 Ex. 822]. For instance, if A agrees to deliver B 500 bags of wheat and when A has already delivered 100 bags, B refuses to accept any further supply, A can recover from B the value of wheat which he has already delivered. It may also be noted that if the party making a breach of contract has done a part of the work in connection with it, he cannot claim anything in respect thereof under this remedy. In order to avail of the remedy under quantum, meruit, the original contract must've been discharged by the defendant in such a way as to entitle the plaintiff to regard himself as discharged from any further performance and he must have elected to do so. While the remedy by way of 'quantum meruit' is restitutory (as noted above), a claim for 'damages' is a compensatory remedy aimed at placing the injured party, as near as may be in the position which he would have been in, had the other party performed the contract [Puran Lal v State of U.P. AIR 1971 SC 712].

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In Planche v Colburn (1831) 8 Bing 14, the defendants commenced the publication of a periodical entitled 'Juvenile Library'. The plaintiff was engaged to write a volume on Costume and Ancient Armour, and he was to be paid £ 100 on the completion of the job. After the plaintiff had already collected the material and written a part of the book the defendants discontinued the publication of the periodical. It was held that the original contract having been discharged by the breach of contract by the defendants, the plaintiff was entitled to recover £ 50 by way of remuneration for the part of the job he has already performed. The remedy by way of quantum meruit is not a contractual remedy although in some cases the remedy is available on the breach of contract by a party to it. The real nature of the remedy is quasi-contractual. The remedy has, therefore, been held to be available when the work has been done by the plaintiff under a void agreement. Thus, under Sec. 65 ('Benefits received under Void agreement'), the court ordered relief by way of quantum meruit [State of Rajasthan v Associated Stone Industries AIR 1985 SC 466]. Where the plaintiff was appointed managing director of a company but his appointment was void, and despite that he continued to render the services to the company, it was held that though the contract was void the plaintiff was entitled to recover for the services rendered by him on his claim on the quantum meruit. Greer L J emphasised that a claim of this kind does not depend upon implied contract arising by virtue of the services having been accepted upon an inference of fact, but upon a rule of law [Craven-Ellis v Conons Ltd. (1936) 2 KB 403]. A quantum meruit arises out of contract because the contract itself ends and then compensation can be recovered on the basis of the quantity of work done under the contract. Though the remedy is independent of contract, but the contract, if any, shall not be wholly irrelevant. Thus where a ship was delivered for repair and the contract used more expensive material than that authorised by the contract, he could not recover under the contract because he had not carried it out precisely, nor under quasi-contract, because the other party had no chance to reject the expensive material [Farman & Co. Ltd. v The Liddesdale (1900) AC 190 PC]. A quantum meruit is an obligation or debt imposed by operation of law which arises in the defendant having taken the benefit of the work done, goods supplied or services rendered. It may be noted that where adequate relief is available under the contract itself, the court may not provide any relief under quasicontract. Thus where the injured party, despite a breach of contract on the part of the other party, continued to work under the contract and completed it, it was held that he had adequate remedy under the contract and there was no need for law to fashion a restitutionary remedy [Morrison Knudsen & Co. v B.C. Hydro & Power Authority (1978) 85 DLR(3rd) 186 Br Col CA].

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Law of Contract REFERENCES

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

Pollock & Mulla: The Indian Contract & Specific Relief Acts. Mulla: The Indian Contract Act. Cheshire & Fifoot. Law of Contract. Williston on Contracts. Anson's Law of Contract. Chitty on Contract. Ramchandran: Law of Contract in India. Sutton & Shannon on Contracts. Avtar Singh: An Introduction to the Law of Contract. Avtar Singh: Contract & Specific Relief. R.K. Bangia: Indian Contract Act. S.K. Kapoor. Law of Contract. R.K. Aggarwal: Indian Contract Act. Verma & Kusum (Eds): Fifty Years of the Supreme Court of India (Indian Law Institute). N.H. Jhabvala: Law of Contracts. Bharat Bhushan & Rajni Abbi: Business and Corporate Laws. Ashok K. Jain: The Landmark Judgments of 1997-1998. Supreme Court Yearly Digests - SCYD (1995-2007) - Shailendra Malik (Ed.) (Eastern Book Co.). Cases and Materials on Law of Contract — Faculty of Law, Delhi University, Delhi. Law Q. & A. (First Semester) - Universal Law Publishing Co. Pvt. Ltd. Question Papers Referred - Delhi and Other Indian Universities; Competitive Exams like IAS.